Gentlemen, Start Your Engines

by Byron King

Bloomberg writer Matthew Lynn just published an article entitled “Cancel That Apocalypse – The Oil Crisis Is Over.” Oil prices have recently pulled back, and the auto industry is re-tooling to manufacture smaller cars that get better gas mileage. Hence, presto-chango, “The Oil Crisis Is Over.” For a minute, I thought he was kidding. But no, this Bloomberg-man is serious.

This is exactly why amateurs should not fool around with issues of Peak Oil. They confuse their readers with rah-rah bromides, and will cause people to hurt themselves. These type of party-hardy cheerleaders idealize the workings of the so-called “free market” (dollar-denominated, so how “free” can it be?), while ignoring the inexorable march of resource depletion and the irreversible decline in future amounts of available liquid fuels. They confuse a temporary market retreat with the equivalent of the Russians defeating the Germans at Stalingrad, and mark an otherwise minor trading event as the start of the end of the Great War. But of Peak Oil, allow me to paraphrase Churchill after El Alamein, “This is not the end, nor the beginning of the end.This is not even the end of the beginning.”

So, Toyota is building the much-vaunted, well-marketed, rather over-priced Prius? Great. There are 500 million motorized & mechanized vehicles plying the world’s roads & off-roads. If the world replaces 25 million vehicles per year with Priuses, or the fuel-efficient motorized equivalent from some other auto maker, it will only take about, ohhhh…20 years to turn over the existing motor fleet, not including meeting new demand or replacing “new” cars that wear out along the way. And many of the world’s motor vehicles are over-the-road trucks that get about four miles per gallon. Shall we replace them with Priuses as well? I suppose it will make for lots of new jobs for people to haul lettuce from the San Joaquin valley, cross country to the ristorantes of New York, with the boxes of fresh produce stuffed in the back of the humble Prius.

Over the next 20 years, the absolute quantity of petroleum available to the world on any given day will decline. We should only hope, and perhaps be so lucky in a Star Trek future, that fuel efficiency on a global scale will be able to make up for the decline in availability of liquid fuel. But that idea is fanciful if you understand the depletion curves that are out there. What we consider today as the “normal” state of the world transportation system will be a distant memory by 2025, possibly a hated past as people look back and come to realize how their forbears squandered an irreplaceable Earthly inheritance.The idea is ludicrous, if not dangerous, that we will simply create an alternative future of never-ending, care-free driving based on soybean ethanol or some other such by-product of composted dead plants. Those who think that way are fooling themselves and others.

“But what about the Tar Sands?” goes the cry. Are we not going to fuel the transport needs of the planet from the “Canadian equivalent of Saudi Arabia?”Are you sitting down? The answer is No! Even the most optimistic estimates from the Canadian government forecast only three million barrels per day of “oil” production from the tar sands of Alberta by 2025. This is, in global energy-speak, a small drop in the big bucket.

At a relatively modest depletion rate of, say, 4% per year (which is very, very conservative…the North Sea is depleting at 8% to 10% per year by comparison), today’s 84 million barrels per day of world oil production from existing reserves will be all of 37 million barrels after 20 years. To obtain the same level of production as today’s 84 million barrels per day – and just to keep even with that current production and not to increase production by one extra barrel – the global oil industry (or whatever succeeds it as a “hydrocarbon” industry in the tar sand, oil shale or coal gas, etc. biz) will have to “discover” and produce the fossil fuel equivalent ofa good deal more than half of all of the world’s present oil reserves.

Let me put it another way. Within the next 20 years we need to find the petroleum or other energy-equivalent of another Saudi Arabia, plus another Kuwait, plus another Iran, plus another Russia. And this is just to keep even with the present requirement to run the global economy at current energy prices, not allowing for future increases in demand. And this also does not even get into the increasing global demand for natural gas, the numbers for which are worse than those for the oil supply.

So, don’t sell your tickets to the apocalypse on eBay just yet. I think that we are all going to have a ringside seat for the main event. And as they say, “Gentlemen, start your engines…”

P.S. Not all nations suffer equally in the event of a crude crisis. Since the United States accounts for roughly 25% of the oil being consumed, even a minor shortfall in the production and distribution of oil around the globe portends disproportionate economic downsides here in America…

For all but a few knowledgeable investors, that is. Discover how you can stay informed and ahead of the upcoming “Petrocalypse.”

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