can’t see the forest

Why ‘Peak Oil’ Is A Big Deal

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Essentially this can be summed up in two words: ‘time constraints.’ But let’s elaborate as if there aren’t any.

What is meant by the phrase ‘peak oil?’

In the narrow sense, ‘peak oil’ refers to the point in time at which world petroleum production will have reached maximum volume; from this point, dwindling supplies of this finite resource will ensure that production levels continuously drop until negligible amounts of petroleum will remain to be extracted.

More broadly, the term has been used to describe not only the peak point, but the social and economic implications of arriving at the peak point and of the steady decrease in supply levels which will inevitably follow it.

Hubbert Curve for World Oil Production - US Military

The American geologist Marion Hubbert first proposed the Hubbert Peak Theory in 1956. Hubbert said that, for any geographic oil-producing region, from a single well up through the planet as a whole, oil production levels will tend to follow a bell curve over time. In the early stages of production, levels will steadily increase because of infrastructural developments which improve the efficiency of operations and which will allow ever-larger volumes of oil to be extracted. But once the supply in question reaches its production peak, improved infrastructure cannot keep extracting increasing amounts of oil out of a dwindling pool. Therefore, in the second half of the “life” of an oil source, production levels will drop more or less in proportion to the rate in which they rose during the ‘halcyon days’ of the source, so to speak.

A case in point is the oil production history of the United States. Many do not realize that, before approximately the time at which Hubbert made this prediction, the USA was the world’s largest exporter of oil; America was the Saudi Arabia of the time, and had been roughly since the first well was installed near Titusville, Pennsylvania in 1859. America’s ability to produce oil in seemingly endless quantities was, in fact, a huge factor in its victory in the Second World War.

But US oil production peaked around 1970, much as Hubbert predicted it would. Since that time, production levels have fallen and the demand for oil has risen in the US so that the US is now the world’s leading importer of oil. It produces less than 5% of the world’s petroleum but consumes around 25% of the same. So, back in the golden years, the US was able to amass large sums of capital from selling its oil on the market, but now it must expend huge amounts in order to cope with rising demand.

So, when is this peak point coming?

This is perhaps the most contentious issue in the discussion of peak oil and the problems associated with it. In 1956, Hubbert said that, based on the available data, the global peak of oil production would occur ‘about a half century’ in the future. We are now at the 50 year mark. Original predictions put the date at around 1995, but the energy crisis of the 1970s and its aftermath lowered the demand for oil temporarily, which offset this date by a number of years.

There is no general consensus, but current estimates based on more contemporary analyses say that the global production peak could occur as early as 2007 (next year) or as late as 2020. Unfortunately, no reasonable estimate provides a sufficient amount of time for the overhaul of a world economy which has been thoroughly grounded in fossil fuels since the Industrial Revolution.

Is this just a theory? What is the evidence?

Saudi Arabia from high, high aboveWell, it is a theory, in the same sense that gravity is a theory. It happens to make a great deal of common sense, and the production histories of the United States and of western European nations testify to its accuracy as a model.

One of the most compelling pieces of evidence for the nearness of the peak point is the consideration that, despite a steadily increasing demand for oil and associated products in America, in China and India, and generally throughout the world, very few new refineries are being built…anywhere. If oil suppliers are expecting increased demand for their product in the near future, as market data and common sense would predict, then an observer would expect them to be busy developing infrastructure which will support increased supply. This is clearly not happening. Refineries cost a lot to build and to maintain, and that oil companies are not investing in new plants is a telling sign that they have some reason for disregarding even the most basic market predictions.

Another more direct sign of the impending demise of petroleum is a drastic slowdown in the discovery of new sources of oil. Companies are not investing in exploration at anything near the levels they have in the past. Nor, as we said above, are they investing in increasing the amounts of finished product they are able to produce. Every oil rig in the world is now in operation, even rigs dating from the 1940s. New ones aren’t being built. The existing outfits are being moved from place to place, often to take advantage of relatively miniscule pockets of oil beneath the ocean floor.

For economic reasons, the largest and most easily accessible sources of oil are exploited first. This is because the larger and more accessible a source is, the lower the overhead costs of extraction and processing. The two principal large-scale sources of oil in the world which remain mostly unexploited are the oil shelf of western Iraq, and the Athabasca Tar Sands of Alberta, Canada. Venezuela also has significant tar (bitumen) sands from which oil can be extracted, but these reserves are not as easily accessible as those in Canada. Middle Eastern nations claim that they are discovering significant new sources of oil and that production levels have not yet peaked, yet they have not raised production levels over the past three years in spite of increased demand.

