Why economic corruption or an oil decline will lead to a financial crash, depression, and permanent energy crisis

This is the introduction to the Corruption category under the Menu item 3) Fast Crash.

The posts in this category show that another, much worse crash, is inevitable.  Meanwhile, low oil prices have led to less oil production and discoveries.  I can’t decide whether corruption or oil decline will bring on the next depression first, but even if there are energy shortages at first, the following financial crash will mask the role of the oil crisis as demand drops as employment falls, and any price is too high to pay.

Alice Friedemann   www.energyskeptic.com  author of “When Trucks Stop Running: Energy and the Future of Transportation”, 2015, Springer and “Crunch! Whole Grain Artisan Chips and Crackers”. Podcasts:  KunstlerCast 253, KunstlerCast278, Peak Prosperity , XX2 report ]

The world runs on oil, as you’ll quickly find out if you try to stuff dollar bills into your gas tank.  But money and oil are entwined, because capital and huge amounts of credit are needed to finance new oil  extraction projects.  This is an overview, but the best coverage of the intersection of money and oil is at Gail Tverberg’s Our Finite World, and the financial corruption and instability at The Automatic Earth.

A major financial crash could slow or stop investments in new oil projects, which would inevitably lead to an energy crisis.

In fact, an energy crisis appears to be on the way right now due to low oil prices.  Oil discoveries around the world in 2015 were the lowest in more than 60 years, preparing the ground for a game-changing spike in oil prices (and another depression) and raising serious questions about energy security.  The amount of oil found so far in 2016 is likely to be even less than in 2015.

Low oil prices have led to many articles proclaiming that peak oil is dead. But Hallock et al. (2014) has data showing peak oil already happened in most oil-producing nations, and has or is likely soon to happen for the entire world.   The public assumes the opposite because gasoline prices have been falling, although they are still high by historical standards, and have gone back to buying gas guzzling SUVs and light-trucks, and electric car sales have been declining.

Since the 1970s, the price of oil has gone up and down as mismatches  occurred between supply and demand. In 2015, the world had an oil glut so prices dropped. These cycles—supply and demand mismatches—most likely will continue. But they do not negate the fact that sooner or later, the amount of oil coming out of the ground will begin to decline.  Even if abiotic oil existed, which has been soundly shown not to be true by Höök (et al. 2010), this imaginary oil is not being produced fast enough. We’re using 7 times more per year than we’re finding.

Whenever oil prices become too high, the economic system falls into an “oil trap.” In fact, high oil prices have helped trigger 11 out of 12 past recessions since World War II (Hamilton 2013). Recessions drive oil prices down, slowing or stopping new oil projects, possibly for a long time, since for unemployed and low wage earners, oil at any price is barely affordable. In a recession, credit shrinks and it is hard to find the capital to drill for more oil or transition to alternatives.

The oil trap might also snap if investors generally became aware of peak oil, because this could cause a financial panic, crashing stock markets, and capital might not be available to lend to oil projects (Macalister 2009). A 2010 German military peak oil study also thought peak oil awareness was likely to lead to market collapse, and that the decline of oil would eventually cause global economic failure, because in a shrinking economy, companies could not make and distribute profits, or pay back debts. As businesses and nations went bankrupt, supply chains would break (BTC 2010).

So I expect that if the next financial system crash is caused by peak oil, few people will realize it, since that awareness would end stock markets since no one would be willing to lend anyone money, since energy is the only way to grow businesses and the economy.  You’ll never be paid back!

And there may not be much oil left to find (see How much oil is left and Matt Simmons “Twilight in the Desert” Saudi Arabia oil: how much left?).  There is a great deal of evidence conventional oil (90% of our oil) peaked in 2005 and that unconventional oil (shale, tar sands) is likely to peak soon.

Even if there is a lot of oil left, it can stop flowing due to oil shocks from chokepoints, declining exports, the flow rate dropping from the Niagra Falls it is today to a trickle, especially shale oil which on average declines 85% within a few years.

It also takes more time to get the remaining distant, nasty, gunky oil.  For example, it can take ten years to build new tar sand extraction facilities, deep offshore oil platforms, and the infrastructure to support them, such as new roads, rail lines, and pipelines to deliver raw crude to refineries.

If we ever figure out how to get arctic oil, it will be at least 30 years before the first drops reach the lower 48 states, because there is no infrastructure.

Many oil-producing countries are not investing enough in their oil fields, and lack technical expertise, which can harm oil fields and reduce the ultimate amount of oil produced (GAO 2007). Exports from oil-producing countries may decline due to increasing domestic use, or to make oil resources last longer for future generations. This would bring the onset of oil decline sooner (Hirsch 2008). China and India have increased their oil imports every year and are able to outbid other nations for exported oil. If their oil imports continue to grow as they have so far, theoretically China and India would be buying all exported oil in 2030 (Brown 2013).

References

Brown, J.J. June 10, 2013. Commentary: is it only a question of when the US once again becomes a net oil exporter? Resilience.org.

BTC. 2010. Armed forces, capabilities and technologies in the 21st century environmental dimensions of security. Peak oil. Bundeswehr transformation centre, future analysis branch.

GAO. 2007. Crude oil. Uncertainty about future oil supply makes it important to develop a strategy for addressing a peak and Decline in Oil Production. U.S. Government Accountability Office.

Hallock, J. L., Jr, et al. 2014. Forecasting the limits to the availability and diversity of global conventional oil supply: validation. Energy 64:130–153.
Hamilton, J.D. 2013. Historical Oil Shocks in Routledge handbook of major events of economic history. Routledge.

Hirsch, R.L., 2008. Mitigation of maximum world oil production: shortage scenarios. Energy Policy 36(2):881–889.

Höök, M., Bardi, U., Feng, L. & Pang, X.  October 2010. Development of oil formation theories and their importance for peak oil. Marine and Petroleum Geology, Vol. 27, Issue 9: 1995-2004.

Macalister, T. 2009. Key oil figures were distorted by US pressure, says whistleblower. The Guardian.

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One Response to Why economic corruption or an oil decline will lead to a financial crash, depression, and permanent energy crisis

  1. David Barnes says:

    Your work is much appreciated. The message is unpalatable. Most won’t buy it. Most don’t want to know and when one brings the subject up the reaction is anger and denial.
    I think you can join the pantheon of heavy hitters such as Kunstler, Heinberg, Greer, and Gail although some of them are starting to pull their punches. Norman Pagett tells it like it is. Don’t be tempted to sugar coat the message. I’ve looked into the abyss and refuse to avert my eyes and until the so called ” leaders” do the same we are history.
    David Barnes, Sydney Australia.