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Peak Oil? A Chaotic Transition is in Process

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As the graphic shows, US gasoline inventories are at a 27-year record high. And yet, gas prices and oil prices continue to rise - having increased by about 30-40% (depending on the grade and source) in 2016. And as the second graphic shows, US gasoline consumption in the first part of 2017 is down 8% from the same period in 2016. Strange things are happening -

The glut of gasoline has led to tankers being turned away at New York Harbor in recent weeks, diverted to ports in the Caribbean. However, even that did not resolve the glut on the U.S. east coast. “Record-high inventories in the region are now pushing prices low enough to turn the typical trade flow on its head,” Bloomberg reports. The east coast typically imports a lot of crude oil and refined products. But refined products are instead heading in the other direction because of the buildup in supply.

It’s a concern for the oil companies, which are barely profitable at current prices - and this overhang of gasoline and crude stocks may well cause the price to crash back down to below $40 a barrel.

What is going on?

In two words - Peak Oil is going on. Any system which is getting out of balance becomes increasingly chaotic - this is true of natural biological systems (population growth and crashes are common), weather systems (with climate change, what was once a hundred-year event becomes more frequent, and more intense - consider the floods in CA right now), and in complex market systems such as the global oil market.

And the global energy system is in transition - there is a critical mass of people who understand that the current energy-intensive economy is unsustainable, and are actively adjusting their lifestyles as a consequence. So gasoline consumption is down 8% year-on-year - to the surprise of the oil companies - normally the sign of a down economy - but by all measures the economy is doing fine. People are voting the only effective way they have - with their wallets. Why drive a gas-guzzler? Why drive at all when you can walk or ride your bike, saving money and making a small environmental effect - multiply this by millions of people, and it can make a big difference.And the oil industry is having a great deal of difficulty in forecasting demand in the new environment.

Now the oil industry has many arrows left in their quiver to control the supply side and hence profitability - taking supply offline by fomenting wars (Iraq, Libya), by forming cartels to restrict supply (OPEC), by taking over governments (Tillerson, anyone?) - but demand is in the hands of billions of individuals who have agency. They do function within an economy which has been specifically designed to maximise petroleum use - from city layout (try living in a suburb without a car to do pretty much everything), to destruction of electrified public transportation (I still remember trolley buses - which General Motors provided bargain diesel replacements for on the requirement that the electric system was dismantled) - but people are figuring out that the oil economy is unsustainable. And acting.

My bet is that oil prices, absent a force majeure event such as a new war in the middle east, or a massive hurricane that takes out a chunk of global oil shipping capacity, will fall in 2017. But that’s just an opinion - do your own research.

About David Camp

Citizen Journalist • Member since Jul 12, 2009

David Camp is a cpa (Canada'86; USA'96) and MBA (Schulich'88) who toiled thirty years in the corporate salt mines, counting beans and telling stories to the auditors and whatnot. Now [...]