Implications of peak oil

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Peak oil is a predicted rise, followed by a sharp decline, in the world's supply of oil. Oil has been an important part of the world's economic growth and prosperity since the Industrial Revolution. However, many economists and commentators argue that, in light of peak oil, society must invest in alternate sources of energy. Opinions differ as to when this will happen, how to replace fossil fuels with alternatives to oil, how difficult it would be to implement such changes, and whether they can happen before oil shortages threaten the economy.

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Catastrophe

Some believe that the decreasing oil production portends a drastic impact on human culture and modern technological society, which is currently heavily dependent on oil as a fuel, chemical feedstock and fertilizer. Oil currently accounts for 40% of all of the United States' energy, along with an astounding 99% of transportation fuels1. Some envisage a Malthusian catastrophe occurring as oil becomes increasingly inefficient to produce.

Effects on Agriculture

A decreasing supply of oil could have drastic impacts on agriculture and food production. Since the 1940s, agriculture has dramatically increased its productivity, due largely to the use of petroleum derived petro-chemical pesticides, fertilizers, and increased mechanisation. This process has been called the Green Revolution. The increase in food production has allowed world population to grow dramatically over the last 50 years. Pesticides rely upon oil as a critical ingredient, and fertilizers require both oil and natural gas (which, being a non-renewable resource, will also peak). Farm machinery also requires oil.

A decreasing supply of oil could cause major problems with intensive agriculture, and at the very least could cause the price of food to rise considerably, and possibly cause a major decline in food production.

Some have argued that the present levels of food production are unlikely to be sustained without fossil fuel inputs. At the most extreme some have argued that fossil fuels have unsustainably increased the world's carrying capacity and that the world's population has "overshot" levels that can be sustained without fossil fuel based agriculture and that a large scale "die-off" of population is possible [1].

Others believe that a major transition to "organic agriculture" methods will be necessary [2], which would probably be more labor-intensive and require a population shift from urban to rural areas, reversing the trend towards urbanisation which has predominated in industrializing societies.

Effects on living arrangements

Another possible effect would derive from transportation and housing infrastructure. Millions of people live in suburbs, a type of low-density settlement designed with the automobile in mind. Some commentators such as James Howard Kunstler argue that because of its reliance on the automobile, the suburb is an unsustainable living arrangement; the implications of peak oil would leave many Americans unable to afford fuel for their cars, and force them to move to higher density, more walkable areas (of course food production would probably be somewhat lacking there).

A movement to deal with this problem, called "New Urbanism," seeks to develop the suburbs into higher density neighborhoods and use high density, mixed-use forms for new building projects.

Recession

Even a benign scenario with a slow rate of depletion and a smooth transition to alternative energy sources might cause a recession or depression due to higher energy prices. There has been a correlation in the timing of oil price spikes and economic downturns in the past. Inflation has also been linked to oil price spikes. However, economists disagree on the strength and causes of this association. The world economy may be less dependent on oil than during earlier oil crises. Conversely, the recessions of the early 1970s and early 1980s were associated with a relatively brief period of somewhat dwindling energy availability; the future increase in oil prices might be much higher and last longer. See Energy crisis.

The developing world

A decline in fossil fuels also affects development in the third world, as it touches on the question of whether it is possible for the vast majority of humanity to live at standards of living currently found in North America, Europe and the Far East. [3] Pessimists argue that resource limitations make this scenario impossible, while optimists strongly disagree, although they might admit that the switch to alternative energy may cause temporary problems.

New technology

New technology may allow new energy sources to be used and may allow more energy to be extracted from old ones. Most of the potential energy in energy sources is not converted to a useful form. For example, only 10% of the sunlight is converted to electricity in solar cells and only 35% of the oil in a typical field is recovered. New technology may increase these numbers. Many of the non-conventional oils today require more energy to extract than can be gained from the oil itself. This may also change with new technology. Opposed to this is the problem that the remaining fossil fuel reserves usually are increasingly difficult to extract. They tend be in increasingly remote areas, such as far below the surface of the ocean or in the Arctic. They may also be of increasingly lower quality, and thus more difficult to refine. Both of these factors may affect oil availability in the future, making prediction difficult. In the end, new technology cannot prevent oil production from declining since the amount of oil is finite. But new technology may push the peak farther into the future than what is predicted today.

