The Four Phases of Transition

The Daily Reckoning PRESENTS: Whiskey and Gunpowder’s intrepid correspondent, Byron King recently picked the brain of Dr. Ali Morteza Samsam Bakhtiari, an independent energy consultant who writes and speaks to a worldwide audience on the subject of oil depletion in general, and Peak Oil in particular. You can read his full account, below…


In a recent article entitled “Nothing Like Business as Usual,” published Aug. 11, 2006, in Whiskey & Gunpowder, I outlined the views on Peak Oil of a man named Ali Morteza Samsam Bakhtiari. Dr. Bakhtiari is a former senior energy expert who spent his long career, which started in 1971, employed by the National Iranian Oil Co. (NIOC) of Tehran, Iran. During the course of his employment with NIOC, he held many important positions of trust and responsibility.

Dr. Bakhtiari is now fully retired from NIOC, in accordance with a mandatory age requirement. He has no current official link with the company. But, luckily for us in the Western world, he is among the pioneers of the global “Peak Oil” theory.

My recent article on Dr. Bakhtiari discussed in general his views and recent comments on Peak Oil and worldwide oil depletion. I noted his predictions of oil costing in the range of $100-150 per barrel in the not-too-distant future. And I referred to what Dr. Bakhtiari characterizes as the “Four Phases of Transition” (which he labels T1, T2, T3, and T4) in a world of declining conventional oil output. I received much e-mail from readers asking me to amplify what Dr. Bakhtiari means by these latter terms. That is, what are the “Four Phases of Transition”?

I asked the good doctor this very question, and his reply was, “As for T1, T2, T3, and T4, they are still very vague concepts, but if you allow me a few days…I shall try to explain to you what I think about these four.” And good to his word, within a few days, Dr. Bakhtiari was kind enough to forward some amplifying thoughts on the matter. Here is what he sent to me, to share with you:

“The four Transition periods (T1, T2, T3, and T4) will roughly span the 2006-2020 era. Each Transition [will] cover, on average, three to four years.

“The major palpable difference between the four Ts is their respective gradient of oil output decline – very small for T1, perceptible for T2, remarkable in T3, and rather steep for T4. In fact, this gradation in decline is a genuine blessing for those having to cope and adapt.

“It should be borne in mind that these four Ts are only an overall theoretical structure for future global oil output. The structure is thus so orderly because [it is] predicted with ‘Pre-Peak’ methods, ‘Pre-Peak’ assumptions, and [a] ‘Pre-Peak’ set of rules.

“The problem is that we now are in ‘Post-Peak’ mode, and that none of [the] above applies anymore.

“The fact of being in ‘Post-Peak’ will bring about explosive disruptions we know little about, and which are extremely difficult to foresee. And the shock waves from these explosions rippling throughout the financial and industrial infrastructure could have myriad unintended consequences for which we have no precedent and little experience.

“So the only Transition we can see rather clearly (or rather, we hope to be able to comprehend) is T1. It is clear that T1 will witness the tilting of the ‘Oil Demand’ and ‘Oil Supply’ scales — with the former dominant at the onset and the latter commanding toward the close (say, by 2009 or 2010).

“But even during that rather benign T1, the unexpected might become the rule and the orderly ‘Pre-Peak’ rapidly give way to some chaotic ‘Post-Peak.’

“In any instance, the overall structure of the ‘Four Transitions’ is a general guideline for the next 14 years or so — as far as global oil output is concerned. In practice, reality might prove to be worse than these theoretical Transitions; but certainly not better.”

Dr. Bakhtiari has a background in chemistry. He holds a B.Sc. and Ph.D. in chemical engineering, granted by the Swiss Federal Institute of Technology in Zurich, Switzerland. He has worked in industry and taught at a university level in the fields of both chemistry and chemical engineering for about four decades.

I asked Dr. Bakhtiari if it would be fair to say that he is using the term “Transitions” in a manner similar to what are known as “phase transitions” in physical chemistry? Of course, the analogy need not be an exact chemical description. But I asked him if that concept from chemistry would be a proper way of helping to explain his thinking process.

The reason I asked the question of Dr. Bakhtiari, and used terms from physical chemistry, was his statement, “The major palpable difference between the four Ts is their respective gradient of oil output decline.” My interpretation of that comment is that at each “transition” point where the gradient changes, we might view that as the “phase change” analogous to, say, frozen water melting, or hot water boiling.

