Part 6: Oil Prices - the Big Crash

Surprizingly, in my presentation to the CSEG I felt the urge to remind everyone - including myself - that there was no guarantee that oil prices would not decrease in the near future. While most of the evidence suggests that it will be very difficult to increase world-wide production levels very far beyond 86 million barrels/day, it is certainly possible to drastically decrease consumption. This is exactly what happened in September 2008.

Every sector of the economy consumes energy to create and transport goods. The transportation sector alone accounts for something near 70% of US oil consumption and 55% on a world-wide basis. When the price of oil became too high, people responded by selling SUVs and buying hybrids, driving less, taking public transit or car pooling. More drastic effects occurred when new car sales plummeted, which resulted in factory closures which resulted in massive lay-offs which resulted in a huge reduction in commuter miles because those factory workers were no longer driving to work. Then truckers were laid off because parts were no longer being hauled to the factories and new cars were no longer being shipped to a nation-wide dealer network. Laid-off workers bought fewer goods and services and this resulted in bigger reductions in the freight hauling industry. All of these actions decreased demand and freed-up capacity in the energy supply chain.

All of us had a front row seat to these events. It certainly had a big impact for our family. In August, as we made our way to Georgia we had to pay over $4.00/gallon for diesel fuel. You can bet that got expensive pulling our trailer! By mid-September we were actually seeing fuel shortages in SouthEast Georgia and several gas stations could not obtain fuel.

Then things shifted in a big way. News of factory closures and layoffs were an everyday occurrence. The price of oil started to slide - then plummet - as illustrated so well in this graph from wiki. If you have the time, the related article is certainly worth a read:

http://en.wikipedia.org/wiki/Oil_price_increases_of_2004-2006

Diesel was about $2.40/gallon as we made our trip back to Canada in December.

Part 5: Oil Prices - the Big Climb

Oil prices had reached an historic high when I made my last presentation to the CSEG in June, 2008. I wanted to include a slide that would illustrate this incredible rise in the price of a barrel of oil and the best example I could find only went up to March of 2008.

As you can see, the June price of $135/barrel was already well beyond the axis of the graph. Several forecasters projected that the price would be between $150/bbl and $250/bbl within the coming year. Anything seemed possible as the price continued to climb towards a peak of $147.27 on July 11.

This was clearly the result of an ever-growing demand for a limited resource.

So - what happened after that?

Part 4: Economy vs. Reality

Economies are expected to grow on an annual basis. Economic growth is required because the world’s population continues to increase and every new person needs food, housing, transportation, health care, education, transportation, entertainment, consumer goods and an occupation. Lack of economic growth results in unemployment, disease, poverty and despair. At least this is what the economists and politicians tell us. For now, let’s assume that it’s true.

We have already seen how energy consumption is directly correlated with economic growth. This relationship exists because manufacturing, agriculture, transportation, resource extraction and even service industries all consume energy for their operation. If the amount of energy consumed for a given product - let’s take a new house for example - is constant, then increasing the number of houses constructed in a given year by 10% will increase the associated energy expenditure by the same percentage.

Let’s summarize:
Economies need to grow. Economic growth is powered through increasing energy consumption. In our industrialized societies, continually increasing energy consumption requires an virtually unlimited supply of fossil fuels.

What happens to economic growth when the available fossil fuel supply can no longer meet the increasing demands?

This same question was asked in graphical form by the people at TheOilDrum.com. Their attached graph shows the historic increase in world-wide oil consumption from 1983 to 2005. Several forecasts are provided for daily oil production rates from 2005 to 2030. The first projection, shown in purple, reflects the view of the US International Energy Administration. They based this forecast on a known relationship between economic growth and oil consumption. Economists had predicted that the world economy will continue to grow in a linear fashion. Oil consumption must therefore increase in the same linear manner. If oil consumption increases then oil production rates will inevitably increase at the same rate to meet the demand. Nothing difficult about this - Except.....

The other forecasts of predicted oil production rates were created by a thorough analysis of geology, reserve estimates and known rates of production decline in various basins. While there is some variation in the assumptions and some uncertainty in the data, it is clear that these three independent forecasts predict that oil production will peak somewhere between 2005 and 2011. Once peak production is achieved, production rates will decline.

What does this mean for economic growth?

Current economic projections for the year 2015 will require daily oil production rates of 100 million barrels of oil per day. Realistic forecasts estimate that actual production rates will be somewhere between 65 and 80 million barrels/day. These production rates are significantly lower than the 85 million barrels produced in 2005.

How can the world-wide economy - at least as measured with current metrics - possibly continue to grow?

