By Patrick Schwerdtfeger
Most people, when they think about oil, think about their winter heating bills or the price of gasoline. If only it were that simple. The fact is that oil plays an integral role in almost everything we do. Oil is used to move products around our country and around the world. Oil allows large machines to build roads, bridges, tunnels and structures. Oil is one of the primary ingredients in asphalt used to pave our roads and freeways. Plastics and plant fertilizers are both byproducts of oil as well. Oil is by far the most important commodity in our world.
Now, let’s think about this for a minute. We’re talking about a liquid that can be pumped from the ground and, after some fairly minor refining, can be put into a car so we can drive around with 200 or 300 horsepower. This is unbelievable stuff. Think about it. 200 or 300 horsepower! What does that actually mean? It means that oil gives us the equivalent of 200 or 300 horses to use as we see fit. At the turn of a key, we can get all 200 horses to ferry us around to our chosen destination. And, we don’t have to feed any of these horses or clean up after them.
I know this sounds silly but it’s an accurate comparison. A hundred years ago, it would’ve taken a fairly wealthy man to be able to afford a horse, much less 200 of them. Today, we almost all own 200 horses or more. With our cars alone, oil has provided incredible wealth compared to past generations. It’s also allowed sophisticated machines to automate entire assembly lines, bringing down prices of almost all consumer goods. Fact is; we all live like royalty today when you compare it to a hundred years back. And it’s this abundance of energy that has dramatically magnified the progress, development and population growth of the past 100 years. Unfortunately, it will have a similarly dramatic impact when it finally runs out.
Let’s look at a couple examples. Back in the 60s, the “green revolution” was achieving massive increases in crop outputs of certain staple crops like rice and wheat. The revolution began back in 1945 with a joint venture between the Mexican government and the Rockefeller Foundation but it really started picking up steam in the 60s. The idea was to use new technologies to improve the agricultural output of farm land and the project had tremendous success with some crop yields increasing by almost 600%. That means a single plot of land could produce 6 times more food by using these new technologies.
So, what actually took place? Well, a lot of the progress involved new hybrid crops and farming techniques. But the backbone of the green revolution was oil. The industrialization of farming required new machines all running on oil. But more importantly, a whole new generation of nitrogen and ammonia-based fertilizers were being developed, and they’re all byproducts of oil. It’s these fertilizers that had the most dramatic affect.
Plants need nitrogen to grow. Nitrogen is found naturally in manure and other decaying organic material. It’s a natural recycling process. Plants dye and decay and then get used by newer plants as fuel. The same is true for manure. And since oil is the end result of millions of years of organic decay, it can provide this nitrogen in an incredibly concentrated form. Before these fertilizers were developed, farmers used to rotate their crops and distribute manure as fertilizer on their fields. But these new petroleum-based fertilizers made all that unnecessary.
The massive increases in food production during the 50s and 60s is credited for saving millions of lives around the world, particularly in underdeveloped countries like Pakistan, India, Mexico, Sri Lanka and the Philippines. And as a result, the population was able to grow much faster than it could have otherwise. Indeed, the entire world population has grown as a result of the green revolution. But what happens when the fertilizers become prohibitively expensive? The population will require more food than the fields can produce and food shortages will result.
I’m not suggesting this will happen tomorrow but it’s important to understand the magnitude of the problem. There are some who have tried to calculate the “human carrying capacity of the globe” based on a variety of variables. Food production and energy always factor in as the most important variables and oil is integral to both. When oil runs out and fertilizers once again come from manure and decaying organic material, food production will drop dramatically and our ability to transport that production will drop as well. The combination of those developments could easily lower that “human carrying capacity.”
Let’s look at another example. We all see the products lining our store shelves that are manufactured in China. We hear about the massive trade deficits on the evening news. All that trade is made possible because it’s still relatively inexpensive to transport products around the world. Huge tankers carrying thousands of containers cross our oceans daily bringing cheap imported goods to our shores. And all these tankers run on oil. So as the price of oil goes up, it will become less profitable to import cheap products from abroad.
Globalization is only possible because of oil. There will come a day when shipping products manufactured in China all the way to the port of Los Angeles will seem absurd, particularly if you proposed doing so with oil. When? Who knows? Perhaps 100 years. Perhaps 200. But it will come eventually and regional economic spheres will result. Production will take place closer to consumption and prices will rise as a result. Put another way, today’s standard of living will drop significantly when we’re forced to rely on ourselves to produce the goods we consume.
