Tom Whipple on Peak Oil

The Peak Oil Crisis: The German Army Report

By Tom Whipple

Wednesday, September 21 2011 06:49:43 PM

In the last five or six years at least 20 major studies have been
published by governmental and non-governmental organizations that
either deal with or touch upon the possibility of severe energy
shortages developing in the near future.

Studies done by governmental entities, however, are rare for nearly
all of the world's governments still prefer to wait as long as
possible before confronting the myriad of problems that will
accompany declining oil production. Exceptions to this phenomenon of
denial, however, seem to be military organizations that have
realistic planning baked into their DNA. All professional military
services know that in the last century they have become so dependent
on liquid fuels that their effectiveness would be severely degraded
should shortages or extremely high oil prices develop.

Last year two military planning organizations went public with
studies predicting that serious consequences from oil depletion will
befall us shortly. In the U.S. the Joint Forces Command concluded,
without saying how they arrived at their dates, that by 2012 surplus
oil production capacity could entirely disappear and that by 2015 the
global shortfall in oil production could be as much as 10 million
b/d. Later in the year a draft of a German army study, which went
into greater detail in analyzing the consequences of peaking world
oil production, was leaked to the press. The German study which was
released recently is unique for the frankness with which it explores
the dire consequences which may be in store for us.

The Bundeswehr Transformation Center, the organization that prepared
the study, starts with the assertion that as there are so many forces
in play, it is impossible to determine an exact date for peak oil,
but that it will become obvious in hindsight. The Germans also
believe that it is already too late to complete a comprehensive
global transition to a post fossil fuel economy. They introduce the
notion of a peak oil induced economic "tipping point" that would
trigger so much economic damage that it is impossible to evaluate the
possible outcomes.

For the near future the study foresees that a very large increase in
oil prices would harm the energy-intensive agricultural systems that
produce much of our food. Not only could the costs of fertilizers and
pesticides become prohibitive, but the massive amount of
oil-dependent transportation needed to move agricultural products
long distances could make food unaffordable for many.

The study goes on to postulate a "mobility crisis" that would arise
from substantial increases in the costs of operating private cars and
trucks. Although sudden shortages could be relieved by volunteer and
regulatory measures, ultimately the mobility crisis would feed into
and add to the worsening economic situation.

As oil is used either directly or indirectly in almost 90 percent of
industrial production, major increases in the price of oil would
change most price relationships. Domestic and foreign trade will have
to adapt to these new relationships but doing so will likely lead to
economic upheavals. As businesses transform to less oil-dependent
forms of services and production, there would likely be an extended
period of "transformation unemployment" that will become a major
economic problem. A case could be made that our current "jobs" crisis
is simply the leading edge of the "transformation unemployment" that
could go on for decades.

The German study maintains that all countries on earth will sooner or
later be faced with the problem of transitioning to a post-fossil
fuel age. As such a transition has never happened before, there are
no guidelines for how it is to be accomplished. Of great significance
is the willingness of nations to implement the economic policies
necessary to effect the transformation to the post fossil fuel age.
Forms of government will be sorely tested. The Germans who have much
experience in these matters note that only continuous improvement in
individual living conditions forms the basis for tolerant and open
societies. Given the widespread unemployment and high mobility costs
that are almost certain to accompany the transition to a post fossil
fuel world, democratic forms of government are likely to face severe
challenges. We all remember the Weimar Republic. Also of note are
recent studies within the OECD that show that voting for extremist
and nationalist political parties tends to increase with economic setbacks.

For the immediate future, however, the German Army study foresees: 1.
increasing oil prices that will reduce consumption and economic
output (i.e. a recession or worse); 2. increasing transportation
costs that will lead to lower trade volumes - less income for many
and unaffordable food for some; and 3. pressure on government budgets
as they must keep populations fed, deal with the social consequences
of mass unemployment, and attempt to invest in sustainable sources of
energy. Governmental revenues are bound to fall as unemployment
increases along with resistance to further taxation.

In the medium term, most companies would come to realize that the
global economy is going to be shrinking for a long time and act
accordingly. In an indefinitely shrinking economy, savings would not
be invested as profits could no longer be made or borrowing costs
paid. In this environment, the banking system, stock exchanges and
financial markets would have a hard time surviving.

Banks would be left with no reason to exist as they would not be able
to pay interest on deposits or find credit-worthy companies or
individuals. The final step would be the loss of confidence in
currencies and with them the ability to carry on normal economic
transactions outside of barter.

If all this sounds extreme to American ears, remember the Germans
have been through far more than we have in the last century. What is
interesting is the way they are telling it like they see it - no
pulling of punches here.

Tom Whipple is a retired government analyst and has been following
the peak oil issue for several years.