Friday, August 19, 2011

How Peak Oil destroys the world economy

[update: Note that the following post ( has a correction to the logic of this one.]

Having expected Peak Oil to seriously impact the world economy, I was not surprised when high oil prices were followed closely by economic problems in 2008. Surely now the world would wake up. But no, the economic problems were attributed to malfunctions in the the financial system. And we Peak Oil believers struggled to put a coherent case.
It is tempting to focus on the high price, but consider what happened when the price went rapidly from $130/barrel to $140/barrel in 2008. Obviously this made consumers, and importing nations, poorer. But it made producers richer by an exactly equal amount, and what can they do with that windfall but spend it, or recycle it by lending it to others to spend? So the net effect on the total world economy is zero, and that is what economists perceive.
Even though the price is now around $100/barrel, as it was in 2008, still most oil comes from old fields that used to profitably produce at $20/barrel, and still could. However all of these big cheap oilfields are past their peak. They produce less every year. Oil production continues to struggle along on a plateau of constant production. But this is made up of increasingly less of the cheap oil, and increasingly more of the expensive oil from newer fields.
Now imagine what happens when we lose a barrel of oil that cost $10 to produce, and replace it with a barrel that costs $60 to produce. That is $50 worth of productive effort that was available for consumption or building new infrastructure. Now that $50 of productive effort is used and lost.
The world consumes about 30 billion barrels per year. The depletion rate on existing oil wells is about 5%. As a rough guess, perhaps 1.5 billion barrels/year (5% of 30 billion) is being replaced by much more expensive barrels each year. In that case, multiplying by $50, it amounts to $75 billion/year lost to the world economy. Perhaps Kjell Aleklett and his team can come up with the right number. Whatever it is it is certainly big enough to cause major disruption to our growth-oriented economy.
So far the economy has managed to grow by: switching to energy alternatives; using petrol more efficiently; and turning to less energy intensive ways of working and playing. This is going to get harder as we come off the plateau and start the actual descent.