[R-G] [BillTottenWeblog] A Milestone In The Dust

[Bill Totten]

by John Michael Greer

The Archdruid Report (March 19 2008)

Druid perspectives on nature, culture, and the future of industrial society


Earlier this month, according to several peak oil bloggers, the world
passed a milestone worth noting: the point at which oil, in constant
dollars, became more expensive than ever before in history. Plenty of us
in the peak oil community have been expecting that milestone any time
now, and the surge that pushed one widely watched price marker past $112
a barrel last week turned the expectation into reality.

Profit-taking and a flurry of margin calls driven by the wider economic
crisis brought oil prices back down at the beginning of this week, at
least for the moment. Meanwhile, though, the higher cost of oil is
already starting to trickle down to the consumer level. Diesel fuel is
up over $4 a gallon in many US markets, while gasoline, heating oil, and
other petroleum products are following the same curve. Speculation, in
several senses of the word, has begun to focus on the upcoming summer
driving season and the likelihood of soaring prices at the pump.

Just now, however, it may be worth taking the long view. When Goldman
Sachs suggested, not so long ago, that oil prices might rise above $110
a barrel, their analysts thought that it would take a crisis threatening
some significant fraction of world oil production to drive such a
"superspike". (That warning was widely and, I think, correctly
interpreted as an attempt by New York financial interests to talk the
cowboys in Washington DC out of launching a war with Iran.) The crisis
has so far failed to materialize, but the superspike showed up anyway.

Like any other economic phenomenon in the real world, that unexpected
event had numerous causes. One factor not often given sufficient weight,
at least in the peak oil community, is the role of speculation. The
global economy these days is dominated by flows of speculative money
that pour into any investment promising an above average rate of return.
Just now, commodities - fossil fuels, grains, metals, and the like -
yield better returns than most other investments, and so that's where
the money goes.

Monday's events demonstrated that. The drastic declines in most stock
markets that day resulted in a bumper crop of margin calls. For those of
my readers who don't follow the markets, a margin call is what happens
when investments bought with borrowed money lose enough value that the
lender demands more collateral for the loan. Since few speculators keep
large amounts of ready cash on hand, that usually means that other
investments have to be turned into cash in a hurry; this is one of the
ways financial panics spread from market to market.

Hit with margin calls in the stock market, speculators unwound positions
in the commodities market, and most commodities dropped sharply in
Monday's trading. Oil slumped from $111 to $106 in a matter of hours.
They rallied after that, but today's ticker shows another dive, with oil
futures down near $104 a barrel as I write these words. With stock
markets sliding again, further declines are tolerably likely. None of
this ought to come as any kind of surprise; the role of speculation as a
source of whipsaw motions in energy prices has been discussed here on
The Archdruid Report, and elsewhere across the peak oil blogosphere.

Still, speculation is only one part of the picture. Another part, hard
to miss just now, is the plunging value of the dollar. Since oil, like
most commodities, is priced in US dollars - a circumstance that has
given the United States some notable advantages - a portion of the price
increases that have roiled commodities markets and startled American
consumers in recent months are simply readjustments by which commodities
retain their value against the measure of a weakening currency.

There are good reasons for the dollar to shed value just now, of course,
but I sometimes wonder if deliberate policy may play a role as well.
After a quarter century of reckless deficit spending, the United States
is insolvent by any reasonable measure, saddled with debts it will never
be able to pay off. Unlike other countries that have recently landed in
the same bind, though, it has a notable advantage - all those debts are
payable in a currency it controls. The other day, US Treasury Secretary
Henry Paulson made the usual ritual noises about upholding a strong
dollar policy, but I suspect it has crossed his mind that the national
debt would be a good deal less intimidating if the dollar were to slide
to five percent of its current value over the next ten years or so. It's
hard to think of another policy, in fact, that will keep the United
States from having to default on its sovereign debt sooner or later.

Whether or not this is on the official agenda, though, some such
readjustment is inevitable. The imperial economics that enabled the five
percent of the world's population who are Americans to monopolize a
third of the world's resources have begun to unravel, with predictable
results. Pundits who denounce "resource nationalism" and laud the
alleged benefits of free trade have conveniently forgotten that America
built the largest industrial economy in the world in the shelter of
protective tariffs, and used its own natural resources as a political
weapon whenever it had the chance - for example, against Japan in the
years before the Second World War. We may not enjoy seeing the tables
turned, but it's not as though we have grounds for complaint.

Behind the wild swings of speculative excess and the tidal forces set in
motion by a collapsing US dollar, in turn, lies a third factor - from a
peak oil perspective, the signal half-hidden by a great deal of economic
noise. This is the failure of world petroleum production to break out of
the plateau it has occupied since 2004. Those who have been following
the peak oil scene for more than a year or so will recall any number of
confident predictions concerning improved secondary recovery, new
discoveries, or alternative fuels, that would enable oil production to
continue on its upward path once prices rose enough to make them economical.

That hasn't happened. Instead, world oil production has continued to
bump along at roughly the same level, while prices have soared through
the skylight. The latest news from the International Energy Agency (IEA)
shows that with ethanol, biodiesel, and every other source of liquid
fuels added in, world production of petroleum and equivalents nudged
just slightly over the records set in 2006, while production of
conventional petroleum continues to wobble downward from its May 2005
peak. Demand remains strong and prices have soared, but supply has
barely budged - and plenty of technologies and energy sources supposedly
poised to surge onto the market once oil broke $30, or $40, or $50 a
barrel are still pie in the sky.

What this implies is that for all practical purposes, peak oil has
arrived. Pinpointing the peak precisely in time quickly becomes an
exercise in quibbling over definitions; petroleum is not a single thing
but a diverse assemblage of chemically related resources, extracted in
many ways and traded in a baroque diversity of markets. Should tar sand
extractives, which require huge energy inputs to bring to market, be
counted alongside light sweet crude, which requires little? What about
ethanol from American corn, cultivated by energy-intensive methods that
burn more fuel than the corn itself yields? Should the ethanol and the
oil used to produce it both be included in total production, even though
this amounts to counting the same energy twice?

Still, there's another way to think about peak oil that's less difficult
to define: the point along the curve of petroleum production at which
geology trumps market forces, and all the price adjustments in the world
can't make supply increase to meet the potential demand. Set aside the
whipsaw motions of speculative excess and the impact of a disintegrating
currency, and this is what the rising price of petroleum seems to be
telling us. Unless events in the very near future offer a different
message, it's fair to suggest that the milestone of record oil prices
fading into the dust behind us may mark the end of the age of cheap
abundant energy, and the coming of a new world of limits and scarcities
for which most of us are hopelessly unprepared.

_____

The Grand Archdruid of the Ancient Order of Druids in America (AODA),
John Michael Greer has been active in the alternative spirituality
movement for more than 25 years, and is the author of a dozen books,
including The Druidry Handbook (Weiser, 2006). He lives in Ashland, Oregon.

http://thearchdruidreport.blogspot.com/2008/03/milestone-in-dust.html

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