The Crash Course - Chris Martenson [82]
Figure 16.9 The Output Gap
How much oil is missing from the equation?
Forget about new global growth; the world may need to find another 10 mbd of production between the years 2009 and 2014 in order to avoid slipping backward. But as we’ve seen, our exponential money/debt system isn’t content with sitting still; it needs to expand. By the time we seek to grow by even 3 percent, the gap is already at 13 mbd. Once you understand the lead times, geological limitations, and engineering hurdles involved in trying to close a 13 mbd output gap, this becomes an improbable task.
In 2009 and 2010, various governmental and industry groups began to observe the same potential supply shortfalls and sounded varying levels of concern over the matter, including: (1) the Industry Taskforce on Peak Oil (UK), (2) Lloyds of London, (3) the UK Parliament, (4) the U.S. Department of Defense, (5) the German military, and even (6) the King of Saudi Arabia, who suggested that perhaps they should leave some oil in the ground for future generations.
In no case did any of these reports connect the dots between energy and the economy as we’ve done in these pages, but it’s only a matter of time before they do.
Peak Exports
However, the most urgent issue before us doesn’t lie with identifying the precise moment of Peak Oil. That is of academic interest, but it’s also something of a distraction, because the economically important event around oil will occur when a persistent gap emerges between supply and demand.
Dallas geologist Jeffrey Brown developed a very simple and clever way to think about the supply and demand problem, which he calls the Export Land Model.9 Suppose we have a hypothetical country that produces three million barrels of crude oil per day, consumes one million barrels a day, and exports the balance of two million barrels a day. All things being equal, it can export those two million barrels year after year. But now let’s suppose that its oil field output is declining due to depletion issues at a modest 5 percent a year. After 10 years, instead of 2 million barrels a day, this country can now only export 0.89 million barrels a day, or less than half the prior amount. The missing balance has depleted away, and it cannot export what it doesn’t have. Now comes the kicker: Let’s further suppose, quite realistically, that this country increases their internal demand for oil at a rate of 2.5 percent a year. What happens to exports in this case, where internal demand is rising and production is falling? Under this scenario, exports will plunge to zero in less than seven years.
This illustrates the miracle of compounding in reverse, where exports are eaten into from both ends by declining production and rising internal demand. It turns out that this isn’t just a scenario, but a reality for many exporting countries. For example, in the case of Mexico, the number three supplier of oil exports to the United States in 2009, production declines and demand growth will entirely eliminate their exports somewhere between the years 2011 and 2015 (depending on a variety of economic and petro-investment variables). When this happens, the United States will have to turn to the global market in search of a new number three exporter to replace those lost imports, but global competition for oil supplies is likely to be quite stiff by that time.
When world production will peak is a matter of some dispute, with estimates ranging from 2005 to some 30 years hence. But as I said before, the precise moment of the peak is really just of academic concern. What we need to