The euro rocketed to a two-month high of $1.29 and sterling jumped two cents to almost $1.54 after the Fed confessed that the US economy may not recover for five or six years.

“The worm is turning,” said David Bloom, currency chief at HSBC. “We’re in a world of rotating sovereign crises. The market seems to become obsessed with one idea at a time, then violently swings towards another. People thought the euro would break-up. Now we’re moving into a new phase because we’re hearing alarm bells of a US double dip.”

http://www.telegraph.co.uk/finance/currency/7893238/Feds-volte-face-sends-the-dollar-tumbling.html

Get that? The most powerful central bank in the world says the US will not recover for 5-6 years. If we are not within the start of a deep oil supply crunch by that time I will be extremely surprised, which means there will be no recovery in 5 or 6 years time either. Extrapolate that out further as you wish, taking into consideration the already record debt levels.

The US workforce has shrunk by a 1m over the past two months as discouraged jobless give up the hunt. Retail sales have fallen for the past two months. New homes sales crashed to 300,000 in May after tax credits ran out, the lowest since records began in 1963. Mortgage applications have fallen by 42pc to 13-year low since April. Paul Dales at Capital Economics said the “shadow inventory” of unsold properties has risen to 7.8m. “The double dip in housing has begun,” he said.

So where do we stand in mid-July 2010? While, the U.S. and OECD economies may not be doing so well, the global demand for oil has recovered nicely. After taking a two-year 3 percent dip in obeisance to the economic downturn, global oil consumption is now reported to be back in the vicinity of its 2008 high of 86.6 million barrels a day (b/d) for 2010. While U.S. demand is down a million barrels a day or so, demand from China and India are up more than enough to offset what is called “weak” US and European consumption. The International Energy Agency (IEA) tells us that it currently expects world demand to increase by 1.3 million b/d next year to a new annual high of 87.8 million b/d.

As nobody who carefully watches global oil production expects it to increase in coming years, we are left with “total productive capacity” which is currently estimated by the IEA to be 89.7 million b/d. This is about 3 million b/d above what we are currently using – maybe. Most of this spare capacity is supposed to be in Saudi Arabia; a land of eternal optimism where oil reserves never go down no matter how much is pumped up and sold. Many are skeptical that all of this “spare capacity” is really ready-to-go, reasonable quality, sustainable, production capacity. If not we are in worse shape than we believe.

Article from retired CIA analyst, Tom Whipple continued here.

The constraints to oil production growth have today been acknowledge by most, even by the Industry itself [5], as show by Figure 1. Also notable have been the implicit warnings issued by the IEA, that despite publishing production scenarios that each year match demand, have been vocal in other contexts explaining how unlikely the scenarios are to happen. It’s Chief-Economist, Fatih Birol [6], has been particularly outspoken in this regard.

Peak Oil, as it was named by Colin Campbell, is a pretty palpable reality at this stage, but for Europe reality is bit more intricate. Only one of its states is a net oil exporter, with most meeting their needs fully with imports. International oil trade peaked in 2005 and has entered a permanent decline; moreover, this decline will likely accelerate during the next decade, by 2020 taking away between 1/3 or 1/4 of the volume of oil available in the market in 2005. This has been the main reason behind the high price environment of the past 6 years.

Continued…

If China keeps growing at 7.5% they will need double the oil they use now, in 9.3 years. Even assuming nobody else has any growth there is no way in hell they will be able to find an extra 9 million barrels a day (around 18mb/d total or about twice what Saudi Arabia, the biggest producer produces per day). If we take it a little further out, to the next doubling time in just over 18 years time, when my son reaches his 18th birthday, China will be needing 36 MILLION barrels every day.

There is no way there will be enough Oil to go around pretty soon, when it is being consumed at 86.4 mb/d at the moment and world wide oil discoveries have been less than annual production, since 1980.

Funny but also disturbing, as you will see in the above must see clip, it is clear there is NO alternative to petroleum otherwise SOMETHING would have happened to transition away from this addiction. Nothing cheap and abundant to replace the over 6000 products which petroleum is used for. No cheap and abundant alternative for the life blood of modern civilisation. Why as we head forward it is a zero sum game from here on out. If china and the developing countries grow, the more developed countries will have to do with less, and once we come off this bumpy plateau of oil production we have been on since 2005, and start a faster decline, we will all have to do with less. Unless there is some as of yet unseen, unknown miracle alternative, but as the Hirsch report noted, any transition would have to happen 10 years before a global oil peak to prevent a serious collapse.

