Peak Oil and the Gulf Oil Spill

Since I cannot write to the producers/editors of the Lang & O’Leary Exchange (see previous post), then I will post my thoughts here.

On a previous episode, perhaps Thursday or Wednesday, I caught the tail end of an interview where the guest was speaking about the investing outlook and made an interesting (but mostly off-the-cuff) remark about the concept of peak oil.  He said that if the recent events in the Gulf of Mexico have taught us anything it is that there is no shortage of oil and that the ‘peak oil theory’ has things wrong.

As I said, I suspect this was just an off-the-cuff remark, perhaps based on one of those fleeting ideas or insights we all get, but it represents a common misunderstanding of the concept of peak oil and what, in reality (or out there in the world), it is describing.  It also shows, I think, how rhetoric sometimes trumps, or stands in for, rational reasoning since if you don’t think about it too much, this rhetoric tends to make some degree of sense.  At any rate, I found this argument interesting and thought it would be a good one to mentally deconstruct and disassemble, perhaps to be used as an example in a future lecture or something.

Seeing the image of the uncontrollable outflow of gases and petroleum from BP’s well does show the tremendous amounts we are dealing with, even just in one blown well.  We, as a species, produce and use petroleum at tremendous rates.  In fact, we measure the world’s daily consumption of oil in millions of barrels. So, as the TV guest said, we are not running out of oil.  However, the concept of peak oil does not include the proposition that we will run out of oil.

What the concept of peak oil puts forth is that it will become increasingly hard to produce large amounts of oil at low prices.  In fact, that is what the underwater image of escaping petroleum really shows: today, we have to go to extreme lengths to secure reliable and exploitable sources of that finite, natural resource.  Most of that oil was not recovered anyway and probably will never be.  I don’t know if the oil that was recovered could even be refined, but I could see that they were burning off a great deal of gas at times.  And, what will all this oil that BP recovered end up costing them? 20 or 25 billion dollars?

The fact is that our global society is having to rely on increasing unstable (usually due to war) and increasingly inaccessible sources of petroleum.  That is why we hear more and more about these controversial forms of extraction like deep-water drilling and mining operations like the oil/tar sands.  It’s not that these methods are any worse for the environment than past methods (resource extraction is just a very messy business) but that these methods are very dangerous, complex, and are themselves extremely resource-intensive.  Sadly, it is probably a safe bet that we will see more of these man-made disasters and that more and more people will lose their lives as we come to rely on squeezing more and more from non-conventional sources.

This is precisely why the concept of peak oil is such an important one for a financial program like the Lang & O’Leary Exchange to look into and in detail.  Modern, industrialized society arose because of, and is reliant upon, abundantly cheap energy.  Since we get most of our energy (and something like 96% in the case of all forms of transportation) from petroleum, this is a big deal.  Think of what this means for the long-term prospects of, not just individual companies, but entire industrial sectors.  Aerospace, airlines (has that industry ever been profitable?) automotive manufacture, global and continental shipping/trucking (think Wal-Mart)… tourism.  If we increasingly use natural gas (and many homes in North America have switched to that fuel for heating) to extract petroleum from oil sands or have to risk threatening other natural resources and the industries reliant upon them, then we don’t have an environment that is conducive to business or investing.  Modern, industrialized agriculture is reliant upon cheap fossil fuels for diesel, fertilizer, synthetic hormones and pharmaceuticals, herbicides and pesticides.  (The pharmaceutical industry depends upon industrial agriculture so is at risk too.)

What is most important is that this will affect all of as individuals too.  Traditionally, energy was measured in terms of real world equivalents: man-hours or horse-power.  One barrel of oil is said to represent the energy that 12 people, working for an entire year, can produce.  Or it contains the energy that is the equivalent of 25,000 hours of labour from a human worker.  So if I can purchase a barrel of oil for $70 today (or, say, 2 cents a barrel in Texas in 1931), that is a really cheap form of energy.  But we are living in the midst of one of the severest economic recessions/depressions in a century.  When or if economies can recover, demand will raise prices.  It was just a few years ago when demand was surging and oil was at $140/barrel.  All this points to the very real possibility that petroleum is going to get more and more expensive.  For each one of us, that means we will have to perform more and more of the labour that petroleum has done for us in the past.

Finally, this is dire for businesses of all sorts (where operations are reliant upon cheap energy) and, especially, the financial sector.  I find the argument that global stock markets (and market evaluations) are filled primarily with petro-dollars or petro-wealth to be a compelling one.  In fact, we have inflated our economies on a mixture of banking-fuelled monopoly money and petro-wealth over the course of the entire 20th century.  What is more, as Western economies are declining, many developing economies are still growing… and growing their demand for oil.  In the future, we are going to have to increasingly compete with China, India, and elsewhere for oil production.

So, I think that peak oil/energy is an important topic for the Lang & and O’Leary Exchange to consider and to investigate.  Many of the people who are discussing peak oil (and who are responsible for its generation as a concept in the first place) are geologists and those working in the oil industry so it’s not just granola munchers and hippies talking about this.  I would contact the editors/producers of the Lang & and O’Leary Exchange to argue my point but they only seem to want to exist in Twitteratii Land.