Tuesday, May 15, 2007

Peak oil

In economics when you have a fixed supply of a commodity and a rising demand, the price is bound to go up. Gold and diamonds are classic examples. Just by the fact that our population keeps increasing faster than we can dig up gold and diamonds the value of these commodities will keep increasing. Plus, there are no good substitutes for gold and diamonds, so, as their price keeps increasing we don't end up substituting other commodities.

Are we in the same position with oil? The supply of oil is finite, but global demand for oil is accelerating – both because of population growth and because countries with the biggest populations in the world, namely, India and China are rapidly industrializing their economies.

Industrialization is a process whereby work formerly done by humans and animals is replaced by work done by machines. In Great Britain, where industrialization first began in the late eighteenth century, machines called steam engines ran on coal. During the early years of the twentieth century the internal combustion engine and the deisel engine replaced the steam engine. Industrialization switched from coal to oil. This switch coincided with the decline of the British Empire and the rise of the American Empire. Britain had ample supplies of coal but it had no oil. The United States had plenty of both.

In 1956 American geophysicist Marion King Hubbert estimated that U.S. oil production would reach a peak sometime between 1965 and 1970 after which the supply of domestic oil would decline. Although his forcast was ridiculed at the time it proved accurate.

Was it a coincidence that the first global oil crisis ocurred soon after U.S. domestic oil production peaked? If the Americans could have kept increasing oil production they wouldn't have felt as much pressure from oil prices when the Arab oil producing nations conspired to reduce supply.

The increase in price of oil in the 1970's was only temporary because the global supply of oil has kept increasing since then. Thus oil was cheap in the eighties and nineties, fueling a global economic boom which in turn caused demand for oil to skyrocket. But if the global supply of oil is finite, the question is, when will we reach peak global production? What with accelerating demand it probably won't be long. And when it happens the global economy is in for a series of shocks. We're not talking about running out of oil – when peak oil occurs supply can no longer keep up with demand as it has for the last 100 years. And when that happens the price of oil will go up and up and up.

Remember I talked about there being no good substitutes for gold and diamonds. Well, guess what? The same is true for oil. Sure there's lots of coal and it's cheap, but burning coal is very dirty. The pollution would prematurely kill millions and burning coal releases twice as much carbon dioxide as burning gasoline. Plus open-pit coal mining destroys and blights millions of acres of land. So coal is not a reasonable option. Nor is natural gas which is in the same position as oil.

What about energy alternatives like solar, hydro, wind and nuclear? All of them lack the portability of oil and all of them would take up to fifty years to be viable at the scale required to fuel our industrial economies. What about hydrogen? Even if it is a viable technology, which is questionable, it will take just as long or longer for a hydrogen based economy to come on tap. And hydrogen requires a source of energy to produce so we're back to square one. Our economies are based on cheap oil, and unfortunately there is no good substitute for oil on the near horizon. If peak oil comes fifty years from now we may be OK, but if it comes sooner, which is more likely given the huge increases in demand, we are in big trouble.

One of the lessons from the “Oil Crisis” of the 1970's was the phenomenon of “stagflation” - simultaneous recession and inflation – something economists had previously thought impossible. What they hadn't taken into account was that our economies are based on cheap oil. When the price of oil rises high enough it takes other prices with it, whereas the only incomes it raises are for those who run or own oil companies. With costs rising and most incomes not able to keep pace the economy slows to a halt.

We might want to consider this given the vulnerablility that the “free trade” agreement or (TILMA) between BC and Alberta puts BC, since the resulting huge disparity in wealth will give oil-rich Alberta a free hand to buy BC lock stock and barrel.

When we think of rising oil prices we mostly think of increases in the cost of transportation: the costs of driving and flying, for instance. But the effects of oil are pervasive throughout the economy. Even the food we buy in our supermarkets is vulnerable to the price of oil because every part of industrial agriculture is dependent on cheap oil, from the tractors, harvestors, pesticide and herbicide manufacture, crop spraying, and irrigation to the transportation and distribution of the produce.

We can do something about peak oil now, by encouraging government to invest in energy saving strategies, such as mass transit and supporting zoning bylaws that discourage suburban sprawl and ecourage higher urban density. The North American suburban lifestyle is a car-centric energy hogging dead end that will become untenable for everyone but the very richest citizens once the price of oil reaches a certain level – and it will.

We can be proactive now by using our cars less and walking cycling, and using the bus. We can start vegtable gardens and grow fruit trees and berries like our grandparents did. We can buy food from local smaller scale farms, or as near to local as possible. We can start to taper off of our addiction to oil now or we can go cold turkey later.

Nothing is certain. Oil production may keep increasing for the next fifty years. The hydrogen fueled “car of the future” may start to be mass produced in ten years. We can all keep assuming that everything will continue much as it has up till now. Or we can proactively change our lifestyles and our habits now so that we don't suffer the consequences when it becomes too late.

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