2006-07-17

Peak Oil Conversation

I've been having an email conversation with a Christian guy about the subject of Peak Oil. I responded to many of his questions in a fairly detailed way and, as a result, I have decided (with his permission and the editing of certain things) to post much of the dialogue here since I think it would be helpful to some people (click "Read more")



Hello Pete,

Some practical questions if i might. Do you think it would be wise to stop putting extra funds into super and redirect them instead to mortgage payments?? What do you think will probably happen to superfunds. (Mine "matures" in a few years - if I take early retirment.) Would investing in land be wise - perhaps from a practical and financial point of view??(At least it provides a fallback position if food does become scare. Market gardens could help feed the church and supplement communty food stocks) Is there any point in investing in anything??


I feel very unsure about specific questions like this but I will attempt to answer them the best way I can.

All funds, as far as I know, have some level of "balance" in them between things like shares, property, bonds, cash and overseas investments. The economic damage wrought by Peak Oil will naturally affect people's investments, but there is one thing we can probably count on and that is the increase of interest rates.

As the price of oil increases so will the inflationary effect. As you probably know, it is the responsibility of the Reserve Bank to control inflation, and it does this via interest rates. If the bank sees inflationary pressures increasing (and it will as the peak closes in and passes by) then they will increase interest rates in order to solve inflation.

The financial organisations that control your super have a responsibility to look after your funds properly, and there are mechanisms in place to ensure that money is taken out of poorly performing investments and re-invested into better performing ones.

This is important for all of us because it means that when interest rates rise, it becomes more attractive for investors to put money into the government bond market. Simultaneously, the dampening effect that higher interest rates have upon the economy will result in poorer performing investments in property and shares.

What I'm saying is that your super fund should react to the rising of interest rates by putting more money into government bonds, thus preserving the funds that are entrusted to its control. The returns may not be stellar, but they will be relatively safe. Riskier investments will lose out more, though, since the balance of the investments will be in shares and property and overseas shares.

***Don't sell your house.*** Although the property market will suffer as well (probably doubly so considering the property bubble that has developed over the last 5-6 years), it is actually those purchasing houses for investment that will suffer the most. People who live in the houses that they have mortgages on will naturally suffer a loss of equity, but these homeowners are much better off keeping their house to live in. In the meantime they should pay off their mortgage ASAP, because interest rates will increase as the peak gets closer.

In response to Peak Oil, a friend has changed his mortgage and is seriously trying to pay off as quick as he can. He often laments about buying his house but I'm always quick to remind him that ordinary homeowners are not all going to go bankrupt because they have mortgages.

Another thing to avoid would be borrowing against equity. Again, this sort of thing will become increasingly rare as interest rates rise.

It's hard to say whether you should invest in "land" because after the peak some land will be less valuable and some will be more. Property in areas far from the urban centre and reliant almost exclusively upon cars for transport will become less valuable since it will become more expensive for people in these areas to travel to and from work. Conversely, properties around public transport, such as train stations and major bus routes, will probably increase in value since transport will become cheaper for these people.

The increase in transport costs will affect global trade. It will become increasingly more cost efficient to produce goods closer to where the customers live. Thus it is also likely that industrial production in Australia will increase to provide Australians with basic goods, while sourcing these from places like Asia will become less viable. This doesn't mean that global trade will stop, or that Australians will no longer buy things from China or Japan, but it does mean that there will be a readjustment that will favour Australian industry.

The most obvious place for buying shares would be in mining companies, especially those who specialise in oil, coal and natural gas. As energy prices skyrocket, these companies will make large profits, and shareholders will make a killing.

I know you think ecovillages are overkill(though personally they have always appealed to me and I think the simple,sustainable and communal aspects are in fact a more God honouring way of living) but at the least ,wouldnt it be wise to "ecofarm" your back yard ,put in a water tank and perhaps some solar panels etc to help counteract the massive energy and food price rises??


None of these suggestions would hurt but you probably need to work out the opportunity cost of time spent cultivating your own backyard garden compared with what you could do doing other things. As food prices increase so will the response of the market - farmers will start to grow more food and employ more people to do it. Only if vegetables are exceptionally expensive would it be wise to set up your own backyard garden - and by that time there are probably people dying of starvation.

I'm not saying don't do it (that is, set up a backyard garden), but just remember that it may not be necessary.

Solar power is probably a good idea. As energy costs rise so will our electicity bills, making solar power more economically viable.

Which jobs do you think will be safest? Do you think christian and non elite private schools will close? What skills would be wise to learn ?eg Permaculture?? I was planning to spend a year or two upgrading my Tesol qualifications but Im wondering if there is any point??


