It occurs to this reporter that the country is a bit like a big "legacy" (zombie) airline. We're both drowning in red ink, and we're both damned if the economy thrives and damned if it doesn't, at the mercy of fuel input costs. If economies around the world pick up steam, the US will have to cope with rising energy prices that will chew right into the bottom line. Like an airline, we can't just switch to a happier, cheaper fuel. You can't fly a jetliner or this American economy on sunshine, at least not yet. We remain unavoidably dependent on liquid petroleum for the foreseeable future. The alternative scenario could be low energy prices amid Great Depression Part Two -- the only way our bottom line doesn't get ravaged by fuel prices is if it's ravaged already. Frying pan ... Fire.

This might be a good time to remind ourselves of James D. Hamilton's intriguing paper CAUSES AND CONSEQUENCES OF THE 2007-2008 OIL SHOCK (pdf) in which Hamilton, economist at UCSD, argues that spikes in oil prices have been critically important factors causing recessions, including the Great Recession we're dealing with now. Current consensus among economists seems to be that $80 oil will drag on growth, but that we can 'deal with it,' while $100 oil begins to crush the consumer-driven economy. One-twenty implies massive upheaval. At some point 100 will be the new 80, in the never-ending struggle to prop up consumer confidence with hot air.

As suggested by this graph from Calculated Risk, there is a magic number somewhere around 14. When Americans start to spend around 14 % of GDP on energy, Jeff Gillooly pops out and bashes the knees of the economy with a broom handle.

 

 

I was barely alive at the time, but events these days remind even me of the 1970s, when the US, a country which had grown up atop an apparent super-abundance of oil, found itself suddenly on the hook to the oil producers in the Middle East (twice). Things were interesting there for a few years. There was a lot of loose talk about Peak Oil and the end of civilization as we know it. But then what happened? Huge deposits of oil were developed in Alaska, Mexico, the Gulf of Mexico and the North Sea. The Saudis ramped their production to amazing new levels, up over 300 % between '65 and '75. The world was consuming a great deal more oil at the end of the decade than it was at the beginning. The oil crises of the '70s were lost in a slick black sea. The country emerged from the deep recession which began the 1980s slurping on a crazy straw of cheap crude, and ready to rock with Tommy Tu-Tone.

Ah, but then what happened? Let's keep going. The huge discoveries of the 1970s were DEVELOPED AND CONSUMED, to a large extent, in the subsequent decades. This is the part that is difficult for many of us to grasp. Almost all of those huge fields today produce a small fraction of what they once did, having peaked long ago. For instance, Prudhoe Bay now produces about 20 percent of what it did in the 1980s. The North Sea peaked in the 1990s and its big fields are down 80-90% from their peak volume. The Mexican super-giant Cantarell, once the second most prolific oilfield in the world, seems to be dying before our eyes. What's done is done. We can't go back and use that oil over again more intelligently. Are there any more Prudhoe Bays out there? Any more Cantarells? And if we find more magic huge game-changing deposits, a prospect that grows darker by the day, how will we use that windfall? Poorly, I imagine. Poorly, again.

The United States re-built a motoring-with-impunity economy based on the temporary abundance of oil that was tapped in the 1970s. Now we have consumed most of that oil without replacing it with new discoveries. The world is now dealing with this uncomfortable situation, a plateau in total production amid the ongoing depletion of its super-giant fields.

This tug-o-war with depletion is occurring as demand in the developing world continues to want to push higher. That's why they call it the "developing world." A Journal article yesterday notes the IEA's projections for demand from the US and China next year. Americans are slated to burn 18.9 million barrels per day. That's down a solid 10 % from the pre-recession days. The Chinese will use something like 8.6 million barrels per day in 2010. Their per-capita consumption is still miniscule compared to ours. Try to pick the year that China's consumption surpasses America's consumption. It may happen sooner than we think, if in fact the necessary oil is made available.

Or, it may happen never, for a few reasons. Deutsche Bank recently made a call that was a bit of a zinger, as very little of its kind is heard out of the mainstream financial industry. Their report raised the spectre of peak demand, and an irreversible decline in consumption, based primarily on the impending switch to electricity for transportation. As I said, these guys generally don't speak of such things. Peak oil demand could very well correspond to peak energy demand, peak commerce, and peak Deutsche Bank.


See the I.C. ENERGY & TRANSPORT HUB for statistics from the IEA, EIA and other agencies, as well as academic, technical and policy papers about energy or the lack thereof.