peak oil special edition 16th july 2009

8/2/2019 Peak Oil Special Edition 16th July 2009

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Copyright 08/09 Pex Publications Pty Ltd ACN: 59 077 704 146

Written under A FSL: 259730

By Peter Strachan

All Ordinaries S&P ASX 200 Energy Index Brent Crude Oil $A/ barrel

Originally Published July 16th 2009

Peak Oil has Grim Population ImplicationsThe ruins of many ancient civilisations, which rose and fell in isolation from othersocieties, bear testament to the impact of scarce resources on limitless growthaspirations. Today, we are all connected in one big global village. As oil production

peaks over the coming decade, food production per capita is also likely to reach amaximum. What follows could well be a reduction in the quality of human life on thisfragile planet, followed by a nasty bout of population downsizing.

On the 16th of July 2006, 28th of February 2007 and 5th of July 2008, StockAnalysiswrote about Peak Oil. Peak oil is that time when oil production on this planet reaches itszenith and begins an inexorable decline. The well known graph adjacent, illustrates howannual oil production has run well ahead of annual discovery rates for many years. Newoil fields are increasingly smaller, more remote, deeper and more costly to find anddevelop than earlier discoveries. Production rates per well are lower and productiondecline rates are higher, while a generally lower quality of the oil and its location inpolitically unstable parts of the world, all militate against even maintaining oilproduction at current levels, before any consideration of increasing oil production overthe coming 20 years.

Peak Oil Special EditionJuly 16th 2009

This Week

A$/US$

Comparison of Annual Oil Consumption w ith Past & Future Oil Discovery (Gb)

Source: ASPO

Page 8

New oil fields are increasinglysmaller, more remote, deeperand more costly to find anddeve l op t han ea r l i e rdiscoveries.

Peak Oil has GrimPopulation Implications

Indices & PricesAll Ordinaries 3,858.80

Energy Index 13,588.50

Brent AU$/ bbl 76.65

AUS$/ US$ 0.7888

As at Close July 14th

3,000

3,250

3,500

3,750

4,000

4,250

Feb-09

Mar-09

Apr-09

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11,000

12,000

13,000

14,000

15,000

16,000

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

50

55

60

6570

75

80

85

90

Feb-09

Mar-09

Apr-09

May-09

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0.6000

0.6500

0.7000

0.7500

0.8000

0.8500

Feb-09

Mar-09

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Jun-09

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Originally PublishedJuly 15th 2009


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By Peter Strachan

Following a period of constrained production, depending on the position of theimposition this quota event along the production lifecycle curve of an oilfield, recoveryto previous highs is unlikely to be achievable.

Economics to the Rescue? I doubt itEconomists believe that the market will solve the peak oil conundrum. They believethat as production costs rise and prices respond, alternatives fuels will be introducedand demand will swing away from expensive oil to other sources. Yeah right!

The problem here is that firstly, there is as yet no other source of high energy liquidfuel to replace petroleum. Biofuels contribute just 1.5 mmbbls per day whileproduction from established conventional oilfields declines by about twice this amount

each year. Even if a new technology were to be discovered, introducing it in the timeframe required would be most unlikely. By the middle of next decade, StockAnalysisestimates that the world will need to find about 2 mmbbls per day of oil equivalent toreplace dwindling hydrocarbon liquid supplies as well as an additional 1.5 mmbbls perday of oil equivalent to cater for growing world energy requirements. From todaysvantage point, this would appear to be an impossible task.

Secondly, the world now runs on oil. Oil feeds us and transports our food and ourmanufactured products around the world. Rising prices and limited availability of oilthreaten both our global economy and the ability of the planet to feed its 6.75 billioninhabitants, which continues to expand at about 70 million pa.

Post the Industrial Revolution, a huge increase in population has accompanied a risein our standard of living. Numbers increased from an estimated 610 million in 1700 tothe current level of approximately 6.75 billion. This truly astounding growth was madepossible chiefly by three factors: great medical advances including sanitation, thewidespread use of high energy density fossil fuels and the use of these fossil fuels togreatly enhance agricultural production.

Fossil fuel based mechanisation has enabled the implementation of sanitation

schemes and supports the introduction of irrigation to boost crop yield whilemechanised planting and harvesting led to huge crop efficiency gains. On top of this,petrochemicals form key inputs into the supply of fertilisers and pesticides, along withplastic packaging and transport of food from where it is grown to where it isconsumed. Even refrigerated storage and other forms of food preservation rely onfossil fuels, without which the supply of food to our shops is extremely uncertain.

Globally, we are now witnessing social stresses resulting in part from a depletion ofnatural resources such as water supplies and fertile soils, with resulting foodshortages seen to cause riots in many places during 2008. Chinas ability to feed itselfis being hampered by its industrial progress, with up to 30% of its cropland nowaffected by acid rain and low sunlight, caused by industrial pollution. Population isalso growing faster than are jobs. Until recently, the outlet for stress from a growingpopulation was migration. Irelands population halved after the potato famine as

people fled to the new world and to England, but this outlet no longer exists.Uncontrolled migration from Africa and Asia into Europe is now running at epicproportions while Australia is just starting to see the first trickles of what threatens tobecome a flood of economic migration from Asia and Africa towards our shores.

To quote Walter Youngquist:

Our modern, developed societies tend to be removed, by their present degreeof affluence, from the environment as the basis for our existence. Food comesfrom the supermarket; clean water comes from the faucet. But the closerpeople live to the margin of existence, the more they realize the vitalimportance of fertile soil, and safe drinking water.

