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The Most Exciting Event in the History of Technical Analysis

Peak Oil And The Olduvai Gorge

Commodities / Crude Oil Nov 18, 2012 - 12:30 PM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleThe Olduvai Gorge theory of Richard Duncan was that human society would be forced back to the anthropoid ape stage of evolution by peak oil and energy scarcity, and would live like Tanzania's "Lucy" the best known precursor or human ancestor, taxonomically called "Australopithecus afarensis", of about 2 million years ago. Duncan's angle, developed in the late 1990s, was that peak oil and energy resource depletion would firstly make inevitable, then speed up this retreat and defeat of Humanity, as human society was forced back to hunting and gathering. An Internet search with Olduvai Gorge theory will produce hundreds of responses.


Among the admirers of Richard Duncan and his "back to the jungle" theory, Britain's Prince Charles and the USA's Bill Clinton have surely consumed a lot of jetfuel kerosene as well as motor gasoline in their lives, to date, and kept away from hunter gathering, as shown by their ability to avoid paperazzi and photo opportunity hunters. They also kept Duncan's gory theory of mass human die off and backward evolution to hunting-gathering, due to Peak Oil and fossil energy depletion, out of nearly all of their speeches. As we know, certainly in recent years, the elite fear of peak oil has been replaced by global warming fear - as the best excuse to impose "world government", unelected of course.

GOOD BYE PEAK OIL
Duncan's theory was given significant media attention about 10 years ago, and was heavily cited by supporters of the US Gas Cliff theory, promoted by writers including Julien Darley and Michael Ruppert in 2004-2006, and by promoters of Doomsday energy shortage and oil soaring to $200 a barrel, such as Matt Simmons. The Gas Cliff theory, we can note, argued that gas resource depletion was running so fast, that US gas resources would be "practically exhausted" by about 2015. Today, we know that we face a towering cliff of unconventional gas resources - discovered since only 2007. Discoveries of unconventional gas march on and up, implying that probably 200 years, or more, of current world gas consumption are now available as exploitable resources, worldwide.

The keywords conventional oil and gas, and unconventional oil and gas, tell us all we need to know about global fossil energy for the next 50 years, at least. Peak Oil (PO) theory as developed by Colin Campbell, Jean Laherrere and Kjell Aleklett among others, only concerns conventional oil resource depletion, does not in any significant way concern gas resources, and also assumes that global oil demand and consumption can only rise.

The PO theory of the period 1998-2008, during which it had large media, corporate and even political support is easy to compare with M. King Hubbert's US oil depletion theory of the 1950s: this also was only focused on conventional oil resource depletion on the supply side, and ever-rising oil demand. Hubbert's theory however attracted little media interest or overt political support, but his theory very probably helped set US Middle East policy of the 1950s - still unchanged today. This is based on the notion of "incompressible dependence", and possibly near total future dependence on Middle East oil, due to "Soviet oil dependence" being (very) politically incorrect during the Cold War. Oil dependence on Soviet fundamentalists was supposedly a lot worse than depending on Islamic fundamentalists.

Hubbert's theory was in large part driven out of mass media not by geopolitical cherrypicking, but by the pace and size of oil discoveries in the 1950s and 1960s - world annual discoveries, each year, were often enough to cover more than 20 years of global oil consumption at the time - although US domestic oil discoveries were already declining. Hubbert's theory, we can note, had hard edged technocratic, even Soviet-style "organized society" ideas about how to control society in face of the coming oil crunch, for example by speeding up the development of nuclear power and of "emergency preparedness".

PO theory, post 2000, was in particular parasitized by ideological hotheads, such as Richard Duncan or Michael Ruppert who proposed 'draconian change' of society and the economy. Actual details on this "survival preparedness" were almost inevitably thin on the ground, but included the well-known, almost traditional call, in urban industrial society and culture, for a return to rural non-industrial lifestyles.

NEW CRISES
The mega-shift from global oil and gas dependence on conventional resources, to unconventional oil and gas resources, has only become so large it is impossible to ignore since about 2005, and especially since 2009. This in major part explains why PO theory's support and media attention has spiralled down, since at latest 2009. This shift relegates oil and gas depletion to an "historic theory" of the past, and has already been noticed, if not yet acted on by OPEC and NOPEC energy exporters who will have to learn to live with a vastly different global energy context featuring the convergence of energy prices, and lower prices for all forms and types of energy, either fossil or renewable.

In particular this concerns oil, with current (November 2012) prices still around 25% or $25 per barrel higher than any "equilibrium price" for oil energy compared with all other forms and types of energy. Very ironically and as I have pointed out in other recent articles, the elite fear of anthropogenic global warming and linked call for "elininating coal from the energy mix" (or forcing worldwide use of carbon capture and sequestration-CCS), implies continued high, or very high energy prices, simply to pay for this elite folly and policy dream.

