Peak Oil Perspectives
Peak Oil Perspectives

Petrol price spike proves ‘peak oil’ predictions

By Roger Diamond

The crude oil price is currently hovering at about $100 a barrel, having been well below this mark for a good couple of years now since late 2008. The proximal (or direct) cause of the rather sudden jump in price is two things: an actual decrease in oil supply and a perceived possible further decrease in supply. These two supply constraints are both related to the Middle-East political turmoil, with the former due to actual disruptions in Egypt and more importantly Libya, and the latter due to potential unrest in Bahrain, Iran and even possibly the mother lode, Saudi Arabia.

The distal (or indirect) cause of this price jump is peak oil. As peak oil workers have been predicting for the past decade or more, as production reaches peak, supply and demand become very tightly coupled and there is no slack in the system to accommodate any disruptions. So when such disruptions occur, be they political, social or environmental, the price will respond. Upwards. However due to the complexity of the economic systems around oil and energy, the price response will not be linear. In other words, if 2% of world production goes offline, as is the current Libyan shortfall, the price will not go up by a mere 2%.

With only a 2% (rough figure) drop in global crude oil output, how come the price has gone up by about 20%?! The reasons for this lie partly in economic theory but also very much in human psychology. Not being an expert in either of these (being an honest geologist!) I will merely raise them as part of the complex dynamic and jump to the symptom, which is that the price rises slowly for a bit, rapidly once the speculation and trading kicks in, and then drops extremely sharply once the big traders pull out and the speculation tower topples. In short, we get a price spike. Just as in 2008.

Newspapers are already reporting various “authorities” on the matter as saying that oil could reach $200 a barrel. I’d be quite surprised if they weren’t paid by speculators to say that! So be prepared for some wild jumps in oil prices but then again it wasn’t so long ago since the last spike, so maybe this one will be tempered by memories of the 70% drop in price once the tower collapsed.

Unfortunately, prices of some other commodities do not behave in the same way as oil, which is traded easily. Food, for example, typically goes up and then even when the grain prices drop, the retailers don’t follow suit. And this is where a powerful positive feedback loop can kick in: public unrest causes oil supply disruption leading to rises in oil prices and subsequent rises in all commodity prices, leading to more public unrest, particularly spreading to other countries. A positive feedback loop that could, if bad enough, bring the global economic system into chaos. This is also a typical peak oil prediction but not one for now. Not yet.

Peak oil is here and although the details of the peak-oilers’ predictions may not bear out, the essence of it is happening. Increased price volatility of oil, increased prices of basic goods, social unrest. Maybe it’s time to read about peak oil in more detail to understand what’s going on around you and maybe it is time to seriously take action in every way you can.

  • Nigel Harris

    As you say, oil price response to demand imbalance is non-linear. I think about it this way: if production exceeds demand by even a small amount for more than a short length of time, the oil price must fall to a level where producers will cut back their flows. Given the very large capital investments they’ve made, they tend to keep pumping anyway, so the price has to go *really* low to achieve this.
    Conversely, if production falls short of supply for more than a short period, the price has to rise high enough for at least some people to stop using oil. Most consumers have little choice in the matter. Ask yourself – how high would gasoline prices at the pump have to get for me to cut back my personal consumption? In 2008, we discovered, to many peoples’ surprise, that $100 oil wasn’t high enough to put a major dent in the level of world oil consumption. It took $4/gal gas in the USA to change peoples’ driving habits. So we should expect the oil price to soar again and plummet again. Nothing to do with speculation at all. Just straightforward laws of supply and demand.

  • Rich Brauer

    There’s just one wee problem with your thesis — there hasn’t been a reduction in the supply of oil.

    Saudi Arabia has increased its production to offset the Libyan reductions.

  • http://community.livejournal.com/peak_oil/863319.html John Smith

    Please see this article on “Peak Oil Induced Economic Shrinkage and Cycles of Recession”

    http://community.livejournal.com/peak_oil/863319.html

  • Prof Baldwin

    re: Rich Brauer Unfortunately not quite the case, because Saudi Arabia cannot produce the kind of oil required to be processed by the Italian refiners. Unfortunately the oil industry isn’t a plug and play technology.

