How Peak Oil will keep us from recovering from the coming depression [View All]

[GliderGuider]

The combination of low oil prices and the economic crisis have brought exploration and new production projects to a standstill. Right now the world is draining its existing stockpiles and using production from existing wells. As the stockpiles empty and the producing wells run dry the supply will fall, and prices will begin to rise again.

Then the real fun starts:

The combination of low oil prices and the economic crisis will have constrained exploration and new production, both of which have long lead times and high capital requirements. That means that there will be little new oil to replace the stuff we've burned while prices were low. As the economy tries to recover it needs more energy, and oil prices are low, so demand goes up. But there isn't enough supply to meet the renewed demand (supply constraints have by now gotten quite severe because we're already past the point of Peak Oil). The supply shortfall then causes a true super-spike in oil prices, which deals a body-blow to the struggling economic recovery.

What we may see is a series of spikes and drops in oil prices. The spike happens when demand outstrips supply, and the drop happens when the high prices knock the economy back onto the mat, thereby lowering demand. Then the low price re-stimulates demand, causing another bump into the supply limits, another price rise, another body blow to the economy, and a drop in oil prices and around and around it goes. Each time the price spikes higher and the subsequent price drop doesn't go down as far. We're at the very beginning of this scenario, because we just passed Peak Oil last year.

Of course, the combination low oil prices and the economic crisis that are constraining petroleum exploration and production are also preventing investment in renewables, so when TSHTF there will be no new new oil AND no significant alternatives. That's a recipe for $50/gallon gasoline within 10 years.

Our inability to capitalize renewables due to low incentive and constrained capital, along with the repeated spiking in oil prices due to supply constraints will make recovery from this depression a dubious proposition.