In the US where shale gas development has slain gas prices, current prices stand at less than $20 per barrel of oil equivalent, a long way from the $80 - $90 per barrel equivalent charged by Gazprom for pipeline gas supplies to Europe, or by Qatar for LNG exports to Asia. The mega-shift in global gas pricing, towards much lower barrel-equivalent prices will also spillover to oil. Gas-indexing of oil prices is moving forward, stealthwise at present, making for the current total disagreement and lack of certainty among oil and energy analysts as to what "the right price of oil" might be, expect that it will be lower than current prices. Conversely, at least in thoery, coal prices might be raised in order to help finance global CCS, although this is currently unlikely.

Certainly in the 6-month short-term, unless the Middle East geopolitcal scene heavily degrades, which is unlikely but possible, and unless global oil demand "bounces", which is almost impossible, global oil stocks will tend to go on growing. Oil production capacity will continue growing (including both OPEC and NOPEC capacity), and competing energy supplies at much lower prices, especially gas and the renewables will also go on growing. This however is only the "rational outlook".

The irrational-but-possible outlook, supposedly "contrarian" is that the need for high-priced oil, by the global financial, trading, asset management, energy fiscal, and both conventional and alternate energy interests and industries is so high that even with the demise of PO, something has to be invented to keep oil prices high. Not a fundamental but treated that way by oil price analysts, US and European fiscal and monetary policy and its spinoff effects on USD/EUR parities and the gold price, create a bundle that is negative for oil prices going forward. The "traditional backstop" for overpriced oil - high gold prices - is under serious threat at this time, despite the supposed outlook for hyperinflation due to QE Infinity. In many ways as dire in its economic impacts, intense deflation is an emerging global macro trend. Gold prices are possibly or probably threatened by major correction, to a more stable price range around $1550 per ounce coherent with oil prices around $60 - $75 per barrel. This may only be a first stage in the "energy asset adjustment" process.

UNRELENTING DEMAND GROWTH
Both  Hubbert's theory, and PO theory post 2000 posited unrelenting growth of global oil demand, but certainly since 2005 or a little later, stagnation of global demand and regional decline of oil demand is the reality. This can rather easily spread to all other forms and types of energy - witnessed by the decline of natural gas demand in Europe, despite the certain prospect of more abundant supplies and lower prices, for a "low CO2 emitter" alternative to coal-fired power.

In the large oil consumer region of Europe, oil demand in 2012 is declining for its sixth straight consecutive year making it harder and harder to brush this off as a "transient trend" only due to economic crisis. Chinese oil demand growth which averaged about 9% a year for 1998-2008 is now set at close to 3.5% a year, with a similar and ongoing fall in oil demand growth rates for India. Energy shift away from oil is a powerful long-term trend. Using IEA data, the OECD group of countries in 1973 obtained about 53% of their total energy from oil; in 2011 they obtained about 35% from oil.

Olduvai Gorge theory may have been exciting, to Prince Charles or Bill Clinton, but other changes have happened and are happening in global energy in a global macroeconomic context that itself is changing very fast. These fundamental changes will continue to build going forward, making for the unsurprising forecast of further decline in oil's role in world energy, geopolitics and the economy. This role will gradually erode and fade as the oil price starts to converge, at a lower level, with prices for all other forms and types of energy. Like Hubbert's theory of the 1950s, and the PO theory of 1998-2008, the Olduvai Gorge theory posited ever declining world consumption of oil - dictated by supply side decline. Demand side decline is also possible, in fact current reality, but the mechanism and process of decline and shift, away from oil, are light years away from Olduvai Gorge.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

bm1
19 Nov 12, 09:12
Accounting for EROEI

Andrew,

Firstly thank you for another interesting and thought provoking article. I am an avid reader of your writing.

You appear to be well read on the topic of peak oil. I am therefore surprised that you failed to mention Energy Return On Energy Invested (EROEI)[1].

An understanding of EROEI is critical to understanding the impact of the shift from conventional to unconventional sources of energy.

This is the difference between a resource and a reserve. Taken to the extreme if it takes 2 barrels of oil to produce 1 barrel of oil from a resource then that oil field will never be a reserve.

Unfortunately due to the complexity and infrastructure demands of modern industrial civilisation, it is estimated that an EROEI much greater than 1:1 is required. Professor Charles Hall and other leading researchers in the field of EROEI have published scientific papers suggesting that an EROEI of approximately 10-12:1 is required to maintain our modern industrial civilisation[2][3].

Humanity has consumed approximately 0.9 Trillion barrels of High EROEI oil to date. approximately 1.1 Trillion barrels of Lower EROEI oil, plus 8 Trillion barrels of oil equivalent fossil fuels are left. Unfortunately these are of an EROEI too low to sustain industrial civilisation.

