Peak Oil Ass-Backwards: Crashing Oil Prices Aren't Due to an Oil Glut But to Demand Destruction and Peaking Credit [part 2/3]

As I began to mention at the end of the first part of this three-parter, I've only just recently come to the conclusion that oil prices aren't going to have a tendency to rise due to the tightening of supply imposed by peak oil, but to depreciate. This of course flies in the face of the common logic of supply and demand, but when factoring in the method by which the majority of our money is created, a deflationary effect can be seen to come into play. This has taken me an absurdly long time to clue into, for although I'd steadfastly amassed a bunch of pieces (various information), I hadn't realized they were actually all part of the same puzzle.

This is a companion discussion topic for the original entry at

Current “low” oil prices are not a problem. They are very much in line with long term trends. The question that should really be asked is why oil was so expensive for the 6 or 7 years it was. Also, the whole boom and bust cycle of the orthodox peak oil explanation is nonsense for a much simpler reason: markets are forward looking. They will smooth the prices and investment rates based on predictions about the future. For the price to wildly swing up and down like that would imply that they regress 100+ years in their ability to accurately predict future production and demand. It’s highly doubtful that would ever happen. So while peak oil will likely cause prices to rise, it will do so in a managed manner until the market adjusts to a new more sustainable equilibrium. It will also spur a lot more investment in other technologies like biodiesel, hyrdogen fuel cells, etc. to meet our transportation needs. Homes will start to be powered with solar, wind, geothermal, and light water or molten salt nuclear reactors. There is very little reason to panic about the collapse of society because of no more oil.

I’ve been following the Peak Oil scene for about 15 years now and it always seems easier to explain what has already happened than predict what’s going to happen next.

I like what you are doing here though and can’t wait for Part 3.

Very true, these are “low” prices in comparison to… to what? Two years ago? Ten years ago? What’s the normal here? That being said, and as I mentioned, the high prices of the past six of seven years has been due to extractors having to tap into more expensive sources of oil that require higher prices to pay for themselves.

I’m not so sure about the market smoothing things out though. One reason for this, and perhaps what is throwing you off a bit, is the notion that other forms of energy are going to step in for oil (and that peak oil will spur investment in them). A proper response would require a whole post (which I haven’t done yet and so can’t link for you), but suffice to say, hydrogen is not a source of energy, but more like a battery. You need a prior form of energy, like natural gas, to split the hydrogen off of a water molecule via electrolysis. That’s an energy intensive venture, and, in fact, an energy losing one due to the four laws of thermodynamics. Similarly, biofuels are pretty much a write-off. They require a massive amount of energy to produce, and their net energy result is close to zilch, if not less. I recommend looking up EROEI, Energy Return On Energy Input. I hope to me writing an EROEI primer in the next month or so. Cheers.

Well, I suppose that rather than predicting I’m taking the easier path you mention of explaining what’s happened, but it seems to make sense to me, based on what I’d already known. That being said, going by comments on other sites, it seems that some think that I’m reaching for straws by trying to mold peak oil into current events. Fair enough, but it seems to me that what’s going on fits the “money as proxy for energy” thing I’ve explained.

Question for you Irv: As a fellow Age of Limits attendee, was I the only one that had the deflationary argument go over their head, or had you clued into it all (regardless of whether or not you agreed with it)?

  1. If low prices are from demand dropping off, then why is total volume of crude consumed/produced increasing?

  2. I demand is down, why are US road miles going up?

You know, it’s OK to be wrong. It’s not OK to not face facts. Peakers have a really bad tendency to not face their mistakes. It shows non objectivity. Shows social behavior rather than scientific.

Good questions.

  1. According to this post (which I overall disagree with), although worldwide “demand” (as the graphs put it) has been on the increase, it’s been on the decrease for non-OECD countries for a few years now. Those are the countries I’m talking about. Then again, is that largely a result of offshoring production of iGizmos and such to our vassal states (and China)? Possibly. With so many variables going on it can be hard to nail these things down as I’m sure you understand. At the same time, with EROEIs dropping, and so much more energy needed to get at all that energy, I wonder how much of that oil is getting consumed not via general consumption, but by drillers and such. That is, oil is being consumed to get at oil, yet it’s being recorded in consumption numbers. How much is that skewing the numbers?

  2. Again, just looking at one aspect of the economy can be misleading, and could rightfully be deemed as cherry-picking. Nonetheless, the increase in US road miles is worthwhile looking at, and this random page I came along, if its numbers can be trusted, points out that the US road miles have just barely passed the previous peak achieved in November of 2007. (That being said, a worthwhile site checking out on the topic is Mark Robinowitz’s Peak Traffic.) Why is that? Well, as pointed out in the article, average pay of American’s was down 4% between 2009 and 2014. With fewer funds, could that mean that American’s are choosing to fly less and drive more? I don’t know really.

Thanks for confirming that it’s okay to be wrong. As this and the previous article readily point out, was I ever wrong when it came to thinking that oil prices were going to inflate to the moon, eh? Geez! Fortunately I was willing to face my mistake! But your mentioning of “peakers” is throwing me off a bit. Are you implying that there’s such a thing out there as “non-peakers,” people that think oil and other energy supplies will never peak because… because oil supplies are infinite?

Great answers. I will go check earlier post.