And as for how much we do not know in a post-Peak Oil world, as Dr. Bakhtiari noted, that could be analogous to the phenomenon known as “flash evaporation.” That is, if you raise the temperature of water to something well below its standard boiling point, but then rapidly change some other condition, such as lowering the atmospheric pressure above the water, the water “boils” at a lower temperature and lower pressure regime. This might be considered similar to some abrupt, unanticipated event reducing the supply of oil; for example, warfare, natural disaster, or unexpectedly rapid depletion and decline in a major oil-producing region of the world.

Dr. Bakhtiari replied as follows:

“I certainly like your idea of ‘phase transition,’…especially the analogy from ice to water, which occurs gradually. Start with ice and end with water, while to the very last second there is some ice present.

“I also agree that at the junction of two Ts, there should be some kind of a milestone. For example, at the close of T1, Supply should totally dominate Demand…I am toying with [the] idea, very preliminary, that close of T2 could be OPEC [oil production] surpassing non-OPEC [oil production], although OPEC died in 2004.”

Dr. Bakhtiari’s statement that “OPEC died in 2004” is an interesting viewpoint, in light of his idea about the nature of T2, when OPEC production will surpass non-OPEC production. To explain this further, let me refer back to February 2006, in the ASPO-USA newsletter, in which Dr. Bakhtiari wrote:

“It goes without saying that when assaying Middle Eastern oil reserves, one should tread carefully. Because, on the one hand, oil reserves’ estimation is both a science and an art; and on the other hand, seen from the point of view of most Middle Eastern countries, oil reserves are more political than geological. Thus, nonscientific views come to prime over science and further enhance the various types of shades that have led to an overall opaque situation in the Middle East.”

Dr. Bakhtiari wrote this in the context of a discussion in which he estimated total oil reserves in the Middle Eastern group of major oil-producing nations (Iran, Iraq, Kuwait, Saudi Arabia, and the United Arab Emirates) as about half, or even less, than what the respective national governments claim.

Dr. Bakhtiari noted in the article that:

“As for Iran, the usually accepted official 132 billion barrels is almost 100 billion barrels over any realistic assay. If the higher figure was for real, its oil industry would not be struggling day in and day out to keep output at between 3.0-3.5 million barrels per day (inclusive of Persian Gulf offshore).”

Coming from a former senior official of NIOC, this is an utterly astonishing comment with immense implications. It may explain much about the current Iranian government’s view of its options for setting future industrial, economic, political, and military policy, although Dr. Bakhtiari certainly did not say this, and I do not want to put words in his mouth.

In February 2006, Dr. Bakhtiari further summarized his thinking on the subject of oil reserve estimates as follows:

“Notwithstanding the importance of conventional oil reserves, their days might now be numbered (both in the Middle East and elsewhere).

“Oil reserve estimates were useful in the era before ‘Peak Oil.’ But in the aftermath of the mighty Peak (as, for example, in the present ‘T1’ period), they tend to become stale and rather useless, as field-by-field analysis and prediction takes over (e.g., Ghawar, Cantarell).

“So it will not be long now before we will have to say goodbye to all these mesmerizing oil reserve figures and dump the whole reserves file into the all-encompassing ‘dustbin of history.'”

In another recent statement, Dr. Bakhtiari has said this:

“The decline of global oil production seems now irreversible. It is bound to occur over a number of transitions, the first of which I have called T1, which has just begun in 2006. T1 has a very benign gradient of decline, and it will take months before one notices it at all. But T2 will be far steeper…My World Oil Production Capacity model has predicted that over the next 14 years, present global production of 81 million barrels per day will decrease by roughly 32%, down to around 55 million barrels per day by the year 2020.

“Thus, in the face of Peak Oil and its multiple consequences, which are bound to impact upon almost all aspects of our human standards of life, it seems imperative to get prepared to face all the inevitable shock waves resulting from that. Preparation should be carried out on individual, familial, societal, and national levels as soon as possible. Every preparative step taken today will prove far cheaper than any step taken tomorrow.”

