The Price of Bread
March 7, 2008
The high-level concept of peak oil is pretty straightforward. For the past 150 years or so global demand for oil has been steadily rising and continues to do so today. Currently, we consume somewhere between 80 and 85 million barrels of crude a day. So far oil supply has been able to meet oil demand. But oil is a finite resource meaning there is only so much of it available. If demand continues to rise, there will come a time that supply cannot keep up. And when demand exceeds supply, prices trend upwards quickly.
Basically, that’s peak oil. It doesn’t mean that we run out of oil, but rather that we can no longer pump it out of the ground at a rate which satisfies demand as oil reserves start to decline. At that time new oil will become increasingly harder and harder to find and existing reserves will become increasingly more expensive to operate. It’s not a question of if we will experience the peak oil phenomenon, but rather when. Some analysts predict this to happen in the next couple of decades. Some say we are starting to experience it now.
This isn’t the first time we’ve heard prediction of astronomical prices caused by natural resource depletion. In the early 70’s the Club of Rome published “The Limits To Growth” which predicted similar increases in commodity prices due to the depletion of natural resources. But in fact the opposite happened, prices actually dropped. One thing the Club of Rome overlooked was the power of the free market and Adam Smith’s “invisible hand” to reallocate resources and find alternative resources to use. The same argument can still be considered valid in the context of peak oil. But the problem is, oil is embedded into every aspect of our lives. Finding alternatives won’t be easy and it won’t happen overnight. Given the dependency we have on oil, can market forces adjust quickly enough to avoid an economic and social collapse?
Consider the life of a loaf of bread. The ground the wheat was grown on was broken and conditioned by machinery that runs on petroleum. The ground was then fertilized using petroleum based fertilizer. The seeds were then planted using machinery. Petroleum based insecticides were then likely applied to keep it from being eaten by pests. It was then harvested using more machinery. Then using diesel trucks, the wheat is then transfered to a processing plant which is either powered directly from fossil fuels or by electricity generated by fossil fuels. The processed wheat (now flour) may be turned into bread there or transfered to yet another facility. After the bread is made it is packaged into a plastic bag and then put on a truck, ship or plane to eventually end up in your grocery store. When you need bread, you’ll hop in your car and drive to the store. All of the workers involved along the process will also drive to and from work in their cars and trucks.
This is a very superficial illustration of how oil impacts every aspect of our food production. What do you think will happen to the price of this loaf of bread as oil prices start their climb?
Given the nature of the oil business, and the way different countries report their reserves predicting a precise time when peak oil will occur is quite difficult. However you would expect there to be some signals if oil were peaking. Perhaps you would read almost daily about record oil prices. Perhaps you would begin to see countries fighting for control over existing oil reserves. Perhaps you would begin to see previously unfeasible extraction methods begin to become common. I wonder if we’re now extracting oil from the tar sands because the high price of crude makes it economically feasible, or if the opposite is the case: the price of crude is high because we’ve had to resort to trying to extract if from the tar sands.
Posted in Fossil Fuels, Industry, Peak Oil
