Folks,
Here’s my latest, about my trip last weekend to some Plan B property up north, including musings on the news that Mexico’s Cantarell field has gone into sharp decline.

It was originally published at Wealth Daily.

Hot Fun in the Wintertime

2007-01-31By Chris Nelder

Now is the winter of our discontent
Made glorious summer by this sun of York;
And all the clouds that lour’d upon our house
In the deep bosom of the ocean buried.

—Wm. Shakespeare

With all sympathy to my friends and co-workers in the Midwest and on the East Coast, it was downright toasty in northern California yesterday—66º and clear. The sun beat down with unaccustomed intensity on my face and neck, feeling at 2000 feet what it normally feels like at 10,000 feet.

Some of the trees were already showing buds, and the creeks that normally run all year round were barely flowing, little more than stagnant pools in their upper reaches.

Why was I traipsing around in a northern California wilderness? Why, doing what any person who reads these columns probably does, or will soon do: looking for a Plan B for the petrocollapse.

I have learned far too much about the state of the world’s energy situation to kid myself that there is going to be some sort of easy transition to renewables. It just makes sense, from a risk-management standpoint, to have a fallback position. You don’t start building an ark when the water is up to your knees, and I think my toes are getting wet.

Now, don’t get me wrong. I fully support investing in all sorts of renewable energy, particularly liquid fuel alternatives to oil. Because I know, given the lay of the land ahead, that we will have no choice but to go after renewables and conservation, as much as we can manage. We’ll do it all, and we’ll make some good money doing it. I’m 100% on that.

But I wouldn’t lay money—or my life—that it’s going to be enough, in the long run, to secure what I might consider a “normal” life here in the heavily populated Bay Area. I want another option, a more remote, self-sustaining option.

In Search of Plan BSo I was walking around a piece of property recently purchased for that very purpose by a friend of mine, who’s a savvy and experienced investor and a visionary thinker. We were sketching out the site’s possibilities: perhaps a water tank here, living quarters there, an orchard here, a greenhouse over there.

Questions kept coming up: Is the water flow from the wells sufficient to support the crops? How many people might we have to house and feed, if things get ugly fast? How much energy can we produce from hydro, solar, and wind? How much battery support do we need? Is there enough light and decent soil here to support vegetables? What if we don’t have liquid fuels—can we do everything we’re talking about by hand? We’ve got quite a bit of wood, can we buy a small farm-sized cellulosic ethanol plant somewhere? Or a clean, small-scale co-gen plant? A thermoelectric generator?

A piece of smooth black rock caught my eye, which I picked up and realized was obsidian. I noted the sharp edge where it had broken, and wondered whether I could learn, if I really needed to, to shape that into a usable arrowhead, using only a bit of deer antler for a tool.

The Winter of Our ContentHow could it be so hot?

In fact, temperatures have been pushing the extremes all month up in the northern California hills, with highs consistently running about 10º over the averages, lows consistently about 10º below the averages, and both the highs and lows coming within a few degrees of the record for each day. Rainfall for January, normally about 6.5 inches, isn’t even half that, at 2.67.

If you didn’t know any better, you’d think it was late spring, early summer.

But it hasn’t just been northern Californians who have been basking this winter. Across much of the rest of the country, the snows of winter finally arrived, but interspersed with record high days. It’s like the winter that wasn’t. Or if you like, the winter of our content.

As I lay on my back in a sunny meadow yesterday, listening to the birds and feeling the warm breeze, I thought, “Wow, this is nice. What a treat!”

Until I had to go and ruin it by reminding myself that this wasn’t normal. It’s not summer. The rain that we don’t get now is water flow that we won’t get from the springs and wells, and the snow that we aren’t getting now in the mountains is meltwater that won’t get shipped to San Francisco and Los Angeles later on this summer.

Half of the World Cup freestyle skiing events, and almost half of the alpine events, have been cancelled or postponed for a lack of snow this year. Temperatures have been so warm that the artificial snow-making machines can’t fight it. Even stalwart, year-round skiing destinations like Tignes in the French Alps and Solden in Austria have had to cancel their traditional early-season events, while the locals watch their glaciers melt.

If this year is anything like the last, those buds that are forming right now on my cherry plum tree will likely be blown right off the branches by abnormally intense deluges next month, or even in March, before the bees have had a chance to come out and pollinate them. So there will be less fruit to go around—either fewer jars of jam for me, or a smaller share for the deer and raccoons and mice and everything else around here that also eats the fruit.

But I have nothing to complain about, with my unremarkable local little plum tree. Last week it was reported that a record-breaking cold snap two weeks ago wiped out nearly three quarters of California’s citrus crop and is threatening other crops as well, such as avocados and flowers.

Crop damage is being recorded all around the world. Here it’s due to freezing, but in Spain it’s due to the heightened intensity of the sunlight.

Naturally, in addition to the climatic signals we’re getting, the flip side of the coin—energy—is sending out a few signals of its own.

Imports at RiskThe warm temps this winter have helped to take oil down from its $61 open on the year to 19-month low territory in the $50s last week. Now it has recovered to around $54, but when you can still fill your tank for $40 or less, it’s low enough to put everybody at ease.

Perhaps we can put our peak oil worries on the back burner and go back to dozing in the sun on this unusually balmy January day.

Not so fast. That $54 barrel is 42 gallons of pure irony, because oil prices have nowhere to go from here but up, way up. (Yes, for those of you who were wondering, that makes irony rather cheap at 77 cents a gallon.)

