I believe oil shocks could lead to a FAST CRASH

Robert L. Hirsch was the author of the first US government report on peak oil in 2005, which recommended taking action to mitigate Peak Oil at least 20 years before oil peaked.  World-wide conventional oil production peaked in 2005, the year of the report.  Here we are 9 years later and nothing’s been done. Perhaps shale oil and gas have delayed the day of reckoning a few years though.

I don’t think the mitigation measures proposed by Hirsch would have worked because of peak coal, EROEI of tar sands, etc., but there are other actions we could have taken, such as beefing up organic agriculture departments at universities and funding scholarships, infrastructure improvements, and so on.

Hirsch has written that the tragedies the Peak Oil community is concerned about will begin when transportation fuel declines since 98% of transportation depends on oil: tractors, trucks, railroads, airplanes, cars, etc.

The author’s prediction of oil shocks coming within the next 4 years could bring on a FAST CRASH given what they predict will happen based on the 1973 & 1979 oil shocks:

• A sudden awakening and rapidly spreading panic, disorientation, significant emotional shock, and insecurity
• Stock markets crash as fear and panic rush people to sell to minimize their losses, and continue to sell as global depression sets in
• Immediate fuel shortages as people and businesses top off their gasoline, long gasoline lines, continuing shortages
• A rapid onset of recession that will get worse every year for at least 10 years because it will take at least that long to try to ramp up tar sands, enhanced oil recovery, and the other mitigation measures Hirsch proposes (which won’t do much good if the decline rate is over 4%, other experts believe it will be double that or more)
• Large increases in fuel prices due to much higher oil prices for gasoline, heating oil, diesel fuel, jet fuel.
• Prices could go up 100-300% if there are no price controls.
• Layoffs, increasing unemployment, service cancellations
• Difficult commuting due to high gasoline prices & growing shortages
• Declining real estate prices in areas far from work or public/mass transit.  Vacation & entertainment areas hit hard.
• Increasing inflation due to much higher oil prices & shortages (I disagree, deflation first — prices can go up in a deflation for scarce essential items, then who knows what…perhaps inflation once all the debts are wrung out of the system.)
• Declining world trade
• Chaos and social unrest
• Gas station closings
• Public anger, impatience, confusion, desperation
• Government confusion, unpreparedness & deadlock
• Rationing by industry/government
• Fuel theft and hoarding
• Scapegoating and blaming, a public hunt for “the guilty”. Likely oil companies will be among those seen as being to blame
• Localization.  California trucks won’t be bringing fresh fruit to the rest of the nation, it will have be grown locally and seasonally across the nation

I think oil shocks will be spun as financial crashes, until they can’t be denied

The German government commissioned a Peak Oil study that stated awareness of peak oil would bring on world-wide market crashes and other dire consequences.

Depressions brought on by financial crashes can also lead to social unrest and further stock market and bank unwinding. But a financial crash at least appears to be “fixable”.  If the public had an awareness of peak oil, that’s the End Of The World As We Know It and would not only exacerbate the financial crash but create greater social unrest, panic, and confusion.

High oil prices accounted for 11 of the past 12 recessions.  High oil prices brought on the 2008 crash as well.  Due to deflationary oil prices (people assumed if Peak Oil were real the prices would have gone up even more), fraudulent banking and Wall Street shenanigans, and hype that shale oil and natural gas would make us energy independent, people stopped worrying. Membership in Transition fell off, many peak oil groups stopped meeting, and the end of theoildrum further calmed nearly some of the very few people who were paying attention.

What I wonder is how much longer can awareness be delayed?  Yergin can always be trotted out with happy talk about the several centuries of oil we haven’t bothered to get yet in the arctic, tar sands, Brazil, deep ocean, and so on.

The system is so fragile now that very little is needed to push it over the edge even without an oil shock.  Another Euro crisis, an earthquake in Los Angeles or Tokyo, bank failures, revolution in Saudi Arabia, China’s real estate bubble popping, terrorists setting off a dirty bomb in New York City, a pandemic like the 1918 flu would do it and dozens of other possible scenarios.

