Peak Oil and M King Hubbert

The concept of Peak Oil is one of the core subjects of this blog and it is high time to introduce the Father of Peak oil to my reader(s) along with a simplified curve of
domestic oil production. World oil production curves are widely available from the internet although they are often laden with data and may be hard to read to a new observer. Wikipedia is a good place to start. If you are a mexican peasant, your home would likely have a picture of Jesus Christ prominently displayed . If you are a recent convert to peak oil, you need M King on your wall. He be the man. He was a Shell geologist who in 1957 at a petroleum meeting in Texas showed a curve of oil exploration and production which he had derived using statistical methodology which purported to show that oil was a soon to be depleting resource. He predicted US production would peak in 1970 and world production would peak in the first decade of the 21st century. He was vilified, criticized and largely ignored not only by oil companies but by federal agencies and world governments. But his predictions have been uncannily accurate. In fact US production of oil DID peak in 1970 and has steadily fallen even despite the discovery of the huge field in Prudoe Bay. This month US crude oil production will fall below 5 million barrels per day(mbpd) for the first time since the late 1940's. Some of the recent decline is due to shut in production from the Gulf of Mexico platforms but the number is stunning never the less. US consumption has fallen a bit over 1 mbpd from last year due to slackening demand but we are still at about 20 mbpd.(http://www.eia.doe.gov/basics/quickoil.html). Transportation accounts for 70% of this number. Enough figures. The reason I gave this history is to provide background for my next subject. How will the reality of Peak Oil change and be changed by the current world turmoil in the financial markets? My thesis is that if the peak oil depletion curve is accurate, governments and people will need time to make adjustments to their economies and their lives. If the production/depletion curve is steep on the backside, time will be limited to make needed changes. If the curve is more gradual as Daniel Yergin of CERA in Massachusetts contends, we may have some time. And here you run into a swamp of facts and opinions. Oil reserves are there. They're not there. Reserves are understated. They're overstated. High prices will result in increased production. High prices won't make any difference. Yesterday Richard Leary in the Huffingtonpost wrote an article on the cost of Saudi(KSA) oil production. Saudi minister Ali al-Nasimi said in 1999 that the all inclusive cost was less than $1.50. What is the figure now? Who knows. The Ghawar field, the world's largest has been producing more than 5 mbpd and is now allegedly is in decline with its output supported by expensive injection of pressurized salt water and the KSA does not allow auditing of its reserves or its production figures. Leary stated KSA deliberately understates its reserves. Matt Simmons in Texas who is a world's expert in oil reserves and production thinks the opposite. Who to believe? There is no way to know. What is known is that there are very few producing countries who are increasing production and for the United States our main suppliers have been Canada, Mexico, Venezuela, and the middle east, chiefly KSA. Cantarell, the huge field in Mexico is in steep decline and Mexico could become an importer of oil in as soon as 3 or 4 years. Canada has been our leading supplier and has ample reserves of bitumen in its Athabaskan Tar Sands but net energy factors necessitate a price north of $80/barrel to be marginally economical. Venezuela and the US have had terrible diplomatic relations in the bush administration and now Hugo Chavez has been striking up exclusive arrangements with China and that source could dry up quickly.New suppliers such as Brazil may step up to the plate but now I must move to the central thrust of this post. How will the recession and credit contraction affect oil production? On the one hand reduced demand here and abroad would seem to ease what was becoming a supply demand squeeze. There may be enough oil to go around, maybe even a good surplus. That could be bearish for oil prices and in fact it already has been. But reduced demand and slumping prices mean less incentive to drill and explore and refine so there is less urgency to increase supply and that is already starting to occur. in a variety of locations for a variety of reasons. The biggest problem is that new oil tends to be a lot more expensive to find and produce and low oil prices mean we will be using up the old and cheap to produce oil. There is no reason a country will sell oil at $80 if their marginal cost of a new barrel is $80. These countries have gotten addicted to oil revenues to fund their domestic consumption and it stands to reason that they will want to keep oil as high as they can and they have the ability to do just that. The world will need oil, recession or not but the OPEC producers will also have to belt tighten and where is the logical place to do that? Delay new projects which will delay new production but meanwhile the old fields will continue to deplete. If and when oil demand picks up, new production may lag and prices will go through the roof as oil consumers scramble for supply. This may have the effect of making the curve of depletion more steep and consequences for economies more severe. My conclusion is that Peak Oil meant that oil production would at some point go into terminal decline but that the credit and financial collapse may mean that it may come sooner than expected and be far worse for the US than anyone expected. If the US deficit soars, inflation is sure to follow, the dollar may collapse and with it the incentive of our chief trading partners to fund these soaring deficits by purchasing our agency debt and treasury securities. The American people do not get it, clearly McCain does not get it and I do not know if Obama gets it. Much of the congress mirrors America generally, so they don't get it. Eventually they will when they realize that our gigantic debt has hemmed us in and constrained our options. Some people like Jim Kunstler(kunstler.com) predict social unrest and regional collapse as our happy motoring and suburban sprawl model collapses along with the economy. We have seen in this election the intolerant Fascist underbelly of this country at Sara Palin and McCain rallies and a mob can quickly get out of hand. The American people are armed like Yemeni and their economic suffering could turn vengeful They may direct their anger at bankers, politicians and corporate crooks or they may lynch minorities and illegal aliens. If it ever comes to this our streets may fill up with National Guard and Army checkpoints and curfews and start to look like Baghdad. One of the reasons I spend so much time talking about Iceland is that I think it may be a model of what may happen elsewhere, and perhaps even here. We will pick up their story tomorrow perhaps.