Thursday, June 26, 2008

Oil: Where to from here?

With oil at $137 today, where will it (and we) be tomorrow?

The EIA estimate the price for a barrel of oil between $113 and $186 in 2030. Some recent estimates put the price at $200 this year, or 2009, and $500 within 5 years. The simple answer is that we just don't know where oil is going.

What we do know is that the majority of 'experts' out there, from economists, to politicians, to bankers, even to people who speak for OPEC, have been taken by surprise by these prices.

There are a small, but growing group who predicted current events many years ago. One of the best commentators of all is the author of The Long Emergency, James Howard Kunstler (

Kunstler also presents fascinating views on what he calls The End of Suburbia (available on DVD). He calls suburbia the greatest misallocation of resources in human history. He also criticises human beings for their delusional psychology, based on both a sense of entitlement and making investments entirely based on previous investments. In The Long Emergency he cogently argues why we are in for some nasty surprises, and an unpleasant collective wake up. That process - which he calls The Long Emergency - has now gone beyond the first pages of Chapter One.

The Prospects For Cities

It is not difficult or complicated to assess the prospects for cities in a world where energy is no longer cheap. European-style designs with three-floor buildings in walkable communities, connected by rail networks, are likely to be the most successful urban environments. The caveat is obviously the extent to which those communities depend on organic systems beyond a limited geographical areas (say 50-100 miles) beyond these city limits.

At the other extreme are places like Las Vegas, Phoenix and Honolulu. These are large urban centres that would never have been able to survive without constant supplies trucked and flown in from other areas. The larger the urban centre, the more difficult it will be to sustain, hence densely populated megacities will struggle. The top 10 most densely populated cities are:

1. Hong Kong, China
2. Lagos, Nigeria
3. Dhaka, Bangladesh
4. Jakarta, Indonesia
5. Mumbai, India
6. Ahmadabad, India
7. Ho Chi Minh City, Vietnam
8. Shenyang, China
9. Bangalore, India
10. Cairo, Egypt

Others unlikely to have it easy include Taipei in Taiwan, Seoul South Korea, Shanghai and Beijing, China, Tokyo Japan, London UK, New York USA and Delhi India. What is obvious from this list is the overpopulation of urban centres in China, India and Africa.

People living in these areas - or any other areas with large amounts of skyscrapers (any building beyond 5 floors) - will experience difficulties accessing adequate food and water supplies, as shortages (fuel and food) begin to have an impact. The poorer the governments that manage these urban centres, the sooner shortages (and thus conflict) will begin to take effect. Indonesia is a good example. Simon Radcliffe has recently written* that even in fairly well off South Africa, xenophobia attacks are linked directly to oil prices which rapidly rob the poor of the ability to function, even to feed themselves.

Although urban dwellers were attracted to cities by the prospects of jobs, in the Long Emergency (a Depression scenario), jobs will be scarce, and the only growing industries will be in resources (mining, agriculture). Where should people in overcrowded cities go?

The Prospects For Farming

While the human population increased 7 fold since 1800, crop production multiplied 10 fold over 200 years. Total grain area harvested peaked actually in 1981**, and has declined steadily by 8.7 % by 2000. Grain acreage per person is also decreasing rapidly. It is estimated that acreage will decline from .28A to .18A, or 35%, between now and 2050. This is due to population increase alone. To put into perspective the dire implications: we are struggling to feed the growing human population despite having the use of highly mechanised, and highly utilised crop production techniques. In the future there is no guarantee of either mechanisation or widespread use of fertilizers or pesticides.

Arable land in the world is no longer increasing. Top soil erosion, leaching, desertification and other consequences of climate change means it is no longer a straightforward process to identify the world's potential bread baskets.

It is imperative that rural areas receive immediate investments - in terms of human resources - to begin activating organic systems in sustainable ways. Many of the under-utilised areas are in Africa, for example Tanzania, Zambia and Zimbabwe.

The Prospects For Suburbia

It might seem counter intuitive, but the prospects for people based in European-style cities or on farms are better than those in suburbia, and not by a small margin. Suburbia is a caricature of country living with none of the benefits. Are suburban homes plugged into any fruit growing orchards, or based near any operative streams? No. In the same way that water has to be piped to homes, food must be conveyed via endless oil-derived trips to the mall. And where do malls get their produce from? Trucked or shipped or flown thousands of miles?

Unfortunately, the carnage we are seeing in property markets is a natural rebalancing. As energy prices tilt upward, the relative value of suburbia (which is predicated on cheap energy, it requires cheap energy to function at all) crashes.

Not only do the prospects for suburbia become compromised, but also the cornucopia of services that have been developed to assist in the project: gardening, construction, interior decoration - these industries are disappearing along with airlines, truckers, supermarkets, banks and central government type schools.

The Future

The future will be lived more locally, as the world unflattens, and becomes a much bigger, less convenient place. Living locally means buying stuff from around where you live. So now more fishing rods or toilet seats from China. People will have to start learning how to fix things, and quit the throwaway disposable culture that persists.

There is likely to be instability and a lack of social order as the number of have-nots increases. Panic is inevitable as more and more people begin to realise that this degeneration is a permanent phase, they will learn the patterns of consequence: that oil price increases today translate to higher fuel prices in the not to distant future.

The Locals Hope and Pray

In South Africa next week we have another 70 cent price hike, despite paying 50 cents a month earlier. The bad news is the 7- cent hike isn't close to reflecting oil prices at current levels. South Africans face at least 6 more months of devastating increases, from R10 a litre to about R16 by Christmas. Everyone is hoping by Christmas that the oil price will be lower than $137.

People like Jim Kunstler don't expect these prices to come down. Neither do I. $150 by Christmas is a conservative estimate, and we are not far from $200. Demand destruction cannot happen when we are chronically addicted to a commodity vital in so many ways to everyday life. While there are massive amounts of oil that remain, demand is equally massive, and in fact, slightly greater than what we're able to extract. Production has peaked, and the top of the slope resembles a long plateau at around 85 mbpd. It is unlikely that we will ever see 90. But the magic number '85' needs to stay high. Once this number drops, the fuel price will adjust for a more vertical course.

Expensive energy predicates new living arrangements and lifestyles for virtually everyone.

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