  • jake

    The definition of what oil is a moving target these days. I better definition would be how much concentrated energy is in conventional light crude oil per barrel versus anything else and what affect that has on a refinery to make into fuel.

  • Judith

    Well that’s great really guys, but the truth is we are paying the manipulated price. What are your suggestions? I am perfectly happy with buying a horse again and riding around the place after I have sold my car. It will upset my daughter that it takes me weeks to visit her! However I am happy with that as currently it takes months anyway.

  • John

    In 1962 I was told oil would run out in the early 1980s, That deadline seems to have passed

    In 1973 I was told 1995, also gone and forgotten

    In the mid 1980’s it was 2002, I still have a full petrol tank.

    Those like our friend, continue to frighten us with profesies of doom. They know we’ve grown tired of the religious ones so they try other avenues.

    The real oil crisis happened in 1973. Until then, the US was dependant on oil for most of it’s power needs. They diversified quickly but the result was that their economy went into a deep recession. It was only when Reagan loosened many restrictions including the limitation on the use of oil that the US economy recovered

    BUT THE LESSON WASN’T LOST.

    Petrol is a blend, not a product of crude oil. I will say it again in case you missed it

    Petrol is a blend of up to 250 chemicals, not a distilate of crude oil. Currently, about 85% by volume of those chemicals come from the petrochemical-industry, this is reducing because many chemicals can be obtained from cheaper sources. Coal is the most notable and using current predictions, the world has enough coal for over 200 years assuming usage continues to compound.

    All chemicals can be produced from other sources, given a lead time of 18 months, thus limiting the longterm fuel price

    The world is also changing and also our use of hydrocarbon fuels

  • P Roman

    Peak Oil is rubbish. These are manipulated numbers. Oil co’s create wars to keep prices up and keep places like Iraq from getting their product out to the world. Iraq has 3 times the reserves that the Saudi’s have but if they let it out it would crush the price. They will only tell you the discoveries they want to so that it will always look like we are at a tipping point. The bottom line is you are being raped and they are using the profit’s to buy up media and politician’s.
    SA was made for solar energy and has the man power to make it happen. You just have to get your politician to give up the monopoly. Germany and Japan pay you to put solar on your house to stabilize energy. California where I live paid %30 of the cost of my solar and it goes right into the house next door when I am not using it. No long distance lines needed. My Nissan electric car will take me off the grid. No War needed

  • Dan

    It also makes perfect financial sense for producers to try to restrict supply enough to keep the price at a decent level. Even accepting that oil is going to run out I’ve yet to see any real evidence that we’ve reached the peak yet.

  • Jonas Barbarossa

    @John: “Petrol is a blend…not a distilate of crude oil.” Have you seen any good Bugs Bunny movies lately? Your facts are incorrect as are your ‘facts’ about peak oil. The prediction you refer to is the Hubbard formulation which predicted peak oil in 48 US states at around 1970. It happened in about 1973 (from memory). Global peak was predicted for around 2006-2008 which, according to my own calculations, is more or less correct. The significance of the accuracy of the calculation despite staggering anthropological odds is wasted on you.
    @P Roman: Iraq ca.110bn bbl. Saudi Arabia ca.250bn bbl. I rest my case
    Peak oil is a serious matter which needs to be debated with facts and not emotional chatter by people who, clearly, do not have the foggiest idea.
    @Dan: read Heinberg’s article on peak oil. He says that, in 2008, when oil prices jumped to $147/bbl the West asked the Saudis (the traditional swing oil producers) to increase output but that THEY COULD NOT. They had peaked in production! Restricting supply? Google OPEC.

