Peak & Prices As Drivers Of Change
Special to Canadian Dimension June 9, 2008
In 2004 when Post Carbon Toronto was initially formed the data supported scientific theories of peak oil and gas were considered by the media and most economists as only slightly less deranged than a 9/11 conspiracy theory. Today that situation has changed far more quickly than we thought possible, in this we have much company. The reason for this change however has much less to do with the work of groups like ours, PCI, GPM, Parkland and ASPO, than it does with the price of gasoline.
Today it is difficult to believe that $138 a barrel oil, with $150 coming soon to a theatre near you, and the accompanying travails of the big three car makers, and the airline, and trucking industries, not to mention consumer anger, won’t be enough to focus our media and our society’s collective mind on the issue of fossil fuel depletion. Given that our original aim at PCT was to highlight the issue of peak we have in that sense become redundant. With that said there is still important work to do as it is essential that the narrative is properly framed if we are not to move from the frying pan only to land in the fire. This is something that people like those who were signatories to Rick Munroe’s letter to the CBC can help.*
*Rick Munroe, National Farmers Union, has asked Canada’s national broadcaster, the CBC, to fully cover the issue. Signatories include authors Thomas Homer-Dixon, Gordon Laxer and Richard Gilbert, geoscientist David Hughes, a brilliant thinker by the name of Kjel Oslund, and yours truly, among others.
To my mind one of the most important memes that needs to be widely propagated is an understanding that the limits to fossil fuels is perhaps the luckiest break that our species, and the ones that we don’t manage to wipe out, have ever caught. The proof for this is captured most easily by a simple thought experiment.
Imagine if you will that nature’s endowment of oil and coal was far more vast than it actually is. Imagine if instead of 74.4 Mmb/d (IEA, February, 2008) we could easily pull out of the ground every day 300 million barrels of the sweetest light pressurized crude. And instead of 4970 Mt (WCI, today, 2008) we every year mined 10,000 million short tons of the highest grade coal from the richest seams. The result of this would be a price as low as the energy return would be high.
Given such a scenario what would stop our businesses, and the businesses of India and China, et al, from doing so? The immediately obvious answer is nothing. Not climate change, not species extinction, not the toxification of our air water and soil. Not at least until it was far too late. The last five decades since the publication of ‘Silent Spring’ are proof of that. The last three decades since the first oil shock and the publication of ‘The Limits to Growth’ further proof.
In fact just about everything about our behaviour over the last five decades in the face of ample warnings indicates that if abundance and low price were the reality, instead of the production plateau and rising prices that we are seeing today, the
arguments for change would exist solely at the outer edges of the mainstream.
No more potent than they were when they were first formulated by native North Americans as a reaction to our destruction of their way of life. Our destruction of the buffalo, the forests and the fisheries.
Even today with the extraordinary rise in prices over the last seven years, with the seas and the sea of change rising, still the internet and our media is filled with websites and pundits who deride peakists as being hooked on “doomer porn”. Castigated for being “anti-development”, their fact based analysis pejoratively dismissed as the puerile musings of “latte sipping eco-freaks”.
Hypocrites unwilling to give up their lavish lifestyles even as they demand that the poor of the world remain in their place. On the plus side at least now they are attacking the messengers more than the message. A step in the right direction, albeit a small one.
Even as brilliant an investigative journalist as Greg Palast dismisses the possibility of an early peak. And only last week I had an extended email correspondence/debate with David Smith, Economics editor of the London Times U.K., who is still very sure that any peak is a long way off. Until very recently such like cornucopian beliefs were considered by most in the business and economic communities to be as sound as the law of gravity. Price, and pretty much price alone, has changed this dramatically.
The reason why this factor should have so much influence when science and the marshalling of fact have had so little is not all that difficult to comprehend if one understands one central fact. I.e. Over the last century and a half we in the developed world have raised the fundamental precepts of classical and neo-liberal economics to the level of natural law. As a result pretty much the only effective tool we have been left with for extensive behaviour modification is price.
The rise of corporatism and globalization, the WTO rules that enhance this dominance, and the all-powerful will of trillions of dollars of capital have conspired to “technocratically isolate” our markets from our governments, and our governments from our peoples. One of the most unfortunate effects of this has been to exclude from the policy and regulatory processes, or at least render ineffective, all science that concludes that industry is seriously damaging the planet we live on and markets are failing to respond in a timely manner. A reality if left unchecked that will ultimately undercut our standard of living and quality of life. The very thing that our markets are assuring us they are guaranteeing.
N.B. All of this is not to say that at the more rarified level of geo-strategy and politics that our ‘betters’ have been wholly ignoring the mounting evidence. To quote former CIA head, former Secretary of Defence, and the first ever U.S. Energy Minister, James R. Schlesinger, “Conceptually the battle is over, the peakists have won.” The difference between this understanding and price being that only price is affecting behaviour. The President of the U.S., and even the Premier of Ontario, on the other hand continue to essentially exhort their citizens to “Shop till you drop.”
