doom letter #10

I decided that instead of writing like everyone already knows what I am talking about, I would take a step back and describe some of the basic ideas that I base my view of the world upon. What follows is a list of ideas boiled down to their essence.

1. Peak Oil Theory

Since most people agree that oil is a finite resource, peak oil is the point at which oil production reaches the all-time high point and begins decline. To better understand the idea of peak oil, it helps to think of it in a different way. There are two components to enhancing your comprehension; oil reserves and daily oil production.

Oil reserves are all of the oil in the ground that we estimate we can remove with existing technology. Today there are more oil reserves in the world than there ever have been before. This is because we have explored most areas where it makes geological sense for oil to exist and we have developed sophisticated techniques for extracting the oil in the ground. You can think of oil reserves as money in a bank account – which means that we have more “money” than we ever had before.

But that is only part of the story.

The other part of the story is daily oil production. This is the maximum daily output of all technology and capital that are applied to oil extraction. You can think of oil production as an ATM machine. It pumps “money” out of the bank account. Unfortunately, like an ATM machine, oil production has a daily limit. The limit could be raised in theory, but eventually production would reach a high point and begin decline.

Now that you understand the difference between reserves and production, you will be better able to understand why some people think peak oil theory is a big problem. If you look at production numbers globally, many of the traditional producing and exporting countries are facing declining productivity. Eventually when peak production is reached all future economic growth will need to be powered with a different natural resource. This is a problem that is not being addressed seriously by business or government.

2. The Bumpy Plateau theory

The idea behind the bumpy plateau theory is that human ingenuity will attempt to fight the onset of peak oil with the implementation of new technologies to extract oil faster and possibly at higher rates than we are now. The result of geological peak oil and want for growth will lead to a truncated series of boom/bust production cycles. The boom and bust will result from daily production limits being reached during economic recovery followed by another crash in the economy. This will continue until we either wise up and find alternate energy to power our lives or reality settles it for us. I think that we are at the very beginning of the bumpy plateau now and could stay in this period of time for 10-20 years.

I will add more to this list as I see fit…