Summary: a brief analysis of Matt Savinar’s Life After the Oil Crash. Are we doomed? Probably not. My title is, of course, fun but absurd. Peak oil is too vast a subject, the range of expert opinion too wide, for any blog post to pose as more than a introduction — showing one perspective of the many possible. Still, I believe this makes a good case for betting that peak oil will not result in depression and war. Please see the conclusion at the end for caveats, and the links at the end for more information.
“Are We ‘Running Out’? I Thought There Was 40 Years of the Stuff Left”
Oil will not just “run out” because all oil production follows a bell curve. This is true whether we’re talking about an individual field, a country, or on the planet as a whole.
Oil is increasingly plentiful on the upslope of the bell curve, increasingly scarce and expensive on the down slope. The peak of the curve coincides with the point at which the endowment of oil has been 50 percent depleted. Once the peak is passed, oil production begins to go down while cost begins to go up.
In practical and considerably oversimplified terms, this means that if 2005 was the year of global Peak Oil, worldwide oil production in the year 2030 will be the same as it was in 1980. However, the world’s population in 2030 will be both much larger (approximately twice) and much more industrialized (oil-dependent) than it was in 1980. Consequently, worldwide demand for oil will outpace worldwide production of oil by a significant margin. As a result, the price will skyrocket, oil dependant economies will crumble, and resource wars will explode.
The issue is not one of “running out” so much as it is not having enough to keep our economy running. In this regard, the ramifications of Peak Oil for our civilization are similar to the ramifications of dehydration for the human body. … A loss of as little as 10-15 pounds of water may be enough to kill him. In a similar sense, an oil based economy such as ours doesn’t need to deplete its entire reserve of oil before it begins to collapse. A shortfall between demand and supply as little as 10 to 15 percent is enough to wholly shatter an oil-dependent economy and reduce its citizenry to poverty. …
Before booking flights to New Zealand or Tasmania, let’s consider this carefully.
I. These forecasts seem very confident. Are they credible?
Does Savinar subscribe to the Psychic Hotline? Energy forecasts — esp. those warning of Peak Oil — have been notoriously wrong for many decades. Has the future suddenly become clear as glass? Let us parse the third paragraph on this home page.
“In practical and considerably oversimplified terms, this means that if 2005 was the year of global Peak Oil, worldwide oil production in the year 2030 will be the same as it was in 1980.”
It was an evil day for humanity when Johann Carl Friedrich Gauss “invented” the bell curve. It applies to many phenomena, but not to ALL phenomena. There is a strong basis to believe the global production curve will be asymmetric. Just to mention one, the graph should be of “liquid fuels” not oil, as substitutes for petroleum (e.g., biofuels, coal to liquids) were insignificant on the way up – but might be significant on the way down. Also, 2005 may have been but probably was not the peak year (see section II below).
“However, the world’s population in 2030 will be both much larger (approximately twice) and much more industrialized (oil-dependent) than it was in 1980. Consequently, worldwide demand for oil will outpace worldwide production of oil by a significant margin.”
How wonderful that the author understands so much about the technology and economy of 2030. No doubt he is a billionaire, as his technology and biotech bets made in 1986 must have paid off nicely.
“As a result, the price will skyrocket, oil dependant economies will crumble, and resource wars will explode.”
Sounds ominous. Can we see his forecasts for 2008 written in 1986? Did he predict the USSR’s collapse, the two Gulf Wars, the Rise of China, and the economic growth of the past five years (perhaps the fastest global growth since the invention of agriculture)?
The actual experts that I read tend to be more modest in their predictions. In fact, I suspect an inverse correlation between expertise and over-confident rhetoric. For example, Robert Hirsch’s writing sound nothing like this site.
Peaking, political or geological, might have already occurred, or might occur during the next ten or twenty years. We do not have the data necessary for more accurate forecasts (e.g., data on Saudi reserves).
Short-term fluctuations are common in the record, so the plateau in oil consumption since 2005 tells us little — especially as we do not know the cause. It might result from …
- geological — we cannot bring on new production faster than decline of existing fields
- transient — new developments have not yet caught up with rising demand), or
- political — Middle Eastern producers can produce more, but choose not to. See these posts: definition of political peaking, and its announcement.
As oil prices have risen over the past five years, the adaptation process has already begun. We just need time. Among the three forms of peaking, Savinar assumes the worst case — a “strong form” of peaking in which a peak occurs soon (before the adaption process has run far), with a short plateau, followed by a rapid decline (he calls a global 3% annual decline rate “conservative”, because many fields have declined at faster rates, which does not take into account the difference between “one field” and “all fields”).
That is, of course, possible — but not, as Savinar implies, certain. Even that scenario would not mean the end of civilization, just severe economic pain during the ten or twenty year-long adaption process, for the reasons discussed below.
