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Blog item: Oil Crash: A Crude Awakening, and Macro Economics 101 of Peak Oil

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0 comments   Add a comment   Author:  newculture (Apr-18-2007)
Categories: Peak Oil/Gas & Energy Demand, Philosophical & Quality of Life

This evening I watched for the first time "Oil Crash: A Crude Awakening". I had been awaiting its appearance for nine months, since I first saw the trailer online, and incorporated it into my peak oil summary video. "Oil Crash" aired on The Sundance Channel as part of its "The Green" environmental programing.

The film is a historical, present, and future look at oil. It uses clips of about a dozen interviews to tell the story. Featured persons include Roscoe Bartlett, Matthew Simmons, Colin Campbell, and David Goodstein.

The story starts with the discovery of oil, and the abundance and wealth that it brought to areas such as the USA, Venezuela, and Azerbaijan. It outlines how production in fields increases and then declines. The story continues as our current technology has allowed for faster extraction of the oil, which leads to faster declines in production, the North Sea being the commonly cited example. An examination of the discovery curve, shows that a peak in consumption will be in the near future.

...(skipping to conclusion due to lateness of the hour)...

Overall, the film is one of the most accurate regarding peak oil. Good follow up films would be "The End of Suburbia" for the impact on the USA, and "The Oil Factor: Behind the War on Terror" regarding the geopolitics and violent solution. "Oil Crash" exceeds the CNN "We Were Warned" program, by focusing on the realities of bringing alternative fuel sources online. As a package, the four programs would make a fine review of the better film-style videos on the topic. "The Power of Community: How Cuba Survived Peak Oil" rounds out the quintet by showing how a rapid shift to a lower energy lifestyle can be accomplished.

As a package, these five do a fine job on focusing on our reliance, dependence and addiction to oil and, more generally, energy. What is missing is a clear Economics 101 style explanation of the impacts of peak oil, and how it will impact jobs, prices, and production.

An Econ 101 explanation would demonstrate that reaching peak oil equates to the supply curve for oil becoming inelastic, i.e. vertical. That is to say, that no matter the price, the quantity supplied will be the same (since by definition, it is the maximum). From that point onward, this vertical supply curve shifts to the left. Due to varying demand during the year, this would not be a smooth shift to the right, but one that accelerates and then slows, possibly at unpredictable times.

At the same time, the demand curve for oil has also become very inelastic, and near vertical. Demand is rising, equating to the demand curve slowly shifting rightward. As the very steep demand curve shifts right, and the practically vertical supply curve shifts left, the intersection of the crossed curves will rapidly rise. As this crossing point, known as the equilibrium point rises, so will the price.

With two curves, both very close to vertical, any shift in either will be magnified by the upward or downward motion of the intersection or equilibrium. This is the price volatility that would make the long term trend difficult to perceive.

Thus far, the supply curve has not shifted to the left, and only the demand has shifted rightward. This has and is leading to inflation, while employment is fairly steady. As the supply curve begins moving to the left, this will not only raise prices, but also increase unemployment. This is commonly called stagflation.

Perhaps the worst situation is when the demand curve begins shifting leftward, and actually moves faster to the left than the supply curve. This would not only lead to rapidly broadening unemployment, but also a decrease in the price level. This is such a horrible economic position to be in that it does not seem to have a name, other than what I shall coin, "The Worst Depression".

What surprises me most is that all of these concepts are literally in any Macro Economics 101 text. That there are a lack of films on this topic is astounding, and clearly an opportunity for someone to be first to really lay it out in a way that makes sense to the economists.

Perhaps this has not happened because of the likelihood that once understanding set in, that this would generate massive speculation in the oil industry, which would in itself, cause "The Worst Depression" by rapidly shifting the demand curve rightward, which would invariably collapse back to the left soon after.

My final observation and recent learning (or I should say, at the edge of my understanding) is that once the market begins to understand the value of oil, they will begin to buy futures contracts. This will bid up the price of the futures, and as a result, cause the current value to rise. I'm not sure how quickly the future prices can rise, but it is certainly seems possible that there are only so many contracts available. If all the contracts were purchased, then the bidding on those contracts could quickly get out of control, driving the price up. How high could it go? Of all the risks of peak oil causing economic collapse, I suspect this will be the one that will be pointed to as breaking the camels back, and heralding the dawn of "The Worst Depression".

Related reading:
  What We Can And Cannot Afford (Jan-17-2010)
  Deep Green: a Good Solution (Aug-12-2009)
  Oil and Gas - The Next Meltdown? (Oct-3-2008)
  Michael Moore Speaks Up: They're Stealing the Si... (Sep-30-2008)
  Just Say 'No' to Henry Paulson. Do Wolves Prote... (Sep-23-2008)
  Learning from Cuba's Response to Peak Oil (Sep-7-2008)
  Costs Of Climate Change, State-by-state: Billion... (Jul-26-2008)
  Our Post-Carbon future: a Peak Oil Perspective (Feb-18-2008)
  Countries With Energy Supply Problems (Feb-9-2008)
  Some of my favorite resources... recommended to ... (Nov-3-2007)

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About author/contributor Member: newculture (Aaron Wissner) newculture (Aaron Wissner)
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Member: newculture (Aaron Wissner) Aaron Wissner is a teacher, educator, organizer and guest speaker. He is a graduate of the University of Michigan, with emphasis on mathematics, science, and education. Mr. Wissner has taught and consulted for sixteen years in public school, in areas ranging from mathematics, science, computers, to leadership and television news production. He is the founder and organizer of the grassroots Local Future Network, a non-profit educational outreach organization dedicated to saving Earth through culture change.

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