…a larger lesson is that no matter how much we improve our regulation of the industry, drilling for oil these days entails greater risk.  After all, oil is a finite resource.  We consume more than 20 percent of the world’s oil, but have less than 2 percent of the world’s oil reserves.  And that’s part of the reason oil companies are drilling a mile beneath the surface of the ocean — because we’re running out of places to drill on land and in shallow water.

For decades, we have known the days of cheap and easily accessible oil were numbered.  For decades, we’ve talked and talked about the need to end America’s century-long addiction to fossil fuels.  And for decades, we have failed to act with the sense of urgency that this challenge requires.  Time and again, the path forward has been blocked — not only by oil industry lobbyists, but also by a lack of political courage and candor.

The consequences of our inaction are now in plain sight.  Countries like China are investing in clean energy jobs and industries that should be right here in America.  Each day, we send nearly $1 billion of our wealth to foreign countries for their oil.  And today, as we look to the Gulf, we see an entire way of life being threatened by a menacing cloud of black crude.

We cannot consign our children to this future.  The tragedy unfolding on our coast is the most painful and powerful reminder yet that the time to embrace a clean energy future is now.  Now is the moment for this generation to embark on a national mission to unleash America’s innovation and seize control of our own destiny.

This is not some distant vision for America.  The transition away from fossil fuels is going to take some time, but over the last year and a half, we’ve already taken unprecedented action to jumpstart the clean energy industry.  As we speak, old factories are reopening to produce wind turbines, people are going back to work installing energy-efficient windows, and small businesses are making solar panels.  Consumers are buying more efficient cars and trucks, and families are making their homes more energy-efficient.  Scientists and researchers are discovering clean energy technologies that someday will lead to entire new industries.

Each of us has a part to play in a new future that will benefit all of us.  As we recover from this recession, the transition to clean energy has the potential to grow our economy and create millions of jobs -– but only if we accelerate that transition.  Only if we seize the moment.  And only if we rally together and act as one nation –- workers and entrepreneurs; scientists and citizens; the public and private sectors.
When I was a candidate for this office, I laid out a set of principles that would move our country towards energy independence.  Last year, the House of Representatives acted on these principles by passing a strong and comprehensive energy and climate bill –- a bill that finally makes clean energy the profitable kind of energy for America’s businesses.

Now, there are costs associated with this transition.  And there are some who believe that we can’t afford those costs right now.  I say we can’t afford not to change how we produce and use energy -– because the long-term costs to our economy, our national security, and our environment are far greater.

So I’m happy to look at other ideas and approaches from either party -– as long they seriously tackle our addiction to fossil fuels.  Some have suggested raising efficiency standards in our buildings like we did in our cars and trucks.  Some believe we should set standards to ensure that more of our electricity comes from wind and solar power.  Others wonder why the energy industry only spends a fraction of what the high-tech industry does on research and development -– and want to rapidly boost our investments in such research and development.

All of these approaches have merit, and deserve a fair hearing in the months ahead.  But the one approach I will not accept is inaction.  The one answer I will not settle for is the idea that this challenge is somehow too big and too difficult to meet.  You know, the same thing was said about our ability to produce enough planes and tanks in World War II.  The same thing was said about our ability to harness the science and technology to land a man safely on the surface of the moon.  And yet, time and again, we have refused to settle for the paltry limits of conventional wisdom.  Instead, what has defined us as a nation since our founding is the capacity to shape our destiny -– our determination to fight for the America we want for our children.  Even if we’re unsure exactly what that looks like.  Even if we don’t yet know precisely how we’re going to get there.  We know we’ll get there.

What I took out of it, is that basically there is no plan for the future yet, but don’t panic because you should have faith/hope even though nobody has any ideas how we can move away from the something like 6000 products which petroleum is used for. He says steps have been made, but when you look at the numbers, oil consumption in the US is UP since he entered the white house, from 21.5 Million barrels a day, to around 23 Million barrels a day. The few things he mentions to tackle the oil dependency are so small as to be almost not even worth mentioning, but I guess he has to mention something.

Still, it’s a bold step to hear such an acknowledgment from someone in such an important position.

As a side note, the amount of oil leaking into the gulf, if we take the higher estimate of around 50,000 barrels a day, is equivalent to just over 3 MINUTES of Americas total oil use each day.

Full speech you can watch here…

Chart from Evil Speculator:

One of the Federal Government’s top infrastructure advisers is warning of an oil crunch that could send the global economy spiralling back toward recession.