I suspect that our choices look like this:

a) We will see a massive reduction in food supply, employment, housing, and manufacturing.
b) We will get a lot more efficient in the way we use energy to power our standard of living.
c) All of the above.

One thing is for sure. The status quo is not an option.

Part 3: Peak Oil

M. King Hubbert (1903 - 1989) was a geoscientist who worked for Shell Oil in the Houston research lab - as well as the United States Geological Survey, Stanford University and UC Berkeley. During his career Hubbert made many notable contributions to the fields of petroleum geology, geophysics and engineering. Notwithstanding these accomplishments, King Hubbert is most widely known for his 1956 paper entitled “Nuclear Energy and Fossil Fuels”. In this ground-breaking paper, Hubbert predicted that oil production in the continental United States would peak (achieve a maximum rate) between the late 1960s and early 1970s. After peak production was achieved, daily production rates would slowly decline roughly following a bell-shaped curve. His prediction was widely criticized - until the domestic US production peaked in 1971 at a rate of 10.2 million barrels per day. Domestic US production rates have been in gradual decline ever since. In 1974, Hubbert predicted that world-wide production rates would peak somewhere around 1995.

Hubbert based his predictions on the observation that the amount of oil in any geographic region - ranging from a single field to the entire planet - is finite. He further reasoned that the rate of field discovery would initially increase quickly and then decline as all the possible accumulations were found. Oil extraction would logically follow the same trend as the discoveries, with a time lag. In the domestic US this lag was about 35 yrs. Once production starts in a region the production rate increases exponentially, as more efficient facilities are installed, until the peak production rate is achieved and then the production rate begins to decline.

Hubbert’s predictions are clearly confirmed when we examine historic production rates on a world-wide basis. From 1900 to 1960 we can see the exponential growth of US oil production that fueled America’s industrialization. As US production rates began to peak, other basins were discovered and brought onto production. One by one, each of these basins have seen the pattern of exponential production increase, peaking and decline. Production peaks have now occurred in the US (1971), Canada (74), Malaysia (97), Ecuador (99), UK (99), Australia (2000) and Norway (01). As we can see the exponential growth in production rates for all of these countries combined (and more), ended somewhere around 1995. Peak production rate appears to be somewhere in the region of 36 million of barrels/day.

It is important to note that these production figures exclude OPEC and the Former Soviet Union. OPEC - especially Saudi Arabia - controls most of the world’s oil anyway. Therefore, it would be negligent not to mention that OPEC production rates hit a maximum of about 35 million barrels/day in 2005 - and in spite of record prices - began a slow decline through 06 and 07. Current projections for OPEC from 2008 to 2010 are 35.75, 35.04 and 36.61 Mbbls/day. FSU projections for the same period are 12.53, 12.57 and 12.78 Mbbls/day. This gives world-wide projections for the coming years of 85.46 (2008), 84.93 (2009) and 86.59 (2010).

Please note: These estimates were made before the announcement of several project cancellations due to the recent crash in oil prices.

Part 2: Energy Consumption as a Function of Economic Growth

The direct link between economic growth and energy consumption is nicely illustrated on this 2005 graph created by the Energy Information Administration of the US Department of Energy. From 1980 to 2005 the graph shows a single line which represents the historic increase in energy consumption over this time period. From 2005 to 2030, three different projections are provided. The reference scenario assumes that the global economy will continue to grow at roughly the same rate as it has for the past 25 years. If the economy were to grow more rapidly, the forecast indicates that this would correspond a more rapid growth in energy consumption. Lower economic growth would result in a slower increase in energy demand.

This strong correlation between economic growth and energy consumption isn’t unexpected. Economic growth is commonly defined as the increase in the amount of goods and services produced by an economy over time. In our industrialized world, the creation, transportation and consumption of these “goods and services” are completely dependent on a unrestricted source of cheap and available energy.

It might be helpful to give an example. Let’s look at automobiles. There is a chain of events that occurs for every car that is produced and every step in that chain consumes a certain amount of energy. These steps range from the mining, extraction and refining of iron ore, manufacturing steel, transporting materials to factories, forging parts, molding the plastic components, powering the factory assembly lines, transporting workers from their homes to the factories and transporting the finished cars to the dealerships. Each car that is produced represents an accumulated expenditure of energy. The more cars that are produced, the larger the energy expenditure. This same type of illustration can be made for the resource extraction, agriculture, construction, transportation, housing, communication and tech sector.

Oil Supply and the Economy (Part 1 - Demand Forecasts)

In June 2008, I made a presentation to the Canadian Society of Exploration Geophysicists in Calgary. If you want to hear the talk - it is available on the link shown below.

