Thursday, January 5, 2012

Shedding light on Peak Oil

            This is an important book on energy, how much it will cost in the future, what this will mean for our "way of life". The Harper government is in bed with the Oil corporations: they provide a very one-sided perspective on the energy future of this country. To counter this slanted presentation of Canada's energy future, we are reproducing a review of an important book on Peak Oil here.
Book review: Jeff Rubin: Why your world is about to get a whole lot smaller, Oil and the end of globalization (Random House, Canada, 2009) 265 pages; notes and index. Rating 8.5 / 10

HEADLINE: Summer, 2008. Spike in oil prices to $145 / bbl announces the end of the Era of Cheap Energy

             Economic insider, Jeff Rubin, former chief economist at CIBC World Markets, has written a very readable, accessible introduction to "Peak Oil" and its future impacts. Although we have doubts about Rubin's cheery "business (almost) as usual" prognosis, he does nail down the basic mechanics and, for this, he gets close to full marks.

             Peak Oil refers to human rationality: humans will pick the "low hanging fruit" first; they will first extract the most accessible, cheapest to exploit, reserves of a non-renewable resource  (petroleum). This is logical: low production costs mean higher profits. Only later, when cheap reserves are depleted, will producers willingly switch to more risky, expensive reserves. To maintain profit margins they will pass on the increased cost to the buyer. Prices will rise, establishing a new market equilibrium of supply, demand and price.

             In extreme cases, such as the contemporary global oil market, supply may become so constricted - "tight supply" - that even exploding demand for oil in emerging markets (China, India) cannot conjure oil out of the ground faster than it's coming already. Supply curves flatten - before, eventually, declining - despite rising prices and demand. This peaking and subsequent flattening of oil production is colloquially referred to as "Peak Oil".

             In effect, the problem the globalized world economy faces today is simple: we've put all - or most - of our eggs in the basket called "fossil energy supply" and now that basket is falling (this is why granny used to say: don' t put all your eggs in one basket!) As easy to access reserves of fossil energy deplete, prices will rise, stiffling the economic growth our economic system requires in order to function - or merely survive.

            In theory, way back in the 1970s - when people began to realize that we had demographic / environmental problems, we could have "converted" our remaining reserves of cheap fossil energy (coal, oil, gas..) into green energy infrastructure. Waiting until production costs of newly exploited oil fields becomes prohibitive is obviously not an intelligent strategy. Paradoxically, this imbecilic, "wait till the free market provides price signals for green energy development" strategy - promoted by the fossil fuel lobby - has been the policy followed for the last 40 years in first world economies. As Rubin indicates, rising production costs of newly exploited reserves - offshore reserves, tar sands.., will stiffle the transition to a green energy economy. In addition, our margin of error has now shrunk to the vanishing point. We have neither the time, the money, nor the resources to make mistakes. If we had begun a programmed transition to green energy back in the 1970s, we could have avoided the urgency to "get things right the first time". Letting things go to the last minute is dangerous and stupid if you life depends on making right decisions.. In addition, it is more costly to convert to a green energy economy today: the energy "embodied" in the construction of renewable energy infrastructure is more expensive than 40 years ago.

           One of the main victims of cheap oil's demise will be the globalized economy itself. The analysis of the impacts of Peak Oil is indeed one of the strong points of Rubin's book.

            During the Golden Era of Deregulation - the Reagan / Thatcher era, international trade barriers fell. Blue collar - and eventually white collar - jobs were exported overseas to 3rd world sweatshops, call centers and software writers. When energy is cheap and tariffs non-existent, this makes (short-term) economic - if not moral or strategic - sense: wages and environmental  costs associated with regulations are lower (or nonexistent) in the 3rd world. As a result of "outsourcing", profits, dividends to shareholders, obscenely inflated salaries and "bonuses" to megacorporation plutocrats shot through the ceiling. The rich got richer and the poor got poorer - bigtime! The rustbelt spreading through disaffected industrial towns of America marked the demise of the "American Dream" for the little wo/man.. As peak oil now rears its ugly head, we are forced to recognize that the Cheap Energy Binge is over. Now we have the hangover, the cops and the landlord to deal with.. (So hungover, you fear you are going to die. And then it just goes on and on and on, and now you're so sick you really are scared you're NOT going to die..)

             As the world economy attempts to recover from the "Great Recession", oil prices will spike again - since supply remains "tight", prices will be driven up by scarcity. Speculation may further inflate prices, repeating the boom-bust cycle of summer / autumn 2008 (which was the cause of the construction bubble collapse in the USA which, in turn, brought down the globalized financial sector, triggering the Great Recession) - this is one probable scenario. Another possible scenario - the economy will be stiffled by higher "new oil" costs and will never recover but continue its death spiral. This latter scenario now seems the more probable one. Only time will tell..

             Regardless of which scenario materializes, the globalized economy is cooked. It will be too expensive to ship cheap rubber bath duckies and steel from China to N. America and Europe. As Rubin says, we will have to get used to producing / consuming locally and regionally as people did in the past. We will relearn the virtues of local food: it will be too expensize to ship mangoes to Montréal from tropical plantations employing massive inputs of expensive fossil fuel energy in the form of fertilizers, pesticides, fungicides, insecticides and transport. We will have to reopen rusting N. American steel mills if we want steel, buy N. American vehicles if we want travel and transport.

              For me, the weak point of Rubin's analysis: where will all the locally / regionally produced energy come from? Can we get enough renewable energy online, fast enough to avoid really serious economic and social disruption? If we can, at what price? Will that price be too high, stiffling any hope of long term economic recovery? I am not sure that even "green" Western Europe has enough installed green energy infrastructure to make the transition a peaceful one. It is for the perceived weaknesses of Rubin's analysis of the long term situation, that I withhold full marks: 8.5 out of possible 10.

               As a general introduction to the subject of Peak Oil, especially for younger readers, it's hard to beat this book - despite its weaknesses.

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