Curtin University Professor Peter Newman sits on the Government’s Infrastructure Australia Council and says peak oil – when demand outstrips dwindling supply – has already hit but that the global downturn has kept prices low.

Professor Newman even blames oil for causing the global recession in the first place, and he is not alone.

It is an issue being taken seriously by some local councils which have drawn up peak oil contingencies.

http://www.abc.net.au/news/stories/2010/04/27/2884100.htm

And check out this even bigger news, which whilst hopelessly optimistic, it is still a major step in that it is finally being addressed that SA oil exports can not keep increasing to handle increased global demand:
Saudi oil chief fears domestic risk to exports

Mr Falih said in a recent speech released by Aramco on Monday. “If no efficiency improvements are achieved, and the business is as usual, the oil availability for exports is likely to decline to less than 7m barrels per day by 2028, a fall of 3m barrels per day, while the global demand for our oil will continue to rise.”

It is believed to be the first time a Saudi oil official has so explicitly addressed concerns about the impact of domestic demand on exports. Analysts welcomed the announcement, saying the world’s largest oil producer and exporter needed to tackle the issue now.

Saudi Arabia produces about 8.5m b/d and raised its production capacity to 12.5m b/d last year, reaffirming its role as the world’s key swing producer.

But rapidly rising domestic energy demand and natural gas shortages have meant the kingdom has to burn increasing amounts of crude to fuel power plants, desalination units and new industries as its seeks to diversify its economy.

Continued at the financial times here..

The energy crisis outlined in a Joint Operating Environment report from the US Joint Forces Command, comes as the price of petrol in Britain reaches record levels and the cost of crude is predicted to soon top $100 a barrel.

“By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day,” says the report, which has a foreword by a senior commander, General James N Mattis.

It adds: “While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India.”

http://www.guardian.co.uk/business/2010/apr/11/peak-oil-production-supply

Here is a Link to the (.pdf) article the guardian references.

The economics of peak oil are explicated using three indicative models: linear decline; oscillating decline; and systemic collapse.

Oscillating Decline

In this model, constrained or declining oil production leads to an escalation in oil (plus other energy and food) prices. But economies cannot pay this price for a number of reasons. Firstly, it adds to energy and food price inflation, which are the most non-discretionary purchases. This means discretionary spending declines, from which follows job losses, business closures, and reduced purchasing power. The decline in economic activity leads to a fall in energy demand and a fall in its price. Secondly, for a country that is a net importer of energy, the money sent abroad to pay for energy is lost to the economy unless we export goods of equivalent value. This will drive deflation, cut production, and reduce energy demand and prices. Thirdly, it would increase the trade deficits of a country already struggling with growing indebtedness, and add to the cost of new debt and debt servicing.

Falling and volatile energy prices mean new production is harder to bring on stream, while the marginal cost of new energy rises and credit financing becomes more difficult. It would also mean that the cost of maintaining existing energy infrastructure (gas pipelines, refineries etc) would be higher, so laying the foundations for further reductions in production capability.

In such an energy constrained environment, one would also expect a rise in geo-political risks to supply. This could be bi-lateral arrangements between countries to secure oil (or food), so reducing oil on the open market. It would also increase in the inherent vulnerability to highly asymmetric price/supply shocks from state/

Full .pdf here

We are at the cusp of rapid and severely disruptive changes. From now on the risk of entering a collapse must be considered significant and rising. The challenge is not about how we introduce energy infrastructure to maintain the viability of the systems we depend upon, rather it is how we deal with the consequences of not having the energy and other resources to maintain those same systems. Appeals towards localism, transition initiatives, organic food and renewable energy production, however laudable and necessary, are totally out of scale to what is approaching.

There is no solution, though there are some paths that are better and wiser than others. This is a societal issue, there is no „other‟ to blame, but the responsibility belongs to us all. What we require is rapid emergency planning coupled with a plan for longer-term adaptation.
From the Tipping point .pdf I posted before

Bigger excerpt and graph below:

• A decline in energy flows will reduce global economic production; reduced global production will undermine our ability to produce, trade, and use energy; which will further decrease economic production.

• Credit forms the basis of our monetary system, and is the unifying embedded structure of the global economy. In a growing economy debt and interest can be repaid, in a declining economy not even the principle can be paid back. In other words, reduced energy flows cannot maintain the economic production to service debt. Real debt outstanding in the world is not repayable, new credit will almost vanish.

