Pondering Post-Peak Oil Theory

Although I would consider myself to be in broad agreement with "Peak Oil" theory, I am less sure about some of the recent approaches to it. The Oil Drum was the go-to site for peak oil analysis, and I am unaware of any comparable replacement. My diagnosis is that Peak Oil theory developed a public relations problem after the 2009 Financial Crisis - many believed that oil prices would keep going on up to $300/barrel (or whatever), and there was a shock when oil prices collapsed. My feeling is that many in the Peak Oil camp over-reacted to that event.

Gail Tverberg was a regular contributor to the Oil Drum. She recently published an article "Deflationary Collapse Ahead?" In it, she argues that low oil somehow indicate that we are near resource limits. This article was a followup from an earlier one published in January, in which she laid out a case for low oil prices.

The logic is that wages are stagnating (due to resource limits?), and so people cannot afford to buy oil. This causes oil prices to fall, and so it can no longer be profitably produced. This means that oil production would fall, which accentuates the problem creates by resource limits.

There is no doubt that demand has been weak globally due to weak wage growth (and fiscal austerity). I fail to see how that reflects resource limitations, instead of a deflationary structural backdrop. To me, this is just an attempt to blame obvious economic problems on a pet theory (resource limitations).

To me, the proper "Peak Oil" attitude is the following: sure, we can produce a surplus of oil now, but how many oil producers are going to go bust in the coming years? It was never reasonable to expect that oil prices would rise in a straight line forever, rather that they would oscillate around an upward trend line. Since policy errors have basically destroyed growth in the developed world, constraints to growth are unlikely to be a major concern. However, one might expect that some new leadership (President Sanders? Trump?) could allow economies to start growing again. At which point, we would crash into those resource limits.

The complaint amongst Peak Oil analysts was that economists did not understand the importance of energy; but this somewhat mirrored by over-simplified views that energy determines all economic and financial outcomes. The crux of Tverberg's argument is that the "our chances of avoiding [financial] collapse are slim." Since finance is critical for the functioning of the economy, the collapse of the financial sector would allegedly imply real economic activity would also collapse.

I am highly skeptical about that diagnosis. Firstly, there is limited evidence that the credit system is as over-extended as it was in 2008. Sure, there are pockets of raw stupidity to be found, but it does not seem as generalised as it was then. Secondly, it is actually not that difficult to avoid a financial collapse. We can re-discover the fact that governments with free-floating currencies do not face debt constraints, and bail out the banking system (again). Or governments can cram down bank equity holders and/or those holding subordinated debt. Either way, the banking system remains open for business, possibly with a bank holiday or two. We might get a recession, but the core functioning of the economy would continue.

In summary, I think Peak Oil theory can tell us a lot about the long-term trends in the real economy, but it is not going to be useful for forecasting the cycle.

Postscript: The Grid

Gail Tverberg's article also throws in scare stories about the electrical grid. When Montréal and the environs got disconnected from the grid for a few weeks in the winter, the situation was pretty bad. However, getting to that state required taking out most of the long-distance transmission lines in the province.

A financial crisis is not going to stop deliveries of fuel to regulated utilities, and so it is not a source of risk to the grid. Although it provides morbid entertainment to ponder what mechanisms will take down the electrical grid (EMP? hackers?), a bank holiday would not make my Top Ten Risks list.

(c) Brian Romanchuk 2015