Wednesday, January 7, 2009

Peak Oil will be the Blacker, Black Swan

The World has fundamentally changed in the recent past.

Just to give yourself some perspective, I suggest you read this article in Forbes, an interview with Bill Gross, one of my neighbors here in Newport Beach and one of the world's most respected investment managers, known as "The Bond King."

To paraphrase and oversimplify a bit, Gross basically explains that since the US Government has now elected to "rescue" major parts of the financial system, instead of letting them die according to the principle of "creative destruction," the financial environment will be much more regulated in the future and we will not be able to "go back to the prior stasis."

This sounds to me like the very definition of what I would call a fundamental change.

In fact, Bill Gross estimates that it will take "15 to 20 years to escape this new regulatory environment and the lack of risk taking."

15 to 20 years!

That's an entire financial lifetime! The bulk of many people's productive working years before retirement. I would argue that is very fundamental.

But, if you think the so-called "global economic crisis" is bad, get ready for something worse.

Peak Oil. You can think of it as the "blacker" Black Swan.

The basic problem is that we are completely failing to manage the risk of Peak Oil impacting human civilization.

For one thing, everybody is too myopically focused on the current media darling, global warming.

If you are really interested in understanding how the financial crisis got so out of control, I suggest you read this article in the New York Times by Joe Nocera about Risk Mismanagement.

Even if you don't have a strong background in statistical modeling, Nocera does a great job of explaining the concept of VALUE AT RISK, or VaR and it's relationship to the derivatives that have melted down and driven the world into crisis.

The important concept is the idea of what Nassim Taleb calls the "Black Swan."

A Black Swan is an unforseen event that comes along and causes a disaster even though a fancy, shmancy risk model estimates that the chance of such a thing happening is down around 1% or less. And guess what? The world has seen this Black Swan thing before, and recently, in 1997-1998.

And guess what else? The people who caused it were the "best and the brightest." In fact, the two guys who set the whole thing up were winners of the Nobel Prize in economics.

But they still blew it.

I'm talking about the financial collapse of Long Term Capital Management and the US Government bailout.

See, the basic problem here is that we don't seem to have learned that these really big catastrophic events that seem really unlikely actually can and do happen. And when they do, they trash everything and make everybody look like an idiot. Black Swans bite!

I enjoyed the analogy I heard that it is like a pilot who is flyin' along, flyin' along, and doesn't understand that there is a thing called a THUNDERSTORM!

Well, Peak Oil is an even bigger and badder and blacker Black Swan.

Except Peak Oil is not unforseen.

That is the strange thing.

It is happening right in front of your eyes.

You can have a conversation with anybody anywhere in the USA about gasoline prices and everybody, I mean everybody understands perfectly well that we are paying a high price for gasoline because we have to IMPORT so much.


That by definition means that the US production has peaked and we don't have enough domestic oil to go around.

There is just some kind of mental disconnect and people have become sort of numb and blindly charge ahead complaining about Arabs and high gas prices while they jam their foot on the pedal of their SUV to go 85 miles an hour down a residential street towards a red light. Well, at least that's how they drive in Newport Beach, but you get the point.

There is a giant lack of awareness of Peak Oil.

I'm trying to change that. Will you help me?

The best military plan the US could have would be to start a "Manhattan Project" style effort to re-leverage the entire country towards energy sustainability like Matt Simmons has suggested for years. However, the style of such a  "Energy Manhattan Project" should only be similar in urgency to the original Manhattan Project. The last thing we need is blind reliance on a panel of government and industry "experts" of the same kind that got us into this mess!

Despite my respect for highly successful guys like Bill Gross, it is still amazing to me that I never, and I mean never hear any discussion at all on "Wall Street" about the relationship between Peak Oil and the economy.

And the interesting thing is that now we know that all the smartest, best educated, best paid people in the financial world were dead wrong.

Are we going to sit around and wait for the Peak Oil Black Swan to bite us too?

It certainly seems like it. Global oil production seems to be peaking right now in 2008-2009.

Dozens of countries, especially the US (1971) have already peaked.

The first part of the solution is developing an AWARENESS of the problem.

1 comment:

Clifford J. Wirth, Ph.D. said...

The top story of the year is that global crude oil production peaked in 2008.

The media, governments, world leaders, and public should focus on this issue.

Global crude oil production had been rising briskly until 2004, then plateaued for four years. Because oil producers were extracting at maximum effort to profit from high oil prices, this plateau is a clear indication of Peak Oil.

Then in July and August of 2008 while oil prices were still very high, global crude oil production fell nearly one million barrels per day, clear evidence of Peak Oil (See Rembrandt Koppelaar, Editor of "Oil Watch Monthly," December 2008, page 1)

Peak Oil is now.

Credit for accurate Peak Oil predictions (within a few years) goes to the following (projected year for peak given in parentheses):

* Association for the Study of Peak Oil (2007)

* Rembrandt Koppelaar, Editor of “Oil Watch Monthly” (2008)

* Tony Eriksen, Oil stock analyst and Samuel Foucher, oil analyst (2008)

* Matthew Simmons, Energy investment banker, (2007)

* T. Boone Pickens, Oil and gas investor (2007)

* U.S. Army Corps of Engineers (2005)

* Kenneth S. Deffeyes, Princeton professor and retired shell geologist (2005)

* Sam Sam Bakhtiari, Retired Iranian National Oil Company geologist (2005)

* Chris Skrebowski, Editor of “Petroleum Review” (2010)

* Sadad Al Husseini, former head of production and exploration, Saudi Aramco (2008)

* Energy Watch Group in Germany (2006)

Oil production will now begin to decline terminally.

Within a year or two, it is likely that oil prices will skyrocket as supply falls below demand. OPEC cuts could exacerbate the gap between supply and demand and drive prices even higher.

Independent studies indicate that global crude oil production will now decline from 74 million barrels per day to 60 million barrels per day by 2015. During the same time, demand will increase. Oil supplies will be even tighter for the U.S. As oil producing nations consume more and more oil domestically they will export less and less. Because demand is high in China, India, the Middle East, and other oil producing nations, once global oil production begins to decline, demand will always be higher than supply. And since the U.S. represents one fourth of global oil demand, whatever oil we conserve will be consumed elsewhere. Thus, conservation in the U.S. will not slow oil depletion rates significantly.

Alternatives will not even begin to fill the gap. There is no plan nor capital for a so-called electric economy. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment. The independent scientists of the Energy Watch Group conclude in a 2007 report titled: “Peak Oil Could Trigger Meltdown of Society:”

"By 2020, and even more by 2030, global oil supply will be dramatically lower. This will create a supply gap which can hardly be closed by growing contributions from other fossil, nuclear or alternative energy sources in this time frame."

With increasing costs for gasoline and diesel, along with declining taxes and declining gasoline tax revenues, states and local governments will eventually have to cut staff and curtail highway maintenance. Eventually, gasoline stations will close, and state and local highway workers won’t be able to get to work. We are facing the collapse of the highways that depend on diesel and gasoline powered trucks for bridge maintenance, culvert cleaning to avoid road washouts, snow plowing, and roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, large transformers, steel for pylons, and high tension cables from great distances. With the highways out, there will be no food coming from far away, and without the power grid virtually nothing modern works, including home heating, pumping of gasoline and diesel, airports, communications, and automated building systems.

It is time to focus on Peak Oil preparation and surviving Peak Oil.