Last Friday, Mexico’s national oil company, PEMEX, said that production from Cantarell, its largest oil field and one of the four super-giant oil fields that produce 14% of the world’s oil, is going into decline much faster than even the last reports suggested. Production fell from 1.99 mbpd at the start of 2006 to 1.44 mbpd at the end—a whopping 28% drop in one year. And PEMEX’s overall production dropped below 3 mbpd for the first time in six years—after they had projected a steady 4 mbpd rate through 2015.

Whoa, dude!

Cantarell accounts for 60% of Pemex’s production, and Pemex’s revenues account for 37% of Mexico’s federal budget. This is very serious stuff for our southern neighbor and number-two supplier.

It’s little wonder, then, that exports have taken the brunt of the drop in production, falling from 1.82 mbpd to 1.53 mbpd last year. Mexico’s economy is booming (due to the exporting of U.S. jobs) and they need the energy. As I have noted before , we should always expect oil exporters to serve their own needs first. Mexico has already warned that it will be unable to fulfill some of its existing export contracts.

Where does that leave the U.S.? Respected Mexican oil analyst David Shields has projected that PEMEX will lose another 0.4 mbpd of production over the course of this year. In all, the declines add up to a loss of more than 1 mbpd of U.S. supply by the end of 2008. The decline rate of Cantarell is expected to accelerate to 40%. In other words, give it a couple more years and our #2 source of imports is kaput.

Clearly we’re in trouble here. We consume nearly 21 mbpd and produce only about five of that. Where will we turn when Mexico can’t meet our needs?

Our #1 source of imports, Canada, is past its peak of conventional crude and is working full-out to increase production from oil sands, at great expense and effort. But those efforts are unlikely to overcome the decline rate of North American crude production.

Our #3 source, Saudi Arabia, looks to be past its peak as well. By the end of last year it was just barely keeping up with a 9 mbpd production rate, which they claim was intentional in accordance with OPEC production cuts. But some shrewd observers believe that due to the high water cut of its major field, Ghawar, they couldn’t produce more than 9 mbpd if they wanted to, and their decline rate may be as high as 4%.

Our #4 source, Venezuela, is past its peak of conventional crude as well. Its recently reelected leader, Hugo Chavez, seems to be angling for “ruler for life” status, and last week told the U.S. to “go to hell” for questioning his plans to govern by decree. He’s been forcing U.S. oil companies out of the country by nationalizing Venezuelan oil operations, and has been cutting some fat supply deals lately with customers to his east. Anybody want to count on him to make up Mexico’s shortfall?

And #5? That would be Nigeria—where the government admitted last week that, due to constant attacks on its facilities by the rebel group MEND, all of its oil refineries have been shut down, forcing the country to import all of its refined products. You heard right: Our number-five supplier of crude has to import all of its refined products. Their economy is grinding to a halt and the number of foreign hostages continues to grow. I hardly need remind anyone, I’m sure, that all of the above is sure to breed further terrorism.

Iran? While its oil facilities have languished under sanctions owing to its pursuit of nuclear technology, its burgeoning population (who receive fat federal subsidies for gasoline) has delivered a double-whammy, increasing domestic energy demand at a rate well beyond the rate of its supply growth. Consequently, its exports peaked in 1996 and have dropped ever since, even though they are responsible for 40-50% of the federal budget. According to Johns Hopkins University researcher Roger Stern, exports could be halved by 2011, and cease entirely by 2015. “It seems plausible that Iran’s claim to need nuclear power might be genuine, an indicator of distress from anticipated export revenue shortfalls.” Stern says. Like Nigeria, Iran actually has to import refined oil products like gasoline to cope with demand…despite being the second-biggest exporter in OPEC. The expected investment in their oil infrastructure going forward? About zero.

Iraq? It will be years—maybe decades—before its oil infrastructure can be made functional again at any significant levels. That is after it somehow finds stability and peace and security. For now, it’s a non-factor.

We may hope other potential sources of imports will be expanded. But recent data show that the import demands from nearly every nation in the world are on the uptick. Even Venezuela recently had to resort to buying oil from Russia just to fulfill its supply contracts. Everybody thinks they can increase imports as domestic production tails off.

It’s like everybody is eyeing that last slice of pie, thinking they’re the only ones who are interested in seconds.

Steep Climb AheadI wiped the sweat from my brow for the fiftieth time as I ascended another few hundred feet up a slope so steep, I was nearly on all fours just to stay on it. This is rugged, rocky terrain populated by rugged creatures: mountain lions, black bears, elk and deer. The sun beats down hard in January and you’re crawling on your hands and knees through thick manzanita, trying to figure out how to scratch a self-sustaining life out of that land.

You have to be as rugged as the place itself. As rugged as the original American Indians who lived there, making flour from acidic pine nuts they harvested from large, thorny pine cones. As rugged as the bears, who might not want to give up their turf so easily.

Here’s a take-home from the weekend: “Plan B isn’t going to be easy.”

Not my Plan B, not my friend’s, and not the country’s.

We need to face up to the simple fact of oil depletion as quickly as possible. We can’t produce enough oil to meet our needs, and the alternatives aren’t going to arrive soon enough or in large enough quantities to keep the whole business moving normally.

We’re entering a new era altogether.

A friend of mine recently observed that the “peak” metaphor itself, while appropriate for talking about oil flow rates, is unhelpful for what really matters to us, which is how it affects our lives. It makes one think of riding a roller-coaster slowly up a hill, then accelerating as we descend down the other side.

But in reality, we really should look at it the other way around. As he put it, “We are not actually at the peak of any roller coaster, but at the bottom of a valley, moving at maximum speed. All that’s left is slow, uphill, hard work, no more thrills.”

Slow, uphill, hard work. It’s not exactly the kind of message that people flock to. But those who heed it can profit, and thrive, on the coming changes.

Chris Nelder