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Ration Oil Ahead of Crisis

Life requires energy; as costs increases or supplies decreases, there will be lower quality of life and then less life.

Recommended Actions:

  • Governments immediately implement oil rationing policies.
  • Allow free markets in transportation and power infrastructure.
  1. Over the past 100 years, incrementally, oil became the lifeblood of our economy based on assumptions:
    • Assumption: Energy at less than $30 per barrel of oil. Reality: Oil at $75 per barrel, upwardly unstable.
    • Assumption: Net energy of 20:1. Reality: Net energy of less than 10:1 on new oil developments.
    • Assumption: Debt can increase forever to buy and consume oil. Reality: Risks of default and/or inflation.
    • Assumption: Economic growth based on oil supply growth. Reality: Crude oil production peaked a 74 mbd in 2005 and existing fields are depleting at 6.7% per year (IEA data).

  2. The debt crisis is really a net oil energy crisis; instead of capitalizig all costs of using and defending oil supply lines, governments socialized costs, when they could not cover these costs, they borrowed until they became uncreditworthy. Actions in the next 18 months will decide the outcome of the next 20 years. There seems two options:
  • Change the lifeblood of our economy from oil to ingenuity.
  • Experience a Malthusian Collapse as net oil energy decreases 90%.

Net Energy of Peak Oil

The failure of these assumptions in illustrated in Disposable Income's ability to buy oil (Gold) and that correlation between GDP Growth (Blue) and Oil Supply Growth (Green). Disposable Income is both a leading indicator of crisis and a trailing indicator of recovery. There are three distinct patterns:
  • Pre-1973 Oil Embargo, steady increase in ability to buy energy.
  • 1974-2002, Shock and recovery
  • 2002 and 2005 Shocks. In 2002 India and China began buying significant amounts of oil to build their economies, reducing oil production spare capacity. In 2005, World Crude Oil Production peaked at 74 mbd. With the collapse of the banking system in 2008-2009, oil temporarily dropped back towards $30 a barrel, but the trend is sharply down.
Growth GDP, Oil Supply relative to Disposable Income (in oil)
  1. Joint Forces Command issued the Joint Operating Environment 2010 (JOE-2010):

  2. "By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day."

    "A severe energy crunch is inevitable without a massive expansion of production and refining capacity. While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India. At best, it would lead to periods of harsh economic adjustment. To what extent conservation measures, investments in alternative energy production, and efforts to expand petroleum production from tar sands and shale would mitigate such a period of adjustment is difficult to predict. One should not forget that the Great Depression spawned a number of totalitarian regimes that sought economic prosperity for their nations by ruthless conquest."

    "Energy production and distribution infrastructure must see significant new investment if energy demand is to be satisfied at a cost compatible with economic growth and prosperity."

    "The discovery rate for new petroleum and gas fields over the past two decades (with the possible exception of Brazil) provides little reason for optimism that future efforts will find major new fields."

    Foward by General James N Mattis
  1. The oil spill in the Gulf of Mexico illustrates that the wishful thinking of EIA, IEA and the oil industry that new oil capacity will compensate for existing fields depleting at 6.7%.

  2. The left graph is from page 103 of IEA's 2009 World Energy Outlook. It shows the decrease warned by the Joint Forces Command, then fills it with overly optimistic forecasts. The graph on the right graph states clearly the "Unidentified Projects"

    Optimistic Gap in Oil Supply

  1. The hurricane forecasts look like a repeat of 2005. They state a 76% probability of a major hurricane landing in the US with 19 named storms.
  1. T. Boone Pickens is warning of $400 a barrel oil. Since farmers and truckers cannot instantly adjust to a 500% increase in fuel prices, the food system might follow the banking system into collapse.
  1. We can change the lifeblood of our economy from oil to ingenuity and accomplish what Thomas Edison noted in 1910:

    "Sunshine is spread out thin and so is electricity. Perhaps they are the same, Sunshine is a form of energy, and the winds and the tides are manifestations of energy.”

    “Do we use them? Oh, no! We burn up wood and coal, as renters burn up the front fence for fuel. We live like squatters, not as if we owned the property.

    “There must surely come a time when heat and power will be stored in unlimited quantities in every community, all gathered by natural forces. Electricity ought to be as cheap as oxygen...."

    Enough solar energy hits the Earth every hour to power all the world economies for a year. For all of human history before 1900, people lived within a solar budget. Since 1900 our understanding of materials and technology has radically improved, but our implementation has been frozen in government monopolies since moblizing to fight World War I:

  2. Millions of jobs were created when communication infrastructure was returned to a free market in 1984. Millions of jobs will be created implementing technologies to live within a solar budget if transportation and power infrastructures are returned to free markets.

    Currently the government is spending our last chance trying to make the artifacts of the oil economy work in a sustainable economy:
  • Treating a wind mill like a tiny coal power plant by trying to connect them with copper wires. Renewable sources seem more like trees, instead of connectng them with an electrical grid, an organic version of the Internet seems appropriate. Nature's low work solution for storing and distributing solar energy is plants/hydrocarbons. Vast numbers of sources connected by natual gas networks to vast numbers of personal mytochondrial generator that make waste heat useful. Economies that mimic nature seem more sustainable.
  • Requiring moving a ton to move a person in congested traffic with an electric car. Personal Rapid Transit, (PRT or PodCars) ultra-light, robotic, personal railroads that operate with 1/10th the energy of cars and no requirement for personal debt, seems more appropriate.

President Lincoln was the only President to be issued a patent. Politicians and bureaurcrates are not renowned for their patents and innovations. Since the systems we have are failing, and more of what is failing will likely fail, it seems we need innovation. Innovation comes from companies too small to comply with government procurement policies. Like Apple and Microsoft in there startup years, these small businesses can please customers but not bureaucracies. They need a free market managed by performance standards.

Returning communications infrastructure to a free market in 1984 resulted in vast innovation and millions of jobs. Small business can innovate if they have only performance standards between their ideas and their customers.
It would be better for the government to lead the geological certainty of oil outages by 2012 with rationing practice in 2010. If we dodge a hurricane and Iran behaves it will be just a drill. If there is a crisis this summer, and governments are prepared ahead of time, the surprise competence might keep the markets from running in fear.

Disclosure: Author is the founder and shareholder of JPods, Inc.