What I can’t work out is if it would ever be in the interest of the wealthy or government to crash the system ahead of an oil shock to drive demand down even further to keep Business As Usual going for the wealthy and upper middle class.  We know from the 2008 crash that demand for oil was greatly reduced as people cut back on personal and business trips, unemployed people stopped driving to work, telecommuting has increased, businesses failed, and more jobs were off-shored. Hirsch says that a drop in demand will not delay the onset of decline, so that wouldn’t work for long.

But awareness has to come at some point.  Rationing would do it, though then  the Chinese or some other enemy would be blamed for buying up most of the oil (and ability to take out our electric grid and other infrastructure with cyberattacks).   So when Hirsch predicts an oil shock by 2017, I wonder if he thinks that even a 3-4% decline can’t be hidden from the public?  I think anything and everything will be tried to avoid a general public awareness.

If there’s an oil shock and it can’t be hidden, then it will be like a switch flipped, within a few months times get really hard (they already are many places, people in cities aren’t aware of how much suffering is going on), and then for decades it just keeps going down hill.

If the depletion rate is over 3 or 4%, that will be a disaster 

If the depletion rate is less than 1%, the problems are manageable.  If it’s over 3-4% it will be a catastrophe (Klare says it’s 9%).  The decline isn’t only geological, the rates are worsened by bad oil field management, inadequate investment, poor and selfish governments.  Also, as populations grow in oil producing nations, more and more is consumed by the citizens, leaving less oil to export.  Nations may also want to slow down exports so their only source of revenue lasts for future generations.

No matter what, decline will result in:

• A decline in living standards
• Severe political difficulties
• Obsolescence of Capital Equipment (I think this means that if there’s no oil to run factories, tractors, trucks, cars, forklifts, etc., then just about anything with a combustion engines suddenly becomes obsolete)

The world relies on just 13 giant fields for 25% of its oil.  16 of the 20 largest giants are past peak production and in decline.  15 nations produce 75% of the oil that 200 other nations consume.  This is not a stable situation for either price or security.

The crash of 2008 also stopped hundreds of billions of dollars being invested in oil drilling and exploration, which will create a future oil shock as current investments run dry.

But so far the price of oil doesn’t reflect how valuable it is, prices are more driven by the value of the dollar, what’s going on int he Middle East, economic outlook, weather, inventories, etc.

How we’ve come so close to the precipice without preparation

1. Ignorance of energy basics is widespread. Since energy has been reliably available and inexpensive, most people have spent time and effort on other things
2. Incompetence for all the reasons it exists
3. Intellectual rigidity. People are so tied to history and their training they don’t see other technologies require different thinking
4. Short-term thinking so attention is only paid to immediate concerns
5. Self-interest, often connected to a person’s job. If realities were publicly understood then a company or environmental organization might suffer, so self-interest leads to less than full disclosure and smoke screen lobbying
6. Conspiracy among people and organizations to protect their common turf, which leads to all of them working to obscure inconvenient truths.
7. Powerful, articulate people and organizations deny there’s a problem, or if there is, it won’t happen for decades.  Don’t worry they say, or we’ll handle whatever happens. Who can blame people for embracing their optimisitc point of view, and worries have declined once oil prices went down a bit and remained stable since early 2009.
8. It’s not obvious that a civilization changing problem is at hand to decision makers or the public
9. There are too many other problems — the recession, unemployment, foreclosures, and more
10. Decision makers want clarity, a clear path before taking action. When oil prices dropped, it was back again to “don’t worry”
11. The situation is unprecedented: The world has never faced a problem like the decline in world oil production (slide 25).
12. also see Why do political and economic leaders deny Peak Oil and Climate Change?

No action will be taken until the public is aware and can’t deny it

By then it will be too late to avoid serious consequences.  Here are some scenarios of how public awareness might happen:

• Oil prices shoot to high prices after the recession and oil shortages occur.  Recovery would stop and another recession would hit.  At some threshold enough people will be hurting financially enough that they will recognize “peak oil” is here.
• A political leader outside the USA announces the problem. If this happened, there’d be a plan to deal with it announced as well.  This would create a sudden and panic that would spread around the world. If this happened the “U.S. Government would be caught with its pants down” and appear to be unprepared.
• The President of the United States announces the problem. Very unlikely “because recent Administrations have known about the issue and denied it”.  It’s also unlikely because all of the “solutions” would be fossil fuel based (see my summary of the Hirsch 2005 DOE Peak Oil study).

