Or, reversing the equation: oil production has been almost flat since mid-2005. Where is the global recession Peak Oil doomsters predicted for a period of flat oil output? Since mid-2005 global real GDP has risen approximately 10%, despite Peakists' prediction that growth was impossible without more oil.

The key to all of the above is the price of oil. The magic of prices. The response to rising oil prices comes in two forms. First, there are the conventional rapid responses to rising prices (e.g., drive less, slower economic growth). More important is the lagged effect of prices. Over months and years people change their personal behavior and business practices, and make capital investments that adapt to higher oil prices. Result: the global economy grew at almost 5%/year as growth in oil production slowed -- then stopped.

What made this possible?

1. The economic stimulus from re-cycling of funds from oil exporters to consuming nations through investments and purchases of goods/services.
2. Reduced discretionary consumption (e.g., vacation locally instead of at DisneyWorld, moving the thermostat higher in summer and lower in winter).
3. Capital investments that yield increased efficiency (e.g., hybrid cars, insulating buildings).
4. Fuel-switching (e.g., electric vehicles, solar for diesel generators).
5. Substitution, as high prices change cost structures (e.g., local goods replace far-away ones, rail transport replaces trucks).
6. Economic stimulus resulting from alternative energy projects.

In economic jargon, the price elasticity of oil demand changes as prices rise. it just takes time. As we saw in the 1970's, this Econ 101 dynamic surprises people. For a current example, see this Bloomberg article.

This process is just starting. Oil prices spiked in 1972. By 1979 these dynamics kicked in strongly. After 7 years of rising oil prices, global oil demand was flat for the next 14 years. After six years of rising oil prices, we might see something similar occur during the next few years.

Aprox 40% of Asia's consumption is at subsidized prices, an expensive way for governments to mute the price signal -- slowing their nations' adaptation process. The world's adaptation to peak oil will accelerate as these government's are forced to reduce subsidies for oil.

A more important lesson learned

In hindsight we see that economists were wrong, but that bald statement overlooks the valuable lesson to be learned. What passes for analysis in energy research is in fact mostly inspired guesswork. Consider reports like the Robert Wescott's "What Would $120 Oil Mean for the Global Economy" (April 2006):

If oil increased to $120 a barrel {from $60 - 70} and stayed there for a year because of coordinated terrorist attacks on oil facilities, the world’s oil bill would be about 8% of world gdp (even assuming some reduction in the quantity of oil demanded) — higher than at any time in modern history. Such oil prices would almost certainly precipitate a global recession. In addition to negative demand effects, there would be large negative supply side effects, policy effects, and confidence effects.

Meanwhile, financial markets would likely judge these attacks on global energy supplies more seriously than Iraq’s 1990 invasion of Kuwait or the 9/11 attacks, because of their continuing disruptive effects. Stock market valuations would likely fall more than they did after the Kuwait invasion or after 9/11. Given the negative confidence effects and negative supply effects, the global recession would likely be severe.

While current conditions do not match his scenario -- oil prices rose over two years (not instantaneously), and have lasted only weeks (not a year) -- yet it is clear that this report did not adequately weight the effects described above.

What should worry us all is that work like Wescot's and the Oil Shockwave simulations of 2005 and 2007 are among the best-funded and executed energy forecasting projects -- and are just sidewalk sketches compared to what we need. The complexity of the task and its importance to America's future means that far more data collection and sophisticated modeling is needed to produce results that are better than guesses.

There are many confident recommendations for our response to rising oil prices -- based on guesses -- but few calls for more research about the problem. Perhaps too many of our experts are comfortable guessing. With each new change in the energy world they blow bubbles of froth, comforting or terrifying depending on their personal predilections.

It need not be so. We have the talent to assemble multi-disciplinary teams (e.g., chemists, geologists, mathematicians). We either have or can buy most of the data needed. A key piece the CIA could probably acquire: what are the reserves from our Middle Eastern allies.

The cost would be trivial, as government projects go, and would provide a foundation for planning and investment to prepare for Peak Oil -- whenever it happens. Conceptually this would be like the creation of the great National Income and Production Account "flowcharts" in the 1930's, which are the foundation for today's economic reporting and analysis systems.

The elephant is great and powerful, but prefers to be blind.
David Halberstam, The Best and the Brightest (1972)

Please share your comments by posting below, relevant and brief please (max 250 words). Too long comments will be edited down (very long ones might be deleted). Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information about Peak Oil

1. When will global oil production peak? Here is the answer! (1 November 2008)
2. The most dangerous form of Peak Oil  (8 April 2008)
3. The world changed last week, with no headlines to mark the news   (25 April 2008)
4. Peak Oil Doomsters debunked, end of civilization called off  (8 May 2008)

Here is an archive of my articles about Peak Oil.

Here are other resources about Peak Oil.

Click here for all posts discussing good news about America's future.

The Oil Shockwave 2007 Project

In 2005, Securing America's Energy Future (SAFE) introduced Oil ShockWave, a groundbreaking simulation exercise that examines the potential consequences of U.S. oil dependence by bringing former senior government officials together into a fictional Cabinet that is forced to contend with a series of international events resulting in a rapid and sustained increase in the price of oil.