Oil companies are valued on the market not by how much they produce but by how much they claim to hold in reserve. In the past few years, some of them have been severely fined for over-reporting their reserves. Likewise, it has long been suspected that Saudi Arabia has over-reported its national reserves, with some authorities suggesting, on the extreme end, that given estimates might as much as double what is available from the Kingdom in reality.

A small minority of reputable analysts have claimed that ‘peak oil’ is ‘just a scare tactic’ designed to provide oil companies with an excuse for price gouging. While I daresay most of us wouldn’t put it past them, there are some reasons why this does not make good economic sense. Since pricing is based ultimately upon the dynamics of supply and demand, one would expect that the surest way to force prices upward would be not to over-report but to under-report reserves, thereby creating a sense of artificial scarcity. This is not what has occured. The opposite has occured, and this is because, as we said, the share values of an oil firm are based more closely on reserve levels than on production levels.

Okay, so, what about the main question? Why is peak oil such a big deal? Why should I care?

The reason peak oil presents a potentially catastrophic problem for the economy and for society lies in the extent to which industrial economies rely on fossil fuels. Indeed, the very term ‘industrialization,’ in our time, pretty much equates with ‘fossil fuel dependency.’ There is much, much more at stake than just how much it costs to get us to work or school and back again.

While fuel used to transport people and goods accounts for most of the oil that is used, significant amounts of oil go into the production of plastics, of medicines, of packaging, of all kinds of things. It’s easy not to be able to see this forest for the trees, but if you step back and take a good look at the big picture, you can see that virtually every part of our economy is not just convenienced by the availability of oil at a cheap price, but is utterly dependent upon it. ‘Peak oil naysayers’ point out that there are alternatives to most industrial uses of oil, and that is true, but the hidden factor is that the burning of fossil fuels is almost always required to harvest these usually botanical alternatives.

The nasty problem with the end of oil is the same thing that has made it such an attractive and convenient source of energy all along: it’s very cheap and very efficient. While politicians and policymakers are to be commended for the extent, however limited, to which they are supporting the movement to develop alternative energy sources, there are some very ugly truths which are not being sufficiently discussed. There is no question that alternatives like solar and wind energy, coal liquefaction, grain-based fuels, and other technologies need to be explored and expanded upon, but the unpleasant reality we face as a civilization is that none of these alternatives, nor all of them taken together, appear to be able to provide the same levels of energy availability as has oil in its waxing years. None of these sources are efficient enough, meaning that the overhead costs of producing energy through these alternative means are generally too great to consider them as viable replacements for oil. This will not always be the case, so the question, and the source of much debate, is: will alternative energy develop quickly enough to keep our economy from grinding to a halt as oil supplies dwindle to nothing?

What are the expected effects of reaching and passing this production peak?

Running on Fumes?As production levels plateau, you can expect to see increasing energy costs, not only in gasoline at the pump, but in domestic utilities. (Sound familiar?) This results in a slow, sustained mounting of inflation, because rising energy costs affect the prices of goods and services and the value of currency for obvious reasons.

It’s important to understand that peak oil is not about just plain ol’ running out of oil per se, but about running out of cheap oil. The reason this is important and potentially quite alarming is the difference in the economic mechanics which are involved in the stage in which oil production is rising and in the later stage in which it will fall.

Demand for oil grows over time. This can be understood as a very basic function of population increase. As more people are created, more drivers are created. More goods are consumed, and oil—a lot of it—goes into the production and distribution of these goods. So as long as a population is increasing, in the Industrial Age, it will need more oil to maintain its standard of living.

As long as there’s more oil left than has already been used up, this isn’t a problem. But, while the demand for oil can be charted on a graph as a rising slope, oil production is a bell curve, as you see above. The big bad wolf lies in that, while oil production is peaking and then beginning to fall, demand will still be rising. This will open a supply/demand gap that we have not yet experienced, in a sustained manner, in our oil-guzzling history.

Consider what happened during the 1970s energy crisis. Political disturbances disrupted the oil supply and the price of crude oil skyrocketed by as much as 400%. This happened because of a supply/demand gap, but it was a temporary gap which was soon resolved.

We are now facing an oncoming supply/demand gap that is far from political in nature. It is coming, quite frankly, because we are exhausting the Earth’s oil supply at an alarming speed. The coming gap will not be temporary, and it is likely to raise the price of crude oil by far more than a mere factor of four.

Consider what Dick Cheney had to say about it in 1999, in his capacity as CEO of Halliburton, the world’s largest oil refiner:

By some estimates, there will be an average of two-percent annual growth in global oil demand over the years ahead, along with, conservatively, a three-percent natural decline in production from existing reserves. That means that by 2010 we will need an additional 50 million barrels per day.

