Enjoy the cheap petrol, while it lasts

Traffic is so low over the Easter break that it doesn't seem worth doing a full Bullroarer for a while, but I thought I'd point to this article by "investment banker and fund manager" Michael Trifunovic as its the nearest thing to a peak oil article I've seen in the mainstream Australian press in months.

Sydney Morning Herald - Enjoy the cheap petrol, while it lasts.

With demand on the rise, existing wells drying up and a dearth of big discoveries, the oil price is only headed in one direction.

IN July 2008, the oil price hit a record high of $US147 a barrel. In its journey from the lows of 1998 to the highs of last year, many reasons were put forward for its ascent. Explanations included a so-called "war premium" , "a terrorist premium", hurricanes and evil speculators - the list of things and people to blame for the rise in oil prices was long.

As the price rose, calls were made by political leaders and interest groups for oil producers to lift production and for a cut in taxes on oil and petroleum. Accusations of price gouging and profiteering by oil companies and producers soon emerged.

Under the glare of TV cameras, OPEC promised to lift oil production and bring prices down. Yet the price continued its march upward and production rose only marginally.

The key point that appears to have been missed was that in the decade from 1998, demand grew about 16 million barrels a day while supply struggled to keep pace, particularly during the later years.

Now that the oil price has collapsed from $US147 to the $US40-$US50 region and it's off the front pages, it is yesterday's story. But is it really an old story. Have we been told the true state of play?

According to most mainstream news reports and even views presented by the investment community, oil was in a bubble and the global financial crisis has plunged the world into recession, which is leading to demand destruction for oil and hence the low oil prices.
...

Reality will occasionally strike even the congenitally immune.

Even when (not if) we enter a full on depression the oil price will inevitably rise,possibly to record levels.I'm sure that nobody who reads TOD at least twice per week needs to be told why.


http://i295.photobucket.com/albums/mm130/damoil/boomtodoom-1.png

heres my little updated picture of where i see everything moving.

i basically see two things happening, either supply will catch demand while we are in a downturn, or we will start to recover and demand will find supply with a possibility in both cases that a repeated demand/economy collapse will follow before supply catches us again. OR when supply catches us next, it will be on a sharpening decline that demand will not be able to lower itself below and see normal functioning of our system - meaning a full collapse.

my theory is based on 30% of supply from high decline rate small fields disappearing in 5ish years plus in the same period 20% decline in larger fields - as per EIA reports. im disredarding stats that have new production starting from zero and presuming we may have only 5mbpd in spare/new capacity that could be put on in a short period. noting also that the green side i have only included where relivant to PO, im not concluding carbon trade is the only way to climate recovery in anyway.
other facts this is based on is - the world will be unable to produce/purchase green cars soon enough or in large enough volumes to offset reasonable demand on the scale of expected declines - tho i am yet to build in this as an option out of disaster. this model is for australia but adoptable to US due to strong links. i assume that fuel prices couldnt reach AU$10/L as it would exceed 30% of an average income for two fills a month. And that commerce and industry would collapse before the public cant drive cars as margins and spending disappears, while inflation (stagflation) runs wild.

i'd love to have feedback on missing/incorrect elements/effects,

cheers.

Damo,

You have way too much time on your hands ;). Great graphic and shows the relationships and dependencies in a way I haven't seen before. The only thing I didn't see factored in is war which could take the world on an entirely different path. A major militarisation on a global scale could mask or contain collapse as individual rights are subordinated to the interests of the state at war.

I would like to see your graphic put up as a key post as i'm sure it would get lots of comments.

cheers termoil, phil and gav have commented on the first version and i have been slowly revising the picture and writeup to submit to them for a full post.
i have included a national conflict as a result, but not really an effect. i am missing bad government policy as an effect on economic collapse and stagflation (oil and bad policy being only elements that can cause it). goverment miliary policy/action could be an effect on national exports as a reduction in oil supply, and run countries towards option 1 of economic collapse as it shifts budgets for all involved nations creating deficit and poor investments on green tech, and possible reallocation of oil reservses.

military action would cause heavy quantitive easing, a run on protectionism, huge deficit, manfacturing collapse if it involves china tension to the usa. it could cause trade collapse through shipping lanes halted.

the emerging markets element i consider as the increasing consumption and the securing of oil fields/contracts etc as china is currently while demand sleeps. this would jump as miliary tensions escalate and shots are fired.

its possible that the arctic collapse could beat the next oil shock, which could spin europe on its head. which would have crop failures and complete oil dependance. but doesnt change much in the theme of the oil shock?

cheers for the feedback.

Excellent Damo,

When I'm old and grey and living in a Mad Max world...
Whenever people ask me,
"What the hell happened???"
- I'll just unfold your diagram and nod sagely...
;-)

I would be surprised if Michael Trifunovic was not a regular reader of TOD as he has accurately summed up pretty much everything as the way I see it which has been learned here. It confirms that the banking, finance, investment and political classes know at least on some levels exactly what the state of the world really is. Mr Trifunovic however leaves the big question, of what to do about it, unanswered.