Crude oil is at $65 a barrel and rising. Traders on commodity exchanges
are warning that a cold winter in the northern hemisphere could see
prices, already up 38% since the start of the year, rise a lot further.
I've been a little surprised at the continuing steady rise of
oil prices over the past few months. After all, with only a couple of
exceptions, even the most pessimistic peak oil folks didn't think world
oil production is going to peak for several more years, which means
there's not much reason for short term price spikes. So what's the
explanation?
It's possible that it's due to nothing more than normal short term
market fluctuations. However, the chart on the right suggests the
answer is more fundamental: demand is now exceeding supply. And while
this doesn't necessarily mean that production has peaked, it may mean
that we've hit the supply/demand crunch I wrote about a couple of months ago:
Current
world demand for oil is about 84 million barrels per day, and current
world production capacity is about....84 million barrels per day. As Amy Myers Jaffe points out, OPEC's spare capacity — and thus the world's — has dropped nearly to zero in the past few years. Everyone is pumping full out.
This is why prices are increasing now even though there's been no
oil shock. It's not because of a sudden disruption, it's because demand
is now bumping up against supply. What's more, this is a permanent
condition: new capacity takes years to develop, so even in the best
case supply will only barely keep up with future growth in demand.
There's not much margin for error.
Oil production
will almost certainly surpass 84 million barrels per day as new fields
come online in the future, but demand is going to increase right along
with it. Thus, unless there's a global economic shock of some kind,
it's likely that demand is now permanently equal to supply. There's no
spare capacity left, and there never will be again.
This mean that we're now living in a different world. I'm not sure
what all the ramifications of this are, but one thing is pretty
certain: the next oil shock — and there will be one eventually — is going to be worse than any previous shock. Fasten your seat belts.
I think it likely that the human species is headed towards a "triple whammy" in this century:
1. Oil depletion: we have consumed about half of the earth's
oil deposits (the half that is cheapest and easiest to get at) over a
century or so. We will substantially consume the remainder in the next
50 years. When it is gone there is no other energy source or
combination of energy sources that can "replace" that one-time windfall
of cheap, readily available energy." When it is gone, those aspects of
modern human civilization that are utterly dependent on an abundant and
ever-increasing supply of cheap energy will come to an end. This will
be massively disruptive, socially and economically, to advanced
industrial societies, particularly the USA which is probably the least
prepared to deal with it.
2. Global warming:By burning up half the world's oil
deposits (plus lots of coal and natural gas) we have already brought on
global warming and consequent climate change that empirical observation
strongly suggests may already be irreversible, accelerating, and
catastrophic. As we burn up the other half in the next 50 years, we
will ensure that the earth experiences a global environmental
catastrophe that will, among other things, kill hundreds of millions or
billions of human beings, and may threaten the very survival of the
earth's biosphere as we know it. (It is important to remember that, as
serious as it is, global warming is only one of the injuries we are
inflicting on the living earth. We are also causing massive ecological
damage of other kinds, through other means, such as conversion of land
to human use and destruction of oceanic food webs.)
3. War: I expect that the human response to the above two
crises will be typical of the human response to similar, smaller-scale
crises in the past: war. In this case, up to and including nuclear war,
possibly large scale intercontinental nuclear war (which has almost
occurred several times in the past just by accident or mistake, and
could easily occur that way in the future).
Unfortunately I see little reason to expect anything other than an
extremely grim future not only for humanity but for all life on earth,
as nature's little evolutionary experiment with big-brained,
opposable-thumbed primates comes to a tragic conclusion.
I've been a little surprised at the continuing steady rise of
oil prices over the past few months. After all, with only a couple of
exceptions, even the most pessimistic peak oil folks didn't think world
oil production is going to peak for several more years, which means
there's not much reason for short term price spikes. So what's the
explanation?
