Peak Oil Is Unavoidable

Jim Brown
 
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That was the decision reached by the German Bundeswehr (Federal Defence Force) Transformation Centre in a study released to the public last November. Unfortunately it was in German. The document was translated into English and released last week and is getting plenty of press.

The task force study was a comprehensive and realistic analysis of one of the biggest challenges we face in this decade. Their conclusion was that peak oil was unavoidable and would be disastrous.

I am posting the link to the complete document, 112 pages, at the bottom of this commentary but I am also going to list some of the important points they mention. I am not going to try and summarize it because it is lengthy and I could not do it justice. I would point out that it is nearly identical to the same kind of study done by the U.K. and the U.S. military and they also came to the same conclusions.

Random highlights:

Page 8: In most cases resource conflicts have been restricted to specific regions and have only been of limited relevance to international security policy. In the light of global peak oil, this could change in future with regard to oil as a natural resource: Firstly, a global lack of oil could represent a systemic risk because its versatility as a source of energy and as a chemical raw material would mean that virtually every social subsystem would be affected by a shortage.

Page 9: The precise global peak oil date is controversial and can only be determined with certainty in retrospect.

The reserve levels officially specified by the Organization of the Petroleum Exporting Countries (OPEC), for example, can be disputed on the grounds of nontransparent data acquisition and partly politically motivated information. The higher an OPEC member declares its national reserve levels, the higher the production rate allotted by the OPEC and, in turn, the export profits.

Page 11: The main objective of the study is to raise awareness about the systemic importance of oil and, in turn, the derivable significance to security policy if peak oil is exceeded. The findings and results are expressly not meant to imply that resources will necessarily have to be secured with military assets. Rather, the study is to be understood as an appeal to think things through at an early stage and to develop both preventive and responsive courses of action.

Page 12: Today approximately 90% of all industrially manufactured products depend on the availability of oil.13 Oil is not only the source material for producing fuels and lubricants but is also used as hydrocarbon for most organic polymers (plastic materials). It is therefore one of the most important raw materials in the production of many different products such as pharmaceuticals, dyes and textiles.

A considerable increase in the oil price would pose a systemic risk because the availability of relatively affordable oil is crucial for the functioning of large parts of the economic and social systems.17 For some subsystems, such as worldwide goods shipping or individual transportation, the importance of oil is obvious. Overall, however, it is difficult to overlook the entire range of possible challenges that could arise from an exceeded peak oil scenario.

Page 13-15: Oil is described as a "Potential Conflict Factor." They point out that Russia, China and the U.S. have all expressed publicly that access to sufficient oil is a national security interest. They warn of potential military conflicts between importers, over exporters and by entities attempting to take over exporting countries.

Page 20: More than 90% of all oil imports to Germany come from countries that reach or have already exceeded their national peaks during the study?s period of review. Various expert analyses assume that it is very likely that peak oil has already occurred for Russia, Norway and Great Britain, for example. These three countries alone currently supply 60% of Germany?s total oil import volume.

While it is assumed that approximately 90% of all oil countries have already exceeded their national peak oil or are likely to reach it by 2015, increasing production rates over several years are considered possible for Brazil and Angola. A reliable estimate of Saudi Arabia?s potential is regarded particularly difficult. There are indications, however, that suggest an unfavorable development for the kingdom. This is extremely relevant because ultimately the point at which global peak oil occurs is likely to be determined primarily by Saudi Arabia?s oil production potential. In a worst-case scenario, this would mean that even a dominant oil power such as Saudi Arabia could cease to function as a potential compensation factor (swing producer).

Page 26: Being aware of exceeding peak oil and in view of countries pursuing their own lasting advantages, there might be a deliberate restriction in supplies ("political peaking"), for example, to preserve undeveloped oil resources for the nation?s generations to come. The more obvious the actual scarcity of oil, the more expensive oil would become and thus the greater the profits of producer countries. The calculus of "political peaking" would become all the more understandable. Political peaking would further aggravate peak oil-induced supply shortage and related price increases.

After peak oil, this could lead to an additional acceleration of the decrease in globally available production quantities.

Page 29: In light of peak oil, the share of oil traded on the global, freely accessible oil market might decrease in favor of oil traded via bilateral agreements. This could, to the detriment of free market mechanisms, result in an increase in privileged partnerships and conditioned supply relationships.