Environmental degradation

When oil production begins to decline, humanity may increasingly turn to less environmentally friendly energy sources such as coal, of which there are still significant reserves remaining on Earth. This may exacerbate global warming, and health and developmental problems resulting from pollution. Some peak oil proponents believe that an alternative energy source should not be considered unless it is less polluting than oil.

Market solution

A market solution is based on the belief that the rise of oil prices due to scarcity would stimulate investment in oil replacement technologies and/or more efficient oil extraction technologies and/or an increase in productivity. The economic challenge within an environment of decreasing energy supplies is that research into alternative energy sources currently relies upon fossil fuels for development. Critics argue that if conventional oil and natural gas become more expensive, alternative energy source development and increased technological efficiency research will become more expensive to the same degree. However, others argue that continued development of alternate energy sources will decrease both their cost and the petroleum input they require.

As rising energy costs exceed the labor costs of construction, and as long-term interest rates drop to match the falling productivity of an energy-starved economy, some believe that other sources of energy would become increasingly attractive. However, others argue that the market solution phrases everything in terms of money, in that it considers only the price of oil, where to them the important metric is energy efficiency (the ratio of extracted energy over energy used by the extraction and refining processes). An analogy in simpler terms would be:

Imagine you are driving a car and you have only 1 gallon of gasoline left. However, in order to reach the nearest gas station you need 2 gallons of gasoline. In this context, the price of gas is irrelevant: it doesn't matter if you are willing to pay two, three, ten or one hundred dollars per gallon, because the car will never reach the gas station.

Or, as Franco Battaglia put it: "You can buy an apple for one euro. If you really want an apple, you might pay five euros. You could even pay a thousand euros, but you would never pay two apples."

The market solution's counterargument is that with more money, you can pay someone to go to the petrol station to bring the gas to you, or push your car to the petrol station, or convert your car to run something other than petrol.

Additionally, some critics believe that a market solution on its own would result in profiteering by energy suppliers from the price shock, due to the scarcity of oil and artificial scarcity of replacement sources of energy, rather than providing a smooth transition from oil to other energy sources, while others would argue that would be a price worth paying in order to keep economic growth sustainable.

Another market-based solution is that if an increase in oil prices was imminent, it would be reflected in the oil futures market [4][5]. As of 2005, this is not the case.

Alternatively, since energy itself is not a fungible commodity, certain types of energy have a higher value than others. If for example an apple is ten times more valuable than an orange, than it is quite reasonable to pay ten oranges for one apple. Because of the energy density and relative safety of gasoline at room temperature and atmospheric pressure, it is highly suitable for transportation. The qualities of oil therefore go beyond the mere measure of its energy content and as a consequence the value of oil is substantially higher than immobile forms of energy. So long as alternative energies are available for less than the cost of extracting oil which could be used to power the drilling, pumping and refining equipment, than indeed market forces rather than energy returned on energy invested (EROI) will dictate the production of non-fungible fuels.

Increased fuel efficiency

Any moderate oil price increase is expected to stimulate an increase in transportation fuel efficiency. Some believe this would postpone and lessen the impact of severe oil shortages. For example some governments mandate a minimum fuel efficiency standard for automobiles. It may also cause a shift to forms of transport which are not so dependent upon oil. Electricity, in particular, can be generated from a number of different sources. This may lead to increased use of transport such as trains, trams/streetcars, trolleybuses and hybrid vehicles instead of fully oil dependent trucks, cars and aircraft. For trips of less than 5-10 km, bicycles may become the preferred means of travel, and for longer trips, the combination of bicycles and trains may be the most economical solution for commuters across the Western world.

However, others will note that an increase in fuel efficiency may in fact compound the problem. This phenomenon is referred to as the Jevons paradox, which states that as technological improvements increase the efficiency with which a resource is used, total consumption of that resource may increase, rather than decrease. Additionally if people manage to do more work with less fuel, their relative ratio of income to oil price goes down, giving them the ability to support a higher price for oil than before. This makes it even more worthwhile to extract hard to reach oil, and faster. On the other hand, if the price of oil increases at the same rate as the increase in efficiency, there is no extra buying power generated and balance with demand is maintained. Finally, if the price of oil increases faster than efficiency, buying power goes down, and inflation begins while the demand for oil goes down.

