My Canaries are dying - it seems we are nearing a big oil crisis

This is another posting that is not really closely related to our main themes at this blog, but there are many friends among our readers who have also exchanged some discussions in this area. I'm talking about when will the next oil crisis hit the planet.

I am very concerned, as my canaries are dying. What do I mean? I mean the little yellow birds, Canaries. When miners went into the mines to dig for coal or whatever minerals, they would carry canaries with them. If there was a poison gas leak, the canaries with their very small lungs, would die first. This way (before there were modern instruments to detect gases) the miners could have an early-warning signal of when a fatal threat was imminent.

So to me, and specifically with the concept of "Peak Oil", I have my own set of canaries. And a flock of my canaries have just died. I am now very worried indeed. And we have more nasty news about oil production problems heading our way, as we found out last week when Russia (the world's second largest oil producer) announced their production had passed its peak, and then Nigeria, another major producer, announced their production will decline drastically this year. I blogged about Peak Oil and how it might impact the virtual and digital worlds, back in 2006, but this is an interest of mine, and one of severely growing concern (as my "Canaries" have, literally, started to die)

So first, what is "peak oil". We all know the total oil reserves on planet earth are a finite supply. We will run out of oil at some point in the future (likely 100 years or more later from today). I am not talking about the oil ending. But rather, that the overall oil production levels will follow a curve shape, similar to a bell curve. A growth period, a peak, and a decline period, until oil runs out. The first commercial oil well (of modern uses) was Drake's Well in Oil City Pennsylvania about 150 years ago. If we expect the world's oil supply to run out, about 100 to 200 years from now, its likely that sometime about now, we'll reach the peak of oil production.

That is what is called the oil peak, or peak oil. The one year, in which mankind's total oil production level, reached its ultimate peak. After that, each year there was less oil produced. This is inevitable, as the last drops of oil will be in very hard-to-drill places and in very inconvenient forms, so it takes a lot of effort to get the last drops of oil.

Ok. Reality check time. So where do we stand today. The first major oil producer, the USA, reached its peak oil back in 1971. There are over 50 oil producing countries that have passed their national peaks, including Indonesia in 1997, North Sea in 2001 and Mexico in 2004. At some point, and many experts expect it to be within a few years of now, mankind will reach the global peak. Note, that this is a historical observation, so we cannot know if 2007 was the planet's Peak Oil year, until 2008's production has been measured. So we do know that 2006 was not the planet's Peak Oil year, as 2007 produced more than 2006. But 2007 might have been our Peak Oil year, or it might become 2008 or 2009 or 2010... Very many experts do think it will be happening with a few years from today (and may have already happened).

And economically what happens next. Our appetite for petroleum, jet fuel, heating oil etc will not vanish. In fact, oil based energy is so convenient (think of all those diesel-powered electricity generators in Iraq and Afghanistan where the war-torn electricity grid cannot sustain the country) that there is a growing hunger for oil based energy worldwide. And the biggest demand comes from China and India, where an expanding middle class wants to buy cars and the less-affluent desire mopeds and motorbikes to replace bicycles etc.

When the overall supply falls, and the demand correspondingly does not, it means one thing. Higher prices. When the global supply falls by a couple of percent, but the global demand grows by many percent, we get a difference in the supply/demand equation nearing 10 percent in the first year after Peak Oil, and perhaps 15 percent or more the second year. This means dramatic and very rapid price hikes in oil and oil-based products, worldwide. As prices skyrocket, that helps curb some demand growth, but still, we won't stop eating food - most food in cities is trucked in. We won't stop going to work - in cities again, people commute on busses, trains and cars. And so forth. About 40% of all oil production goes to automobile transportation (and of the 20 biggest corporations on the planet, check out how many are oil companies, ha-ha, vs car makers or in fact any other industry)

What do I expect. That the year after Peak Oil, we might see a price hike of 50% more for consumer prices of oil products in the first year, and 100% annual price hike the second year after Peak Oil. (Americans, think your 3.50 dollar gallon of gas is nasty? How about $5.25 this time next year? and $10.50 two years from now? Who dares to drive a car at those prices?)

So, back in 2006, I told you that my personal early-warning radar was the discount airlines. A discount airline is operating on so thin margins, with minimal staff which is non-unionized and young, so the total employee costs are far less than established carriers. They operate from alternate airports so their airport fees and costs are much less. They have very specific fleets of planes optimised for their route plans, so their aircraft costs are less. The only constant between all airlines is jet fuel costs. For a discount airline, the relative portion of jet fuel out of all costs, is far greater than for other airlines.

