Why are oil prices going wild?

by Chris Harries

“No Peak Oil In Sight”
“Oil Boom Shakes Up Energy Politics”

So scream the headlines. If you read them as fact you’ll be forgiven for believing that Peak Oil is simply not a threat to us any more. So what is going on? If world oil supply is peaking then why have oil prices been on such a roller coaster in recent times?

The Peal Oil lobby is right now experiencing exactly what the Climate Change lobby has experienced for some time, a headlong rush by conservative media commentators to say that it’s all been a big hoax and that there’s no problem after all.

As with climate and wild weather, oil prices will go up and down from month to month, with many peaks and troughs, but underneath all of that ‘noise’ is a steady one-way progression that, in the long run, we can’t run away from.

Understanding the oil price see-saw

To understand what’s really going on it’s necessary to look at the dynamic relationship between oil price and the global economy. If economics is not your forté then panic not, you don’t need to be a Harvard academic. Essentially all we need to know is what we already know: oil is not just the petrol we put in our cars, it is the veritable lifeblood of industrial civilisation. Oil flows through virtually every product that we see around us, our clothing, our food supplies our freight systems, our pharmaceuticals, our building materials, even our solar panels… nearly everything we buy and depend on for modern daily living.

Not surprisingly then, if this vital commodity becomes too costly to get out of the ground, then the ramifications on the global economy are, to say the least, rather devastating. Just look to Europe.

To better understand the oil price see-saw let’s look at what some expert commentators have to say.

The prestigious science magazine Nature brokered this issue earlier on this year with an easy-to-read summary, that you can download here. It’s recommended reading. The article was illustrated by the illuminating chart below, showing the impact of oil depletion on global oil prices.

As you can see, although the dots are quite scattered there has been an abrupt vertical swing at around 74 million barrels of oil per day. (World crude oil supply has stayed fixed on that output for the last six years.)

To understand the relationship further it’s worth going to a paper by petroleum economist Chris Skrebrowski, who argues that peak oil is best defined as the point at which “the cost of incremental supply exceeds the price economies can pay without destroying growth.”

As you can see from this chart, there is a point at which the cost of delivering oil becomes so high that the global economy stalls. The crossover point (around the year 2014) gives the economically determined Peak Oil when sustained growth becomes impossible. That article can be seen here.

The above two articles explain why there is a delicate relationship between oil prices and economic growth. If economic growth stalls then oil prices go down. It is likely to wobble around for some time. Oil prices tend to go up and down with the stock markets, not as an accidental relationship but as a causal one.

So what can we make of the current dip in prices? Do lower petrol prices mean good news for citizens?

According to resource analyst Gail Tverberg, writing in Our Finite World, there’s no certainty as to what may happen next, but if low oil prices are sustained then we are probably facing an emerging global recession, and not just a little one. We’re looking at the ‘D’ word.

That likelihood is captured in the chart below.

As you can see from this chart, growth in the global economy and growth in oil supply are both in decline and follow each other closely. Growth in world GDP is hovering around 1% and falling. At what point does recession happen?

Understanding the facile media outlook

Much of the media distortion around the peak oil issue has stemmed from the classic peak oil graphic (i.e. as in our logo at the head of this website) that shows a peak and then a collapse. To the uneducated media or political commentator this has translated into a simplistic view that after a little while there’s no oil left. Bang! It’s all gone.

“Ha!” they chortle, “we’ve still got oil, the predictions were all wrong.” Such wishful thinking is translating into public confidence too as Australia set record new car sales this Autumn, lumpy 4-wheel-drives being by far the outstanding big sellers.

The graphic logo actually shows that at least half of the world’s oil is still available. Some 8 trillion barrels of it are still in the ground. Add to this unconventional hydrocarbons and coal and there is plenty left to fry the world, for sure.

The Peak Oil problem that the world faces is not that oil will disappear but that nearly all the dirt cheap stuff – that black gold that shoots out of the ground – is gone and the cost of delivering liquid fuels energy from now on is becoming prohibitively more expensive… and, as we’ve seen from the above, this is playing havoc with the world economy… and environment.