(Warning - Perhaps this is something best considered for a night when you are having trouble falling asleep!)

The most important part of the talk is near the end, and it goes something like this:

World-wide energy demand has increased steadily every year since the beginning of the industrial age and forecasts indicate that this growth in energy demand will continue at the nearly same rate until at least 2030. This projected increase in energy consumption is based on economist’s assumptions of steady growth in the world-wide economy.

(Link to presentation for those brave souls who might be interested: http://cseg.ca/events/luncheons/2008/06jun/20080616-Hirsche.cfm )

A New Dawn for America?

We live in a beautiful part of the world. Our community of Cobble Hill is near the South end of Vancouver Island. From the top of the actual Cobble Hill ( a small mountain in it’s own right), we get excellent views of Washington state - ranging from the San Juan Islands (about 10 miles West across the Georgia Strait or Puget Sound - depending on whether you're Canadian or not) to Mount Baker and the other peaks of the Cascade range. In fact, Seattle is considerably less than 100 miles to the SE.

Yesterday morning Kailee and I hiked up Cobble Hill to watch the sunrise. As we beheld this wonderful ritual of nature, I realized that this particular sunrise marked the first full day of Obama’s term as president. A brand-new day for America - and perhaps for the world.

I still have a difficult time believing that this man with the funny name is now the “Leader of the Free World”. Obama is African - not even Irish. Barack is even more intriguing. In Hebrew and Arabic the triliteral B-R-K means blessing. Is this just a coincidence - or is there a message here? On the other hand, the triliteral B-R-Q, also pronounced Barack - can mean lightning, or a flash of light.

Will Barack truly be a blessing - or just another flash in the pan?

I suspect that the answer to this question will depend more on the average American than it will on Obama. To his credit, he has been in office for less than 48 hours and he has already signed an order to close Guantanamo, taken steps to give Iraq to the Iraqis, restricted lobbyists, redirected the economic bail-out and blocked all of Bush’s last minute loopholes. These actions alone seem quite incredible.

Over the long haul it will take the will power and cooperation of a big majority of the American people before Obama can actually make progress on issues of entitlement, health care, energy consumption and foreign diplomacy. And this same majority of Americans will suffering through the life style adjustments brought on by a major recession.

Personally, I believe there is hope on the horizon. For example, the Sumter for Change group - Obama’s campaign volunteers in Americus - were the first major racially integrated advocacy group in the area. Rather than disbanding after the election, they are continuing to promote positive changes in education, health care and social services. The black churches are also preaching the message that Obama needs everyone to stay engaged in the remodelling of America. They can’t leave everything to him alone.

Nevertheless, Obama is only one man - and a politician at that. Is he sincere? Will his presidency result in any real positive change?

I certainly don’t know the answer - but isn’t that an outstanding view from Cobble Hill? The sun is just cresting over the ridge of the Saanich peninsula. To the left you can clearly see the volcanic cone of Mount Baker. Look closer along the horizon and you can see several peaks of the other Cascade mountains. As for the San Juan Islands and the lower coastal elevations of Washington, they are completely obscured by the fog.

It will take considerably more time before the fog clears and we can see what is underneath.

President Barack Hussein Obama

Tuesday undoubtedly marked an historic day for the United States of America - and for all the other citizens of this planet. Barack H. Obama was sworn in as the 44th - and first non-white - president of the USA. I must confess that we were riveted to the television for most of the day as we watched the spectacle unfold.

While we sat comfortably in our home on the socially progressive West Coast of Canada, our appreciation of this unlikely inauguration was heightened by our recent internship at Koinonia Farm in Southern Georgia. Koinonia had been established in 1942 as a Christian statement against the racial exploitation of the deep South. During the 1950’s and 1960’s, Koinonians had to survive bombings, gunshots, beatings and economic boycotts for standing up against socially-sanctioned and religiously -sanctified apartheid policies. While things have certainly improved, and this black mark on the gleaming history of America seems a part of the distant past, we were constantly reminded of its lingering effects.

During our time in Georgia, we became close friends with men and women who grew up in a world where it wasn’t safe to be seen in public with Whites - especially of the opposite sex. They couldn’t eat at the same table, drink from the same water fountain or even use the same public toilets. They remembered friends who simply disappeared and were never seen again - except for the rumors of unidentified remains found in the woods along the highway. As children, they would lay awake in their beds at night, terrified that the KKK would break down their door and take them - or their parents - away. As teen-agers they faced the angry mob when the national guard enforced the integration of public schools and as young adults they marched in protests. In spite of all the progress, shadows of this dark time still linger today. A clear example of this is the case of Troy Anthony Davis, who was convicted of murder in 1991. In spite of the fact that there was no physical evidence and the eyewitnesses later recanted their testimonies, Troy has spent the past 19 years on death row in Georgia. He came within hours of execution this past October - and a majority of Georgia supreme court judges still feels justified in executing him - as opposed to hearing the evidence that will prove his innocence. Could this ever happen to a White guy?