In his message to me, Dr. Bakhtiari stated that the “gradation in decline (between T1, T2, T3, and T4) is a genuine blessing for those having to cope and adapt.” Indeed, it is a blessing, but only if informed people and the industrial and political policymakers of the world will actually take Peak Oil as a serious matter and set policy accordingly.

In this regard, when it comes to his efforts in explaining Peak Oil to a worldwide audience, Dr. Bakhtiari is a prophet. He is both predicting something, and giving a 14-year time frame for its occurrence. Thus his efforts, his writings, and his work embody the old saying that “Time takes no holiday.” Simply allow me to end by expressing my deepest thanks to Dr. Bakhtiari for sharing his thoughts with me, and recalling the words of Dante Alighieri, who wrote in Purgatorio, Canto III, “It is the wisest who grieve most at the loss of time.”

Until we meet again…

Byron W. King
for The Daily Reckoning
August 30, 2006

Editor’s Note: Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. He is a regular contributor to the free e-letter, Whiskey and Gunpowder, which covers resources, oil, geopolitics, military history, geology and personal freedom.

‘Things do seem to be getting worse very quickly. Free-fall is a strong word, but I think it’s the right one to use here,’ says Paul Ashworth, chief U.S. economist at Capital Economics.

But most Americans look into the future, see a weakening property market, and fear not. They have been told that soft housing prices pose no problems for the rest of the economy. They have no reason to doubt that it is true; no reason to squint and try to see further. They dread neither slump nor boom…neither war nor peace. They believe everything will be managed by the authorities so as to do no great damage to the homeland.

But you typically don’t lose money (or make it) when things happen as expected. No one plans on losing his life savings. It comes as a surprise – along with sudden death, financial crashes, and other crises.

Where will the surprise come from this time?

We wonder, because things that are expected present few opportunities and few catastrophes. When an old man dies, people gather at his grave almost with relief. Finally, it is over. His affairs are usually sorted out long before he reaches room temperature. So, the book can be closed and put down. No more chapters, footnotes, or postscripts. Time to move on.

But when a young man dies, it is as if the printer had made a mistake. The story is unfinished. We turn the page expecting to find out what happens, and there is nothing there.

The young man typically dies suddenly and unexpectedly, leaving crops in the field and his widow and children in the house. While the widow grieves, grasping neighbors move their fences, taking what was once his…and banks wonder if his mortgage will be repaid.

“I can’t tell you how hard it was,” explained a neighbor, widowed before she was 40, with five children, one of whom was severely retarded.

“Suddenly, everything changed. My husband had borrowed money to modernize the farm. But I really didn’t know how to pay it back. And then, farm prices were falling. And our farm hands all demanded more money. And nobody would give me any time or credit because they all thought I would fail and have to sell the place. It seemed like everyone was angling for something…and I had my children to look after. Those were the most difficult years of my life.”

If there are going to be difficult years in America, however, Americans are not worrying. They recall the last recession in 2001, almost fondly. Even before they had forgone a single Krispy Kreme donut…or darned a single sock…the recession was over. And on its heels came the biggest boom in housing prices the world had ever seen.

Recession? The last one was no trouble; why should they worry about the next?

The expected slump poses no danger to them. But what if the slump is not what Americans expect? What if the softening of housing prices is not so benign? What if the roof really does cave in?

Ah…that would come as a shock.

The Guardian took up the idea this week, quoting Paul Ashworth:

“House prices have been rising at unprecedented double-digit rates in recent years, giving homeowners massive windfalls and supporting a wave of investment in new construction. However, the number of unsold new homes is now at a 10-year high.”

Ashworth reckons that 30 percent of all the jobs created since the end of the last recession in 2001 – 1.4 million – have been in sectors related to the housing market boom, from construction to DIY stores. As the boom runs out of steam, he calculates that 73,000 jobs a month will be lost.

And, also in the Guardian, Stephen Roach warns, “for a wealth-dependent U.S. economy, the bursting of another major asset bubble is likely to be a very big deal.”

He notes, “With U.S. fiscal and trade imbalances now larger than five years ago, the fallout for the rest of the world could be more devastating than the aftermath of the dotcom boom.”

Of course, we have no more idea than anyone else. But at least we know what to look for – the unanticipated. What analysts broadly anticipate is a “soft landing” in housing…and no landing at all in stocks. What is unanticipated is a hard crash. Will it come? We don’t know. But at least we haven’t failed to anticipate it.

