There seems to be an on-going debate among peak oilers and many economists as to which came first, the chicken (peak supply flow) or the egg (peak demand). The first is attributed to the classical peak oil theory that when about half of the oil in the ground is pumped out, extraction rates start to go into deceleration and eventually peak, thereafter going into decline. The oil price spike of 2009 was quickly interpreted in this vein, the price of oil reflecting the fact that peak had come at last and oil was just going to get more expensive with declining supplies. There were dire fears that oil at that price would trigger a recession, which seems to have been the case. But then the price fell precipitously leading other analysts to conclude that the spike might have been an anomaly set off by speculation and that the subsequent reduction in oil flow rates was due to demand destruction owing to the effects of a global recession. The problem with these kinds of interpretations is that they often look for a prime cause in a linear chain of cause and effect. In this case the prime cause would have been peak oil and all else follows. A general truth behind this explanation is that oil is depleting and will indeed, if not already, become so expensive, both in monetary and energy terms, to extract that our production rates will begin to decline and less and less oil will flow over time. But the economic system that is dependent on oil is far more complex and no linear model can really explain what we have been witnessing in terms of oil prices and economic activity (the general so-called health of the economy). Feedback, Mutual Causation, and Dynamic Systems Real life dynamic systems are dominated by complex feedback loops, most of which operate over different scales of time. This latter fact is very hard to represent in typical systems dynamics models since the latter tend to provide only one size of time increment (?t) for a time step and to represent much longer time scale phenomena. It is necessary to use extremely small time constants in your equations – and hope the precision is OK – and run your model for excessively many iterations. But it is this mixture of short and long time scale phenomena with mutual feedback that cause system variables to behave seemingly erratically. In an attempt to try and grasp what is happening in the oil industry at a macro scale, I have employed two approaches to linking the many variables involved in the oil markets and the general economy in causal diagrams that might help shed some light on the interactions and subsequent seemingly unpredictable behavior of the whole system. The first method is to show the large scale feedback loops in two domains: the consumer economy, and the debt-based (financial) economy to show the relations between the variables. These diagrams are based on outlines provided by Gail Tverberg (personal communications) from her financial markets perspective. The second approach is to put together a systems dynamic model which attempts to combine several short and long-term loops that may help explain the seeming dichotomy between peak oil and peak demand and why the price system doesn’t seem to operate in the classic, and direct, economic supply-demand fashion we would expect. This article provides a first look at the developing model in an attempt to gather useful feedback from readers to help improve it. Going Through the Loops I’ll start with a simple loop diagram to show the long-term feedback between oil supply fluctuations, prices, effects on consumers and the economy, and how these eventually feedback to cause an opposite effect on supplies. This feedback loop is surprisingly similar to the phenomenon of homeostasis found in biological systems. Lowering supplies, possibly from diminishing extraction rates put upward pressure on oil prices, but that has an impact on consumers’ discretionary spending.

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