All these are interesting questions. The friend I mentioned who is concerned about Peak Oil has decided that he will pull his son out of his Christian school at the end of this year and instead send him to the local primary school so that they can free up more funds to pay off their mortgage. Privatised and independent education has increased markedly in the last 10-15 years and, as people's disposable income is eroded through higher interest rates and/or unemployment, many may well choose to send their kids to public schools. I think this is a real possibility and I can foresee many independent schools closing as a result. However, there will still be rich people and they will always have enough money to send their kids to private schools, so the chances are that many of these parents will "downgrade" to a private school of lesser stature.

There is no doubt that our highly specialised economy, whereby the market rewards those with specialist qualifications, will begin to tilt towards those with multiple skills the further along the peak we go. In order to save money, people will begin to do things themselves and this will reward people who are competent in multiple skills.

I don't think that the peak will bring about a complete destruction of western society and its economy - there will still be a great need for specialist training, but the situation will tilt against them (ie they won't be as financially better off).

I have no idea about Permaculture and whether it would be a good thing to get into or not. I'm not convinced that we're going to have to set up backyard farms unless there is a major catastrophe. Even 100 years ago the best way to farm was for large scale agribusiness selling its wares in the marketplace.

I can't speak for you about your TESOL qualification. I will point out, however, that NESB Australians will always be better off financially and socially if they have a good grasp of the English language. As the peak approaches and passes, and as the economy goes into its tailspin, I think there probably will be a serious demand for TESOL.

My son is living and teaching English overseas. Is it possible he might get stranded there?(When airlines collapse/become too expensive for the middle class)Perhaps it would it be wise to suggest to him to come home at the first big sign/s of trouble?What might those signs be?


From the tone of your question I would assume that maybe you think that the peak will be accompanied by some massive economic and social collapse. My feeling is that it won't. The world is NOT going to suddenly run out of oil. If you haven't understood it so far, try to understand the science behind Peak Oil - the situation will not be a sudden loss of oil, but a long term and gradual decline. This means that the pain will be felt over a longer period.

There is no doubt that many airlines will go under. The cost of ferrying people around the world will become so expensive that many people will stop flying, thus depriving the airline industry of revenue. But with each collapse of an airline, the supply of air travel will reduce, thus making the surviving airlines better off. I don't know how many airlines will go under but it won't be all of them - in fact I think it may be less than half (and many will amalgamate in order to survive).

All I'm saying is that the chances of someone being stranded somewhere because of some sudden airlines collapse is actually very, very rare. Even if air travel becomes prohibitive, travel by ship will become more viable. We may even return to the pre-ww2 days of ship transport rather than airlines.

As I said about your TESOL work, a common language is important for world trade and I think that English teaching will become quite important amongst non-English speakers.

As far as the first sign of trouble - it's been going on since 2004. It's the price of oil. Every few months we hear some "expert" saying that the price rise is only temporary and will be back around $20 in no time. But that hasn't happened. While the oil price fluctuates according to certain crises (eg: Hurricanes detroying oil infrastructre in the Gulf of Mexico; threats of violence from Iran; Israel invading Lebanon; Gunmen attacking oil rigs off the coast of Nigeria... etc), there are also price hikes due to the basic issue of supply and demand.

What I'm saying is that the oil price has gone up and down all the time for the past few decades in response to various world events. In the last two years, however, the price has been steadily going up, which means that there is something else influencing oil. In my opinion it is due to the fact that demand is increasingly outstripping supply.

What we will see in the next few decades is stubbornly high oil prices and interest rates set at levels that cause recessions and hinder recoveries. During a recession, oil prices will actually come down but they will not come down far enough. We won't see a return to the inflation that we experienced in the 1970s because Central Banks the world over (including the US Federal Reserve and our own reserve bank) know how to fight inflation - by raising interest rates. In place of inflation, however, we will have unemployment.

Not a good situation is it? I'm fairly certain that the world will survive this, however. It won't survive unscathed, but my honest opinion is that we will not be returning to medieval fuedalism.





From the Peaknik Department

© 2006 Neil McKenzie Cameron, http://one-salient-oversight.blogspot.com/

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10 comments:

apodeictic said...

You made the comment that we might see a return to sea travel.

As far as I see it, the main reason passenger liners between Australia and Europe finally stopped service in the early 1970s was because the price of oil (combined no doubt with decreasing passenger demand due to an increased preference for air travel) meant it just wasn't economically viable to run these liners any more.

You can still travel by sea between Australia and other continents in a passenger berth on a container ship. Compared to the old liners the conditions are very spartan (it might just be you and the crew) and it is *much* more expensive than flying: http://www.freightertrips.com/guide/costs.html But current prices on either container ships or on luxury cruise ships aren't really an indication because long distance sea travel is a niche market. If we were to return to mass sea transit I'm sure you could do it quite a bit cheaper.