Once the rate of oil extraction can no longer increase with demand, in other words the oil peak has been reached, Jevons paradox instantly ceases to apply. The price of oil may still continue to increase, but the amount of oil available to the economy remains the same or even goes downwards. This means that anyone wishing to maintain the same standards of living must increase efficiency from that moment on, as it will not be economical to be less efficient with oil. In conclusion very high oil prices will force efficiency universally, but also means the more efficient use of oil can only keep oil at a high price or slow its rate of gaining even higher prices, once oil returns to a lower price the incentive for efficiency is equally reduced and efficiency will drop, and thus the Jevons paradox will likely take effect.

Political implications

Image:Imported Crude Oil as a Percent of US Consumption 1950-2003.jpg

As of 2005, the United States economy is the world's largest user of oil, with a historical reliance on what have been, and still are, some of the world's lowest oil prices. Its position as the global hyperpower rests on its economic supremacy, which in turn depends heavily on oil being sold to it at a price that does not create a United States trade deficit that forces down the value of the US dollar against foreign currencies. At the same time, the world's largest oil reserves are held by Saudi Arabia, followed by those of Iraq, the United Arab Emirates, Iran and Russia. When Hubbert Peak occurs and oil becomes a progressively scarcer commodity, there may be political and economic tension between its principal producers and consumers. The United States benefits from the current petrodollar, so it is wary of seeing the dollar superseded by any other currency on the oil market.

Some observers see the actions of the U.S. government in the middle east, including the 2003 U.S. invasion of Iraq, as the continuation of a long-term geopolitical struggle driven by the need of a nation built upon diminishing domestic oil resources to secure replacement oil supplies from overseas at an acceptable price.

An Oil Depletion Protocol has been proposed as a way to mitigate the risk from a peak in the world's production of oil. Adoption of the Protocol means that "oil importing nations would agree to reduce their imports by an agreed-upon yearly percentage (the World Oil Depletion Rate), while exporting countries would agree to reduce their rate of exports by their national Depletion Rate."

Lifestyle choices

A significant percentage of today's resource use is based upon lifestyle choice rather than unalterable human needs. The United States has 5% of world's population and accounts for 24.8% of global oil consumption by using 20.52 million barrels of oil per day, according to the U.S. Department of Energy. Europe, not including Russia, accounts for an additional 19.9% of the world's oil consumption at 16.45 million barrels of oil daily. The voluntary simplicity movement advocates a shift from consumerism to a reduced use of natural resources and energy. Regardless of choice, a period of decreasing fossil fuel reserves is likely to lead to a decrease of demand for goods and services. However, environmentally friendly, low-energy replacements for many current activities are increasingly or already available. Examples include commuting by bicycle, mass transit, and eating home-cooked, locally grown, organic meals instead of highly-packaged convenience foods from restaurants and grocery stores. Jobs that make use of telecommuting or that are nearer to home with shorter commuting distance may become increasingly desirable.

Changes in lifestyle choices have other important practical advantages. First, under extreme conditions, social change can proceed much more rapidly than large-scale infrastructure change. Second, the other alternatives assume the results are technologically feasible, whereas decreased energy availability can be planned for and potentially mitigated by increased efficiency and less demand. Finally, living simply can reduce one's reliance on the well-being of the global economy. Even so, a serious shift from a high-energy lifestyle could lead to increased unemployment, and bankrupt many businesses and markets.

Others are pessimistic about the lifestyle changes needed to reduce energy demand. If society doesn't proactively reduce energy use and consumption remains high as supplies run entirely out, this reduction may be imposed by a reducing energy supply. Many of these lifestyle changes are seen as unpleasant. People may be forced to work more to replace the work previously done by machines. Airplanes and cars may be replaced by railroads, ships and mass transport. People may travel much less, for example staying at home during holidays. Foods like meat, chocolate, coffee, tea, fish, and milk may be replaced by locally produced cereals and vegetables. Air conditioning may disappear. People may move to smaller houses that cost less to build and heat. In general, there will be less consumption because higher power cost affects all stages of production and transportation. In extreme cases there may be rationing of electricity, transportation fuel and heating.

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