The result of our unhealthy reliance on price alone has been the exclusion of the best available information from our decision making processes. As a result despite the fact that the overwhelming majority of people want to see carbon emissions decrease, want to see military spending decrease, want to see the rate of species extinction decrease, want to see cancer rates and the toxification of our environment decrease, all of these things only continue to increase. The only signal for policy is price and price to date has not internalized these costs.
It is into this mix that the geologically imposed limits to fossil fuels have come in. Now acting as the principal driver of necessary change. Especially here in North America. N.A. was first out of the gate with the large scale extraction of oil, gas and uranium, and its coal deposits are enormous. As a result we were also first to the age of motoring, urban sprawl, electrification and mass production. First to extend the dominance of our corporations and their capital around the world.
We have however crested the wave that carried us to this position of global power. Once wholly self-sufficient in oil, and in fact the world’s largest exporter, today the U.S. imports over two-thirds of its oil. The U.S. in fact imports more oil than China and India combined use in total. My country, Canada, despite being a net exporter imports 50% of its consumption. Exporting its ‘surplus’ to the U.S.
In addition the supply of natural gas peaked in N.A. at the turn of the millennium. This latter fact has been wholly overshadowed by the rise in gasoline prices but in the near term at least is likely to prove even more problematic than oil supply for we northerners.
Reason #1 why this will be so being that most northerners heat their homes with natural gas. And if the history of the extraction profile of this most perfect of fossil fuel energy sources is any guide, and it is, then we will all but certainly find ourselves at less than half our current supply in a time frame that will allow next to no mitigation. A scenario that will ensure not only very high prices but outright shortages. Both of which will translate to many a winters night of alarming danger to the old, the young and the sick. Already North Americans have seen the price of natural gas rise over 600% since 1999, and 55% since last year. Here in my home province of Ontario there is already a social organization called LIEN (Low Income Energy Network) trying to render social assistance to those being affected.
Even coal production seems to have peaked here in N.A.. And while it is true to say that we still have very large deposits of this most polluting of combustible fuels, the poorer energy return of what remains means that the useful energy derived from this source will also experience a marked decline over the next few decades. Unless of course we can manage to burn even more of it than we are today. Not a solution that any sane person could advocate. Nonetheless one that is most assuredly being studied at the highest levels of the U.S. government where adding the demand of coal liquefaction to the coal market is already in the planning stages.
That this shift from plenty to scarcity in terms of available energy will impoverish us in a material sense cannot be doubted by anyone with even the smallest understanding of the relationship of energy to economic activity and work done. (Not to mention trade balances and inflation.) That this will require massive and fundamental changes in how we organize ourselves is equally clear. What is less talked about but essential to understand is that these are changes that needed to be made in any case, and changes that we almost certainly would not make absent these limitations.
On the industry side one need only look at our big three’s creation of an SUV fleet in the face of the first two oil shocks to know this as true. On the political side one need only look to Chretien, Clinton, Harper and Bush’s inaction on climate change. A twenty year period wasted despite the scientific evidence being ‘in’ as far back as 1988. No small part of this delay attributable to the effectiveness of corporately funded denial machines.
Over the next decade the U.S. will not be able to maintain its hegemony and military spending. It’s debt, trade and energy deficits ensure this fact. Gore Vidal was always right about America’s global reach when he said that “It will end because we can no longer afford it.” Chalmers Johnson estimates the real total for America’s military spending is now over $1 trillion a year. (All actual expenditures plus the proper allocation of yearly interest charges to the DoD for its part in creating America’s national debt. Now closing on $10 trillion.)
N.B. The result of America’s return to one of a community of nations will mean that the ‘center’ of the world will move back to where it has been for most of human history, Eurasia. Let us all fervently hope that this inevitability can be adjusted to more peacefully over the next few decades of this new century than it has over its first.
Almost everywhere in the developed world we will be forced to massively scale back our miles traveled, and the number of goods that require energy, and nowhere will this be more true than here in N.A. We quite simply have left things too late, and made too many unwise investments. The Germans and Scandinavians on the other hand will not only continue to enjoy the best standard of living and quality of life anywhere on planet they will also see their relative affluence climb significantly in relation to everyone else. The reason for this is obvious, they saw the future and embraced it. They like we knew that even if fossil fuels and uranium were not limited we would need to move away from them in any case. The difference being that they acted on this knowledge.
