Peak oil as central analytic intuition

The profit criterion, which may be considered the international economy’s organizational
basis, guarantees that the depletion of oil reserves proceeds along a rising marginal cost
curve.

When the easiest accessible, smallest resource-bundle-demanding find is exhausted, the

operational locus moves to the next smallest, which is still higher than the previous one,
and so on until the absolute maximum is reached. This happens when input costs become
so high that, if they would move only one Planck-length higher, the buyers of oil (the
world at large) could no longer afford it. That is the “economic peak” in theory.

How and when it will be reached in practice, provided we are not there already, no one
knows. Nor is it possible to determine if the mere threat of the “economic peak” would
not make the growth of oil output stop long before the “physical peak” (breakeven
between energy gained from an additional barrel of oil and energy in all forms sacrificed
to access it) is attained.

A problem like no other

Historical experience and statistical theory suggest that the predictive potential of the
Hubbert model (exponential rise, peak and terminal decline) varies according to the area
occupied by the reserve and the time that remains until half of the world’s confirmed and
economically accessible oil wealth is used up. The smaller the space, the more accurate
the prediction; the closer the generally perceived midpoint in aggregate depletion, the less
robust (i.e., the more assumption-driven, hence more dispersed) assessments become.

This “space-time” dependency is readily understandable. Data are the most complete and
accurate and the experience in estimation is the richest for wells and fields. The exact
opposite is true for the planet. And the more oil is believed to be available (i.e., the
farther the era of grave concerns), the easier it is to find perfect substitutes for the peaked
source of supply, the less problematic the winding down process of “exhaust and
abandon,” the more symmetric (“Gaussian”) the descent will be.

“Hubbert” worked best for wells and fields in the fifties. It gained deserved notoriety by
being right on the money about U.S. output reaching vertex four decades ago, and proved
to be of great practical significance in forecasting drain-down profiles for a variety of
non-oil material resources in different parts of the world. But the model has become
much too “noisy” now when applied to the global ceiling in oil output.

The area examined is at its maximum and the time left to the midpoint is stochastically at
its minimum, i.e., it converges fast to zero.

But next to impossible as it may seem to pinpoint the peak now, it will be there in
retrospect along an appropriate macrohistoric timescale because the proposition has no
compelling alternatives.

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Flat absurdity, sinusoidal silliness

Fast forward to 2110. There are only two ways the lucky analyst poring over oil figures
(not data on “liquids,” which tend to confuse the peak issue by lumping the crude with
other items) at her green-energy-lit desk would conclude that “it takes fuzzy logic to call
that a peak.” Either annual average output remained on a flat plateau for decades or the
plateau undulated for the same period with such regularity that it traced out a sine curve
whose maximum points happened to lie on a straight line paralleling the horizontal (time)
axis.

Both of these scenarios are sterile because they ignore that unidirectional (irreversible)
and chaotic (nonlinear) developments must accompany the metabolization and ousting of
a nonrenewable, yet admittedly crucial, natural resource.

The flat plateau postulate tacitly presumes that the discovery of new reserves
compensates for emptying known ones; technological development keeps costs of access
and exploitation from rising to prohibitive levels; and the introduction of substitutes
occur in such prefect combination as to preempt any fluctuation in worldwide demand for
an extended period. Believing in this scenario is like buying a lottery ticket and taking out
a huge loan with the intent to repay it from the winnings.

“Perfect undulation” differs from the flat demand mirage by the implicit assumption of an
automatic self-coordination among all “below ground” and “above ground” factors of
production and consumption. Here the loan secured by the power ball ticket is cautiously
lower because there is evidence of undulation.

The economic setback, which ensued in the wake of rising oil (energy) prices in late
2007, reduced both demand and supply. Oil and energy prices fell until stimulative fiscal
and monetary policies rekindled growth, prompting a new increase in consumption
(demand and supply).

The currently experienced cyclicality may indeed be equated with undulation. But
how can it be regular?

The probability is near zero that the joint dynamic of population growth and economic
expansion, sputtering as it may be through periods of stall and recovery, and the financial
crisis, which is inseparable from the world’s encounter with the growth-constraining
exhaustion of low-cost barrels, would make the evolution of global oil output time-
symmetric.

The long-observed fact that reduction in unemployment lags behind general recovery
leads to the inference that impoverishment and income differentiation within and among
nations is likely to be one of the unidirectional processes accompanying the foreseen
undulation in oil production (hence, in the world economy). That is, by the time

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employment reaches its pre-recession level, a new, prohibitive oil-price triggered
recession would slow job creation and bring new layoffs.

Statistics corroborates this hypothesis. Worldwide unemployment gradually declined

following the 2001-2002 recession, from 6.3 percent in 2003 to 5.7 percent in 2007
before the new downturn pushed it up again to 6.6 percent in 2009 (IMF data). The
International Labor Organization (ILO) forecasts the number of jobless persons to range
between 219 and 241 million this year -- the highest on record. And, to paraphrase
Bertolt Brecht, the bitch that bore triple-digit oil prices is in heat again.

The quack oracle of “peak on demand”

Some analysts claim that the phasing out of oil dependence is going to be a relatively
unruffled process because it is natural moderation and decline in demand rather than the
insufficiency of affordable supplies that will direct and regulate it. Demand in the
developed world has already peaked, the reasoning goes, and the rest of the world will
follow suit in due time.

