Letter Re: Bad News on Peak Oil: Five Year Slide to a 50% Production Crash

Dear Jim and Family,
I have bad news on the Peak Oil front. We’re about five years from losing 50% of our current production, in real world terms. The producing countries are failing in their big fields, many from 8-15% decline a year (Cantarell in Mexico is down 25% from last year, Ghawar is down 10.5%, Burgan in Kuwait down 12%, Iran down something like 16%, Russia down 12%, UK/North Sea no longer exporting). Even if there are no wars and no embargos, we only have about 5 years before we only have around half as much oil (gasoline, diesel fuel, fuel oil, plastics, cosmetics, lubricants, pesticides, etc) production left. There will still be oil in the ground, however it won’t be enough for the demand so the remaining supply will be bid up in price until things get very bad. Very bad. If we’re quite lucky we’ll see rolling blackouts (scheduled) in the Western states which only last a few hours a day, rather than days a week. There are certain unpleasant complications too, already being felt around the world.

The first to feel the effects of Peak Oil was Cuba. Contrary to public claims by the commies, they don’t feed themselves with their city gardens. They feed 18% of themselves, and import 82% of their food. Castro lies: how unexpected!

Zimbabwe is ruled by a crazy despot named Robert Mugabe. First he stole the land of the only productive farmers and gave it to untrained poor people. [JWR Adds: And lots of land to his political cronies in his own tribe, most of whom have left the land fallow.] Crops failed. Lack of crops meant lack of money (and food), and fuel bills didn’t get paid so fuel stopped being delivered to Zimbabwe. The country has 1200% inflation (or higher) and the whole country has collapsed. Then he cleverly tore down the slums and did not build new housing for the 120K poor people now homeless. With no money, how could he? Before his brilliant land theft, Zimbabwe was feeding Africa with its grain. I’m still trying to figure out why nobody has thought they might shoot Mugabe.

Another country suffering from Peak Oil is Guinea. This is one of two major cacao (chocolate) producing countries. The average person there earns $370/year. The fast rise in fuel prices has destroyed most businesses and farms there so there have been fuel/food riots.

Indonesia, usually considered a fairly stable developing country, has had several strikes and riots over fuel costs. Indonesia long subsidized fuel costs so it was the same everywhere. This seemed like a good idea back in the early 1990s when [the price of] fuel was pretty stable anyway (after Gulf War 1) but then the price went crazy and the government lost control. I recall that people died in the rioting, and more than a couple. Indonesia used to export oil, but its been importing for the last few years now.

The USA peaked its oil supplies in 1970, a year earlier than M. King Hubbert (the father of Peak Oil) predicted. At that point, the USA suffered a major economic shortage and suffered troubles from the OPEC embargo. The USA responded by getting involved in Middle Eastern conflicts and sold weapons in the region, making a bad situation worse. A deal closed with Saudi Arabia was deepened with modern planes and tanks and more oil was pumped out, using the Latest Technology. By 1980, the USA was struggling with even worse problems but Ronald Reagan convinced the Saudis to pump oil even faster, with even later technology, greatly increasing the production rate of their wells, and the decline of their major field, Ghawar. Prudhoe Bay helps the USA a little but the decline continued, even with the latest technology (notice the emphasis?). By 1989, Russia, forced to sell its oil at a lower price thanks to the Saudis, declares bankruptcy and the Berlin Wall comes down. US citizens all buy SUVs to celebrate the end of communism and recession promptly kicks in after fighting Gulf War 1. GHWB is replaced by Clinton and he’s the first president we know of for sure that’s heard of peak oil. GHWB probably did too, and Jimmy Carter talked about energy crisis but we didn’t want to hear it and fired him. Lord Knows, the American People won’t stand for lowered expectations. All that oil pumping in Saudi means the field is going empty. The latest figures show its declined from 8% in January to 10.5% in March, which means the decline is accelerating. In these Latest Technology oilfields, oil supply can suddenly just… stop. You pump water in and get water and oil back out most of the time, but if you pump too much too fast you just get water out. And your field is done.

And that’s kinda what’s happened in Venezuela too. Overproduction by politically correct amateurs. A boss who cheats the polls, kills his opponents, and blames the USA for his problems. Like Mugabe a few years ago. I wonder if it will go just as well?

Nigeria doesn’t have a civil war. Honest. It’s just Youths. With AK-47s, who control large parts of the oil fields in the Niger delta. Its just Troubles, not stealing oil and kidnapping oil workers and stopping work on the oil platforms. Just troubles. Honest. Nigeria is not in Civil War. You can trust me on this. Pay no attention to the blackouts covering most of the country, or the fact that exports have dropped by 600,000 barrels a day. Not civil war. And I got a bridge I can sell you.

What do you think will happen when there’s only half as much oil left to use? Its called a Bidding War. The price is bid up until demand is destroyed. How high would that price go when there’s only half as much fuel to go around, and we’ve got 1/3 of China and 1/3 of India who are bidding for it too, and their money is more stable than ours because they’re not bankrupt funding the Iraq War. $300/barrel? Nope, that’s too low. More like $500. Gasoline is around $3/gal now, when oil is $63/bbl. Do the math on that. At $300/bbl, gasoline jumps to around $15/gal. Rip out the taxes and its $11/gal, which is still really high but less than beer. At that price driving around will be expensive, and questionable for commuting. If you keep your junker SUV and carpool, you can afford it, barely. Of course, when 100 million more Chinese buy cars, the price goes up again, to $500/bbl, which means fuel now costs around $20/gal. This is more than the average person can afford. Carpooling is no longer something you can do on a daily basis unless you can carry 3 other people. The vehicle gets more crowded, the bidding goes higher and production keeps falling, inevitably, because there’s just only so much oil to go around. And before you get too excited about Ethanol, oil makes the pesticides and herbicides which makes growing corn over and over in the same field possible. Without it, you need crop rotation or bugs and rots and molds will destroy all future crops. Crop rotation means far lower yield, which means less ethanol, much less. Around 1/6th as much and at that point, wouldn’t you rather eat the corn? The greatest irony of a bidding war and fuel economy is the higher the total economy rises, the higher the price of fuel can go. A 60 mpg Prius means that the price of gasoline can run to $45/gal. for the average driver. Throw in one carpooler and it doubles to $90/gal. Swap that Prius for a modified Plug In Prius, getting 150 mpg (some have reported 200 mpg) and a short commute, and you’re looking at $100/gal for gasoline, sold in a hand cut, etched glass decanter at a high end liquor/fuel store where men with shotguns stand guard at the front door. Ad nauseam. Yes, you can argue that such and such thing will make this new alternative source of fuel affordable but the real world can’t afford that stuff. Nickel is in short supply: there just isn’t enough of it to make batteries for all the vehicles needed. Other options aren’t as good as nickel, or are even rarer and more expensive.

So basically, we’re up the creek. Take a good look at your car in the driveway and think hard: should I be selling this car and buy a junker that only lasts a couple more years rather than sit in debt on something I won’t be able to afford gas for? A few days ago I figured we’d see $4.50/gal as the high point this year. Now I think we’ll pass $6/gal by Christmas. Think about that.

I hope I’m wrong. I hope that a miracle occurs, but we don’t plan for miracles here. We plan for worst case, and worst case is getting used to the idea of unexpected fuel shortages and expected unsteady-but-continual rise in prices.

I feel like sticking my head in the sand and doing my Ostrich Impression. I’m seriously pondering bailing out of the city much sooner because of this, but there are things I need to finish here so we’ll wait as long as we can bear it. Best, – InyoKern