Friday, July 5, 2013

Pain of peak oil is not spread evenly

Oil is being produced in north america from tar sands and from tight oil fracking. This oil is not economical. Cheap oil, conventional oil, peaked in 2005 as predicted. These new sources, unconventional oil, are economically unsustainable.

So, why is unconventional oil being produced, and where is the money coming from?

The production and consumption of oil comprises massive fixed capital assets. It is not possible to gradually convert these assets. Millions of cars and trucks cannot suddenly be changed over to run on solar power. A pipeline cannot be used to carry wind. Since these assets cannot be sold or gradually converted, any reduction in use represents a loss of profit. They must be used at fullest possible capacity. Hence the glut of oil in Oklahoma. The high extraction costs mean that production must run as fast as possible. There is a virtuous circle of more production keeps price from destroying demand, which makes production justifiable, which allows more in-ground oil to be considered reserves (assets), which justifies more investment.

Any reduction in demand turns this virtuous cycle into a vicious cycle in the other direction.

Where does the money come from?

The money for unconventional oil is coming from the money gained from the falling wages. Labor is made cheap by having many applicants for each job. This cheap labor is the basis for optimism in finance to increase debt to produce oil that interest on debt will be paid from future profits gained from continued cheap labor in the future.

So money is being taken from workers wages to maintain an oil system that is inflexible. Because the oil system is currently still profitable and transport still runs, this is said to be economically successful. Some will benefit greatly, many will keep their jobs a little longer, but the suffering and numbers of the poor will grow.