New Peak Oil Theory Explained

Jim Brown
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Some analysts believe Peak Oil will be delayed until 2020 or longer but don't start rejoicing today. The reasons for the delay could be worse than Peak Oil itself.

Several readers have emailed me asking about the view by some analysts the disaster from peak oil will be delayed significantly. Those holding this view believe the world will experience peak demand before we experience peak production.

There are various reasons why they believe demand will slow over the next few years and avoid the explosion in prices because demand exceeded production.

Some analysts believe the current economic climate will eventually create another global recession as the various debt problems come home to roost. Almost all major analysts believe Greece will eventually default on its debt. Quite a few believe that other EU countries will follow Greece into default once they realize that Greece was able to escape payment and live for another day.

EU countries defaulting on debt is a minor problem compared to the U.S. debt balloon. Analysts believe the U.S. is locked into an outcome on our debt that will be less than pleasant. Even with the new scaled down budget the U.S. will run a $1.2 trillion to $1.6 trillion annual deficit. This does not even count the off book liabilities like Social Security and Medicare.

The U.S. is eventually going to reach a point when bond investors will require more than 3% to loan money to Uncle Sam for a long time. Once the bond market starts to deteriorate the problem will accelerate very quickly. The U.S. can sell enough new debt today to pay the interest on the old debt because the interest rates are relatively low. Once bond investors become so worried they start bidding up rates to the 6%, 7% or even 10% levels the wheels are going to come off of the bus. You can't continue to pay the interest on one credit card using another credit card. Eventually you run out of cards and your credit limit prevents you from adding more. This will happen in this decade. You can count on it.

This will cause hyperinflation where rates and prices on everything explode out of sight. I lived through the hyperinflation back in the late 1970s and I know how bad it can get. I have paid mortgage payments with an 18% mortgage rate.

The Fed says there is no inflation but food inflation around the world is roughly 20% per year. Energy prices are rising daily and should only continue to increase even without the arrival of peak production.

The Fed has never before been able to maintain an extraordinary low level of interest rates and then return them to "normal" without experiencing inflation. They are always behind the curve. They don't see the inflation coming until it has gained speed and no matter how fast they react at that point it always ends in disaster. Changes in Fed policy normally take 6-12 months to filter through the system. That means once they see the problem and start on their monthly hiking process it can be 6-10 months before they get rates back to normal and then another 6-12 months for those changes to impact the economy.

This suggests we are going to see hyperinflation again this decade. This will depress the global economy as prices spike for everything we use.

Economists that describe to the peak demand theory believe the drop in demand due to coming changes in economic conditions will prevent crude demand from increasing to the point where production cannot keep up. HOWEVER, this does not mean we can't have peak oil production over the next couple years and a slow decline in production from that point. They believe demand will also be declining so the decline in production will not be catastrophic.

I received an email this week from a reader who works for an OPEC consultancy group. They work with OPEC and attempt to determine the future of oil demand and prices so OPEC can make future production decisions. He said OPEC believes the world will see peak consumption before peak production. They are hoping this is how the future works out so they can continue to benefit from rising prices EVEN AS THEIR PRODUCTION DECLINES.

Did you get that? OPEC expects demand to slow and offset their declines in production.

I personally believe that demand will moderate in 2012 but continue to be flat to slightly higher. Yes, $4 gas prices in the U.S. in 2011 as predicted by Boone Pickens and $120 oil will be a drag on the economy but it is not terminal at those levels.

I find it hard to believe that global demand will decline with slightly higher prices because 2.6 billion people in China, India and Asia are trying to move into the 21st century and out of a poverty stricken agrarian lifestyle. They are putting down cash deposits of $20,000 to $30,000 and waiting six months to a year for delivery of a car. In some locales they pay up to $10,000 a year for license plates but they are still buying cars.

In 2000 China had less than 25 million cars. By 2020 they are expected to have more than 275 million cars. They have already passed the U.S. in car sales at 16 million in 2010. (U.S. = 12.6 M) GM said China could hit 20 million cars sold in 2011. Sales in China rose +27% in November alone.

India is on track to double auto production in this decade and surpass the U.S. by 2025.

You can't keep adding cars at the current global rate of 50 million per year without using a lot of gasoline even if they were all economy models. If each new vehicle consumed only 5 gallons per week that would be an increase of 6.25 million barrels of new oil consumption PER WEEK. (325 million per year) How many people do you know that use less than 5 gallons per week?

The global population is now 6.9 billion and growing by six million a month, 72 million a year. We are on track to exceed 7.5 billion by 2020. All of those new people require food, clothing and transportation and all of that is produced and shipped with oil.

While I agree a downturn in economics for whatever reason will probably slow existing demand there will always be that new demand being created from new families and new businesses.

I believe it will be a race between demand and production to see which one peaks first and I am still predicting 2012 as a peak in production if Saudi Arabia has less capacity than they claim and 2014 if they actually have that claimed capacity.

I asked earlier this week for emails with links or documentation rebutting my peak oil thesis but nobody responded. I received dozens in support of my views. If you know any skeptics please send them my way.

I suggest everyone review my special report from last year "Peak Oil Postponed, Not Canceled" along with dozens of confirming data points at this link: LINK

Jim Brown

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The OilSlick Newsletter is based on the expectations for global oil production to peak and begin to decline in the 2012-2014 timeframe. This is called "Peak Oil." This is the point where global production of conventional oil supplies can no longer be supplemented by enough oil sands production, deepwater oil production, biofuels and natural gas liquids to offset the decline in existing fields. The roughly 6% annual decline of existing production due to depletion is larger than the rate of new discoveries and new production being added each year. The Peak Oil countdown clock is ticking and time is growing short. Peak Oil is coming, are you prepared?