Tuesday, January 19, 2010


Energy Decline and Peak Demand

Oil & Gas Magazine has posted a guest editorial by The Oil Drum’s Gail Tverberg, titled “Oil, Gas and Electric Power: Some Issues for 2010” (it’s also posted at The Oil Drum here). The editorial is short and gets right to the point, so even if you have just a few minutes, it’s well worth your time to read it.

There is one place in particular I would like to discuss here. It deals with “peak demand,” not in the sense of, for example, there was a new (local) peak in demand for electric power, but in the sense of overall demand declining, which we are starting to see because of the global business downturn.
While some are painting “Peak Demand” as a good thing, I see it as a problem, since it is likely to be accomplished through declining standards of living. Peak demand may, in fact, be inevitable because our current standard of living cannot be supported if oil and gas prices rise to too high a level—people will spend too much of their incomes on necessities, and will not have enough left over for new homes, new cars, and all of the other things that have enabled economic growth in the past.
This is an excellent observation, and I would just like to add something. If demand for energy declines (or even if it is perceived to fall — watch the markets), so does its price. Again, this seems like a good thing, because the cheaper energy is, the better the chances of economic growth resuming. But the downside is that the less we pay for energy, the less capital is generated for further energy development, and the less incentive energy companies have to make those investments. Developing fossil fuels is more expensive than before, and investment in renewables is expensive. So we have a classic dilemma. If we want to keep developing fossil fuel resources, and if we want to invest a lot in renewables, we need high demand to generate the requisite capital. But, as the editorial points out, energy is already too expensive for an economy designed to run on cheap energy. You can see where this is leading.

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