Tuesday, February 7, 2012

Is Globalization Now Blunting the Effects of Peak Oil?

Mish Shedlock of the Global Economic Trend Analysis blog posted a reader letter on Monday that included the chart above as well as some rather startling facts about the current trends in gasoline consumption in the United States:
As I have been telling you recently, there is some unprecedented data coming out in petroleum distillates, and they slap me in the face and tell me we have some very bad economic trends going on, totally out of line with such things as the hopium market - I mean stock market.

This past week I actually had to reformat my graphs as the drop off peak exceeded my bottom number for reporting off peak - a drop of ALMOST 4,000,000 BARRELS PER DAY off the peak usage in our past for this week of the year.
The letter goes on:
An amazing thing to note is that in two out of the last three weeks gasoline usage has dropped below 8,000,000 barrels per day.

The last time usage fell that low was the week of September 21, 2001! And you know what that week was! Prior to that you have to go back to 1996 to have a time period truly consistently below 8,000. We have done it two out of the last three weeks.
Mish himself then rather blandly concludes:
A mild winter can explain part of the drop in petroleum usage (heating oil), but it does not explain the declines in gasoline usage or the overall trends.
Back on September 23rd of last year, in my post "Fear and Loathing in the Auto Industry: The Flacks Can’t See What’s Right in Front of Their Eyes," I highlighted a story about how annual American automobile sales remain mired more than four million below their peak in 2000, even after recovering over two million from the depths of the Great Recession. Moreover, with gas prices having remained above $3.00 a gallon for more than a year now, sales of smaller and higher mileage vehicles have increased as a percentage of the number of vehicles purchased. Additionally, back on November 21st of last year, in my post, "Peak Vehicle Miles Travelled Shows the True State of America's Economy," I highlighted a story about how for the first time since at least the 1960s, U.S. total vehicle miles traveled have dropped during the past four years.

Clearly, the explanation for less gasoline being used is that there are fewer cars now on the road driving fewer miles at a higher average of fuel efficiency. Greater efficiency, of course, is a good thing for the economy. The fewer miles travelled, however, not so much. Because so few Americans have access to adequate public transportation options, and those options are also being cut back and becoming more expensive as I have demonstrated in several previous posts, fewer vehicles miles travelled can only mean less real economic activity in a car centric society such as ours.

But wait, I hear you protesting. What about last Friday’s fantastic jobs report from the Bureau of Labor Lying Statistics? Wasn’t that an indicator of how we have finally turned the corner and are on the road to a full economic recovery? You gloom and doom peak oil pundits were saying all during last year that the return of world oil prices to triple digit territory was going to trigger another recession, yet it obviously hasn’t happened. So what gives?

Well, the flippant answer to that question is that it isn’t 2008 anymore. By that I mean it is now apparent that the global economy underwent a major adjustment the past four years and that $100-a-barrel oil is the new $30. That’s not to say the global financial market crash of 2008, the loss of seven million American jobs, the bailouts of the big banks and Wall Street and the various stimulus programs were not PAINFUL. They certainly were. But as things stand nearly four years later the adjustment is largely complete. The weaker banks, retail chains and other businesses have largely died off, and those that remain are so far better able to weather the storm of higher energy costs, even if many of them have seen the size of their operations reduced.

That’s all well and good, Bill. But what about the fact that the more dire predictions you peak oil types made back in 2008 that oil prices would top $200 or $300 a barrel by now haven’t come true? Clearly, you and numerous others in the movement owe us all an explanation for how you blew that call so badly.

The answer to that question, of course, is right there in those gasoline usage figures. Demand destruction globally, but in the United States in particular as the world’s largest oil consumer, has thus far prevented peak oil’s upward pressure on prices from getting completely out of control. Note, however, that the figure of four million barrels per day less usage almost perfectly mirrors the amount of reserve oil production capacity supposedly possessed by the world’s swing producer, Saudi Arabia. It’s pretty clear that had American demand not been reduced so dramatically, we would again be bumping up against the limits of world production capacity like we were in 2008 and $200 oil and $7.00 a gallon gasoline (at least) would already be a reality.

So what you’re saying is that if America continues along our current path towards economic recovery, and jobs continue to be created at the rate they apparently were in January, that we will soon see demand increase to the point where we’ll again be facing the prospect of $200 oil?

Not necessarily. Even if you take the BLS jobs numbers at face value and ignore the rise in structural unemployment resulting from people “exiting the job market,” there is still the thorny little problem of how the actual net number of jobs can increase so robustly even as the gasoline usage figures above have been dropping so dramatically. Those two data points seem on the surface to stand in direct contradiction to one another.

My theory is that what we are seeing here is globalization, which used to be a driver for increased oil usage and thus higher prices, now serving to actually blunt the price of oil and gasoline. Demand continues to rise in the world’s new factory economies like China and India, of course, but at a rate largely offset by the demand decline in consumer economies like the U.S.

I’ve posted countless stories on this blog in recent months containing news articles showing that, despite higher energy costs, the relentless offshoring of good paying American jobs to the lower wage factory economies is continuing at a rapid pace. Moreover, the wages and benefits for those jobs that do remain are being decimated more rapidly than they already were before the financial crash due to the amount of surplus labor we now have. The new normal in America is that the average person is poorer than they used to be, which means they have less money to be able to afford to buy cars and to drive them as often, especially at the current elevated gasoline price levels.

These effects of globalization on the prosperity of America’s working and middle classes will likely continue to place downward pressure on oil and gasoline prices even as the average barrel of oil itself gradually becomes more and more expensive to produce as the traditional supergiant oil fields deplete and “tight” oil sources (oil sands, oil shale, deepwater) struggle to replace the lost production. As long as we remain mired on the so-called “bumpy plateau” at or near the all time peak of world oil production first achieved in 2005, the globalized economic system will likely continue to limp along unless abruptly disrupted by a geopolitical crisis such as a Middle East war.

Eventually, of course, even without the advent of a major resource war, oil supplies will begin to decline and oil prices will rise to a level above that which can continue to sustain an economic model which dictates that products be made wherever in the world it is cheapest to make them and then shipped everywhere else. Globalization is doomed in the long run, and eventually we will all be returning to localized economies whether we wish to or not. This we know for certain. It just won’t happen as quickly as many in the peak oil community were expecting it to happen.


  1. My instinct is that we'll be in the bumpy plateau for about ten years. This is good news for those that need more time to localize their lives and cross a few trips off their bucket list. Bad news for anyone expecting a return to expansion.

  2. The IEA / EIA state that western demand will fall at about 6% a year over the next decade, if I recall correctly. They don't state that this will be due to continuing recession in the OECD region, the US mainly. The peak will be prolonged by demand destruction - to paraphrase the 1974 Kissinger Report, "people don't burn oil they can't afford."

  3. I'm exploring an idea I'm calling "the end game for coal".

    there must be some sort of formula for

    X amount of electricity requires Y amount of coal

    But there is only one form of electricity while there are many varieties of coal so the formula would need to take that into account.

    Richard Heinberg has pointed out that the world is preferentially consuming the high-density coal leaving lower density coal.

    At what point does the amount of coal required to produce the amount of electricity demanded start to imply an impossible feat of transporting coal?

    Both the increasing demand for electricity and the declining density of coal are bringing the world to that point.