Since then, simulations have been held around the country and the world, including the 2006 World Economic Forum Annual Meeting in Davos, Switzerland, and the Aspen Strategy Group's 2007 Summer Session in Aspen, Colorado. With each event, the simulation scenarios are updated and refined to reflect the most current and realistic challenges. But through each Oil ShockWave, participants have remained consistent in their conclusions: oil dependence represents a grave national and economic security threat to the United States.

Segment 1 of the scenario: instability in the Caspian -- May 4, 2009

• The outbreak of violence in Azerbaijan, a key Caspian Sea oil producer, sends a shiver through an already tight global oil market.
• An explosion in Baku has temporarily disrupted the operation of a key regional oil artery, and more violence is anticipated.
• With global spare production capacity already below 2.0 million barrels per day, the possibility of unrest in a major oil producing region sends oil prices up to $115 per barrel.

Later the president’s advisors are interrupted by breaking news...

• The sudden spike in oil prices is leading to speculation of financial turmoil on Wall Street.
• Hedge funds are reporting major losses, the stock market is down several hundred points.
• Tetail gasoline prices are expected to climb to well over $4.00 per gallon.

June –July 2009

• Continued violence in Nigeria causes Western oil companies to shut-in an additional 500,000 b/d of production.
• Inspectors from the International Atomic Energy Agency discover an undeclared nuclear facility in Iran, causing tensions to rise.
• Scientists predict that the peak months of Atlantic hurricane season will be highly active.

Segment 2 -- August 7, 2009

• With tensions rising over its nuclear program and the threat of harsh international sanctions growing increasingly real, the government in Iran suspends nearly 10 percent of daily oil exports.
• Later, Venezuela joins the limited embargo.
• The combined actions of Iran and Venezuela remove 700,000 barrels each day from an already jittery oil market and send crude prices soaring to unprecedented levels.

The president’s advisors are once again interrupted by breaking news...

• The government of Venezuela has announced its intention to match the Iranian oil embargo, bringing the total amount of oil withheld from global markets to 700,000 barrels each day.
• The news significantly accelerates the upward climb of crude oil prices.

The economic impact of $165 oil

To analyze the impact of $165 oil, SAFE commissioned The Interindustry Forecasting Project at the University of Maryland (Inforum) and Keybridge Research llc. Using the well-respected LIFT Model, an interindustry macroeconomic model of the U.S. economy, researchers were able to provide some detailed characteristics of the potential economic impact of the events depicted in Oil ShockWave.

A thought about this....

Serious and simultaneous problems in Azerbaijan, Nigeria, Iran, and Venezuela -- plus hurricanes -- would be bad! A sudden increase of oil prices to $165 would be bad! Thank you SAFE for this brilliant insight. Of all the things that could be studied about energy, is this the most pressing in terms of value added?

This is but one of many possible "shockwaves": low-probablilty but high-impact scenarios. Studying them individually tells us little, as the correct public policy response is "so what?" Shockwave analysis is useful only with analysis of the scenario's impact AND probability. Otherwise these are just nightmares.

Today analysis of shockwaves is done almost exclusively by special interest groups (often academic or non-profits). Wwe allocate resources to shockwave scenarios based on several factors:

1. the group's access to elite opinion,
2. the group's ability to raise funds,
3. their degree to which their shockwave resonates with the public.

Many studies have shown the people have little grasp of these kind of issue, and less understanding of the relevant statistics (probability and risk). There is a better way to do this. Allocation of our limited resources towards these require sketching out (as best as can be done) the full universe of such dangers.

A modest suggestion

Commission a group to collect as many shockwave scenarios as possible, with a brief analysis of each. Fortunately there are thousands of interest groups willing to pitch in and help! Then apply a common analytical framework to rate them on both dimensions: probability and impact. The results would prove quite interesting, and allow more rational public policy discussion.

Please share your comments by posting below (brief and relevant, please), or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information about Peak Oil

1. When will global oil production peak? Here is the answer! (1 November 2008)
2. The most dangerous form of Peak Oil  (8 April 2008)
3. The world changed last week, with no headlines to mark the news   (25 April 2008)
4. Peak Oil Doomsters debunked, end of civilization called off  (8 May 2008)

Here is an archive of my articles about Peak Oil.

Here are other resources about Peak Oil.

Robert Hirsch, one of the world's top energy experts, has an important article in the February issue of Energy Policy magazine, "Mitigation of maximum world oil production: Shortage scenarios." As usual with his work, it offers a mixture of new insights and careful analysis seldom found in Peak Oil research -- on either side of the debate. I strongly recommend reading it. Unfortunately Energy Policy is subscription only. Here is a brief review of his analysis. Here are slides to an earlier presentation on this topic by Hirsch at the ASPO-USA conference in October 2007.

Political Peaking

Hirsch introduces an important concept which he (and many others) has long discussed, but only now is formally described: political peaking, an extreme form of resource nationalism.