[Ed. Note: The housing boom is over. You can join the ranks of those who ignore the evidence and continue on like nothing is wrong – or you can prepare for the unanticipated. Protect yourself from the worst real estate bust in American history – click here:

It’s Too Late For Some Homeowners

More news:


Justice Litle, reporting from Reno, Nevada…

“Now, I believe to understand how we’re going to get out of this mess we’re in, it is necessary to conceive of a solution that represents as radical a break with the past as the automobile was with the horse-drawn carriage.”

For the rest of this story, see here:

Unconventional Solutions


Bill Bonner, with more thoughts…

*** Yesterday, it rained all day. It was dismal…dreary…almost depressing. We had a fire in the dining room fireplace, and in our library, an octagonal building out in the yard, we had to turn on the gas heat.

Maria has gone back to school in London. Jules has left for school in Boston. Our last summer guests left this morning.

These are the last few days of summer…and there is an air of sadness about them…the kind of sweet tristesse that you get at the end of a long vacation.

Of course, this was no real vacation for us; we worked every day. But it was on our summer schedule and in our summerhouse…with our summer friends around…and the family coming and going. And now, it is time to close up the house.

Elizabeth left for Paris this morning to try to put our new apartment in order and this weekend, we will close the shutters…bolt the doors…put away the tools…lock up the library and the wine cellar…and prepare for another long year of work.

“I love it out here,” she said last night. “Especially this year, I really felt it – why I like this place so much. There are so many people around who care about the same things I do. They care about gardens, and old houses, and history, and manners. I feel more at home here in many ways than I ever did in Maryland.”

This summer, there seemed to be an especially active social life in this area. We attended two weddings, several dinners, and a couple of parties. None of them were particularly elegant, but all were tastefully done…and attended by interesting, cultivated people.

“Oh, my…I think this is our first serious social faux pas,” Elizabeth remarked as we walked to a party on Saturday night, only half joking.

We were approaching an ancient house, by way of a causeway between two large ponds. The house was of stone, substantial, and remarkably simple…with unpainted wooden windows that looked hundreds of years old. But as we were walking along we passed other guests, all wearing masks. And then, a sign reminded us we were supposed to have “come masked!”

“Uh oh…”

It was only then we realized that the invitation had not proposed a “masque,” in the Shakespearian sense of a private revelry…but a masked party…like a masked ball. And here we were, arriving unmasked….our faces naked. We were exposed as rude, foreign oafs – they might even take us for Americans!

But, the party evolved nicely…the masks came off after a while, revealing several friendly faces.

“Yes,” Elizabeth continuing her line of thought, “I like this area…and these people. They are as moss-backed as I am.

“But one man I met was even more moss-backed. He was a monarchist. You know, when people tell me that they are monarchists, I never quite believe them. They sound as if they are pulling my leg…. just being provocative…not serious…like you are when you say you favor monarchy.”

“But I am serious,” we replied.

“Well, maybe…but this man is actively working for the restoration of the Bourbons…even though he admitted that there was no chance that France would support a king again.”

*** An item in the news caught our eye the other day. Senator Lieberman compared the war in Iraq to the Spanish Civil War; it is a harbinger of worse to come, he wrote.

Coincidentally, we too have been reading about the Spanish Civil War in a history by Anthony Beevor. What interested us is that both sides – from before the war began…up until the day before yesterday – shared a common assumption. They both argued that they had the support of the masses. Votes were analyzed, polls taken, speeches deconstructed, both sides trying to prove that it had the right to rule – because it enjoyed the most popular support.

And each side committed sordid, barbarous acts: murder, rape, pillage, theft – you name it – secure in the knowledge that it had 51% of the population behind it and thus had the right to govern.

And today, the idea is hardly ever contested. “Majority rule” replaced monarchial rule a long time ago. But we wonder what makes it better? What gives people the right to rule one over another…merely because at that particular moment, in those particular circumstances, there are more lumps on one side than the other?

No thank you, dear reader. We are not democrats. Instead, give us a good king. Put him on the throne and tell him to mind his business. And if he taxes too heavily, spends too much, or dares to drag the country into war or absurdity – off with his head!

The Daily Reckoning