The world and its official global economy have reached the end of a crucial phase. The beginning of that phase was in 2005, when the world's growth economy first began to encounter the reality of constrained global oil supplies. In May 2005, the world's oil producers produced slightly over 74 million barrels of crude per day (or 85 million, if one counts natural gas liquids, “oil” from tar sands, biofuels, and other non-conventional sources). This was an all-time production record which was not exceeded for at least 2 ½ years, if one believes the production numbers of the International Energy Agency (IEA) and the United States Energy Information Administration (EIA). Some believe that the production numbers for 2008 were inflated, and that the May 2005 record is indeed an all-time record that has never been exceeded.
What is clear, however, is that global oil production stayed in a relatively flat band right around 85 million barrels per day from May 2005 until September 2008. Those who study Peak Oil have called this period the time of the “bumpy plateau,” where oil suppliers struggle to find enough new fields and start enough new projects to offset production declines in existing fields. We know we are past Peak and that the suppliers have lost the struggle when total daily world production begins to fall in spite of the best efforts of oil suppliers. At that point, the world has fallen off the bumpy plateau and is now on the downside of Hubbert's Peak. One of the signals that we are past Peak is an inexorable rise in the price of oil and petroleum products.
The 2007-2008 price spike may therefore have been such a signal. Oil climbed from around $65 per barrel to over $147 per barrel in a little over nine months. There were also spot shortages of petroleum products in various places, though this was not widely reported by the American media. Those who study Peak Oil devised a few theories to describe what they thought would happen as a result of the price spike due to Peak Oil. The consensus of many was that a sufficiently severe spike would derail the global economy, causing a recession and collapsing economic activity. This would also cause the price of oil to fluctuate wildly for a time before resuming its inexorable upward climb.
All these things have happened. The oil price spike of 2008 caused not just a global recession, but the beginnings of a depression potentially so severe that it may just end the official global economy. The price of oil has also crashed – from $147 per barrel to around $40 per barrel today. Of course, the fall in price is not due to finding new supplies (no one has found any large new, cheaply extracted supplies), but is due, rather, to falling economic activity. It now appears that the world has no more new supplies of cheap, easily-gotten oil.
So what happens next? Some analysts have stated that the price of oil will remain low until the world attempts an economic recovery. At that point, perhaps a few years into the future, global demand will run up against shrinking supply and there will be another price spike, followed by the return of a global recession or depression. But a report released in January of this year presents a different view – namely, that the coming price spike won't wait for an economic recovery, but that it will begin this year.
The report, titled, “Oil Prices: Another Spike Ahead,” was written by Jeff Rubin and Peter Buchanan, and is in the 23 January edition of StrategEcon, a publication of CIBC World Markets. (You can find it here: http://research.cibcwm.com/res/Eco/ArEcoMI.html. Click on the report titled, “Reflation.”) The report analyzes the effect of collapsed oil prices on new oil production projects, most of which require prices of well over $60 per barrel to be economical. Because the actual price of oil is so much lower than what is needed for oil producers to make money, many planned oil projects have been cancelled. The result is the removal of well over a million barrels per day of new production, and a decline in total world production from 85.8 million barrels per day in 2008 to 84.8 million barrels per day in 2010. The IEA has also stated that due to depletion of existing oilfields, the petroleum industry will have to spend well over half a trillion dollars each year just to meet future demand. This money is not likely to be spent in our present economic climate.
The CIBC report therefore predicts a supply shortfall of at least two million barrels per day by 2010, and a price spike that will begin in 2009 – indeed, within the next several months. By the end of 2010, the global price of oil will likely be back over $100 per barrel again. This will hinder, and may possibly derail, any attempt at a global economic recovery.
It appears, then, that we have fallen off the bumpy plateau. Or at least we don't have much longer to wait before we know for sure. All the words written on this blog and others concerning alternative systems and living lightly on the earth were not in vain. If anyone hasn't yet taken those words to heart, hopefully it's not too late.