Current Events

Join us as we watch the crisis unfolding

May 29th, 2009

My apologies for not posting a Current Events item earlier; I'm in the late stages of writing a third book on oil.

Bloomberg News reports that a high-level commission may be appointed to explore the roots of the present economic crisis. Bloomberg quotes Charles Geisst, a professor of finance at Manhattan College, who says that the commission would have to "dig way below the surface and get to the bottom of what caused all of the problems." It seems blatantly obvious that the crisis was caused by the end of growth in the world oil supply. Suggested people for the panel are Sandra Day O'Connor, Paul Volker, and Arthur Levitt. None of them could find peak oil using both hands and a flashlight. How about appointing a geologist like T. Boone Pickens to the commission? O'Connor, Volker, and Levitt will come out with recommendations for armor-plating the banking system, but the crisis could have had different effects from the same cause. Other countries could have stopped reinvesting our trade deficit back in the USA, or oil could have switched from pricing in dollars to pricing in Euros.

The financial crisis deepens, fed by positive feedback. Job losses reduce personal spending, resulting in more lost jobs. The USA lost 539,000 jobs in April 2009. That's supposed to be good news because in the previous month we lost even more: 699,000 jobs. We're supposed to find hope in the second derivative. The basic number is the number of jobs. The monthly losses are the first derivative. I'm afraid to try to fit an algebraic formula to the employment numbers. When it finally bottoms out, the number of employed people might be down to one: President Obama and nobody else.

I'm reading and enjoying Paul Ormerod's book Butterfly Economics. The "butterfly" is a reference to atmospheric general-circulation computer models that are very sensitive to the initial conditions. Ormerod gives a clear explanation of positive feedback. When I finish reading it, I'm going to put it on my bookshelf next to Bert Malkiel's A Random Walk Down Wall Street.

In a few years, there will be an abundance of non-geological explanations for peak oil: OPEC cut back production to support the price. Investment in new oil sources was interrupted by the drop in the oil price. The Hubbert prediction did not involve the minutiae of the oil markets. It could well be that the oil-supply tail is wagging the world economic dog.

One of the available data sources is the Baker-Hughes count of the number of drilling rigs actively digging for oil or natural gas. The Hughes rig count dates back to 1944, when salesmen from Hughes Tool Company went to the active rigs to sell drill bits. Here are some recent counts for North America:

The rig count was cut in half in 8 months. That's not the "drill, baby, drill" chant from the Republican National Convention.

A speculative news story says that the major international oil companies are eager to re-enter the oil business in Iraq. I have been in denial for 5 years, not wanting to admit that the principle reason for the Iraq War was getting the major oil companies back in business. But there they are, lining up, even before there is internal legislation in Iraq dividing up oil responsibilities and before the American Army pulls out. (No one is going to like my idea for staffing the residual US "advisory" force in Iraq. I would limit it to volunteer officers; no enlisted men at risk.)

Kenneth S. Deffeyes, Corporal, US55437660