Based on projections showing flat oil consumption in the OECD area during the next 20
years, the theory’s proponents argue that the trauma of the past decade has revealed that
once an economy reaches a certain level of development, it can substitute away from oil
through innovative programs and radical policies.

The idea stinks of advocacy.

While it is in the best interest of petroleum producers and exporters to convince the
public that “supply peak” is sheer nonsense, the opposite happens to be true: Partial
equilibrium amidst an aggravating, dynamic general disequilibrium is plainly impossible.

Since oil is both fungible and critical, the consequences of an evermore expensive
barrel do not recognize national borders.

No area can isolate itself from countervailing megatrends in the rest of the world.

A secular rise in the world price of oil is bound to affect OECD countries directly
because the restraint in consumption is not all that dramatic. DOE/EIA reference case
shows only a relatively minor decline in OECD’s reliance on “liquids,” from 38 percent
in 2010 to 36 percent in 2030. What’s more, EU dependence on oil imports is on the rise,
in Japan it remains nearly 100 percent, and although it should embark on a downward
trend in the United States, it is still expected to be high enough (ca. 40 percent in 2030) to
retain the national economy’s vulnerability to price hikes and/or supply disruptions.

Indirect effects are equally unavoidable. A climb in oil prices as the marginal cost of
production rises will negatively affect every single net oil-importing nation. It will
increase production costs across the board and weaken the ability to pay for imports in
general, thereby endangering the stability of those economies (regardless of OECD

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membership) where structural trade surplus is an important (positive) component of the
GDP.

Many independent analysts consider the need-based forecasts of oil consumption in 2030
unattainable. Anemic investment in the sector, relative to what would be required to
support projected levels of demand, is an early indication that a physical constraint to
global growth, called “cheap oil,” is already binding. Ambitious national economic
targets, conceived with the historically conditioned belief in the abundance of
inexpensive energy, could easily get lost in a dense new network of pernicious
unknowns.

Supply, not demand, will dominate the endgame.

The world economy pushes toward a boundless increase in material welfare, propelled by
private profit-maximizing incentives. These ends and means have proved to be in perfect
harmony as long as the absolute (physical) limits to economic expansion were
appropriately distant. But now, when they are near (the Earth is full and getting fuller
with each passing day) and it has become necessary either to thump down the growth
gung-ho or find substitutes for the actually binding resource (“cheap oil”), the system is
in a failing mode.

The means (market-guided decentralized decision making) turn out to be incapable of

adapting so as to accomplish either alternative without endangering income and
employment, that is, social peace.

Growth is essential for the survival of private business and substitution away from
nonrenewable resources is growth-hampering in the long, and self-disabling in the short
run.

Concerning the long view, a renewable-resource-based world economy is smaller than

the one that can -- at least for a while -- exponentially finish off once-in-a-geological-
time gifts of nature. The future will say a very harsh “nay” to the cornucopian myth of
endlessly growing material abundance.

Regarding the immediate perspective, our socioeconomic organization’s

unconditional reflexes effectively prohibit the release of resources required for the
structural transformation of the resource base.

This phenomenon unfolds before our eyes. When the price of oil is relatively low,
substitution for it is all but forgotten, as if economic agents suffered from transient
amnesia. And when it is high, the cost of substitution goes up, and this circumstance, in
conjunction with the curtailment of aggregate demand, discourages the flow of capital
into the grand project of real sustainability.

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Comprehensive and persistent government action would help, of course, but the system
resists that with every ideological, institutional, and legal inch of its body politic, with
every cell of its cultural matrix.

The conclusion is that constraints on the supply of oil rather than consciously restricted
demand will usher in the end of the age of petroleum. The most likely scenario is a
secular increase in the price of oil by sequential shifts in demand being met by less and
less adequate and ever slower responses from the “supply side.” Physical and economic
factors jointly contribute to this sluggishness. As the marginal cost of extracting oil rises,
so does the opportunity cost of “extraction now.”

Since reaching a maximum in the rate of output is unavoidable, and lingering at that level
for several years is unlikely in the extreme (it would require the coincidence of too many
conditions to be regarded realistic), a peak in worldwide oil production remains the sole
intrinsically plausible alternative.

Most analysts share this view. Opposing arguments in service of oil producing nations’
strategic propaganda are so threadbare that they border on the droll: The Arabian camel
asking a crowd of onlookers with sublime nonchalance, “What hump?”

The conundrum arises from the ex ante unpredictable peakedness of the peak
(kurtosis) and the temporal landscape in which it will find permanent home ex post.

A lengthy, multigenerational progression away from the disaster-bound practice of

scavenging on peleobiological remnants in support of exponential economic growth will
play the decisive role in imparting and conserving the depletion leg’s negative slope. Net
exporting nations shifting supplies from foreign to domestic users will contribute to it,
since the implied curtailment of oil trade will reinforce permanent, post-oil characteristic
transformations in net importing countries.

Among the factors counteracting the descent (e.g., discovery of new, relatively “low
marginal cost” reserves, technological development, revitalized demand associated with
economic recovery), setbacks in substitution, exactly because of the high real price of oil,
stand apart.

Oil dependence penetrates all forms of extrasomatic energy. Harnessing even the most
sustainable sources -- movements of air, water, and geologically endowed flows of heat --
requires oil. Contrary to conventional economic calculus, when the barrel is high, the
development of inexhaustible energy sources suffers.

Indeed, a widening discrepancy between reality and expectations bids fair to be the
malheur of our epoch.