A few nations have the bulk of the world's remaining conventional oil reserves. There large sources of unconventional liquid fuels: heavy oil, deep-sea, polar, bitumen (oil sands), kerogen (oil shale), coal (for coal to liquids conversion). However, these have high extraction costs -- both in terms of initial capital requirements and operating costs -- which create operational limits on their production flows.

The output of the few nations with large conventional reserves will become more important as production declines everywhere else. This result appears in all forecasts (e.g., EIA, EIA, energy consulting firms). Optimists and pessimists debate how much oil these nations hold, and how long they can meet the world's growing thirst for liquid fuels. Hirsch turns the question around. Perhaps they can increase production, providing cheap and ample supplies. But will they? What best meets their long-term needs?

Policy experts have long advised conservation, seeking to cap consumption. Political peaking means that oil exporters choose to conserve their reserves -- a cap on supplies.

The oil-rich peoples of the Middle East long believed their oil reserves to be unlimited. During the past decade they slowly realized their error, the "Bedouin to Bedouin over five generations scenario."  This insight changed the world.  Consider their choice: after pumping enough oil to meet expenses, is it better to pump more and invest the surplus - or leave it in the ground for future generations?  The latter looks like the superior bet, given the inevitable peaking of oil and the paucity of potential substitutes over the next few generations.

1. No risk of foreign investments being expropriated.
2. No danger of losing money from instability of financial markets or poor investment decisions.
3. No way foreign bankers and brokers can siphon the money into their own pockets.
4. Equal or even superior ability to grow in value.

It is a tribute to our lack of energy research and planning that this scenario is both likely and receives near-zero attention from our public policy experts.

Update:  It is not a theory any more.  See The world changed last week, with no headlines to mark the news.

Emergency Oil Shocks

Some points in this article seem more debatable. Hirsch opens with a commonplace among of Peak Oil literature, quoting from the Oil Shockwave study: "It only requires a relatively small amount of oil to be taken out of the system to have huge economic and security implications. That might be true of an instantaneous shock, such as the "emergency oil supply disruptions" studied in the "Shockwave" scenario.

The paradigm here is 1973, when Arab oil exporters cut their oil production by 25% (see the Wikipedia article). Oil prices quadrupled; US consumption dropped 6%. Along with other events, this resulted in a 3% decrease in US GDP, a severe recession.

However these shocks do not represent the only possible forms of Peaking, despite the often myopic focus on dramatic scenarios. Rate of change is a critical factor in any economics analysis. Both political and geological peaking occurs slowly compared with political events such as the 1973 embargo, mining the Straits of Hormuz, or bombing the Saudi oil fields. These other forms of peaking allow time for the "invisible hand" to work its magic, allowing adaption to a plateau in the growth of liquid fuel supplies.

History provides some grounds for optimism

Economies adapt, given time. "Peakists" (doomsters discussing Peak Oil) seldom mention the 1979 - 1993 period. Oil prices rose from $1.80 in 1970 to $36.83 in 1980 (Arabian Light oil price, as posted at Ras Tanura). Reacting to that, global oil consumption peaked in 1979 at 66,048 million barrels/day, then dropped by 14% through 1983 -- reaching the 1979 peak again only after 14 years, in 1993 (see the BP Statistical Review for details).

During that period the global economy increased at roughly 3%, slightly below the post-WWII average (using IMF data). A fourteen percent decline in consumption! That is a far larger drop than in the post-peak scenarios many Peakists (not Hirsch) predict will end civilization as we know it.

Absract of the Hirsch article

Energy Policy, Volume 36, Issue 2, February 2008, Pages 881-889 (doi:10.1016/j.enpol.2007.11.009)

A framework is developed for planning the mitigation of the oil shortages that will be caused by world oil production reaching a maximum and going into decline. To estimate potential economic impacts, a reasonable relationship between percent decline in world oil supply and percent decline in world GDP was determined to be roughly 1:1.

As a limiting case for decline rates, giant fields were examined. Actual oil production from Europe and North America indicated significant periods of relatively flat oil production (plateaus). However, before entering its plateau period, North American oil production went through a sharp peak and steep decline. Examination of a number of future world oil production forecasts showed multi-year rollover/roll-down periods, which represent pseudoplateaus. Consideration of resource nationalism posits an Oil Exporter Withholding Scenario, which could potentially overwhelm all other considerations.

Three scenarios for mitigation planning resulted from this analysis:

1. A Best Case, where maximum world oil production is followed by a multi-year plateau before the onset of a monotonic decline rate of 2-5% per year;
2. A Middling Case, where world oil production reaches a maximum, after which it drops into a long-term, 2-5% monotonic annual decline; and finally
3. A Worst Case, where the sharp peak of the Middling Case is degraded by oil exporter withholding, leading to world oil shortages growing potentially more rapidly than 2-5% per year, creating the most dire world economic impacts.

Please share your comments by posting below (brief and relevant, please), or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information about Peak Oil

1. When will global oil production peak? Here is the answer! (1 November 2008)
2. The world changed last week, with no headlines to mark the news   (25 April 2008)
3. Peak Oil Doomsters debunked, end of civilization called off  (8 May 2008)

Here is an archive of my articles about Peak Oil.

Here are other resources about Peak Oil.