  • Grant

    Peak Oil is rubbish? So you think that there is an infinite amount of oil on the planet? That a strange conclusion given that we live in a closed system. Logic dictates that at some point, a finite resource will come to an end. Your attitude is strangely childlike…

  • MLH

    A few months ago, Nigeria was struggling to sell the more than 2 million barrels per day (bpd) of crude oil she produces.
    Angola has scheduled about 4 million barrels of oil for April loading and is now scheduled to export about 1.5 million bpd in April, down from 1.73 million bpd in March (maintenance will be done on a refinery then). This could reduce the country’s total crude oil exports for that month to around 1.37 million bpd.
    Ghana, Africa’s latest oil producer since December,
    has lifted 3.7 million barrels of oil so far.
    According to Reuters, Libya usually produces 1.6 million bpd.
    Grit your teeth Chaps, frankly I think we could manage if only OPEC wasn’t holding the purse strings.

  • GrampaJones

    When the price goes down, will you be saying peak oil is false?

    I’ll be waiting for your correction.

  • http://www.darlenns.com Glenn

    We are getting closer by the day of having to work all day just to buy what we need to survive for that day. Just like the Bible says in
    Revelation 6:6 which says “Then I heard what sounded like a voice among the four living creatures, saying, Two pounds of wheat for a day’s wages,[b] and six pounds of barley for a day’s wages, and do not damage the oil and the wine!

  • http://www.ecosnout.co.uk/ steve

    It makes sense to keep the price of oil stable to avoid a global recession where the price of oil crashes back down. When oil was $147 per barrel in 2008 it would have made perfect sense to sell oil to a) profit from the high price and b) to avoid a price crunching recession. That no one did strongly suggests the world has now reached peak oil.

  • Owen

    It is not so much as what reserves are lying untapped as who owns those reserves. Also the US is deliberately weakening its currency so the oil price will rise in Dollar terms.

    The internet is rapidly changing our use of energy and I think that in fifty years most will ask what was all the fuss about peak oil.

  • David Brown

    I reckon its a spiral spring graph that we are working with where the spiral is the cyclical nature of the oil price and the spring is the way we cannot really predict when peak will come as it stretches out.Conservation is going on as are attempts at alternative but both very slowly. We will lurch form crisis to crisis. Strategies will ebb and flow as the process unfolds. But I suspect a famine shall return in biblical proportions.The beehive death syndrome might be the real indicator Silent Spring was written in the 1960’s. I remember reading it in the natural science club at my school. Imagine the food insecurity level without bees!The details of all of this are unfolding in our times as we climb on little pedestals of knowingness.

  • Jonas Barbarossa

    @steve: your message comes across garbled and the way I read it is that you claim high the oil price somehow prevented a recession. You do not understand that the high oil price only favors a few. The rest of us who have to buy oil at inflated prices are worse off, lessening our spending power and contributes to the worsening of the recession. Economics 101. I am not going to debate peak oil. So, to those who doubt it: have a pleasant day in La-La Land…

  • Rory Short

    As was said above by @?? we live in a closed system so crude oil is a limited resource. If we continue to consume it we will definitely reach peak oil at some point. That aside our burning of fossil fuels, be they coal or oil, is disrupting the earth’s atmosphere and leading to global warming which if not halted will see us, and most other life forms that we know, off the planet for good. To my way of thinking this latter deserves much more of our attention than arguments about the possibilities and timing of peak oil. We should not be having these debates. To me they are like arguing which is the best way to commit suicide. Luckily we already have the technologies to be able to get the energy that we need from renewable resources such as wind, surface versus deep ocean temperature differences, tides and directly from sunlight. Pushing the politicians to put these technologies into place is where our energies should be going.

  • Jonas Barbarossa

    @David Brown: …which makes Hubbert’s prediction even more remarkable is that he predicted peak oil accurately on two occasions despite having to contend with the uncertainties of wars, disruptions and the ‘free will’ factor as well as the effects of technological advancements he could not have known about at the time.