There will be much bad news and human misery accompanying this time of transition. Jobs lost, families broken by penury and bankruptcy, communities hollowed out, and social unrest of the kind that we have not seen, at least here in the U.S. and Canada, in generations. At the same time the various denial machines will co-ordinate with many in media and politics to facilitate multiple successful rear-guard actions by ‘optimists’, militarists, ’security’ shills, and their corporations. A constant thorn in our side that will greatly slow the rational allocation of our molecular patrimony and judicious investments in the future. Much of this delay is avoidable, but then so too were the last three decades of inaction.
Rising prices and demand destruction will wreak havoc at every level from the personal to the industrial and still we will hang on to the very model that is causing so much of our pain. That this will be so is incontestable. That we will nonetheless collectively have to fight for the whole of this century against the wrong-headedness of this antediluvian and atavistic thinking is equally undoubtable.
The market and its pricing mechanisms alone cannot deal with fossil fuel depletion without causing the collapse of the very thing it putatively seeks to protect. This is not irony but tragedy. Those agitating for change are not arguing for an economic collapse but the mitigation of just such a collapse. An outcome that is now at least in part unavoidable because of our industries reluctance to adapt to changing circumstances in advance of ruinous price increases.
The simple fact of the matter is that the dominance by the markets and their pricing mechanisms over the policy process will have to be modified. The good news is that it will be. The bad news is that the longer we wait the worse off we will be. To quote a friend of mine, “The end is not in doubt, only the road we will take there.” Even so, for now at least, price is the one driver that is creating the kind of signals and modifications that are so obviously needed for a whole host of reasons.
As to what is driving these price increases. It is impossible to parse exactly how much of the rise from $24 to $138 that we have seen during Bush’s presidency has to do with market manipulation and geopolitics, as opposed to supply constraints and runaway demand. What is known on the supply side is that the supply of crude oil has been on an unchanging plateau since 2005. What is also known is that Russia, Saudi Arabia, Norway, Iran and Nigeria, account for half the exportable oil in the world, and whatever the reasons, over the last year the cumulative production from these countries has at best remained static. Demand on the other hand has not.
The Brookings Institute and the Dominion Institute separately funded the creation of economic models aimed at projecting the result of supply constraints with oil. The Brookings study found that a 4% decline in supply would lead to a 175% increase in price, whereas Dominion’s model projected a 550% increase given a 15% decrease in supply. Surely this would translate to similar results if supply remained the same as demand rises. And while these studies are by no means definitive they are at the very least an indication that the relationship between supply and demand is a major component of the prices we are seeing.
Not without reason we hear much about the rise in consumption of China and India. What we here much less about is that demand in both Russia and Saudi Arabia has also increased considerably over the last few years thereby cutting into their ability to export. Saudi Arabian demand increased by 5% last year alone. Also rarely mentioned is the fact that 70% of the worlds production is declining every year by about 4 MMb/d. The other 30%, trying to rise by that much or more, coming mostly from Russia and Saudi Arabia. The new oil projects coming on line accounting for virtually all of the rest.
The other angle that might bear looking at in order to help us better understand the why of prices as we move forward is separating out the oil extraction rates and demand in oil exporting countries; from the oil extraction rates and demand in oil importing countries.
Saudi Arabia and Russia will after all one day ‘roll-over’ and see their production begin to fall. It would be best if we were to know such a thing in advance. Although there is mounting evidence that this may in fact already have happened to one or both of them. When it does and their production begins to decline one can be sure that the ‘high’ prices of today will be happy memories by contrast for we who have had our lives and societies so shaped by the ‘Age of Motoring’.
Another fact to consider is the fact that the ‘global’ price of oil is really no such thing. It is instead the price of oil imports, with most oil exporting countries selling to their own citizens at a discount. Canada and Norway being exceptions to this rule.
The difference between these last two countries for their citizens being that Norway’s high cost results in the capturing of much more of the economic rent of their molecular patrimony. These monies then fund a broad range of conservation, public transit, and other programs. Whereas in Canada most of the value of this one time gift from nature goes to corporations, most of them not headquartered in Canada. The result being that a vanishingly small part of the $138 makes its way to programs for conservation, renewables and transit. Yet another example of the fact that prices and markets alone will not make for an easy transition from the box canyon we have engineered for ourselves. Something that GM made very plain to its workers only this past week.
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Comment by A to Z Energy ETF » Blog Archive » DrumBeat: June 10, 2008, writing from on June 10th, 2008 at 11:14 pm:
[…] Peak & Prices As Drivers Of Change Today it is difficult to believe that $138 a barrel oil, with $150 coming soon to a theatre near you, and the accompanying travails of the big three car makers, and the airline, and trucking industries, not to mention consumer anger, won’t be enough to focus our media and our society’s collective mind on the issue of fossil fuel depletion. Given that our original aim at PCT was to highlight the issue of peak we have in that sense become redundant. With that said there is still important work to do as it is essential that the narrative is properly framed if we are not to move from the frying pan only to land in the fire. […]