The problem with the new sources of oil such as the Athabasca Tar Sands and the new Gulf of Mexico “jackpot” is that they’re not efficient sources. For instance, at Athabasca, these sands have to be unearthed, they have to be transported (by truck) to a plant, and then huge amounts of natural gas are required to convert this ineffably nasty sludge into usable synthetic crude. The process is much more costly than simply piping the stuff out of an Arabian well. This means that oil produced through these dirtier means is going to cost a lot more, both to consumers and to the environment.

The same is true of coal liquefaction. We’re not yet near the predicted peak of coal production, so a lot of attention is being directed to the possibility of creating something like oil by liquefying coal. This is something like saying you’re going to get milk by melting ice cream and then separating out the sugar and the vanilla. It can be done, but the end product is going to cost way more than a gallon of milk from the store. Coal liquefaction also requires huge amounts of energy, energy which comes from the very procedures the process is trying to circumvent. The same is true of the supposed ‘oil shale’ rock which is so common in the western US. It doesn’t take a rocket scientist to understand that squeezing oil out of rocks is going to be very dirty, very costly, and ultimately an unfeasible process.

The big picture, my dears, is that there is no way to significantly mitigate the crisis that’s coming once the market awakens to the fact the oil production is going downhill. This might not be true if we’d gotten busy with preparations, say, twenty years ago. But we didn’t, because there was still too much money to be made from oil. It’s basic economics. We will see skyrocketing inflation, we will see massive layoffs, we will see transportation systems locking up and supermarkets going out of business left and right. In short, within the next ten to twenty years, we will face an economic depression that stands to make the ‘Great Depression’ seem, in retrospect, a blip on the radar.

So if this is such a huge catastrophe, why aren’t we hearing about it? And what’s being done about it?

The reason peak oil has not yet entered mainstream discussion at the appropriate volume is so simple it can be hard to see: once the market comes to terms with the coming problem, it’s going to panic. Large business enterprises and governments are doing all they can to delay this point, because, once falling petroleum production takes its toll on Wall Street, things will get very ugly very fast.

As to what’s being done in order to prepare for the crisis, at least in the US, we have an official story and we have reality. The official story is that we’re funding research into alternative means of energy. It’s gonna be okay, folks.

Mosque domeBut, as we hinted at above, there are some terribly disconcerting problems with these alternative energy sources. Denmark has been a world leader in wind power for a long time, but energy derived from wind is still not able to provide more than 10% of its needs. Solar energy infrastructure requires mining large amounts of platinum, which in turn requires large amounts of petroleum. Aside from the fact that there just isn’t enough arable land to grow the grain we’d use to produce enough ethanol to get us by, the production of ethanol is horribly inefficient and—guess what—requires large amounts of oil for the machinery involved. So the official story, while correct in principle, is way too optimistic considering the economic realities of the processes behind it.

In reality, the US is preparing for the crisis by establishing a huge and permanent military presence in the Middle East. This process got underway not in 2003 or even in 1991, but in 1945 when Franklin Roosevelt signed the first oil-for-protection agreement with the King of Saudi Arabia. Western Iraq is the only area in the Middle East whose oil production is not yet nearing its peak. Consequently, US-friendliness in coastal States such as Israel, Kuwait, Afghanistan, and Pakistan ensure that pipelines from the Caspian Sea are directed towards US interests. Again, basic economics so fundamentally simple that they’re easily obscured through talk of Islamic fascism and American patriotism.

The showdown taking place behind the scenes is between the United States and its allies and China. By 2030, China’s oil demand is expected to pass that of the United States. By this time, by all reputable estimates, global production levels will be well on their way towards zero. So, what we’re faced with is a ‘grab it while you can’ scenario. Rather than develop its own comprehensive policies with which to deal with the crisis internally, US business and government has been moving steadily, for quite some decades, towards simply pushing everyone else out of the lifeboat. This is not because the US is somehow evil, but because its economy is, at least for now, more fossil-fuel dependent than that of any other nation on Earth, by a scale of proportions. So the US, then, has less time than anyone to prepare for the bottom of the tank.

So why isn’t China getting involved in the military occupation of oil-rich regions? Because it has a million-man standing army that is only going to grow in the future, that’s why. This is akin to the reason why there has been so much interest in Beijing lately in developing rail lines to Tibet and road connections to Pakistan. Folks, you’ve got to scratch beyond the surface if you’re going to call yourselves critical thinkers. It’s not paranoia and pessimism. It’s realism with all the rhetoric stripped away.

I’d like to close this topic, for now, with some words by Noam Chomsky on his views about peak oil. This comes from an April 2005 interview with Steve Scher, of KUOW FM in Seattle:

If you’re interested – I don’t know if we have time to talk about it – there’s quite an interesting article about it in the Bulletin Of The Atomic Scientists, in the current issue [“Oil: Caveat Empty” By Alfred J. Cavallo], which is a very serious journal, and the person who wrote it I know is very good.