Coping

Rationing has many issues. The prices of goods and services, national economic growth, there will be losers and winners, lobbyists will try to get favors for their clients, how to prevent fraud, and so on (pp 86 & 87.  Also see my summary of the 1980 oil rationing plan.

Upgrade heavy oil so vehicles can use it. Transportation uses 75% of all the oil refined, the other heavy 25% is used in power plant boilers, the petrochemical industry, home heating oil, etc.  If we can upgrade the heavy, non-transportation fuel so we can use it in trucks and other vehicles, that would help.

Increased CAFE standards.  The problem is that after every recession from high oil prices, fewer vehicles are produced because fewer people can afford them. So whatever increase in mileage there is will be offset by lower vehicle sales (Hirsch’s 2005 peak oil study expected a much higher contribution from higher efficiency vehicles).  The median lifetime of vehicles is autos 13, light trucks 14, heavy trucks 18, aircraft 22.  To replace them would cost trillions of dollars that the American public doesn’t have and that the U.S. government can’t afford to subsidize.

Heavy Oil & Tar Sands: Because of high viscosity these don’t flow out of the ground like the sweet oil we’ve mostly used up. Heavy oil and tar sands are very expensive to because they have lots of impurities that need to be removed. It’s not easy to ramp up the Canadian tar sands because there’s limited natural gas, the climate is extremely hostile, and requires enormous amounts of water.

Coal-to-liquids.  You can see what he says on pages 122-123.  Many of these plants would be built outside of the USA.  Given that we’re at peak coal now or soon, and this process is very energy intensive with few experts in the world to help build them, I don’t see how this could be a big contributor.

Enhanced Oil Recovery:  Wow, the way this would be done is that the United States would collect CO2, refrigerate, ship, and inject int in wells in the Middle East. This would be very expensive!  We’d have to build new tankers and drill new wells in the old fields, and many oil fields are not suitable for this technique.  You wouldn’t see any effect for 5 years, and 10 years out this would only increase production by 3%.

Alternative energy.  A non-starter, our existing vehicle fleet runs on oil.  Hirsch is one of the very few well-known energy experts who understands why wind, solar, and so on can not replace fossil fuels, which is so refreshing.  He discusses the reasons why in the book, which you can also read about in the energy category of this website.  He focuses on liquid fuels that can be used in existing combustion engines because even if we could electrify our transportation system, we don’t have the time to do it.  We don’t even have time to turn over our existing fleet of inefficient gas-guzzling vehicles for more efficient ones, plus very few Americans can afford to buy a new car now.

Other transportation fuels will not work

Methane Hydrates. Hirsch has the best explanation yet of why these haven’t been exploited yet despite decades of trying.  It’s so easy to get oil and natural gas (methane) out because they’re trapped under rock. Drill down, suck it up, and put it in a pipeline. But methane hydrates are like delicate Christmas ornaments, ice globes with methane inside that when shattered, release the methane which floats to the surface and escapes into the atmosphere. Methane is fifty times more global warming than carbon dioxide.

Natural Gas.  Fueling stations are scarce.  To build them you’d need to greatly expand the existing pipeline distribution systems. No one is going to buy a natural gas car if there aren’t fueling stations to fill up at.  Hirsch also questions whether there’ll be enough natural gas left in the future to justify such a huge infrastructure investment.   LNG has issues as well.  Bill Powers in his book “Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth” provides a lot of evidence that Natural gas will also peak by 2017, if not sooner, and so many others have written about this that I rarely update my post “Shale Oil and Gas will not Save Us“.

Biofuels.  I don’t know of a paper that better explains all of the reasons why biofuels won’t work than my article “Peak Soil“. Hirsch mentions just a few of the dozens of reasons, such as too much fuel is burned in tractors and trucks planting, harvesting, and delivering the plants to the biorefinery — more fuel than the plant can produce.  Existing trucks and autos can’t burn more than 10% ethanol.  Many scientists have shown that ethanol has a negative EROI — more energy is required to produce it than you get back.

Algae to fuel.  This is the least likely of all for several dozen reasons. Hirsch’s main reason is that “A great deal of energy — usually liquid fuel energy — is required to harvest the heavy, water-soaked algae and to remove the water.”

