Several things make it hard to talk about Peak Oil these days. At the bright end of the Reasons To Be Cheerful About Oil spectrum, there are no zombies or Mad Max gangs on our streets. Some Peak Oilers were die-hard doomsters, so the absence of A-Grade harbingers of apocalypse surely proves that it has not, will not, indeed cannot happen.
Also, there are no shortages of fuel (or at least very few) to be seen. Commonsense decrees that Peak Oil and queues at petrol (gas) stations will go hand in hand.
But that’s just it. Scarcity and shortage are very two different phenomena. They exist at opposite ends of the supply chain.
Scarcity is when the supply of something is limited and no amount of money, technology or prayer will increase the flow rate.
Shortages happen when demand exceeds supply at the point of delivery. You might get a temporary shortage of fuel locally if a tanker driver oversleeps. Here in the UK, we’ve only had prolonged national shortages on two or three occasions since WW2: first back in the days of the OPEC oil embargoes and, more recently, when farmers and truckers blockaded refineries to protest high diesel prices in 2000.
Theory says that scarcity of crude oil shouldn’t lead to actual shortages. That’s because if the supply of crude gets tight, the markets send price signals up the delivery chain. So pump prices go up and in turn demand goes down. It’s that bloody Invisible Hand again.
Except that right now, oil is getting scarcer. Conventional crude production is stuck on a plateau so that the short-lived gains from fracking in the US only make up for declines elsewhere. Total world liquids production keeps inching up but a lot of those liquids can’t do the same job as crude and you get the impression the IEA would count the coffee in the rigger’s flasks if it could in order to present an optimistic figure.
OK, what about demand? Well, the basic driver of demand – registered motor vehicles – is going up in leaps and bounds. Having taken 120 years to reach one billion combustion-engined road vehicles worldwide in 2010, we’re on track to reach two billion in under 10 years from now.
By rights, the price of oil should be ratcheting up rapidly so that all that demand will be satisfied without shortages arising at the point of delivery. Instead it is stuck sullenly around $50 a barrel. That’s barely enough to cover the cost of extracting a lot of the remaining conventional crude, let alone very high-cost resources like tight (fracked) oil or tar sand.
The oil companies (and by extension everyone in the industrial world) are now caught between a rock and a hard place. The experiment with very high oil prices that lasted from 2011 to 2014 showed that consumers will cut back on fuel use rather than make sacrifices elsewhere in their budgets.
But without those high prices, oil producers can’t profitably extract what oil is available. They’re trapped. They can’t satisfy the all demand for $40 oil but if the price gets better from their point of view (i.e. higher) the demand goes away.
Conventional wisdom says that consumers will try to keep driving until their eyes bleed – partly because they have to to get to work and shop for essentials. But that’s no longer true.
People with sufficient money (which usually means capacity to take on debt) can upgrade to more fuel-efficient cars. Those who don’t have the means have to find ways to use less.
That is easier than people think. The average private car spends between 95% and 98% of its time unoccupied and stationary. Unless the vehicle is only used for essential trips – say commuting to work – there’s almost always a way to cut down on mileage. After all, the owner is only increasing their non-use of the vehicle by perhaps 1%.
But from the oil company’s angle, a 1% increase in vehicle non-use translates into a 20%-50% drop in that consumer’s demand for petroleum. You can see that in the 25%-30% falls in oil consumption in Greece and Italy, which have been at the sharp end of enforced conservation since the onset of the eurozone crisis in 2008.
This has got huge potential to carry on for a long time. Certainly longer than most oil producers can live with. Millennials are generally happy to take their own sweet time getting a driving licence and even then it’s not a given that they’ll immediately enter the car market. Ride-sharing among commuters has barely got started and it could increase rapidly if real incomes keep falling and fuel costs rise.
Boiled down to brass tacks, the problem is this. Crude oil is scarce and it’s getting scarcer. The reason there are no queues at the pumps is that scarce crude creates a shortage of affordability. That is because the alternative ‘high tech’ petroleum sources, like tight oil, kill their producers unless the global oil price rises to the point of driving marginal consumers out of the demand pool.
Imagining that people will overcome their inability to afford cheap petroleum by switching to electric or hydrogen cars is on par with Marie Antoinette’s brainwave about getting the starving poor to eat cake instead of bread. (Yeah, yeah, I know that’s a mistranslation of cake. But that’s to say that even la Reine Marie was smarter than today’s economists and policymakers. And look what happened to her).
Finally, this is much, much bigger than something that’s just an awkward predicament for the automobile industry and its consumers. Oil is the master resource. It is essential for extracting other fuels and feeding the world. It built the bulk of today’s civilisation’s infrastructure (more than half of which didn’t exist yet when I was born in the mid 1950s).
Oil scarcity will heavily constrain humanity’s ability to unhook itself from oil dependency. For a detailed analysis of how that works in the macroeconomic context, read Oops! Low oil prices are related to a debt bubble on Gail Tverberg’s Our Finite World site.
And if you start seeing queues for fuel in more OECD countries, give a little smile. As bad as that will be, at least it will be a sign that the energy crisis has reached the point where people need to stop pretending and start dealing with it.