Some people believe we’ll easily find an alternative source of energy when oil runs out. They believe human ingenuity will inevitably save the day. I agree that human ingenuity will find ways of dealing with the problem. I agree that human ingenuity is capable of incredible things. But let’s not forget that we’re talking about a liquid we can pump out of the ground, refine, store at room temperature, put into a car and drive around. Nothing will ever provide the ready availability of energy offered by oil. Nothing.
There’s a measurement out there called the EROEI or the “energy returned on energy invested”, and it measures exactly what it says. How much energy do you get back for every unit of energy invested in production? When oil was first discovered, its EROEI was over 100. For every unit of energy you invested in pumping oil, you would get over 100 units of energy back. According to Howard Odum who wrote Environmental Accounting, Energy and Decision Making (1996), Middle East oil has an EROEI of about 8.4 and Alaskan oil is just over 11. Meanwhile, hydroelectricity is 10, nuclear is 4.5 and geothermal is 13.
The point of bringing this up is that hydrogen has an EROEI of less than 1. In other words, it takes more energy to isolate hydrogen than it eventually delivers when used. Hydrogen isn’t a source of energy at all. It’s only a carrier of energy, and you lose some in the process of using it. Hydrogen will never replace oil because it can’t. It doesn’t provide energy.
Hydrogen only plays an important role because it can be transported (although storage has challenges) and it also allows combustion without any greenhouse gasses. When burned, hydrogen only releases heat and water. That’s a major benefit. But anyone who believes hydrogen will swoop in and save the day doesn’t know that much about the topic. It will play a role, yes. We may even be running our cars on it one day but it won’t represent any sort of miracle cure, that’s for sure.
So the million dollar question is: when? When will oil start running out? And the answer to that question is hotly debated these days in political and industrial circles around the world. So far, oil production has increased every single year, but so has demand. With China and India developing their countries and building infrastructure, demand is growing faster than supply which is why we see the price rise. But the more important concern is when the annual production of oil starts to decline.
That milestone is commonly referred to as “peak oil”; the year when oil production reaches its zenith. Peak oil is an incredibly important milestone because it will be followed by an age where annual oil production slowly drops while demand continues to grow. You think we’ve got high oil prices now?? Think again. Once we pass peak oil, prices will soar. And it’s not a matter of price gouging, by the way. It’s just a matter of supply and demand. If the demand for oil is greater than the supply, a bidding war will begin until a new equilibrium is reached. Fact is; there’s a small bidding war taking place right now and that’s why we’re seeing gas prices trending higher. And although oil companies will make larger profits along the way, the real money will end up in the hands of those countries that have oil inside their borders.
That means the Middle East will be swimming in money and you can bet that will come with increasing corruption, brutality and militarization. Other countries slated for the windfall include Venezuela, Canada and Russia. In fact, if you include the tar sands in Alberta, Canada has the second largest oil reserves in the world. Keep your eyes on our northern border because the power dynamic will be shifting in their favor in the years to come.
Experts on the subject can’t agree on when it’ll take place. And since production statistics are only aggregated after the fact, we won’t know until the following year anyway. But most experts believe it will happen either within the next 10 years or somewhere around 2050. Not surprisingly, the scientific community generally supports the former prediction while the oil company experts support the latter. Either way, it’s coming up and it’ll put a major damper on the world economy.
In the short term, we can expect continued high oil prices. China and India are both in a race against time. They’re both trying to develop as fast as they possibly can before the prices get too high. Go to Beijing. You’ll see more cranes than you’ve ever seen. More skyscrapers. More freeway construction. Go to New Delhi. They know what’s coming. They know peak oil is just around the corner. The population of China is about 1.3 billion and the population of India is about 1.1 billion. By comparison, the population of the United States is about 0.3 billion. So you can bet the demand for oil will keep growing and that will keep prices on the rise.
Since oil is so integrally involved in everything we do, rising prices will filter through the entire economy and eventually cause inflation. This process takes time because companies are reluctant to raise prices in a competitive market. But increasing costs can’t be ignored forever and will eventually be passed on to the customer. Rising inflation will get tacked on to interest rates to protect the real rate of return demanded by investors. That will further dampen the housing market and slow the economy in general.
Oil is the most important commodity on earth and although the media rarely draws the connections, we’re seeing the effects of rising oil prices in dozens of ways every day. The pundits and experts will identify these connections more as prices continue to rise and the population will begin an educational process. The sooner that happens, the sooner political support will grow for alternative energy research and that will lubricate (no pun intended) the transition to life after peak oil.
About the Author: Patrick Schwerdtfeger is a licensed Mortgage Banker located in Northern California. He is the creator of Beyond the Rate, a detailed and candid information series for homeowners covering real estate mortgages, loan qualification and interest rates.
Source: www.isnare.com