Charles A. S. Hall and John W. Day, Jr. recently wrote in American Scientistwww.americanscientist.org MayJune 2009 Revisiting the Limits to Growth AfterPeak Oil. Their graphic of US oil production and drilling activity is a template for the

rest of the world.

Peak Oil Special EditionJuly 16th 2009

Page 3

Market theory does not

cope well with absolute

shortages.


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By Peter Strachan

A boom in drilling activity duringthe late 1970s and 1980s, whichw a s i n s p i r e d b y t h e1970s oil crises, failed to halt thatcountrys declining oil production.So it will be for the whole planet.StockAnalysis calculates that totalliquid hydrocarbon production ispresently on a plateau atbetween 84 and 90 mmbbls perday. It is unlikely that totalannual production will ever riseabove this plateau. By 2013,global l iquid hydrocarbonproduction will begin a rapiddec l ine, wi th potent ia l lydevastating impacts on yourinvestment portfolio, unless youare prepared.

The energy return on investment (EROI) is the energy cost of acquiring an energyresource; one of the objectives is to get out far more that you put in. Ultimately, thereis no point in expending 100 units of energy to produce a fuel which delivers 50 units ofenergy. That is just a way to go broke!

Domestic US oil productions EROI has decreasedfrom about 100:1 in 1930 to 40:1 in 1970 and toabout 14:1 today. The EROI of most green energysources, such as photovoltaic, is presently low.

(Lighter colours indicate a range of possible EROI dueto varying conditions and uncertain data.) EROI doesnot necessarily correspond to the total amount ofenergy in exajoules produced by each resource.

Extending the reach of rising energy costs revealssome potentially unpleasant consequences. Increasedagricultural yield has been achieved principallythrough a greater use of fossil fuels for cultivation,

fertilizers and pesticides. It now takes some 10calories of petroleum to generate each calorie of foodthat we eat, and that is before we package it and getit to market and store it.

To quote Hall and Day, The concept that modernsociety could be heading towards a huge,

multifaceted failure of some substantial part ofindustrial civilisation is so completely outside theunderstanding of our leaders that we are almosttotally unprepared for it.

There are virtually no existing forms oftransportation, beyond shoe leather and bicycles that

are not based on oil and even our shoes are nowoften made from oil. Food production is very energyintensive, clothes, furniture and mostpharmaceuticals are made from and with petroleum

and most jobs would cease to exist withoutpetroleum.

Peak Oil Special EditionJuly 16th 2009Page 4

Source: Charles A. S. Hall and John W. Day, Jr

EROI of the USAs Energy Sources vsAmount of Energy From Each Source

US Oil Production vs Drilling Activity


Prepare your investments

for peak oil.


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By Peter Strachan

A form of the graph below was first published in The Limits to Growth in 1972 writtenby the Club of Rome. Unlike their graph, with the benefit of 35 years, this graph nowhas a time scale showing that food per capita is also peaking now and that populationshould peak by 2050, under the weight of steeply rising deaths. Very grim stuff, but ashuman beings, we have found a way of swimming and not just floating along with thetide, so there is hope that we can overcome the catastrophe that will face us if we fail.

The rise of new technologies, such as the internetshould make up part of the solution, and along withadjustment to our present way of living, whichseems an obvious candidate for change.

Many people believe that there will be a black swanevent (unforseen new development) in technologywhich will change everything and which can not, byits definition, be forecast. We have the option ofbusiness as usual, while we wait in the hope for theblack swan, or we can try to swim.

Peak Oil Special EditionJuly 16th 2009Page 5

ContactPeter Strachan: [email protected] Publications: [email protected]

5/1 Almondbury Rd Mt Lawley, WA 6050Tel: 08 9272 6555 Fax: 08 9272 5556 Website: www.stockanalysis.com.au

www.pex.com.auDisc la imer

The information or advice (including any financial product advice) herein is believed to be reliable and accurate when issued however,StockAnalysis Pty Ltd ABN 39 079 812 945; AFSL 259730 (Strachan), does not warrant its completeness, reliability or accuracy.Strachan, its Directors and their Associates from time to time may hold shares in the securities mentioned in this report and thereforemay benefit from any increase in the price of those securities. Opinions and estimates constitute Strachans judgment. The authorcertifies that the views expressed in this document accurately reflect the analyst's personal views about the subject company and aresubject to change without notice. Strachan, its officers, agents and employees exclude all liability whatsoever, in negligence orotherwise, for any loss or damage relating to this document to the full extent permitted by law. This material is not intended as anoffer or solicitation for the purchase or sale of any financial instrument. The investments and strategies discussed herein may not besuitable for all investors. In preparing such general advice no account was taken of the investment objectives, financial situation andparticular needs of a particular person. Therefore, before acting on the advice, you should consider the appropriateness of the advice,

having regard to your objectives, financial situation and needs. There may be a product disclosure statement or other offer documentfor the securities and financial products we write about in StockAnalysis. You should obtain a copy of the product disclosure statementor offer document before making any decision about whether to acquire the security or product. If you have any doubts you shouldcontact your investment advisor. The investments discussed may fluctuate in price and changes in commodity prices and exchangerates may have adverse effects on the value of investments.

The author has small holdings in shares of BRU, MMA, SRI & BRT. Modest holdings in SSM, OEL, CWP, NXS, UXC, MGR, GRD, SUN,WES, HZN, RCR, TAP, AWE, TLS, PTM, TSE & GLH and larger holdings in ACE, ROC, HAV.

Revisiting The Limits to Growth



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peak oil special edition 16th july 2009

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