In November of 2005, Henry Groppe, an elder statesman of energy analysis, spoke at the first ASPO-USA conference in Denver. According to Stuart Staniford’s report of the speech for the Oil Drum, Groppe believed the world was at or near peak production, but that something like 20 million of the world’s current 84 million barrels per day of demand comes from heat and power generation in developing countries. With the price of oil in the $50-$60 range, Groppe said, this demand will be converted to coal or natural gas—essentially the same thing that happened in the developed world in the late 1970s in response to the oil shocks of that decade. According to Staniford, Groppe believed that along with increased fuel efficiency, this switch “will keep us out of serious economic pain for a decade or so.” Left unsaid was what the economic repercussions would be for those developing countries.
Indeed, something strange has happened in the world oil markets over the last couple of years. As Tom Whipple points out, world oil production stayed flat or increased insignificantly in 2006. Oil consumption in the industrialized countries (Europe and the U.S.) was also flat; but in China and Russia, consumption grew significantly. Logic dictates, therefore, that consumption must have fallen elsewhere to make up the difference. Hard data is difficult to come by, but there is significant anecdotal evidence to suggest that the underdeveloped world has taken the hit.
In the last two years, there have been fuel riots Nepal, Yemen, Iraq and Indonesia. In Guinea, nurses at hospitals periodically pull premature infants from incubators, put them on the mother’s bellies, and pile blankets on them to keep them alive during the long blackouts; the hospital can’t afford to run it’s oil-powered backup generators anymore.
In a June 8, 2006 editorial for the International Herald Tribune, Indiana Senator Richard Lugar described some of the critical energy crises poor nations have been facing, from the transportation and infrastructure costs that have devastated the coffee industry in Ethiopia to electricity cutbacks in Afghanistan, scrubbed development plans in Bangladesh, to skyrocketing oil costs in Nicaragua that ate up an entire $175 million U.S. aid initiative. (Luger’s solution is more funding for biofuels—an ill-advised but expected position given his Midwest agricultural constituency).
In Zimbabwe, energy problems can’t be purely attributed to tightness in world supply; political problems have led to hyperinflation in recent years. But the high price of oil can’t be helping. The only gasoline is available on the black market, and people routinely miss work and school for lack of public transit.
Standard economic theory argues that markets would predict peak oil in the form of higher prices, which would then spark investment in alternatives. But in his 2005 book Beyond Oil, Kenneth Deffeyes makes a different argument based on queuing theory. (The same argument was taken up recently by Kurt Cobb).
Queuing theory, the mathematical study of waiting lines, is widely applied in business to model customer traffic to call centers, for example, or in server applications. According to Deffeyes, “queues . . . become chaotic when the load approaches the capacity of the system. Customers arrive at random, and the time spent waiting in the queue jumps from very short to very long.” Applying this theory to the oil markets suggests that the consequence of peak oil would not be sustained high prices, but dramatic price volatility, such as we have seen recently. “We are looking into enormous uncertainties in the price of oil. The first time price swings downward, cornucopians will chant in unison that there was no Hubbert peak. Don’t listen.”
Deffeyes, of course, was also the person who predicted that peak oil would hit on Thanksgiving Day, 2005 (later amended to December). That prediction has, so far, not been disproved by an increase in production.
Flat or barely increasing production, severe demand destruction in the third world, high volatility in oil prices—nothing to give much comfort to observers of the world’s energy situation, cornucopian myopia notwithstanding.
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