This backdrop of unbelievable racial injustice made Barack Obama’s presidency all the more unlikely. During the election campaign, we volunteered with Sumter for Change - the Democratic campaign organization in Sumter county - and helped voters get to the polls. We had the privilege of door-knocking along side black civil rights veterans who shared their stories of the bad, old days. Apparently the most dangerous thing you could do was to help other blacks register for the vote. Even in the the enlightened 21st Century, we found that fraudulent voter information cards had been regularly given to blacks - and these cards directed them all the way across town to the wrong polling station. Or “official” phone calls were made to remind them that only Whites voted on Tuesday (election day) - Blacks couldn’t vote until Wednesday!

Amazingly, and in spite of these odds, Barack Obama not only received enough votes to win the Presidency of the United States, he also carried Sumter County, Georgia!

The picture on the right shows the scene that occurred in the backroom of Wood’s Swinging Wings - also known as Sumter County Democratic campaign HQ - the very moment that Obama was declared president.

Now you can see why I still believe in miracles.

Where are we now - Part II

Ok - sorry to leave things so unsettled and uncertain. The trip to Vancouver Island went very well. There was plenty of snow in the mountains - and much of it was very unstable. Nevertheless, we made the drive from Calgary to Salmon Arm (or Salmon Fin, as Jan correctly observes) without much problem. Only a short delay near Revelstoke where the park rangers used artillery cannons to fire shells at the mountain and force a premature avalanche. Once the snow was cleared, we could proceed with our journey.

From Salmon Arm, we had to traverse the high elevations of the Coquihalla pass on our way to the Pacific Coast. Fortunately we had good weather, and we arrived in the city of Vancouver on the afternoon of January 2. Vancouver was another story, as the city was struggling under the effects of a record snow fall. Fortunately, our 4X4 truck was able to navigate the narrow, snow drifted streets until we were able to drop Trevor at his apartment near the University. Then we made our way to the ferry terminal and arrived about 830 PM to catch the final crossing at 9:00.We arrived on Vancouver Island about 10:30 PM and drove to our friend’s home in Shawnigan Lake - arriving around 11:30. By midnight we were fast asleep.

On Saturday morning, January 3, we arrived at our new house on Chapman Road in Cobble Hill. We couldn’t have imagined the scene that greeted us - the Island had experienced nearly record amounts of snowfall. Once inside the house, we found that our shipment had arrived and it took a great deal of effort and imagination to extract everything from the back bedrooms and move it to a more appropriate location in the house.

After several days of effort, we are beginning to feel like we are finally home!

Go West, old man

I guess it is an appropriate way to celebrate the New Year. We are packing up and getting ready for the final leg of our road trip to the West Coast. Being back in the Calgary area for the past week has given lots of time and opportunity for reflection on the past year. It has truly been a time of transformation and contrast. Two weeks ago we were at Koinonia - a relatively short drive from the Atlantic and Gulf Coasts - enjoying 70 degree (+20 degree for us Canucks) weather. Within the first 2 days we were trying to survive -30 degree temperatures and timing our progress between two major blizzards.

Today we are preparing for the final stage of the journey. First we track down our 3 children - which are all staying at different places scattered across two cities (I suppose this is foreshadowing of the near future) - then we point the truck West towards the Pacific Coast. We hope to arrive at our new house on Vancouver Island by Saturday, January 3.

There is a lot of uncertainty. First we have to cross the mountains in the middle of Winter. Never a fun proposition and to add to the entertainment value, the BC highway reports are virtually useless compared to the high quality of the Alberta information. We know that Vancouver and the Island are experiencing heavy snowfalls and extremely severe Winter conditions (which is highly unusual), but we have very little information of what lies between here and there. Our new house is empty and waiting for us, and the remaining contents of our household are stored in 2 bedrooms and storage sheds, but we really don't remember much about what we packed and shipped and what we gave away. O.U.R. ecovillage, one of the main reasons we chose to relocate to the Victoria area, is in financial crisis and may not be able continue past mid February. We have never spent any real time in the new house, or on the Island and Krista is facing an entirely new school system.

Yet, in spite of all this, we feel a growing hope and optimism.

Perhaps Uncertainty and the Unkown are Under-rated.

At least we are hopeful.