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.