Page 38: When peak oil is exceeded, not only oil immensely gains importance and attention but particularly the needed transport infrastructure as well.96 Global transportation routes via which oil is distributed with supertankers or long pipeline sections are, due to their broad ramifications, difficult to protect and sometimes provide easy targets for interrupting the oil supply. This would also increase the incentive to sabotage energy infrastructure. In this context, the high return on investment of attacks on pipelines, ports or refineries97 is likely to automatically put the oil industry in the focus of interest for any actor who seeks to reach his goals by using force.

Page 41: The strategic significance in securing resources and the exploration of new and controversial oil-producing areas may increase the probability of a further build-up of military arsenals to enforce those claims. Efforts aimed at expanding military capacities for the protection of own claims on the Arctic can already be seen today. Even if Russia?s current activities are primarily aimed at positioning itself as a world power, and the activities of other nations primarily serve to secure their national sovereignty in mostly vast regions, a relevant increase in military expenditure can already be observed.

Similar considerations apply to international waters. The growing possibility of deep-sea resources exploration would increasingly bring unsettled territorial claims as a potential cause of conflict to the fore, as can currently be observed in the territorial conflicts over the South China Sea. Moreover, an exploration of deep-sea resources would lead to an increased importance of maritime high technology. Actors with appropriate capabilities would therefore experience a revaluation. Finally, with the exploitation of high sea deposits, the significance of blue water navies would also increase.

Page 52: Since oil is needed directly or indirectly for the production of more than 90% of all industrial goods, effects would show across the entire economic structure. Since an increase in the price of oil would bring about a shift in almost all price relations, consumption and, in turn, domestic production and foreign trade would have to permanently adapt to the new oil prices.

Page 56: The Systemic Risk of Exceeding the Tipping Point
The scale of potential peak-oil-induced setbacks in economic growth can include what is referred to as a "tipping point", which determines whether or not an ex-ante analysis of peak oil effects remains possible or not.

The phenomenon of tipping points in complex systems has been known for a long time and is referred to as "bifurcation" in mathematics.

Tipping points are characterized by the fact that when they are reached, a system no longer responds to changes proportionally, but chaotically.

At first glance, it seems obvious that a phase of slowly declining oil production quantities would lead to an equally slowly declining economic output. Peak oil would bring about a decline in global prosperity for a certain length of time, during which efforts could be made to develop technological solutions to replace oil. Economies, however, move within a narrow band of relative stability. Within this band, economic fluctuations and other shocks are possible, but the functional principles remain unchanged and provide for new equilibriums within the system. Outside this band, however, this system responds chaotically as well.

From the perspective of economics, at least one border of the band can be identified: an economic tipping point exists where, for example as a result of peak oil, the global economy shrinks for an undeterminable period. In this case a chain reaction that would destabilize the global economic system and cause a clear shift in the analytical framework for all other security consequences would be imaginable.

Page 58: In the medium term, the global economic system and all market-oriented economies would collapse.

1. Economic entities would realise the prolonged contraction and would have to act on the assumption that the global economy would continue to shrink for a long time.

2. Tipping point: In an economy shrinking over an indefinite period, savings would not be invested because companies would not be making any profit. For an indefinite period, companies would no longer be in a position to pay borrowing costs or to distribute profits to investors. The banking system, stock exchanges and financial markets could collapse altogether.

3. Financial markets are the backbone of global economy and an integral component of modern societies. All other subsystems have developed hand in hand with the economic system. A disintegration can therefore not be analyzed based on today?s system. A completely new system state would materialize.

4. Mass unemployment. Modern societies are organized on a division-of labor basis and have become increasingly differentiated in the course of their histories. Many professions are solely concerned with managing this high level of complexity and no longer have anything to do with the immediate production of consumer goods. The reduction in the complexity of economies that is implied here would result in a dramatic increase in unemployment in all modern societies.

5. National bankruptcies. In the situation described, state revenues would evaporate. (New) debt options would be very limited, and the next step would be national bankruptcies.

6. Collapse of critical infrastructures. Neither material nor financial resources would suffice to maintain existing infrastructures. Infrastructure interdependences, both internal and external with regard to other subsystems, would worsen the situation.

7. Famines. Ultimately, production and distribution of food in sufficient quantities would become challenging.

I could go on but you get the idea. Germany has joined the ranks of those who view the approach of peak oil as a complete change in the current economic paradigm.

Read the entire report here: Bundeswehr Transformation Centre Study

Similar report: U.S. Joint Operating Environment 2010

Key point: "By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach 10 mbpd"

U.S. Joint Operating Environment 2010

Jim Brown

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