14 October 2010

Guest Post: Peak Oil - There Is No 'Plan B' By Chris Martenson

Future Chaos: There Is No "Plan B"
By Chris Martenson
October 13, 2010

Note: This article builds on my recent report, Prediction: Things Will Unravel Faster Than You Think. It explores the coming energy crunch in more detail by looking at existing government planning and awareness, and the implications of what international recognition of Peak Oil as early as 2012 might mean.

The hard news is that there is no "Plan B." The future is likely to be more chaotic than you probably think. This was the primary conclusion that I came to after attending the most recent Association for the Study of Peak Oil & Gas (ASPO) in Washington, DC in October, 2010.

The impact of Peak Oil on markets, lifestyles, and even national solvency deserves our very highest attention - but, it turns out, some important players seem to be paying no attention at all.

ASPO conferences tend to start early, end late, and be packed with more data and information than should be consumed in one sitting. Despite all this, I was riveted to my seat. This year's usual constellation of excellent region-by-region analyses confirmed what past participants already knew: Peak Conventional Oil arrived a few years ago, and new fields, enhanced recovery techniques, and unconventional oil plays are barely going to keep up with demand over the next few years.

But there were two reports that really stood out for me. The first was given by Rear Admiral Lawrence Rice, who presented the findings of the 2010 Joint Operating Environment (a forward-looking document examining the trends, contexts, and implications for future joint force commanders in the US military), which spends 76 pages summarizing the key trends and threats of the world. "Energy" occupies six of those pages, and Peak Oil dominates the discussion. Among the conclusions (on page 29), we find this hidden gem, which uses numbers and timing that are eerily similar to those that I put forth in my April 2009 report, Oil - The Coming Supply Crunch:
By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD.

While there are two "coulds" in that statement, the mere possibility that such an imminent arrival and massive shortfall could be true should give every prudent adult a few second thoughts about what the future may hold. If surplus production capacity disappears in just a couple of years, there is an entire world of planning that should take place beforehand at the international, national, community, and personal levels.

More on the JOE report in a minute. Next I want to turn to a presentation given by Rick Munroe, who did his best to discover where within the civilian governmental departments lie the plans for what to do in a liquid-fuel-starved future.

To cut to the chase, it turns out that virtually every department that he contacted in both the US and Canada denied having any such reports. In one humorous exchange by email, Natural Resources Canada stated two things in the same email:
• “At this time the Department has no views on [Peak Oil].
• "There is no imminent Peak Oil challenge…."
It will be interesting to see how NRCan words their emails once they do develop a point of view.

The main conclusion from Rick's presentation was that Peak Oil is being examined closely and taken seriously by military analysts, but not civilian authorities. The few plans that do exist on the civilian side are decades old.

The implications of this are that North America "remains highly vulnerable to a liquid fuel emergency disruption" and, since because there are only a few dusty plans lying around, there will be greater chaos than necessary.

Now back to the JOE report.
OPEC: To meet climbing global requirements, OPEC will have to increase its output from 30 MBD to at least 50 MBD. Significantly, no OPEC nation, except perhaps Saudi Arabia, is investing sufficient sums in new technologies and recovery methods to achieve such growth. Some, like Venezuela and Russia, are actually exhausting their fields to cash in on the bonanza created by rapidly rising oil prices. (p. 26)

A severe energy crunch is inevitable without a massive expansion of production and refining capacity. While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. (p. 28)

Well, the amounts needed from OPEC are quite, shall we say, 'ambitious,' as they amount to an additional two Saudia Arabias coming on line in order to make up the shortfall. A massive crunch is not otherwise avoidable. Let's be honest; there are no more Saudia Arabias to be found. Perhaps we could cobble one together out of thousands of smaller, less productive fields, but the likelihood of a few massive fields waiting to be found 1,100 feet underground is extremely remote. People in the business of actually producing oil know that producing from smaller wells takes more time, equipment, and manpower.

Meanwhile, I also happen to agree with their assessment that the details of the effects are difficult to predict but that the general theme will be one of reduced growth, and that's under the best of circumstances. More likely we'll have to figure out how to operate on zero or even negative growth.

So I came away from the ASPO conference pondering two completely polar trends that combine to create lasting discomfort. On the one hand, we have more and more private and military organizations coming to the conclusion that Peak Oil is imminent and will change everything, possibly disruptively. On the other hand, there appear to be no plans within the civilian government to deal with a liquid fuels emergency.

While we can expect that such plans will be tossed together when necessary, I would hope that Katrina taught us a few lessons about developing plans on the fly after the disaster has already arrived. Sure, things got done, but they were certainly suboptimal and led to more confusion and more chaos than if they had been carefully developed, practiced, and debugged.

The way that I understand the lack of planning on the part of the civilian side is that Peak Oil does not present any easy political wins, if any at all. Given the two-year planning cycle in DC, it's never a good time to bring up such an unpleasant subject. Politics trump necessity.

What can be rather easily predicted here is that when the next fuel crisis arrives, there will be more chaos than necessary. Some areas will get completely stiffed on their fuel allotments, while other areas will be reasonably well supplied. The reason that this can be easily predicted is because it more or less already happened in Europe during a protest by French fishermen inspired by high fuel prices. They blockaded ports in late May of 2008, and by early June, the action had spread across Europe. Shelves were quickly stripped bare of essential goods, tensions mounted, and petrol stations ran dry in a hurry.

And these were just the effects of a port blockade and tanker truck strike. What would happen with a real and persistent shortage of fuel? Well, if it were perceived to be due to a structural and permanent inability of the global oil market to meet demand, prices would rise stratospherically until demand was cut off. The only problem is, letting prices determine which industries idle back may not be the best plan.

Consider the case of agriculture. If full 'pass-through pricing' is the mechanism of rationing, which it currently is, then less food will be grown. With world grain stocks at historic lows, this is one area where we might not want to let Mr. Market dictate the activities of farmers based on fuel price. To do otherwise would require a plan of some sort, and none appear to be in effect.

That's the source of my discomfort. It's not necessarily that large organizations are beginning to share my sense of timing and impact of Peak Oil, although that will hasten the tipping point of awareness. It's that somehow I always thought that because Admiral Hyman Rickover knew well that this day would come (in the 1950's!), 60 years would have been sufficient lead time to assemble some credible plans.

No plans = unnecessary chaos.

The lack of planning also betrays a very common attitude, which might be summarized as, “We’ll deal with that when we get there.” I detect this attitude in a wide range of individuals and market participants, so it’s not at all uncommon. However, I think it's a mistake to hold this view. When (not if, but when) full awareness of Peak Oil arrives on the international stock, bond, and commodity markets we will discover just how narrow the doorways really are. Only a few will manage to preserve their wealth by squeezing through the doorway early; most will not make it through. As mentioned frequently on this site, our What Should I Do? guide for developing personal resiliency against a Post-Peak future offers a valuable resource for those just getting started in their preparations.

This thinking is explored in greater depth in Part 2 of this report (enrollment required), in which I discuss strategies to fill the official vacuum by developing our own plans for what we should do in response.