Financial Consequences of Peak Oil
It is becoming evident that the financial and investment community begins to accept the reality of Peak Oil, which ends the First Half of the Age of Oil. They accept that banks created capital during this epoch by lending more than they had on deposit, being confident that Tomorrow’s Expansion, fuelled by cheap oil-based energy, was adequate collateral for Today’s Debt. The decline of oil, the principal driver of economic growth, undermines the validity of that collateral which in turn erodes the valuation of most entities quoted on Stock Exchanges. The investment community however faces a dilemma. It desires to protect its own fortunes and those of its privileged clients while at the same time is reluctant to take action that might itself trigger the meltdown. It is a closely knit community so that it is hard for one to move without the others becoming aware of his actions.
In this situation, interest shifts to commodities and to short term trading to benefit from daily or hourly fluctuations in price, implying that there are few valid genuine long-term investments left.
The scene is set for the Second Great Depression, but the conservatism and outdated mindset of institutional investors, together with the momentum of the massive flows of institutional money they are required to place, may help to diminish the sense of panic that a vision of reality might impose. On the other hand, the very momentum of the flow may cause a greater deluge when the foundations of the dam finally crumble. It is a situation without precedent.
The following is the summary of a presentation to the Edinburgh Conference by C.J.Campbell, which extreme as it may sound, seems consistent the new posture adopted by the International Energy Agency.
The Second Great Depression : Causes & Responses
Oil was formed but rarely in time and place in the geological past, which tells us that it is subject to depletion. It also has to be found before it can be produced. Finding oil is primarily a matter of geology, notwithstanding the technical, political and economic factors. So, an understanding of petroleum geology forms the bedrock for forecasting future production.
Depletion itself is easy to grasp as every beer drinker knows: the faster he downs his draught, the sooner it is gone. However, the issue is not about finally running out of oil, which will not happen for many years. What does concern us – and most gravely– is the long downward slope that opens on the other side of peak production. Oil and Gas dominate our lives, and their decline will surely change the World in radical and unpredictable ways.
How has this self-evident reality been so successfully confused and denied? In short, oil companies under-reported discovery to comply with strict Stock Exchange rules, and revised reserves upwards over time, delivering a comforting but misleading image. But those days are over, forcing the major companies to find reserves by merger rather than in the ground. Some OPEC countries, for their part, started reporting original, not remaining reserves, as they vied with each other for quota, explaining why their reported reserves have barely changed for 20 years. Furthermore, definitions of the several categories of oil and gas are confused. Public data are grossly unreliable.
Production has to mirror discovery after a time lapse, as amply demonstrated in one country after another. The peak of production comes broadly when half the total has been consumed. Deciphering the conflicting evidence as well as possible indicates that approximately 944 Gb (billion barrels) of Regular Conventional oil have been produced; 764 Gb remain in known fields (Reserves); and 142 Gb are Yet-to-Find. If so, the midpoint of depletion was passed in 2003, meaning that peak production is imminent. On present estimates, the overall peak of all categories of oil arrives in 2006, with that of oil and gas combined coming about two years later.
A widely held myth proclaims that technology will deliver more, when its main impact has been to hold production higher for longer, accelerating depletion. The observed growth in reserves has been an artefact of reporting, not technology, save in special cases.
The First Half of the Age of Oil now closes. It lasted 150 years and saw the rapid expansion of industry, transport, trade, agriculture and financial capital, allowing the population to expand six-fold. The financial capital was created by banks with confidence that Tomorrow’s Expansion, fuelled by oil-based energy, was adequate collateral for To-day’s Debt.
The Second Half of the Age of Oil now dawns, and will be marked by the decline of oil and all that depends on it, including financial capital. It heralds the collapse of the present Financial System, and related political structures, speaking of a Second Great Depression.
But there are survival strategies. Governments may be persuaded to sign the Depletion Protocol whereby imports are cut to match world depletion rate, such that world prices fall into reasonable relationship with cost, and profiteering from shortage avoided; the current monumental waste of energy may be reduced; renewable energies from wave, tide, wind, solar, hydro and geothermal sources may be brought in; and the nuclear option re-evaluated.
The survivors, whose numbers may not greatly exceed those of the pre-oil age, may find silver linings as they rediscover rural living, regionalism, diversity and local markets, coming to live in better harmony with themselves, each other, and the environment in which Nature has ordained them to live. But the transition will be a time of great tension, including international tension as consumers vie for access to dwindling supplies, and as city life becomes unsustainable.