Peak Oil and the Fracking Bubble: Could this Mimic the 2008 Housing Bubble?

I'll admit that I was completely caught off guard by the recent (and ongoing?) crash in oil prices. It'd be a stretch to say I'm embarrassed by my lack of foresight, although perhaps "dumb-ass" would be a bit deserving.

This is a companion discussion topic for the original entry at

Excellent article

Much obliged

Let me guess here. You’re a follower of the Keynesian Superstition, correct? Because a Classical economist would state that those fracking companies going under would be the result of a shake-out where the unproductive would be weeded out of the equation, and the more productive making the system more efficient.

One other thing: Frederic Bastiat. He wrote a little thing about what is “Seen”, and what is “Unseen”. You are quite good at recognizing the “Seen”. But perhaps you should check out what is really under the rug and still “Unseen”.

Thanks for the article.

No, I’m certainly not of the Keynesian persuasion (or of Paul Krugman for that matter), but nor do I put much more mirth in that Bastiat-like point of view either (widely known nowadays as austerity and the laizzes-faire free market economics of Milton Friedman).

In short, both viewpoints have the optimistic belief in growth as the cure for economic ills, and so neither take into account limits to growth. More to the point, money is simply a proxy for energy. Remove money from the economy, and although things will be tough, they can muddle by. Remove energy, and you’ve got serious problems. I’m sure I’ll write a post on that some time later.

Most peak oilers saw the arrival (and quite logically) as high oil prices and hyper inflation. The problem was applying Economics 101 to a problem that is way beyond that simplistic level of thinking. That said a handful of the more qualified analysts foresaw the opposite affect heralding the arrival of peak oil. (eg. see Tverberg: 2012) viz. Low oil prices driven by contracting demand and unsustainable debt. Simply put if growth slows or stops and goes into reverse credit dries up. People are paid less. Prices drop. Debt defaults. You enter the deflationary spiral which is just as bad if not worse in a debt riddled global economy. Economic collapse would always precede total collapse and it’s happening as we speak. So I wouldn’t get to excited about “peak oil” being over. It’s just begun. Infinite growth with finite resources. Do we really think this story has a happy ending…

Too true. Yet unfortunately, and much like 2008, peak oil’s involvement with current economic conundrums is hardly given it’s due recognition.

Alan, peak oil has been around far longer, and suckering in more people, than you are familiar with. So sure…it suckered you in. True believers on this topic have been at it for decades, and those who dared to point this out were rounded ostracized when they did. And it is just as obvious now, as when peak oil was declared in 2005, that the same reasons continue to discredit the idea, and WILL continue to discredit the idea. You’ve heard that those who refuse to study history, are doomed to repeat it, right? Peak oilers have been doing this…how far back are YOU familiar with the history of this routine, or the more exciting routine of “running out” that preceded it?

Yes, I’m aware of what you’re talking about, and it goes as far back as the 1800s (I forget the exact year) when proclamations were made that coal was about to run out, to the early 1900s when it was said that oil was about to run out, and so forth. What they didn’t have then, and what we have now, is more concrete geological evidence of what’s actually under the ground.

On the other hand, if what you’re talking about is abiotic oil, that oil emanates from deep in the centre of the earth and slowly makes its way up, that’s a bunch of cornucopian hogwash, and is simply another form of denying that limits to growth exist.

J.P. Lesley made just such a claim. 1886. In Pittsburgh. There is also another cool one from 1849 related to using up “rock oil before its gone” but that doesn’t seem to be a fair reference on the topic. As far as knowing much better what is in the ground now, you are quite correct. But that isn’t the problem, the problem that is peak oilers don’t use that number, they use much smaller ones. Do you know why? To obtain that number, one only needs to purchase the IHS Edin database, collect all the field data, and add it up. Why don’t peak oilers do that? Ever?

And no, there is no need to talk about abiotic oil. Why should I, others have already worked through the basics of why peak oil keeps schnookering folks? A single damn paper demonstrates why, and can you tell me how many times you’ve seen it refuted?

Saleri, N.G., 2006, The Next Trillion: Anticipating and Enabling Game-Changing Technologies, Journal of Petroleum Technology, Vol. 58, Issue 04, April 2006.

$15 for SPE non-members , you can find it at OnePetro…funny thing, peakers not even able to spend a lousy $15 to get a grasp of why they have been wrong before, and are likely to again.

Buy a copy for yourself, you won’t be able to claim you were schnookered next time.