• Our localized needs and welfare have become ever-more dependent upon hyper- integrated globalised supply-chains. One pillar of their system-wide functioning is monetary confidence and bank intermediation. Money in our economies is backed by debt and holds no intrinsic value; deflation and hyper-inflation risks will make monetary stability impossible to maintain. In addition, the banking system as a whole must become insolvent as their assets (loans) cannot be realised, they are also at risk from failing infrastructure.

• A failure of this pillar will collapse world trade. Our ‘local’ globalised economies will fracture for there is virtually nothing produced in developed countries that can be considered truly indigenous. The more complex the systems and inputs we rely upon, the more globalised they are, and the more we are at risk from a complete systemic collapse.

• This will evolve as a systemic crisis; as the integrated infrastructure of our civilisation breaks down. It will give rise to a multi-front predicament that will swamp governments‟ ability to manage. It is likely to lead to widespread disorientation, anxiety, severe welfare risks, and possible social breakdown. The report argues that a managed „de-growth‟ is impossible.

• The high dependence of food on fossil fuel inputs, the delocalisation of food sourcing, and lean just-in-time inventories could lead to quickly evolving food insecurity risks even in the most developed countries. At issue is not just food production, but the ability to link surpluses to deficits, collapsed purchasing power, and the ability to monetize
  transactions.

• Peak oil is likely to force peak energy in general. The ability to bring on new energy production and maintain existing energy infrastructure is likely to be severely compromised.  We may see massive demand and supply collapses with limited ability to re-boot.

• The above mechanisms are non-linear, mutually re-enforcing, and not exclusive.

• We argue that one of the principle initial drivers of the collapse process will be growing visible action about peak oil. It is expected that investors will attempt to extract themselves from „virtual assets‟ such as bond, equities, and cash and convert them into „real‟ assets before the system collapses. But the nominal value of virtual assets vastly exceeds the real assets likely to be available. Confirmation of the peak oil idea (by official action), fear, and market decline will drive a positive feedback in financial markets.

Our primary question is what happens if there is a net decrease in energy flow through our civilisation? For it is absolutely dependent upon increasing flows of concentrated energy to evolve and grow, and to form and maintain its complex structures. The rules governing energy and its transformation, the laws of thermodynamics, are the inviolate framework through which all things happen- the evolution of the universe, the direction of time, life on earth, human development, the evolution of civilisation, and economic processes. This point is not rhetorical, access to increasing flows of concentrated energy, which can be transformed into work and dispersed energy, is the foundation upon which our civilisation stands. Yet we are at a point where these flows are, with high probability, about to begin decreasing. We should intuit that an energy withdrawal should have major systemic implications, for without energy flows nothing happens.
Continued…

In the oscillating decline model: economic activity increases→energy prices rise→a recession occurs→energy prices fall→economic activity picks up again but to a lower bound set by declining oil production. In this model the economy oscillates to a lower and lower level of activity. From our discussion about the origins of the current recession, we see this process has already begun.

Full .pdf here. It is kind of long, but well worth a read.

The key remaining question of the peak oil crisis is just when world production is going to start on an unstoppable decline.  A few years ago those analysts who were deeply enmeshed in the problem were saying that 2011 or 2012 looked like the fateful year.

But then the unexpected happened — a great recession came along and the demand for oil plunged. Although global oil production set a nominal high during the great price run-up back in the summer of 2008, production soon fell away as the deepening recession cut demand by some 4 million barrels a day.As long as the additions to our capacity to produce oil do not get too far below the pace of depletion, there would seem to be no reason for wild spikes in oil prices – in the near term. If the world continues to bump along in its current state for the next 3 or 4 years, it would seem that the availability and price of oil will not upset the apple cart with shortages or unaffordable gasoline prices. After 2013, however, all bets are off as there does not seem to be enough new production starting up to balance depletion.

This train of thought seems to say that somewhere around 2014, world oil production, which has been on a rough plateau since 2005, will start to decline, perhaps rapidly.

Full article..

Those who would argue for economic recovery must answer two intractable questions.

The first is: Where will the energy come from, as more of the world’s net exporters become net importers?

Britain, Argentina, Indonesia, and others have become net importers in recent years. (Joining a long list of others) Mexico and Columbia are expected to follow suit within a decade. Clearly, we can’t all be net energy importers.

