Economy and Energy Conservation / Renewable Resources and Peak Oil15 Jan 2010 10:02 am

I just finished reading Why Your World is About to Get a Whole Lot Smaller (Oil and the End of Globalization), by Jeff Rubin. Mr. Rubin is one of the few economists out there who truly understands peak oil, one whose viewpoint is not corrupted by a blind belief that the global economy is without resource constraints.

Mr. Rubin provides some of the best, most balanced coverage that I’ve seen of many of the serious problems facing us.

This is a guy who was ignored by some and derided by others when he predicted in 2000 that the price of oil would break $50 / barrel by 2005 (at the time it was at an all time high of about $30). He was proven correct. In 2005 he predicted (to similar reception) that it would break $100 by 2007. He was proven right a second time.

In this book, Mr. Rubin shows that he wasn’t just making lucky guesses, or that he simply believes the price of oil will continue monotonically upward. He has a deep understanding of the reasons why oil prices have behaved as they have (including the 2008 peak and subsequent drop), and the impact of those prices on the global economy.

He makes a number of points that have been well-covered by others, but are worth repeating (apologies for all the bullet points, but I’m too lazy to put this into a more coherent format):

  • Cheap energy (mainly in the form of oil) has pervaded our lives for decades, and is responsible for many of the things you probably associate with a ‘normal’ life. New car, big house, nice income, traveling, cheap goods from distant lands, affordable food, and so on.
  • Energy prices were the cause of some hallmarks of the last two decades: low interest rates and easy credit, followed by the housing bubble and subsequent subprime mortgage implosion, and the current recession. Many people still do not get this – mistakenly believing that the recession was primarily due to shoddy or fraudulent banking practices and overreaching homeowners – and Mr. Rubin does a great job of explaining it.
  • The end of cheap energy will have a major impact on our lives. No longer will we have access to amazingly cheap goods from China and other faraway lands, and food will become pricier. Your dollar will buy less all around. On the bright side, as shipping becomes more expensive, we will see the local re-birth of many industries, and a return of many jobs that had gone overseas.
  • Neither unconventional sources of oil nor alternative sources of energy will make up for the decline in conventional oil. All of the major oil fields are nearing peak or are already depleting rapidly, and the new finds don’t nearly make up for the losses. Mr. Rubin does a good job explaining why unconventional oil and alternative energy are the equivalent of finding loose change under the couch cushions when we are months behind on our mortgage.
  • There will be no large-scale transition to electric vehicles, for a combination of reasons (the biggest being the inadequacy of both energy sources for generation of electricity and the electrical grid itself).
  • The energy return on investment (EROI) for Canadian tar sands, deep water drilling, and biofuels is far lower than the returns we are accustomed to, and demonstrate how desperate we are becoming for energy. In the case of biofuels, we are also directly driving up the price of food (feeding corn to our cars).
  • In the last century, the US (driven in large part by the interests of Detroit) squandered an opportunity to build infrastructure for, and a society friendly to, public transportation. Instead, we invested in a system that favored, even required, the automobile. That was a huge mistake in the long-term picture.

Some of the things Mr. Rubin discusses are not so well covered elsewhere (or maybe are just not so familiar to me):

  • Some of the biggest oil exporting nations are massively subsidizing internal prices. This is driving increases in internal consumption and decreasing exports (to, say, the US and Europe). As a result, you cannot consider the global market for oil as a traditional economic marketplace. Supply constraints for developed nations will cause price spikes that distort the market. The global economy will repeatedly see the price of oil spike (as it did in 2008), in turn crushing demand and causing prices to fall. Then the economy begins to recover, and demand causes the price to spike again. Meanwhile, every time demand implodes, the expensive exploration and recovery projects to bring in low-EROI oil will be shelved, further constraining future supply.
  • Jevon’s Paradox states that increases in energy efficiency do not lead to lower energy consumption, but to higher consumption (!). This has played out numerous times in the last 150 years. When technical advances increase efficiency, it opens the door for new uses of the energy source as well as increasing the number of people who can afford access to that energy. Policy goals should not focus primarily on increased energy efficiency but on lower overall consumption.
  • The politics of climate change will be shifting. Consumption of fossil fuels in the developed world will decline (because of supply constraints) while that in the oil exporting nations will increase. The first implication of this is that the developed nations will not be in control of climate change. The second is that, according to Rubin, it is in the interest of the developed world to use carbon tariffs to mitigate climate change, pushing exporting countries to lower emissions while creating a ‘green economy’ in the developed world.

Some miscellaneous crazy shit I wasn’t aware of:

  • Iran subsidizes oil for internal consumption to the tune of tens of billions of dollars per year. As a result, consumption is growing. When the government tried to raise prices in 2007 to stem growth and curb financial losses, people rioted. The government backed down.
  • Countries in the Middle East are using increasing amounts of (heavily subsidized) oil to generate electricity.
  • Countries in the Middle East are rapidly exhausting their water supplies. They are increasingly using subsidized oil to fuel the energy-intensive process of desalinizing sea water.
  • The (in)famous indoor ski slope in Dubai (which serves roughly 3000 people per day) burns the equivalent of about 3500 barrels of oil a day to keep the place refrigerated and snow-bound. That amount of oil could alternatively be used to fuel about 100,000 cars (driving a typical 35 miles / day)!

Mr. Rubin does take some positions I’m not sure I agree with:

  • He believes that the sweeping bailouts and fiscal priming that nations around the world have undertaken will send us into an inflationary period. Stoneleigh makes a very interesting argument that we could see a deflationary descent down the energy curve.
  • Given how well Mr. Rubin ‘gets it’, he remains remarkably optimistic about the prospects for simultaneously weaning ourselves from oil and maintaining (modest) economic growth. He points to living conditions in Europe now (with $7 / gallon gas, including heavy taxes) as a lifestyle we could achieve. Maybe that is because he is only thinking out a decade or two, or maybe it is just that the economist in him demands the last word on growth ;-) Or maybe my long-term outlook is just too pessimistic… Here’s to hoping he is right!

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