Okay, I see what you’re saying. That our estimations are a bit low. Supposing that’s true, how much of a difference does it make if our estimations are short by, say, a trillion barrels? With oil consumption currently in the range of 33 billion barrels per year, and supposing that it continues increasing year after year, all an extra trillion barrels buys us is a bit more than 10 years. If that’s you being referenced, then I’m sure you’ve seen the graphic posted at Kjell Aleklett’s site a few days ago which I came across when doing a search for the paper you mentioned. As Aleklett references:

Supposing we do have an extra trillion or two barrels of oil, and putting aside that that would seriously trash the planet if we were to burn all that as well, Robert Hirsch et. al. already pointed out in the Hirsch Report that we ought to start preparing for peak oil 20 years prior to its arrival if we’d like to try and make much of a non-chaotic transition. So if we’ve got that time (and again, putting aside climate change), then great. Let’s get a move on it. That being said, I don’t think we have those higher levels of oil, conventionals peaked back in 2005, cumulative conventionals and unconventionals are about to peak in the next couple of years or so (not in 2026 as that USGS chart suggests), and as per the Hirsch Report’s analysis we’re about 20 years too late to get started. But there’s no better place to start than where you currently are.

That all being said, I don’t see the need to spend the $15, regardless of who has the right figures. I left the party some time ago.

Note the comments section on that part of Aleklett’s blog, and who brought up the EIA work. Interesting that his name was Johnny. Someone there already figured out that the EIA representation is unreasonable, and so too should peakers. Johnny on that blog referenced the EIA work only to demonstrate that they are now, by definition, closer to a peak oil date than Colin Campbell’s prediction, the grandfather of the modern peak oil meme. You see, growth in production does not exponentially increase and then go off a cliff, regardless of whether or not it was said by EIA or Albert Bartlett. Numerical analysis often fails when it doesn’t operate from first order principles, see the demise of TOD as one such example.

And it isn’t an extra trillion or two, as those of us with access to IHS Edin can attest, or who took the time to pay the $15 to read the paper referenced, or have a subscription to JPT. But it does accentuate the point about why peak oilers have decided to be so willfully ignorant of even the most basic geoscience topics. Out of curiosity, if you left the party some time ago, then why would you care in the least about how schnookered you were?

If you wish to discuss the Hirsch report I can do that in extensive detail, and while I understand the fascination with his magic “wedges” spanning 20 years, his fundamental assumptions and knowledge of the resource base were discredited about the same time his report was published. His magic wedges was a fascinating concept, too bad he didn’t factor in how fast industry technology made them invalid. His report in some cases was the best description of certain processes and procedures ever contained within a peak oil advocates writing, and also the worst.

And of course you must be aware of his claims of running out, peaking, and the oil crisis in the early 90’s, correct? He was quite concerned, back in about 1988, about that oil crisis. You know, the one that never happened either?

And that chart? It wasn’t from the USGS, and some of that is explained by Johnny on Aleklett’s blog in the commentary section as well. He even provided references. Funny thing that, people not reading source material prior to doing something that has been specifically precluded by the authors.

Well, then I suppose I’m just another “schnookered” sucker who doesn’t know a good $15 dollar deal when he sees one.

So now we are turning on moderation to censor? How interesting……can’t say it is unexpected, but how intellectually honest and informed can you claim to be when your only answer to a poorly informed opinion is to censor those who not suffer the same problem?

No, the default setting on this comment script is set to not automatically let through comments with links (you provided a link to which has so far blocked such junk as advertisements for viagra pills, Gucci bags, and your previous comment. I was most certainly going to be “intellectually honest” and approve it, until I read it. Unfortunately there was little to nothing that was “intellectual” in it to be “honest” about (which you should very well know), and such callousness will not be tolerated here.

Furthermore, I get the impression that you barely paid any attention to what was in my post, since you have not acknowledged what was actually said in it: overall supply levels have been increasing for the past several years due to the recent tapping of nonconventional supplies of oil. No theories or papers that you cite are going to change the reality of the matter.

You’ve hammered away on your point over and over again that there’s much more oil than many in peak oil circles think there is, and that (from what I gather) the peak is therefore much further away than I think. I have stated otherwise. I was hoping to be able to leave the comments on this site permanently open, but your recent post shows that that time has come to an end. If you would like to post another comment with a link to a website of yours where you state your argument(s), that would be fine. Otherwise, it would seem that this conversation is over.