III. The magic of prices
Savinar assumes that rising prices will wreck civilization, with no other effects. Changing prices are information in motion for a free market economy, signaling changes in the environment and forcing people act. The author ignore these mechanisms.
A. Substitute other things for energy. Convenience (car pool or buses instead of driving alone to work or play). Higher cost goods from local suppliers for cheaper but distant goods. Substitute rail for truck transport. Local vacations for trips to Disneyland, Las Vegas, or Europe. Light clothing for air conditioning; sweaters for heating. Tele-conferencing for meetings.
B. Make investments (capital expenditures) to increase energy energy efficiency. Insulation. More efficient motors. Hybrid cars.
C. Make investments to substitute other forms of energy for petroleum. Replace gasoline and diesel vehicles with electric cars, trucks, farm vehicles. Solar panels replace diesel generators. Electricity and water can replace natural gas in the production of fertilizer. Convert coal to liquid fuel.
D. Innovation: higher prices spark innovation, both new ways to do things and new technology.
As stated above, all these things take time.
IV. Energy efficiency
Savinar assumes that reduced oil consumption means less economic activity. History shows this is not necessarily true. Oil prices rose from $1.80 in 1970 to $36.83 in 1980 (Arabian Light oil price, as posted at Ras Tanura). Reacting to that, global oil consumption peaked in 1979 at 66,048 million barrels/day, then dropped by 14% through 1983 — reaching the 1979 peak again only after 14 years, in 1993 (see the BP Statistical Review for details). During that period the global economy (GDP) increased at roughly 3%, slightly below the post-WWII average (using IMF data). A fourteen percent decline in consumption!
At $120, oil prices are up 6x from the 1990’s average. Almost certainly that price shock has created substantial efforst to change energy use, whose results might have not yet appeared in the data. But they will appear, I suspect. Sooner than people expect.
V. The global effect of high oil prices
Unlike the author’s implied assumption, money spent to buy oil does not disappear. Oil producers invest or spend it. Hence rising oil prices shift wealth and income around the globe, not destroy it. To the extent that oil producers save more than oil consumers, this has a net slowing effect on the economy. But nothing like the Armageddon described in doomsters’ forecasts. This reduced growth in GDP slows the growth in demand for oil. If prices rise so that real global GDP slows to 2%/year (very roughly), oil demand no longer increases. If oil prices rocket high enough, global GDP will actually fall (historically a rare event, except during wars).
To put this in perspective, oil prices have risen from their 1990’s average of $20 (West Texas Intermediate) to $120 during a period of record or near-record (depending on whose numbers are used) growth in global GDP.
Why have rising oil prices not wrecked the global economy? The consensus five years ago was that every $10 increase in oil prices slashed at least 1/2% off real global GDP growth. Answer: energy consumption per dollar of GDP has declined — a lot. In 1950 the US used almost 20 British Thermal Units (BTU) to produce $1 of GDP. In 1970 it was 17.44 BTU. Today it takes 8.78 BTU. (From The Gartman Letter, 7 May 2008, based on data from the EIA and Dr. Mark Perry of the University of Michigan)
This is not because we “no longer make things.” US manufacturing as a % GDP has been flatish for a generation.
Much of this post is over-simplified for brevity and suitability for a general audience. Also, I may have incorrectly represented Matt Savinar’s assumptions. On the whole, however, I hope this post shows the weak and speculative basis of “end of civilization” and “die-off” scenarios about Peak Oil. Given all this, I find this discouraging: (from Savinar’s “about” page)
LifeAftertheOilCrash.net, averages 15,000 visits and 50,000 page view per day. It is assigned reading at multiple university courses around the world.
Unfortunately there is an information shortage about Peak Oil. There is too-little good research (Hirsch and his peers are grossly underfunded), and even less reliable information for the public. Neither is a good indicator of our readiness for peak oil.
The faster we prepare, the easier the transition will be to peak oil. Other nations already have strong programs in motion to prepare for peak oil. We are among the world’s laggards. Civilization will continue even if America falters as a result of peak oil, just as it survived the fall of the Spanish Empire. We have the ability to adapt, but so far lack the will and awareness of the need. Over-dramatizations like “life after the crash” are part of the problem, in my opinion, not part of the solution. They are too easily dismissed, and unfortunately the awareness of peak oil often gets dismissed with them. Equally unfortunate, their facile certainty about the future discourages the need for research and modeling about our energy resources and consumption — necessary to efficiently marshal and apply resources for rapid mitigation programs.
No matter how well and rapidly we prepare, bad things might still happen. Civilization, indeed human life itself, depends on Fate. Soon and fast collapse of oil production, super-bug pandemics, larger asteroid or comet impact, massive climate changes, eruption of a super-volcano, or a supernova exploding within 50 light years … the number of high impact – low probability scenarios is legion. But we live our lives in defiance of these things, not in fear of them.
Originally posted in Fabius Maximus and reproduced here with the author’s permission.