I don’t think that oil will last forever, but I think it is kind of scarecrow to make that argument about the terminology. Clearly there was something different with those who were into the rampant mid 2000s peak oil scare and those who thought it would be another one of the several times over last 150 years that we get this scare in error. Whatever you label the two camps.

Well I do think that we’re at the cusp of hitting the peak in both conventional and unconventionals. Just the other day the EIA pointed out that it estimates 2016 oil crude production for the US will be a million barrels less than its peak in April of this year. So if we’re not there already, we’re pretty damn close.

sorry, I didn’t mean to accuse you of explaining rather than predicting. Other do lots of that. I assume you will have a prediction to make in part 3, after getting us set up for it in parts 1 and 2.

The deflationary idea didn’t go over my head at Age of Limits, but that would be mainly because I had already encountered it from Nicole Fosse at The Automatic Earth. She actually did predict a few years ago that the price of oil would eventually take a big drop because of demand destruction. But if I understand her correctly, she thinks the price of oil will recover and there will be hyperinflation.

I’ll go out on a limb here and predict that this is it–we are in a deflationary spiral from which we won’t recover until energy consumption matches what is available from renewables, 10 to 20% of current levels.

Hehe, no worries. About that prediction though… ah, well… if I gave the impression that I was about to make one in part 3, whoops. But you can certainly count on some fancy foot-work and pretty pictures. I hope you like pretty pictures.

“geologically induced price shock”.

No Allan. It isn’t. And those prior, so called geopolitically induced price shocks? Jimmy Carter wasn’t whining in 1977 about ONLY the geopolitics, he was proclaiming RUNNING OUT (a geologic concept because that is where the oil starts out, and he said we weren’t finding any more). Hindsight is 20/20, but it also allows for a perspective that has nothing to do with what was being said at the time. At the time, running out was all about lack of, not some Arab countries deciding to horde the stuff.

In other words people back then are saying the same thing you are NOW, and you don’t even understand the past well enough to know you are recycling a failed idea, and therefore have no hope of even understanding why yours is no different.

And I promise that oil prices won’t continue decreasing. They may get lower, find a floor, and then, just as had happened during the 1979 peak oil, demand and supply will equilibrate at a new price and as one or the other changes, so too will price.

I’m “recycling a failed idea”? Well that’s pretty rich coming from the guy who has twice now avoided answering the question: what year or decade or century or millennium do you see oil supplies peaking? Are you going to continue to cower from answering that?

"‘geologically induced price shock’

No Allan. It isn’t."

Actually, yes it is. And I’ll repeat it for you. To maintain and increase production levels, we’re now forced to extract more expensive oil. This has resulted in higher prices. They proved to be rather unaffordable for consumers and businesses, and so resulted in less demand. Prices then dropped.

Furthermore, all I see is that you want prices to go up. I see no economic rationale or argument to back up anything that you’re saying. Just “promises” and normalcy bias and ad hominem attacks. Got anything else?

p.s. You said “And I promise that oil prices won’t continue decreasing.” Then your next four words were “They may get lower…” Nice job of covering all your bases.

The real price of oil began increasing around 1970 Allan. So what more expensive oil are you talking about? Prudhoe Bay? The North Sea? And this resulted in higher real prices ever since, effectively your entire life has been under the auspices of higher oil prices. This was uncomfortable to consumers who then bought Japanese cars and used less, launching Toyota and Honda to their current stardom. And then in 1986 when it became obvious that new sources, like Prudhoe Bay and the North Sea had created yet more decades of abundance, the price crashed.

You were implying that today is somehow different? Why whatever could you mean, other than pointing out how little you know about this topic, it apparently not being required reading for either filters or farmers.

Awesome! So it’s a one-way conversation we’re having here, eh? I’m willing to answer your questions, yet you seem to shy away from answering mine, particularly my question of what year or decade or century or millennium you think oil supplies will peak. As you like to say, “interesting.” Don’t worry, I’ll keep trying though.

Anyway, on to your question(s).

Yes, oil’s price increased in the 70’s. Did you forget about the oil embargoes?

North Sea oil? You mean the North Sea that peaked a decade and a half ago?

Of course I’m implying that today is different! We’re tapping into energy sources with lower EROEI’s, heading on down towards a 1:1 ratio! Muy differente, although it’s admittedly a tough pill to swallow for some.

great post, mr christensen. i was 19 during the arab oil embargo of 1973. the world changed very abruptly. gasoline was just something you tried not to run out of before then, and suddenly it was a budget-buster for everyone. society has become accustomed to the large fluctuations in fuel prices, and it doesn’t seem like such a big deal now. i remember paying under $.30 per gallon before the embargo, and now the price can fluctuate that much in a couple of days. i really think that point in time was a sea change in the way oil was marketed, in response to the industry’s knowledge that oil would no longer see substantial growth in supply/availability. i also think that supposed game changers like deep-sea drilling and other massive technology/ limited return projects have been used as marketing tools to reassure the public that there will always be plenty of oil. the result has been, predictably, consumers purchasing trucks and suv’s and generally using their personal “abundance” of petroleum products at will. the oil-induced predicaments we currently find ourselves immersed in are severely damaging to everyone, everywhere.

I heartily agree with everything you say. I think you’re right regarding the unconventional oils being used as marketing tools to assure the public about limitless energy supplies, but possibly even worse, I think the marketers believe their schtick as well. How high up the totem pole that belief goes is something I often wonder.