One nitpick, but it’s important.

“Demand destruction” due to high oil prices does NOT refer to reduction of total purchase of goods due to unaffordability. That isn’t a reduction in demand for oil, that’s a reduction in the purchases of oil; people still want oil. So when the price goes back down, oil usage goes back up.

“Demand destruction” for oil refers to people (and businesses) who look at the price of oil at $100/bbl and decide to retrofit to stop using so much oil. For instance, someone who replaces their 12 mpg car with a 40 mpg car, or with an electric car. Or someone who replaces oil heating with gas heating or electric heating. Or someone who insulates their house and reduces their oil heating bill permanently. Or a factory which retrofits its equipment from using oil to gas. That’s “demand destruction”. (The closure of coal generating plants and the opening of solar farms is another example of “demand destruction” for coal.)

The key point is that when oil stays high-priced for a long time, a bunch of people decide to make the long-term retrofits – replace their car or their boiler – which removes demand permanently. Even when the price goes down, the demand is GONE becaue that 12 mpg car is scrapped, the oil boiler is scrapped, etc.

“Peak oil” happens when oil is expensive enough that alternatives are cheaper. And we’re passing that point at high speed. The possible selling price for oil is capped by people switching to alternatives, but the production cost of new oil keeps going up as all the “easy” oil is gone. This causes total demand for oil to drop drop drop – the price will gyrate but the volume traded will start dropping.

I will be more specific yet. There’s a Deutsche Bank report analysing the future of oil prices. They expect the following pattern:
1 – demand rises as economy grows, but supply cannot keep up. Prices rise.
2 – high prices cause people to switch away from oil (big expensive permanent changes which take years to do, and are hard to reverse)
3 – drop in demand, with supply constant, causes prices to crash
4 – shakeout in the market eliminates high-price oil suppliers
5 – low profits mean that oil exploration is cut back massively
6 – so supply stays constant or declines
7 – demand grows, and oil prices go up again
8 – but investors are a lot more skeptical of oil exploration because they lost their shirts last time, so exploration doesn’t recover much…
9 – … while high prices cause people to switch away from oil,…

Repeat until volume of oil sales is very low.

TLDR: cycle of low prices causing no oil exploration, alternating with high prices causing consumers to switch away from oil.

So far we’re following the Deutsche Bank model precisely.

Fair point. I couldn’t find (just now) the original source for the term “demand destruction” (although it seems that it may have come from the peak oil crowd), which I presume was derived from the strict understanding of “supply and demand.” But what you’re saying is that demand – or perhaps, desire – hasn’t been destroyed, just people’s ability to afford to pay for it. So if I’m not mistaken, a more clear understanding of the situation and terminology would be “affordability destruction.”

But although some people do make retrofits as a response, many others remain in denial and/or expect the “good times” of cheap prices to return. As just one example, sales of gas guzzling vehicles have recently increased as a result of cheap oil and gas prices.

As well, I’m not so sure about the notion that “‘Peak oil’ happens when oil is expensive enough that alternatives are cheaper.” Never mind that this assumes a transition from one energy source (oil and other fossil fuels) to another (“renewables”), or that higher oil prices may translate into higher prices for the construction of alternative energy sources and so lessen any price advantage, but I think peak oil has more to do with extraction rates that are determined not by what people are willing to pay, but what they’re able to pay. That is, I don’t think people will overwhelmingly use less oil because they choose to use alternatives, but rather, because they can’t afford to pay for it in the first place. (This would all be an outcrop of decreasing EROEI levels, which I take it you’re familiar with.)

About the Deutsche Bank report you mention, I think they got #1 right, but lose it with #2. Seems like a bit of a techno/cornucopian/optimistic view of how things work, derived from an extrapolation of how things have worked, on to the assumption that they will continue to work in such a way in the future (if not in perpetuity). To make just one point, if people can’t afford the high price of oil, how would they be able to afford something else instead?

And about us following the Deutsche Bank model “precisely,” from what I’ve read, alternative sources of energy have not even been outpacing growth, and so have yet to cut into fossil fuel use. You might say that they’ve actually been allowing for growth to continue. Perhaps their growth curve will grow exponentially and allow for a “switch” to occur (i.e. they outpace growth), but I don’t see it happening as I don’t think alternatives can become cheaper than the “free” subsidies of fossil fuels. While alternatives can be useful for some time, they’re not a replacement, and at best can assist us on the down-slope and in a bit of de-centralization.