Industrial civilisation can no more survive on low EROEI energy sources than humans can survive on high salinity salt water. This inability of low EROEI energy sources to sustain industrial civilisation may be the underlying reason for the demand destruction within the OECD.

The problems of the OECD economies are compounded by the possibility of a 65% reduction in oil exports as indicated by Export Land Model analysis [4].

When dealing with any finite resource both depletion and EROEI decline are an irrefutable fact.

As far a I am aware, our team is the only group with a portfolio of projects in very early development with governments and multinationals, which has the potential to resolve the EROEI issue and buy time for a transition to renewables.

We are only able to circumvent the depletion/EROEI decline by hybridising various proven technologies in combination with changes to system boundary constraints. This does not provide an indefinite solution, except perhaps millions or a billion years appear so on a human time scale. The laws of entropy appear absolute.

Our own advanced confidential multidisciplinary research is indicating that even with our breakthrough solutions, due to feedback loops and nonlinear events the OECD and GCC countries are near or at their event horizon for mitigation. Even if all our various projects come online without delay and work as well as expected, it will still take several more years before we will even be able to guesstimate with some minor degree of accuracy which side of the collapse event horizon we are currently on.

We currently expect that it will take a minimum of 5-10 years simply to offset the declines in the availability of essential high EROEI oil and other energy supplies.

Strangely, once the minimum resource point is reached, because we are countering 4-8 exponential decline factors the recovery may be very rapid. So rapid and significant that we are currently unable to model the possible side effects.

During the next 3-8 years it is likely that due to infrastructure scale up times a point of maximum resource constraint will be reached. Because we are dealing with multiple exponential decline factors, if during this point of maximum vulnerability feedback loops and nonlinear events cause systemic cascade failures Olduvai Gorge may well rapidly become a reality [5].

Because we are dealing with multiple exponentials, if we have overestimated by even a small amount the current state of various decline factors then the situation may be significantly more benign than portrayed above. There may be too many unknowns at this point for accurate projection.

[1] Wikipedia, Energy returned on energy invested, Accessed 19 Nov 2012, http://en.wikipedia.org/wiki/Energy_returned_on_energy_invested

[2] Charles A. S. Hall, Stephen Balogh and David J. R. Murphy, What is the Minimum EROI that a Sustainable Society Must Have?, Energies 2009, 2, 25-47; doi:10.3390/en20100025, Accessed 19 Nov 2012, http://www.mdpi.com/1996-1073/2/1/25/pdf

[3] I have had the privilege of viewing, an as yet unpublished report by Jessica Lambert, Charles Hall et al, which contains the estimated minimum EROEI required for various activities.

[4] Babak Madadi, Oil Export Declines by 2020, CGSA, http://wp.cgstrat.org/publications/oil-export-declines-by-2020/

[5] Babak Madadi, IRAN – THE STRATEGIC MASTER PLAN, http://wp.cgstrat.org/publications/iran-the-strategic-master-plan/


Mart
22 Nov 12, 12:52
Why is demand down?
A thought provoking article, but the tone surprised me. I have read his work for a number of years. I certainly don't disagree that demand has changed. For example, this graph of US traffic volume: http://www.fhwa.dot.gov/policyinformation/travel_monitoring/12septvt/figure1.cfm suggests that something unprecedented occurred with the onset of the most recent economic troubles in 2008. The sudden flattening post-2008 looks nothing like the tiny dents in 1991 or 2001 in the utterly linear increase across the two decades before 2008. However, I have a hard time believing that this was merely due to increased efficiency of the fleet, which has a much shallower curve. This data -- and similar data from Europe -- suggest instead a sudden and sustained reduction in the ability of drivers to pay for fuel. In the US, this fits in with other economic data showing high stress, such as a near doubling of the number of people on food stamps over the same period. Andrew points out that there has been some move to methane. I can see in the case of electrical generation, but it seems much less relevant for transport, esp. in the US. As the previous commentator mentioned, the relentless reduction in EROEI of all kinds of energy doesn't point toward endless growth in oil (and other fossil fuel) stocks. Instead we see greater reliance on bottom-of-the-barrel stripper wells, lease condensates, natural gas liquids (lower energy density), ethanol (disastrously low EROEI!), lower EROEI fracking (horizontal drilling, expensive proppants), tar sands, all along with the faster depletion that accompanies these newer methods (horizontal/bottlebrush gas wells, major depletion in <1YR in Haynes shale). Probably not a problem next year, but the overall world picture hardly looks stable to me in the moderately longer term. In particular, the fact that methane frackers have essentially put themselves out of business in a just few years, right at peak crude oil, suggests that there is a poor 'impedance match' between our short-look-ahead monetary system and the bumpy road ahead.

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