Sunday, March 29, 2009

ALERT: Oil Shortages are Imminent [and why a 'recovery' will be really bad news]

I have warned in the last few days and weeks that oil prices are about to surge again, and in the last week we have seen prices breach $50.
Oil prices will rise to last years record $150 and surpass this record. It may go beyond $200 or even $250 before we see another collapse, in a cycle of convulsions. It is for this reasons (severe supply constrictions) that I say talk of recovery is foolish and shortsighted. A recovery is impossible. We are headed beyond a Great Recession. We'll see a Great Depression that will make the 1930's look like a picnic.

The economic catastrophe is bad exactly because people have failed to see the simple subtleties in the market. We're talking about a resource that underlies all activity, a resource = energy. That resource is now declining, from a Peak Moment, which means whatever your theories, whatever your economics, contraction is going to be your Guiding Philosophy.

Unfortunately it is so late in the day and few people have taken the trouble to understand let alone absorb the real implications of this. Many don't want to think about it or accept it. That's a pity because to some extent we still have a choice right now to change the future. Those choices are diminishing with each second. Investing in automakers, and banks is rather sad given what we know. We ought to be investing in railways, in making food networks sustainable.

All hope is not lost however. Projects such as South Africa's JOULE (Electric Vehicle pioneered by Optimal Energy) are underway though not even in production. This is VERY late in the day but better late than never. The JOULE will not solve our problem, in fact nothing will, but we can ameliorate our prospects somewhat.

It may seem counter intuitive that oil prices will rise when the industry:

1) acknowledges large excesses in supply
2) demand has been severely constrained

However, it is a more subtle point that in the same way that the credit crisis has impacted on demand, so has it impacted on supply (and vitally, investment in supply).

It is interesting to see that the Media have been quicker to pick up on this subtlety this time around.
Oil supply crunch is likely to return
Low oil price puts supply growth at risk

One of the reasons for the drain on supply is China, where millions of people are experiencing having a car for the first time, and thus the last thing on their minds is conservation or fuel supply limits.

Gerhard Swart, one of the engineers behind South Africa's Joule project (I met him on Thursday in Stellenbosch and will post an interview at some stage on this site) confirms that the oil price relief we've seen is temporary. A crunch is imminent.

Matt Simmons confirms this, saying we are 3 - 9 months away from serious shortages. These shortages will not be easy to 'fix' as a lot of production has been permanently curtailed, and other production still requires large amounts of free capital to come online again.

"When you have an old oilfield whose flow is being maintained by extremely high levels of investment and you reduce production, you rarely if ever get back to where it was."

Because of this and natural declines in output, oil use may not need to rise much before production fails to meet demand.

"Unless oil demand falls by 10 or 15 percent per annum, which it is not going to do, then we don't need to wait for oil demand to come back before we have a supply crunch," he said.

"Within a few months, we are going to realize our visible inventories are really tight -- squeaky tight -- and what would really be inconvenient is to see a recovery in the economy."

One of the issues most people fail to see when looking through the window called 'RIGHT NOW ECONOMICS' is that oil prices and supply are based to a large extent on present flows. They ignore the reality that oil discovery (which is an indicator of future supply) has been decreasing for the past several decades. Even oil companies like Chevron and BP acknowledge this. Without new discovery, you start guzzling the stuff that was discovered 30 years ago. And very quickly.

Electric vehicles provide a solution in terms of energy efficiency. That said, EV's are a temporary solution. The future needs to be about more walkable communities. And living more locally. In the future, 20 years from now, very very few people will possess cars. Thus the future is not going to be about motoring or suburbia. It is more likely to be based around growing food, around agriculture. Remember, as oil depletion worsens, the ability to conduct large scale industrialised agriculture diminishes. And the world's food systems - growing, production, transport - is all heavily based on a cheap and abundant energy scenario.

One of the first casualties will be the meat market. You can start today by consuming less meat. It's healthier for you and the climate.

Gerhard Swart describes the electricity problem in South Africa as a 'peak electricity problem', not a total electricity problem. Peak Oil predicates Peak Food, Peak Cars, Peak Finance, Peak Education, Peak Commerce, Peak Employment, Peak Freedoms, Peak Choice, Peak Transport, Peak Gadgets, Peak Health, Peak Population, Peak Entertainment and Peak Safety and Security. The slippery slope we face from here on out will deliver diminishing returns on all of these at the same time.

The above article states that 'investors seem to have shrugged off government data and had been bidding up prices on the expectation of a future shortage of crude oil.' These investors are 100% correct. Put your money in oil stocks now, but get your money out before the next 'crash'. There are likely to be a few as what is left of the finance system convulses until it is dead wreckage incapable of doing or being anything other than an epitaph to a bygone system called 'Capitalism' (how greed killed off all of humanity's interests...).

Financier sees oil shock from credit crunch

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