End of the Petroleum Age

I believe most people not familiar with the oil industry truly believe today's overall oil economics are normal and that supply and demand should return to balance without extraordinary adjustments.  Those beliefs fuel conspiracy theories underlying current price action such as actions by producers (OPEC or major oil companies), speculators, state hoarding, etc.  While there is some minor merit in confirming the role of these matters in creating disequilibrium, such examinations detract from understanding and crafting effective policy responses to the current structural situation.

View the oil production graph available here.  People can debate if the world peak was 2005 or whether it will be 2010.  In the big picture a few years one way or the other doesn’t make any difference.  Accelerating production of remaining irreplaceable oil may change the production curve slightly but not the overall  situation.

The existence of savings, unused credit, government reserves, and unessential purchases, has slowed a market response to higher prices.  Normally, consumption would be expected to go down in response to higher prices.  The “must have” view of oil has muted reduced consumption and muted restraint on new demand.  Some people are desperate to buy fuel to go to work.  Some people are desperate to heat or air condition their homes.  The structure and infrastructure of our society exploits the petroleum age with it suburbs, exurbs, interstate highways, air transportation system, and long haul railroads.  Societies such as China are emulating the industrial revolution of the 1920’s when oil production was in its early days of increase.  With their new found wealth as manufacturer for the world, they are in a position to capture a significantly larger share of world oil production.

Those who have studied history know that access to food, access to water, and access to energy are three major catalysts of war.  Atop these major catalysts may be cloaks of religious or social matters that seem pivotal however need and plunder often are the true motivators. 

At the point of oil production inflection in a world with expanding demand, the search for a clearing price that will temper demand or temporarily expand production yields prices that are perceived as outlandish.  That is because we haven’t experienced a similar situation of critical need that cannot be satisfied in either the short or long term.  Price as a clearing mechanism seems to fail.  Government is going to have to visit rationing and that will be a difficult debate.  It represents central economic control well known as a core principal of the Communist Political System and the antithesis of Free Markets.  Our country to survive has to adopt policies to make the country more energy efficient while encouraging substitutes to oil.  The most important way to do that is by clustering its people.  The supporting infrastructure for such structure can be designed for very efficient energy use.

The desire to avoid abandoning huge portions of the current structure and infrastructure of our society, suggests deploying electric vehicles will solve petroleum imbalances for years to come.  This has some appeal because life as we know it has a chance of continuing.  When this alternative is evaluated in carbon footprint terms, it is bad public policy as a total response.  It is a band aid solution.  It is an acceptable element of a much more comprehensive response.   For a recent article discussing pressures on the US refining industry see Roger Ihne's article.

Population size management is frequently dealt with stealthily because some people believe such matters are totally private and a matter of core belief.  Periodically, resources are allocated to a population allowed to grow without restraint.  In the US, we rarely see this in a significant way.  In the world, marginal populations periodically starve or die from lack of basic medical care.  In the US, add the context a US dollar losing its purchasing power in world markets, and it becomes clearer that US wealth is actually declining despite higher nominal values.  Government policy has long been to foster modest inflation because a deflating economy tends to take on a life of its own and is difficult to manage.  But years of trade imbalances and funding government with borrowed money has debased the currency.  Today's energy situation is likely to force individual purchase decisions by Americans among food, medicines, medical care, etc. and require tapping into savings and unused credit.  Such a mess can be politically destabilizing and force reduction or elimination of former government safety nets such as Social Security and Medicare. 

I doubt our politicians will focus current discussion using carbon footprint principals when rounding up the usual suspects is so ingrained in political methodology.  Who has the confidence in their beliefs to work toward such a major restructuring of our society and keeping discussion focused on matters that will really make a difference.  Absent such courage, expect energy to destabilize our world in ways well beyond the current situation.

© 2008 - 2010 by Walter K Cruden
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