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More on Peak Oil

Last month I wrote a little about the ‘peak oil’ problem after watching the film A Crude Awakening: The Oil Crash.  With the recent escalation of oil prices, it is much easier to believe that the time of peak oil (when production can no longer increase and starts to contract) may be with us.  I came across a host of other videos dealing with the subject and showing how significant these events could be.

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How bad will this oil situation get?

I have heard mentions of the coming of peak oil for a number of years now. The other night I watched the film A Crude Awakening: The Oil Crash, a film first released in the US back in March 2006 but not in the UK until November 2007. The film is mostly made up of parts of interviews with some oil industry people and people who have researched the subject.

The film, coupled with the current massive increase in oil prices made me realise that I hadn’t really understood the full implications of peak oil and how quickly it could affect us.

The peak oil concept, while being significantly absent from much of the media, government and industrial dialogue, seems mostly to have been met by dismissal, a little like how global warming was received 10-20 years ago. As the film points out, there are a few dangerous assumptions at work behind these dismissals… there seem to be some hangovers from the 1970s when 2 oil crises prompted a lot of “it’s the end of the world” type cries followed by complete returns to normality shortly afterwards, unfortunately, the current situation is based on a completely different problem. There also seems to be a belief that we have to be “running out of oil” before we have a serious problem. But this does not take into account how catastrophic rising demand and falling production can be for market prices. In fact in the 1970s it seems that the quadrupling of prices was only caused by a 5% reduction in availability.

Finally, with the incredible reliance on oil that we have built much of the world’s economy and infrastructure on, the realisation that oil supply will only shrink and become more expensive in the future is highly likely to cause an economic crash, possibly of gigantic proportions.

One of the most interesting interviewees in the film was Matthew Simmons, an energy investment analyst with a long history with the oil business, he is even reputed to be an adviser to George W Bush. He points out that data show that their was a peak in global oil production in May 2005 of 74.3 million barrels per day. As time passes, this is looking likely to have been the point of peak oil production! In August 2007 when he collated this data, the production was down to 72.5 mbpd. Meanwhile, consumption of oil has been growing consistently by almost 2% per year.

The question is, what will happen next? The Guardian’s economist last week wrote that he thought the oil price was suffering from a classic bubble market effect, with speculation driving most of the recent price gains. He was expecting this to collapse at some point and become more stable. Certainly, high oil prices should start to have some impact on demand. Unfortunately, energy markets do not respond as easily to price increases due to lack of alternatives (a person commuting 80km to work by car with no public transport alternative can not easily reduce consumption even if the cost doubles). However, there seem to be noises that the US is losing its appetite for SUVs and some airlines are starting to fold.

What is unclear for me is how much the financial markets have really taken account of of this situation and its implications, and what effect there will be when most people do come to understand it. Are we facing sudden financial melt down or a slower reaction depending on exactly what happens with oil prices? With the way global finance seems to be based on ever more illusory forms of investment, I’m not sure I credit the system with much intelligence.

To understand more, I recommend watching the film and looking at some of the following…