  • John

    Jonas Barbarossa

    What is Petrol or Gasoline? Maybe you want to check Wikapedia before posting, it can save considerable embarrassment! There is a chance someone out here has studied the topic.

    http://en.wikipedia.org/wiki/Gasoline

    Wikapedia says – “Gasoline that is separated from crude oil via distillation, called virgin or straight-run gasoline, does not meet the required specifications for modern engines (in particular octane rating; see below), but will form part of the blend.”

    http://en.wikipedia.org/wiki/Crude_oil#Crude_oil

    This site is also useful to debunk most of what is written above.

    If you appear to be this ignorant about what petrol really is – how can you comment on other issues regarding Peak Oil?

    Before anyone attempts to make a prediction, they should answer just three very simple questions:
    How much hydrocarbon was layed down each year? How much of it survived? How much of this is currently extractable and useable?

    When you have answered these questions you realise peal oil is some way off, even though demand is compounding each year…

    This is why I skillfully side stepped predicting the future of Crude. If the famous French energy economist Dr J P Bond (James Bond), now number 3 at the World Bank fears to tread, who are we to rush in!!

  • Jonas Barbarossa

    @John
    You are wrong, of course. If you wish to differentiate straight run gasoline from petrol then be clear about it. Petrol is a blend of straight run gasoline and other distillates. All the products used in the blend is derived from crude. It would serve no purpose to lose your temper as the fact remains that you are still wrong except that you are now angry as well as wrong. Peace

  • Jonas Barbarossa

    @John
    As for your simplistic and erroneous view of the factors that contribute to peak oil, you would be better informed to know which factors are determining in crude oil production. You will find that the actual amount of crude oil present in the crust of the earth is quite irrelevant to peak oil just as the actual amount of gold in the earth’s crust does not determine the gold price. Capice? I happen to be someone who has done more than drive past a refinery on the odd occasion and you are out of your league. Your inferences and interpretations of the Wiki articles are also…shall we say, wrong.

  • Rich Brauer

    @Prof. Baldwin: “Unfortunately not quite the case, because Saudi Arabia cannot produce the kind of oil required to be processed by the Italian refiners. Unfortunately the oil industry isn’t a plug and play technology.”

    That’s a classic strawman, and it forms the basis for Mr. Diamond’s article. It conflates the production of refined petroleum products with peak extraction of raw oil. The former isn’t related to the latter, and therefore doesn’t play a role in deducing the accuracy of the peak oil theory.

    An example: Were Al Qaeda to launch a systematic attack on oil refineries in the US, and manage to disable many of them, it would result in an enormous shock to prices in petroleum-related products. It would not, however, have *anything* to do with Peak Oil.

    Current price fluctuations have everything to do with the irrational psychology in the petroleum market and the recovery from the Great Recession. It has almost certainly *nothing* to do with actual production levels, which, as I pointed out, have remained unchanged.

    Determining the validity of Peak Oil predictions is something that will only be possible in historical retrospect. It’s impossible to make such an assumption based on a single blip.

  • Jonas Barbarossa

    @Owen:
    The notion that the US is deliberately weakening its currency to raise the oil price is laughable. The US is a net importer of oil and a weakened currency would be detrimental to the US economy. Do you have an economics 101 textbook?

  • Richard Eis

    Grampa Jones, the oil price will go down when the economy fails due to high oil prices. It’s what happens every time, and what was missed originally in the doom predictions the first time. Businesses fail, no jobs, no drive to work, no oil used. Basic feedback loop.

    Frankly the economy did collapse last time. It just got refloated with trillions of pretend dollars. Something that can’t really be done again.

  • John

    Jonas Barbarossa – CONGRATULATIONS

    You know more about petrol than Wikipedia

    WELL DOME

    You are a greater expert on crude oil than one of the worlds expert on energy, crude oil and peak oil, Dr J P Bond. He was France’s leading energy economist before joining the World bank. Director of Environmental and Socially Sustainable Development for Africa; IFC Director of Mining; Director of Energy, Mining and Telecommunications, to name a few.

    He is now Number 3 at the bank, responsible for international risk, and this obviously includes peak oil.

    A brief CV…
    http://www.miga.org/documents/jamesbio.pdf

    I seemed to have shared a bedroom with him for 16 years… when we were children.