George Monbiot’s recent article in the Guardian has unfortunately added to the myth that peak oil was never a problem. Monbiot, as a journalist, loves a punchy line and so his articles are always readable and challenging but sometimes not entirely balanced. (He is now staunchly pro-nuclear power.)

That article was followed by a string of rebuttal articles by those who have been following these issues for some time. One of my favourite writers on these energy subjects is Italian based Ugo Bardi writing on his website Cassandra’s Legacy. Here is what he has to say. And here is Sharon Astyk’s view (in Casaobon’s Book science blog)

It is worth reading through these in order to keep up to speed with current thinking on this subject.

But what about all those new energy supplies, like coal seam gas?

“Drill, baby drill” is the shrill cry we are hearing to ensure energy security in the future, and apparent success on these fronts is part of the reason for the spate of energy triumphalism we are seeing lately.

We can supply a whole new set of charts (try this for starters) to show why this does not translate into energy security, but for a short overview of what these (non-conventional) energy supplies really mean, here is an article by science writer Kurt Cobb writing in his blog Resource Insights.

The problem here is that scientific facts are not the core problem. The real problem (just as with climate change) is human denial when faced with a threatening problem.

I will close off on this article with this link to Richard Heinberg’s latest piece, ‘Peak Denial’.
To quote Heinberg:

Meanwhile, soaring oil prices and plummeting real energy yields from liquid fuels have already left economic carnage in their wake, as a fragile global financial system perched on a Matterhorn of debt has been dealt blow after blow by the failure of the real economy to expand as expected. It turns out that industrial production and global trade depend on energy, not just credit and confidence. June saw weaker oil prices—but this was due to an accelerating erosion of world economic strength (leading to expectations of falling oil demand), not to moderating petroleum production costs or substantially increasing production.

As many peakists have been saying all along, we’ll know for sure precisely when global oil production peaks (in terms of rate of production in barrels per day) only when we can see a steady decline in the rear-view mirror. But by then it will be too late for society to prepare for the economic impacts of Peak Oil. So is the Peak Oil “movement”—not as an exercise in analysis, but as an effort to warn the world and prevent catastrophe—doomed to failure? Maybe. But by the same token so is most of, if not the entire, environmental movement. We will not substantially change our collective behavior until crisis is upon us.

But even if we cannot avert a crisis, we can prepare some portion of the populace for the aftermath. We can build community resilience. We can seed the public conversation with information that will undermine the inevitable, reflexive effort to blame economic unraveling on handy scapegoats. Also, the future will be better if we protect at least some species, some habitat, some wild places, some water, and some topsoil before the energy-led crash of the economy, so that we have an ecological basis for ongoing existence in the absence of cars, planes, iPads, and cheap, abundant fuel.

In short, things will go better for us if we resist denial rather than engaging in it.

[If anyone wants to get into this subject in even greater depth there’s a very comprehensive article here, a conjoint effort between Norwegian and Russian academics.]

(Chris Harries is a long term advocate for sustainability and social justice policies. He is a member of the Tasmanian Climate Action Council and an active member of the Peak Oil Tasmania working group.)

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4 Responses to Why are oil prices going wild?

  1. Garth says:

    Thanks for that informative summary, Chris. I read that article in The Australian and was wondering if I should reconsider my position. But it seems shale oil isn’t quite the same as crude oil. Sure, we might might be able to extract more of the stuff, but it is more expensive and not always easily substitutable. And so the Long Recession continues!

  2. Paul Gilding says:

    Very good summary Chris. One of the better overviews I’ve ready lately and a timely reminder to be prepared!

  3. Helen says:

    Brilliant summary, and thanks Chris for all those links to some very interesting reading. May I add another, for anyone who is interested, to a recent blog entry of the always excellent John Michael Greer. This one ties in nicely with your closing words “The real problem (just as with climate change) is human denial when faced with a threatening problem.”

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