Wednesday, April 27, 2011

Agriculture and the Oil Supply

photo
photo: flickr

There have been a slew of great posts in the blogosphere lately about our oil dependency and supply situation, so I thought I'd devote a thread pointing readers towards some that I found especially informative. Global oil demand is growing while supply is not, at the same time that economic models built upon growth are growth-impaired by our current set of circumstances.

There is nothing more important than our fossil fuel supply when it comes to modern agricultural production. That is unfortunate, as current policies seem to promote maximum production of just a few crops, on a regional basis, over the goal of our own national food security with built-in resiliency. Today's far fewer farmers with far larger equipment, while efficient during periods of time offering abundant and low-priced oil and natural gas inputs, would need more and more government support were prices to go permanently higher. Or, if supplies become truly tight, rationing of oil and price subsidization dedicated for agriculture would become necessary.

As energy input costs go up, farmers in the poorer nations are already opting out and growing alternative lower-input crops, or none at all. Could that happen here? As ever more expensive equipment and seasonal inputs weigh upon farm profits and the resulting higher priced food commodities encourage demand destruction, there becomes a diminishing return which might threaten this high energy devouring agricultural system itself. Luckily, a great deal of slack in today's entire U.S. food system model would afford us an opportunity to zero in on essential production practices provided our governing leaders are up to the task and providing we have enough time to do so.

With today's global developed nation's economies on the fringe of economic stability and with the USD as the world's reserve currency being challenged by the BRICS, is our modern-day, high oil input farming system also dangling by a thread?
K. McDonald

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Next, are some of the posts that I recommend reading:

Stuart Staniford's Early Warning blog has had excellent posts (here and here) discussing the recent IMF report's frightening statements about oil price elasticity as well as surprisingly including a scenario presenting a diminishing oil supply of 2% per year. The IMF then links that scenario to poor world GDP growth and central bank rates of zero percent. Staniford concludes, people will keep trying to grow without getting much more oil efficient, that won't work, oil prices will go through the roof, another global recession, or at least a major slowdown, will ensue, and then people will begin in earnest the work of starting to transition away from oil dependence. I can't tell you the timing precisely. It could easily be this year, it could be next. It's even possible that some other global crisis will intervene first (like the credit crash of 2008 did). But I will say categorically that there's no way we are going to get through 2016, as the IMF projects, with business-as-usual economic growth.

FT Alphaville and others are all in a toot over Jeremy Grantham's latest "paradigm shift" (a phrase I've seen used frequently, of late...) in which he discusses resource depletion and limits to growth of economies. "I believe that we are in the midst of one of the giant inflection points in economic history. This is likely the beginning of the end for the heroic growth spurt in population and wealth caused by what I think of as the Hydrocarbon Revolution rather than the Industrial Revolution. The unprecedented broad price rise would seem to confirm this. Three years ago I warned of “chain-linked” crises in commodities, which have come to pass, and all without a fully fledged oil crisis. Yet there is so little panicking, so little analysis even. I think this paradox exists because of some unusual human traits." (To read the entire Grantham report, visit Paul Kedrosky's Infectious Greed.)

Gail Tverberg who writes Our Finite World blog, did a lengthy analysis of the recently released EIA report showing January figures here. Preliminary global oil production numbers through the end of January were headed upwards slightly, but that was before Libyan events, and the Japanese earthquake. She then goes on to make her case for expecting a steep downslope in future oil production.

James Hamilton, at Econbrowser, wrote a great post titled, "Saudi oil production and the Libyan conflict". Most importantly, he concludes "You may call it unable, or you may call it unwilling. But whatever you want to call it, don't pretend that the Saudis' claimed excess capacity is oil that the world is actually going to use in 2011. And whatever you want to call it, don't pretend that the current price of oil has nothing to do with supply and demand."

Today's WSJ addressed this same subject of decreased oil production from Saudi Arabia at a time of increased demand due to Libya here. Everyone's confused and many articles are out there speculating on the Saudi situation.

Gregor MacDonald helps explain problems with today's "but natural gas will save us" attitude here. "(T)he problem of energy transition is a problem of the built environment. Europe and Japan are in position to uptake more NG as their transport sectors also run on power. The United States, however, is not."

Rather incredibly, the Washington Post is starting an opinion series called "A World Without". The first entry, by Steve Hallett and John Wright, appeared this week, "Imagining a world without oil". This one's pretty basic for the newbies.

To help appease some of your indigestion after reading all of the above doom, over at Oil Voice, David Bamford wrote "OilEdge: 'Peak Oil' postponed....." It starts out, "I am somewhat skeptical about ‘Peak Oil’, specifically the notion that there will be a supply-side peak in oil production in this current decade. Why am I a sceptic? I have four points." and concludes, "Such breakthroughs – and many others - can dramatically reduce the cost base of finding, developing and producing petroleum…unlike the costly ‘incrementalism’ offered by the big oil field service companies."

And finally, from USAToday: Nearly eight in 10 economists say they’re less optimistic about the nation's economic outlook this year than they were three months ago and most call high energy prices the biggest threat to the recovery, according to a USA TODAY survey.



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