What’s a Martguerita Glass Have To Do With Gas Prices?

Strangely with oil prices rising once again there’s been a resurgence of articles claiming that Peak Oil Theory is both a theory and is false. One recent article (¹) went as far as to base the claim of Peak Oil being dead by stating that “… our reliance on foreign oil appears to be evaporating before our eyes.”, by effectively comparing apples to oranges, instead of taking a global view. In a note to clients (²) Citigroup said “The belief that global oil production has peaked, or is on the cusp of doing so, has helped to fuel oil’s more than decade-long rally … this is now all changing because of what is happening in North Dakota.” When one looks at the numbers it’s clear that the authors are stretching straws. This may be in over-reaction to those with claims that Peak Oil equates to an apocalypse for Western Civilisation. Neither is true, and we’ll look at the reasons here.

First of all Peak Oil is not a theory, it is a law. Ever heard of the Flowerpot Law? If you were distracted during Economics 101 a refresher would be provided by simply looking at a flowerpot. In a limited space such as a flowerpot there is an absolute limit of productive yield for whatever you are trying to grow in that space. There comes a point where planting more seeds will not yield an increase in production. This is a physical law, and no one needs to prove it, right? Now let’s look at a Martguerita glass. Placing more straws into a Martguerita glass does not increase the amount of tequila that you’re going to ultimately enjoy. Longer, fatter and better straws just let you get to the good stuff more quickly, eventually leaving the sound of slurping. In fact, more straws also get you to an empty glass in less time. The difference between Peak Oil Law and The Flowerpot Law is that one is accepted and taught in basic Economics, the other has yet to be.

The size of the Martguerita glass doesn’t change the law, the only unproven theory is the tequila, or oil production decline curve. No one knows what the Peak Oil Law depletion curve will look like. Will it be a slow and gradual decline, or resemble a virtual cliff? Most people haven’t noticed that they are on a large “container” holding oil among other stuff moving through space. We have no way to guide ourself to another planet somewhere and refill our hydrocarbon supply. The size of the container we’re on doesn’t alter the law. By noticing this simple fact it should be obvious that once the majority of our liquid fuel resources have been consumed, production will decline for everyone on Earth one way or another. The Martguerita Law implies that ultimately you’re either surprised by the first slurp of air and ice water, or you’ve thought ahead and already ordered another drink.

The real problem then is that past attempts to forecast production declines have clouded the issue. News of vast new discoveries and new methods to extract shale and deep ocean oil have also thwarted attempts to extrapolate the shape of the decline curve. There’s also a bit of obfuscation by authors who point to the recent rise in U.S. net exports of refined products in 2011. Sure we exported 27 million barrels of gasoline and diesel last year, but note that these are refined products, not oil. Let’s do some math just the same: This translates to an average of 73,972 barrels DAILY of refined fuel exports, while we imported around 11.2 million barrels of oil daily in November of 2011 (³). On an average day last year we exported less than one percent of the volume of diesel and gasoline compared to the oil we imported. In essence comparing 6/10 of one percent of an apple to an orange.

Getting back to the point, this is truly a planetary phenomenon and needs to be viewed from a higher perspective than simply looking within national boundaries. In fact we are already seeing an absolute decline in global oil production as measured by barrels per day per well. We’re drilling more wells and getting less out of each one on average, globally. In simple terms that means that in spite of all the ultra deep reserves, enhanced recovery technologies, shale and tar sands we’re developing, each well is producing less. This is not what one would expect given all of the technological advances we keep hearing about. The easy stuff is gone and now there’s more effort and expense required to get what’s left, period. Short-term or long-term the trend is the same.

But where most folks get their wires all tangled up is in equating the end of Western Civilisation with Peak Oil Law. The question of what happens to our lifestyle is the proper place were we can start developing theories. Calling for the end of Western Civilisation is no more responsible than calling for global starvation when becoming suddenly aware of the Flowerpot Law. This is where intelligent discussion must start, by recognising that Peak Oil is not an obscure theory to be vilified by association with doom and gloom forecasts.

How resilient we are to bumping into physical laws depends on our collective reaction when we become aware of them. If we accept that the laws of the Universe will provide both the opportunities and constraints, then mankind has one less thing to fear. Do citizens become responsible partners in their lifestyles, or choose to demand more for less? Do U.S. and European parents raise children expecting to work creatively, intelligently and diligently, or do parents help their children focus on entitlements? Do governments and private industry collaborate to optimise the use of the resources and develop alternative fuel sources, or do private citizens consume energy in non-productive endeavours? Do private ventures find investors for alternative forms of energy, or does capital flee to emerging markets? Perhaps the most important question is this: Is the production decline curve slow and gradual allowing alternatives time to fill the gap, or unexpectedly steep, leaving nations in panic to make irrational decisions? The bottom line is that if we remain in denial of physical laws, then we will demonstrate Malthus to be right someday.

Working towards good answers to these questions and shaping public expectations, when it needs to be redressed, is the second step. By no means does Peak Oil Law mean that civilisation collapses when we face production declines. Throughout history mankind has shown great adaptability and resilience. At the same time, expecting to deny and cloud physical laws forever most assuredly increases the likelihood of a very undesirable outcome for everyone.

 


(1) The End of Peak Oil Theory
http://www.fool.com/investing/general/2012/02/16/the-end-of-the-peak-oil-theory.aspx

(2) Citigroup Says Peak Oil is Dead
http://blogs.wsj.com/source/2012/02/17/citigroup-says-peak-oil-is-dead/

(³) U.S. Energy Information Administration U.S. Imports by Country of Origin
http://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbblpd_m.htm

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About sandiachris

I love the diverse people and cultures in the United States and especially New Mexico & Colorado. I enjoy exploring new trails, as the South West USA is amazing. I'm a small business owner and software developer. I've taught economics, built computers, vegetable oil powered cars, software, and like to write about things that could make our lives more meaningful, pleasant and less stressful.
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