Discussion of Mitigation Measures Above

If oil declined at 2%, and you implemented all of these measures, you could keep production flat for over a decade.  But a 4% decline is a disaster (Hirsch chooses not to mention that there is a more likely 8-9.7% decline rate, given actual decline rates of giant fields. I know he knows this because it’s been discussed at ASPO meetings he’s attended and many publications.  Perhaps because it means the fall of civilization, and there are no mitigation’s to prevent this fate at this late date).

Obstacles to Implementing these Measures

Governments have to rapidly permit these facilities, prevent legal challenges, provide incentives to industry to act quickly, and protect industries from financial risks.  After Quantitative Easing, the government is $16 Trillion in debt and the Chinese are grumbling about a new currency not based on the U.S. dollar.  The government doesn’t have the money to finance a Manhattan project anymore.  They blew their wad bailing out a corrupt financial system that hasn’t been reformed at all since the 2008 crash.

Industry doesn’t have the money to do this either, nor the infrastructure, engineers, or capacity to launch a Manhattan project overnight because we outsourced manufacturing to China and elsewhere, and other nations aren’t going to be in a position to help other countries — or want to.

Government will not move quickly enough.  It takes a while to understand the options and switch governmental priorities.  Hirsch doesn’t mention the main reason: Congress has been brought to a standstill by the Tea Party, Limbaugh ditto-heads, and other extreme right and left-wing ideologues.

Since all of these fossil-fuel based “solutions” will worsen climate change, there will be a lot of opposition from environmental groups.  Though I wonder how much opposition there will be when people are cold, hungry, and in the dark…

What the authors say you might do

I’m only going to mention a few of them:

1. Buy a high mileage automobile early.  I agree — in the 1979 oil shock there were 6 month waiting lists for high mileage cars, and their prices went up quite a bit too
2. Invest in rental properties near mass transit
3. Don’t buy very large houses, they’re going to be harder to sell in the future
4. Avoid buying stocks in companies that depend on consumer spending (I assume he means superfluous things, not food and other essentials).
5. Short sales in the stock market
6. Hold cash and other short-term financial instruments
7. Buy stocks in countries that produce oil

 

 

slide 5: A drop in demand is not going to delay the onset of decline

slide 12: oil production determines GDP — not vice versa. so 2012 to 2015 both GDP and oil production will decline.

slide 17: Who will be hurt the most: the biggest oil importers (descending order): USA, Japan, China, South Korea, Germany, France, Italy, U.K.  Who will be hurt the least?  The biggest oil exporters (descending order): Saudi Arabia, Russia, Iran, Canada, Mexico, U.A.E., Kuwait, Norway, Venezuela

slide 18: wars and oil producers withholding oil are possible

slide 21: we believe that “Peak Oil” will burst into the public consciousness as a SHOCK.

It will be the same as 1973 & 1979, but it will last much, much longer.

I strongly disagree with Hirsch that we’ll find a way to electrify a lot of our technologies.

Miscellaneous

Original 7 sisters (access to 85% of world oil) : The 4 sisters now. Access to 8% of world oil (and a bit of another 12%)

• Standard Oil of NJ and NY: ExxonMobil (3% of total world oil production)
• Royal Dutch shell : Shell
• Anglo-Persian Oil : BP
• Standard Oil of California, Gulf Oil, Texaco : Chevron

The current Big 7:

1. Saudi Aramco
2. Gazprom (Russia)
3. CNPC (China)
4. NIOC (Iran)
5. PDVSA (Venezuela)
6. Petrobras (Brazil)
7. Petronas (Malaysia)

In 2008, 136 million cars consumed 25% of all U.S. liquid fuels. Light trucks 20%, heavy trucks, 13%, and Aircraft 7%.

References

The sources for this article are the July 10, 2012 slide show “Peak Oil Guru Robert Hirsch Gives A Dire Outlook For The Future” and his book “The Impending World Energy Mess. What it is and what it means to YOU!” written in 2010 with co-authors Roger H. Bezdek & Robert Wendling (forward by Dr. James R. Schlesinger, 1st U.S. Secretary of Energy).

Robert L. Hirsch is a former senior energy program adviser for Science Applications International Corporation and is a Senior Energy Advisor at MISI and a consultant in energy, technology, and management. Hirsch has served on numerous advisory committees related to energy development, and he is the principal author of the report Peaking of World Oil Production: Impacts, Mitigation, and Risk Management, which was written for the United States Department of Energy.