    Signed
    John M Bond, Brother of Dr James P Bond, Director of International Risk, bla bla bla bla…

    OUCH!!!

    IN ADDITION – All the chemicals we currently get from petrol we can get from other sources, sometimes much more cheaply. This means demand will increase more slowly.

    Be careful what you post on the web, there are certainly people out here who seem to want to discredit you when you haven’t a clue. We seem to get diabolical pleasure from just telling the truth…

  • John

    Sorry the sentence:
    “…we currently get from petrol we can get from other sources”

    should read:
    “…we currently get from crude oil we can get from other sources”

  • Enough Said

    Hooray for peak oil. Fossil fuels are killing the planet. The sooner we run out and convert to renewable energy the better. Only dinasaurs and right wing wingnuts cannot envisage a planet run on 5% fossil fuels, virtually 100% renewable energy. Feel free to respond to this dinasaurs, I am not interested in replying to your ignorant uneducated rhetoric about renewable energy. You are so out of touch with reality its laughable.

  • Jonas Barbarossa

    John, John, John. You don’t know when to quit do you? Having a brother that’s an expert on petrol does not qualify you as an expert. Besides, from your post I gathered that he is the smart one. You have no idea who you’re talking to, John. As for your statement that petrol is a blend and not a product of crude oil: it was wrong, it is still wrong and it will be wrong for a very, very long time – perhaps even for geological time. So, get over it and move on with your life.

  • John

    @ Barbarossa

    Go back and read the Wikapedia pages I posted previously and try to understand what petrol is. This site should be arguments about substance and phrases like “John, John, John…” show immaturity rather than arguing substance and fact!

    1. Already, about 25% of our blend of petrol in South Africa doesn’t come from Crude oil. This increases year by year.
    2. The first “Blend” was developed by Kettering, the guy who invented the starter motor and he blended fuels as early as 1913 for Indy racing cars. By 1919, Harry Recardo (of RON Number fame – you see it on pumps as you fill up) was producing blended petrol for aircraft. By 1939, the Spitfire and Hurricane used British blended fuels. All the British aircraft were using blended fuels (to the Ricardo recipe) by 1940.
    3. The US cut off their supply of crude to Germany in (I think) 1941. The Germans had already been blending fuel for their BD6 range of aero-engines (also a Ricardo recipe but different) and had also anticipated the fuel embargo. They started making coal based “blended” fuels called Benzol to run motor vehicles as well as ALL their aircraft. This is the process that Sasol adopted in 1959. The German blends were initially made in Czechoslovakia but by 1944, the Germans had 5 plants. (One was shipped to SA in 1947/48 and became Sasol

  • John

    Continued from above…

    In the aftermath of WW2, most countries gave up blending but started again in 1953 during the Egyptian Crisis. Blending gained popularity and the last non-blended or pure fuel available in South Africa was Union Spirit. It was a pure alcohol based product from sugar cane spirits (not even Crude Oil based). The plant still makes feed-stocks for the blending of petrol and is based 20 km outside Kwa Dukuza (where I live).

    The petrol you buy from the same pump at the same filling station, week after week is significantly different each time you fill up.
    1. The blend is varied depending on the expected weather conditions. There are many reasons for this but the most obvious are that the petrol blend that facilitates easy starting in the cold causes vapour locks when hot. Another change is because wet weather causes condensation in the fuel tank so the blend has added alcohol during wet spells to carry away the water in the fuel (up to 1.3% water slightly improves the quality of petrol!).
    2. Prices of the feed-stocks change so the blender (BP, Shell, Caltex etc) change the formulation to take advantage of these price breaks and blend the least expensive fuels.

    Oh and by the way, I worked for an Oil Company some years ago…

  • Luis Zardo

    Oil prices were rising much before the Libyan crisis, or even the Egypt crisis have even started.

    Prices are rising since they were somehow and artificially dropped down after the spike in 2008.

    Actually, oil price rises most probably where the catalists for current middle east turmoil, not caused by it

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