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Kamloops News

GEORGE: Protesting the future: It didn't work in 1920 and it ain't gonna work now either...

December 18, 2018 - 12:02 PM



The tight integration between oil companies, governments, and the rest of the economy has led to chaos in the oil markets recently and will have predictable effects in the months and years to come. Those making decisions in this area have spent decades ignoring reality in their pursuit of more of everything. As usual, reality bites. And the oil market's time has come.

Not even ninety days ago the analysts were screaming about high oil prices and the impact they would have on the global economy. And based on market fundamentals, they had something to scream about. “Tight supply, healthy demand, falling global inventories … and anemic spare capacity” were all cited as reasons to expect prices over $90 per barrel by year-end.

Forty-five days later, prices had reached a low not seen since shortly after the economic downturn in 2008. Producers in North America were screaming for intervention from OPEC, or in the case of Canada, from the Alberta government. Edmonton responded by imposing a production cap to boost the price.

Now the stated reason for the intervention was to reduce the glut of product sitting in storage in Alberta, something that the government felt was causing the price paid in Cushing to an unacceptable low. Someone needs to tell Notley that the market is in Cushing and that is where prices will be set, not in Alberta. And reducing the glut there (and in Texas City) is not something that more pipeline capacity will fix.

In the meantime, OPEC decided to cut production to boost prices.

Economic theory holds that when there is a glut of supply prices will fall until demand rises to meet that supply. It is a self-correcting process. Excess demand is met with higher prices which will destroy spur producers to increase supply to meet the demand.

Something is obviously broken when those price signals are no longer working.

The problem is that there is no price low enough that will support a modern civilization while also being high enough to ensure producers can invest in exploration and production of new wells. And it is actually a predicament, not a problem as there is no solution.

Peak oil is here. This is the "bumpy plateau" foreseen by the likes of Heisenberg and Kunstler back in the mid-nineties. Politicians and oil companies can play hot potato with the facts for a while but the volatility which is now apparent will not be contained. Instead of a functioning commodity market which underpins the entire economy and by extension our civilization is now, more than at any time in our history, teetering on the edge of collapse.

The evidence is all around us if we care to look. Diesel looks like it is going to be the first end product to hit the wall. No amount of supply is going to be enough to meet the demand. Economists are flummoxed. There simply isn't anything that can fill the gap that reduced production of diesel will leave in everything we do. Fewer ships, trains, and trucks mean fewer goods and services available in the local markets and higher prices for most everything.

Part of the chaos is social. The "yellow vest" bunch here in Canada have chosen to champion the oil and gas industry at a time when governments are already struggling to keep the corporations involved solvent. Never mind CO2 pollution. The market, barring heroic intervention by taxpayers, is about to drive an entire industry into the ground.

Luckily we have many examples from the past to examine for ideas on how to respond. I am pretty sure that no amount of protest by the carriage trade, horse breeders or those making their living from scraping up horse manure from the streets would have done a damn thing to keep their industry afloat. As it was, so it will be.

We have truly inherited that famous Chinese curse. We really do live in interesting times.

— Chris George believes one measure of a just society is found in how well it balances fiscally conservative economics with social responsibility and environmental soundness in all of its living arrangements.

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