There is also the obstinate fact that aggregate net energy — the energy you get in return for investing energy in its production — has been dropping steadily. Oil net energy dropped from 100 in the early 1930s to 11 or less today. Net energy for natural gas is now in decline. We don’t have adequate data to know yet, but coal’s net energy is probably in decline too. Meanwhile, the net energy of all substitutes is low: wind, 18; solar, 6.8; nuclear, 5-15; all biofuels, under 2.

The second question is: If the creeping infection of sovereign default continues to spread to more countries, where will the money come from to bail them out?

The answer has been, and continues to be, more aspirin. Without more cheap energy, monetary tactics to play the game into overtime will not only be futile, they will only draw us closer to the edge of the net energy cliff.

Continued here…

Is it coincidental that the money multiplier is now less than zero? For every $1 increase in the monetary base – the money supply only increases by 79 cents.

Starting around 2012-2014, we will need to build the equivalent of the entire world’s existing renewable energy capacity every year just to replace the lost BTUs from oil.

In 2009, more cars were sold in China than in the United States, something most analysts did not expect to see before 2018 or 2020, said Mr. Yergin. If China continues at its current pace, he said, it will be consuming more oil than the United States by the end of the decade.
The United States consumes about 19 million barrels-per-day now. China consumes about 8. The difference is 11. Thanks to the slowdown in energy consumption, OPEC producers now hold an estimated (highly unlikely given decline rates and overstated reserves) six million barrels a day of spare capacity, equal to roughly 7 percent of current demand, much of it in Saudi Arabia alone.
Here’s the deal. Once we run through the current spare capacity, the oil supply then and for the rest of your life is essentially a Zero Sum Game. If China uses more, someone else must use less.

zero-sum describes a situation in which a participant’s gain or loss is exactly balanced by the losses or gains of the other participant(s). If the total gains of the participants are added up, and the total losses are subtracted, they will sum to zero.

Saudi Arabia is gradually reducing crude oil exports to the US as it is pushing deeper into China and other fast-growing Asian markets. Exports to the US fell to 837,000 b/d in November, the lowest level in 21 years.

Bank of America and Barclays Capital, two leading oil traders, have told clients to brace for crude above $100 (£64) a barrel by next year, before it pushes relentlessly higher over the decade.

If they are right, (and based on simple mathematics they are) we can kiss goodbye to any recovery until things get really bad again, at which point the price will most likely drop again, and the talking heads will start talking about green shoots again, and the price will rise again.

Rinse and repeat.

Really who knows what will happen, but some or all of this future is hard to rule out as a likely possibility.

This is one part of an 8 part video which everyone should see. If you want to really understand it, your best bet is to start at the beginning here. You might find it boring to start with, but the information is invaluable. I watched it a few years back and just rediscovered it last night and the 2nd watch was even more rewarding.
Hat tip TAEC.

Meanwhile, following up on the post a few down:

WSJ Reports, “The Next Crisis: Prepare for Peak Oil”
The Wall Street Journal today has an article about the work of Britain’s Industry Taskforce on Peak Oil and Energy Security that goes well beyond summarizing what the task force said in its report. The article starts out:

The Next Crisis: Prepare for Peak Oil

As Europe’s leaders gather in Brussels today, they have only one crisis in mind: the debts that threaten the stability of the European Union. They are unlikely to be in any mood to listen to warnings about a different crisis that is looming and that could cause massive disruption.

A shortage of oil could be a real problem for the world within a fairly short period of time.

From the oil drum…

The report, titled “The Oil Crunch – a wake-up call for the UK economy”, finds that oil shortages, insecurity of supply and price volatility will destabilise economic, political and social activity within five years. (Note: It already has, but it is good to hear important companies finally acknowledging it)

Having assessed the systemic changes caused by the global economic recession, coupled with the projected growth from non-OECD countries, ITPOES predicts Peak Oil will occur within the next decade, potentially by 2015 at less than 95 million barrels per day. (In 2008, production levels were 85 million barrels per day.) The study finds that the recession has delayed the oil crunch by two years. This provides invaluable time to plan for a future which will see structural increases in oil prices coupled with shortages and increased market volatility.

Q: What is different in this analysis of peak oil – I’ve read hundreds?
A: This is the first time leading businesses have warned that a peak in cheap, easily available oil production is likely to hit by 2013, posing a grave risk to the UK and world economy. The warning comes from a broad spectrum of industry (Arup, Foster + Partners, Scottish and Southern Energy, Solarcentury, Stagecoach Group, Virgin Group).

Download the full report here.