Discount airlines also operate on thinner margins and their customers are extremely price-sensitive. So even small hikes in the price of oil jeopardize these carriers. And a large hike in jet fuel puts them out of business.

So, the discount airlines are my canaries. And over the past few weeks, a total of 5 discount airlines have gone out of business. From the start of April five discount airlines have suddenly died. They are Aloha out of Hawaii and ATA out of Midway, Ohio based Skybus, Hong Kong based Oasis, Denver based Frontier. Several of these came as surprises to the industry, as the airlines were believed to be in good health. So why is it? Jet fuel costs have risen 80% over the past 12 months..

I am VERY concerned. We may have reached Peak Oil. The Canaries are dying.

Then, last week we get further regional confirmation of my fears. Russia, the world's second largest oil producer, announced that they had passed their peak in oil production. And Nigeria last week said that they expect severe drops in oil production this year.

Now, my gut feeling? was 13 when the first oil crisis hit us in 1973. Most of our readers are far too young or were not even born to remember. The second big oil crisis was in 1979 and the world economy spun into a bad depression. The US economy was hit so hard, they were in a period called stagflation, the combination of high inflation and low growth which cost Jimmy Carter his re-election.

This time we have the US economy already in trouble with the housing and banking crisis. The government has been running up hideous budget deficits and funded costly wars. All the while the American car-buying public has switched from cost-efficient smaller cars to gas-guzzling SUVs. An oil crisis now would hit America remarkably hard. I believe far harder than it did in 1973 and 1979 - when people were lining up for gas to their cars around the block.

Jet fuel has nearly doubled in the past year (80% growth). A flock of discount airlines has gone under. Now a pair of oil producers announce unanticipated declines in their production. Oil has already climbed to 117 dollars per barrel. We may well have hit Peak Oil. If so, then expect oil products to become much more expensive this year, and even more next year. Three times more for fuel in two years? Then we will of course take drastic measures to shift energy production to other means - more polluting older coal fuelled powerplants, synthetic fuels and biofuels, nuclear, and the "eye-sore" windfarms etc. None of that will fix the problem immediately but there will be rapid development in those areas. Also the concerns about drilling for oil in ecologically problematic areas will soon be swept aside.

One very bad effect of high price of oil is food distribution in the developing world. The cost of food will be directly impacted by the cost of petroleum products. We've already seen riots in Haiti and a lot of smaller troubles in many countries about the rising price of food. If we've hit Peak Oil, we will also see very dangerous developments around food, riots yes, perhaps even wars.

Keep your eyes on those canaries, if more discount airlines die, we are heading for very troublesome times indeed. I am afraid we will experience a greater recession or depresssion than with the first two big oil crisis of the 1970s.

Comments

[Sami]

Nice choice of a "canary".

I completely agree with you that we are on the verge of Peak Oil - and the rising prices is exactly what it'll look like. It won't be, as some people seem to think, a "Oh my God we're gonna run out of oil!"-moment, but rather relentlessly increasing prices, the beginnings of which we're probably already witnessing.

What comes to food issues, the craze for 1st-generation biofuels ought to be reined in - as food prices prove, that biomass is needed for food now. We should concentrate on conservation and, if we must, 2nd or 3rd generation biofuels that are not derived from edible plants.

Peak Oil alone will bring gradual but dramatic changes to all walks of life - but unfortunately we're also facing the peak of many other things in addition to peak oil (little things like fisheries, fresh water, population etc). Basically our excessive consumption is now catching up with us and, frankly, humanity gets what it deserves. The most unfortunate thing about it is that those who are largely "innocent" of the impending crisis, are the first to suffer.

But overall, prepare to live in a very different world 20, 30 or 50 years from now. Worse? Not necessarily - that's really up to us to decide what the future will be. The only certainty is that it'll be vastly different from today.

[simon cavill]

Just a thought to tie your canaries back to mobile...

In many developing countries, operators can spend 40% of their costs on providing fuel to power their cellular masts and other infrastructure.

If that is the case, then will the ever increasing cost of oil impact the seemingly non stop growth of operators in these markets?

Simon

[simon cavill]

Just a thought to tie your canaries back to mobile...

In many developing countries, operators can spend 40% of their costs on providing fuel to power their cellular masts and other infrastructure.

If that is the case, then will the ever increasing cost of oil impact the seemingly non stop growth of operators in these markets?

Simon