The View From Over the Mountain

By David L. Brown

As every child knows, when the fabled bear went over the mountain (to see what he could see), all he saw was the other side of the mountain. But sometimes when we cross a peak the view is quite different from that to which we are accustomed.

That is certainly the case when it comes to the world’s supply of petroleum. We have written much about the looming possibility that oil supplies will soon be unable to keep up with demand. The scenario was first described in the 1950s by oil geologist M. King Hubbert, who predicted that oil supplies would continue to rise until reaching a peak, then decline. He graphed the phenomenon as a classic bell curve. Time has proven Hubbert’s theory, particularly in regard to his accurate prediction of peak oil production in the United States.

In the past few decades the world economy has continued to grow and populations to expand on the back of a growing flood of cheap oil. But the nagging question has been, when will the world Hubbert Peak be reached? That event is sure to have profound effects, and politicians, the energy industry, and the media have played down the danger.

Well, now we know. According to Energy Watch Group (EWG), an independent watchdog group based in Germany, we passed the Hubbert Peak in 2006. Like the bear, we are seeing the other side of the mountain and it is quite different from what we have known before.

Hmm, you might be asking yourself. This sounds important, so why haven’t we heard much about it? Well, the media, politicians and oil companies haven’t been crying from the rooftops, that’s for sure. That’s because they don’t want to cause us unnecessary worry, which might cause us to change our spendthrift ways or voting patterns. But you may have noticed that gasoline seems determined to stay at or above the three dollar a gallon price and is sure to rise even higher since a glance at commodity statistics reveals that crude oil has been climbing of late and is nearing the $100 per barrel mark.

Returning to the news from the Energy Watch Group, here is a key paragraph from the executive summary of their report “Crude Oil — The Supply Outlook,” released last week (you can read and download the report here):

The major result from this analysis is that world oil production has peaked in 2006. Production will start to decline at a rate of several percent per year. By 2020, and even more by 2030, global oil supply will be dramatically lower. This will create a supply gap which can hardly be closed by growing contributions from other fossil, nuclear or alternative energy sources in this time frame.

So what is the Energy Watch Group and should we pay attention to what they say? It is a privately funded international research agency formed in Germany which has the mission, as described on their website here, of providing objective information about energy policy. This is needed, the EWG says, because “power industry and Government organizations keep up the belief of the unlimited availability of cheap energy from conventional sources.” The group aims to provide sound data concerning “the shortage of fossil and atomic energy resources; development scenarios for regenerative energy sources, as well as strategies deriving from these for a long-term secure energy supply at affordable prices.”

So what does it look like, this other side of the mountain that we have now entered? Here is a graph from EWG report that shows the contribution of various regions to the total global oil supply:

oil-peak-2.jpg
The view from this side of the mountain is breathtaking. In a sense, you can “see forever,” but what you will see is not good. In fact, it represents the worst possible news for the world as we have known it. The economic consequences will be disastrous, especially for those nations that have built their infrastructures on the uncertain sands of oil-based energy — that is to say, every developed nation on Earth. Note the dotted line going up to the right which represents the world’s projected energy needs, and especially note the awesome and rapidly increasing gap below it.

The EWG report concludes that “the world is at the beginning of a structural change of its economic system” triggered by declining fossil fuel supplies. This “will influence almost all aspects of our daily life.” It notes that climate change caused by global warming will also come to bear to force changes in energy consumption patterns. In other words, we can’t simply replace oil by burning more coal.

According to the scientists at EWG, a “false signal” has been sent, “anyway until recently,” by the International Energy Agency (IEA) which has continued to deny that the oil peak is upon us, or that fundamental changes in energy use are required “in the near or medium term future.” It concludes: “The message by the IEA, namely that business as usual will also be possible in future, sends a false signal to politicians, industry and consumers — not to forget the media.”

The authors point out the following:

For quite some time, a hot debate is going on regarding peak oil. Institutions close to the energy industry, like CERA [Cambridge Energy Research Associates, Inc.], are engaging in a campaign trying to “debunk” the “peak oil theory”. This paper is one of many by authors inside and outside ASPO (the Organisation for the Study of Peak Oil) showing that peak oil is anything but a “theory,” it is real and we are witnessing it already.

(Editor’s Note: The IEA is an intergovernmental organization based in Paris which was created in 1974 in reaction to the first oil shock. You can find its website here. CERA describes itself on its website (here) as “a leading advisor to international energy companies, governments, financial institutions, and technology providers.” You can access the ASPO web site here.)

The EWG report summarizes its key findings with four succinct words: “Peak oil is now.” It goes on to explain the reasons that more optimistic projections have not proven reliable. An important factor is based on observed delays in development of new oil fields, as well as “earlier and greater declines” projected for important producing regions, especially in the Middle East.

But the most important finding, the report says, is “the steep decline of the oil supply after peak” — that breathtaking view of wide open spaces suggested by the graph reproduced above. The rate of decline is sharper than even the most pessimistic previous estimates.

While many surprises no doubt lie in store for us as the oil decline sets in — (the EWG report predicts that “things might happen which we never experienced before”) — we can easily see that the new landscape will be quite different. In fact, some features of the new paradigm are already apparent. For example, those who have oil will be enriched even more than ever, because shortages mean higher prices. Just because there will not be enough oil to satisfy the world’s demand doesn’t mean that the oil that does remain will disappear. In fact, it will be worth more than ever, as we are already seeing, so that those who have the oil will continue to roll in Petrodollars beyond their wildest dreams.

Here are some examples of what that will mean:

Russia with its vast supplies of oil and gas, will continue to gain geopolitical strength and will be in a strong position to hold an energy sword over the European Union. In fact, it is already doing so and this trend will become more pronounced as Russia gains economic and military power. Already Putin is rattling the Russian saber and seems to be preparing Russia to resume a powerful place in the world. It seems likely that perhaps the Cold War never ended and we have merely been living through an interlude as the Russian Bear regroups for the next phase. Europe, already besieged by a de facto Islamic invasion, will live under an increasingly uncomfortable threat by a powerful and inimical enemy to the East. Europe as we know it is perhaps doomed to disappear.

Mideast nations, notably Saudi Arabia and Iran, will also continue to benefit from a vast transfer of wealth from the West in return for their remaining oil. Saudi Arabia and Iran are the major supporters of Islamic Jihad, and we can look forward to a continuation of the endless war against all Infidels, funded by Petrodollars. As noted, this will impact Europe, but will also be a threat to all non-Muslim peoples of the world.

Venezuela under Hugo Chavez provides another example of the power those who have oil will have in the new landscape on the other side of the Hubbert Peak. Again, we can already see the results as he becomes an increasingly painful thorn in the side of the United States. Our immediate neighbors, Canada and Mexico, will also gain economic power relative to the U.S. This could lead to conflict in the Western Hemisphere.

Aside from the political and military implications, I need hardly attempt to describe the economic stress that the crossing of the Oil Peak will create. The U.S. in particular, with our long-standing addiction to oil, will be in a difficult position — but we will not be alone. China, for example, is already feeling the economic stress of high energy costs and if a severe recession destroys their export markets they could be in deep doo-doo for sure.

There is much more that I could write about this unfolding disaster, a topic that I and my co-author Val Germann have been discussing for 15 years. I will leave it there for now, with the confidence that much more news will be breaking as the world looks around the new and frightening landscape in which it finds itself. It is too bad that after passing over the Hubbert Peak we could not have found, like fabled bear, nothing more than “the other side of the mountain.” Instead, this is going to be like finding ourselves on some entirely different planet — a planet where oil represents vast wealth and power.

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