Do you have any figures on the fuel comsumption of a sea vessel vis-a-vis an airliner over various distances? I imagine a ship gobbles up a fair amount of oil -- probably considerably more than a plane over the same distance. Of course with a ship, you should be able to stick a lot more passengers on it than on a plane which would mean that the per passenger fuel consumption for a ship could be less than a plane.

It would be good to see some figures. But where sea travel competes with air travel today it is considerably more expensive. It is cheaper to fly between the UK and the continent of Europe than it is to catch a ferry. It is cheaper to fly from the mainland of Australia to Tasmania than it is to take the ferry. How much more expensive will oil need to become for sea travel to become cheaper than air travel?

Jonny said...

Without doing any calulations, I doubt ships would get cheaper than flying anytime soon, for people.

Planes are light, and move easily through the air. Once up in the sky, they could probably do the last 1/3 of the trip with the engine off if they wanted. Meaning they wouldn't need to use much fuel. (Thinking out loud).

A ship is heavy and has alot more friction moving through the water. With the engine turned off, it wouldn't go far. Ships are only good for moving heavy cargo.

As flying gets more expensive with the cost of fuel, I guess more Americans are going to catch the Greyhound. But I'm not even sure that would be cheaper.

Has anyone worked on a airplane with electric jets running off a hydrogen fuel cell? That sounds like the future. I may quickly invent it now.

One Salient Oversight said...

I'm no scientist but...

Planes tend to work against gravity while ships don't. There is a considerable amount of energy that is used in keeping a plane flying through the air.

You may want to check out This article about an Airbus that ran out of fuel over the Atlantic. Once the fuel ran out, they were able to glide for 120km - hardly a decent distance.

And electric jets? I always thought that it was the burning of the jet fuel that caused the thrust. If you're wanting to burn pure hydrogen then I suppose that's a possibility, but if you're talking about a fuel cell being used to create electricity then it would be an electric propeller.

Jonny said...

"Jet" can mean a few things. You can have a jet of water, a jet of air, a jet engine. Ever heard of a jet-ski? Or a jet-boat? They don't have a jet engine like a plane. They have a normal piston petrol engine, which is mechanicaly linked to little propellers inside the boat that shoot out a "jet" of water for propulsion. In this way there is no big propellor to get caught on things.

In a jet engine, the burning of the fuel causes lots of propellers to turn (lots of little fins around the outside), which causes other parts of the propeller to draw in air, and shoot AIR out the back causeing thrust. A series of propellers are used with different angles on the blades to make best use of the burning fuel that slowly looses its heat. I may have to check this.

It is only with an afterburner, that burning fuel gives dirrect thrust like a rocket, and I don't think that's very efficient.

I think electric planes will only be used after most of our cars are electric (30 years time). But I am sure someone is working on it.

We see new technology in cars first, in trucks 15 years later, and in aircraft 15 years after that. (Speaking mechanicaly).

Jonny said...

Ok I had a look at this. I don't know much about this, but I would like to think it's posiable to have electric motors powering a fan. Because aircraft with a big propellor have a speed limit.

One Salient Oversight said...

On the issue of the energy usage of air transport:

Avoid air freight whenever possible. Aside from being expensive, it consumes far more fuel per mile traveled. Patagonia calculated that the energy costs associated with a product rose from 6 to 28 percent when the mode of transport shifted from ground to air.

Source

Jonny said...

I will get to work designing the electric ship then, powered only by wind turbines, solar panels, wave turbines, and hydrogen from sea water. :)

Jonny said...

Your quote there is talking about the cost of air transport compared to trucks in America. There are lots of planes in America criss crossing the continent, not always needed.

The same website says very bad things about ships.

Dave Lankshear said...

Hi Neil,
good post!

I wanted to share the first peak oil sermon that I know of covered by conservative evangelicals!!!

It packs an extra punch because it is by EX OILMAN turned minister, Andrew Robson.

Sermon at CCEC.

It's about 50 minutes, and starts off talking about the Easter Island collapse!
Enjoy!

Prentiss Riddle said...

I've been Googling around for reliable numbers on the relative energy intensity of different transportation modes. The best I've found are from the Centre for Sustainable Transportation and its "Sustainable Transportation Monitor": http://cst.uwinnipeg.ca/monitor.html

The March 2000 issue says, "Ocean freighters use less fuel per tonne-kilometer than other freight modes (on average, roughly half that of rail, one tenth that of trucks and one seventieth that of air freight."

Note that this is a comparison of long-haul freight, not passenger traffic. An ocean liner that has to keep passengers happy for days on end will have considerably more overhead than an airplane which has to accommodate them for just a few hours. Still, a factor of seventy is a lot of room to work in.

You all might also enjoy Gilbert and Perl's "Energy and Transport Futures", a June 2005 report to the Canadian National Round Table on the Environment and the Economy: http://www.richardgilbert.ca/Files/2005/Energy%20and%20Transport%20Futures%20(Web).pdf