He points out that Exxon/Mobil, the biggest energy corporation, and the one that’s very quiet and conservative about this, just published its forecasts, and for the first time ever, they bring this up.

What they predict is that within five years – five years – non-Opec oil will have reached the peak. Non-OPEC means U.S., Canada, and so on. Venezuela – Venezuela isn’t OPEC, but most of the non-OPEC oil producers will have leveled off. That’s five years.

And Exxon does not predict that alternative sources like tar sands, shale and so on will replace it – they think that’s way too expensive and uses too much energy in fact.

Their prediction is that it’s just going to have to come from OPEC, meaning mainly the Gulf. So the gulf states are going to have to sharply increase oil production even to meet current demand, let alone the future demand, which is rising. And that’s not a long way off, they’re talking about five years.

So yeah, this is a very serious issue, and my own guess is that if we ever get the secret documents about the planning for the Iraq war, my expectation is that these considerations will have entered significantly.

As to when you get a peak for OPEC, that’s farther off – decades, but it’s certainly real.

There’s another side to this, there’s a sense in which it’s advantageous if the oil peak is earlier. The reason why is it will compel the world, primarily the U.S. here, to move toward something like sustainable energy.

If there’s unbounded amounts of hydrocarbons, we’re just going to destroy the environment for human life or most biological life, so the earlier the peak is, in some respects – yes, it could be catastrophic, it could also be beneficial.

Host Steve Scher: So you see a silver lining?

Chomsky: There is, because the major threat is the effect we’re having on the environment, and that’s mostly through hydrocarbons.

Scher: There was a report that China was experiencing blackouts and expensive gasoline in the last week because of a shortage of oil.

Chomsky: China is probably the most polluted country in the world – you can’t see. It’s kind of a totalitarian state, so they kind of force it on people, but the level of pollution is awful, and India too.

Still in per-capita terms, the U.S. is way above anybody else, and we don’t do anything about it.

For example, I was just in Europe for a couple of weeks, and they have the same traffic jams we do, but not SUV’s. Their mileage for cars is way higher than ours. They have a public transportation system which we don’t have.

So here the rail system, which is the most efficient, has been very much underfunded for fifty years and is now being virtually eliminated. There they’re way more advanced, and Japan even more so. These are policies that HAVE to change if society is going to survive.

Further reading:

Hubbert Peak Theory
Lifeaftertheoilcrash.net – these predictions are overall a little doomsdayish, and I have to say I find it more than a little sleazy that this guy is taking the opportunity to sell his solar ovens, but if you can overlook these faults, there’s a ton of good, solid, reliable information here.
ASPO – a well-rounded and diverse information source.

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8 Responses

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  1. Drima aka SudaneseThinker said, on 9/29/06 at 5:01 am

    On hell of a pleasant read. It’s unfortunate that some right-wingers will see Noam Chomsky’s name and then discredit your whole post as a lie. That’s the problem I have with the attitude of far right wingers. On ther other hand you’ve got far leftists who say some really weird stuff like 9/11 was orchestrated by the American government and who don’t realize that there really are Muslim extremists out there who really do want to destroy “Big Satan” etc.

    Curt, you’re one sane guy bro. Where on earth do you get the time to actually research and type all this… What do you study anyways?

    Cheers

  2. tellitlikeitis said, on 9/29/06 at 8:59 am

    You’re right, the truth is always closer to a balanced point of view than to the extremes of either end. Furthermore, it’s easy for any of us to forget that how one defines even extremes is a relativistic point in the first place, within the boundaries of common sense and convention, at least.

    I could provide some compelling arguments in favor of my insanity.

    I don’t sleep all that much. :-)

    Thanks, Drima.

  3. Gracie said, on 9/29/06 at 11:47 am

    As usual, you provide a wealth of information in your articles. I also think it’s taboo to discuss this serious issue for fear of causing widespread panic. There’s always more taking place behind the scenes which is easy to lose sight of during these times.

    Thanks for including Chomsky’s interview, I’ve heard him discuss this before but somehow missed this particular one.

    Talk about not sleeping………..Ouch!

    Great article & beautiful photograph, thanks again.

  4. tellitlikeitis said, on 9/29/06 at 3:22 pm

    Thanks Gracie, and thanks for the link.

    No matter how serious the situation gets, there’s not anything to be accomplished by hysterics.

    The main issue missed by most of those who might, however reasonably, be skeptical of the magnitude of the effects of passing our global production peak for petroleum is this: our entire monetary system is based on future expansion.

    This is what allows banks to lend out more capital than they actually hold at any given time–in a simplified sense, the prospect of future expansion of the economy is the collateral through which all present activity is financed. And it is oil that fuels this expansion as only it can. This is why even a relatively small—say 10 to 15 percent—supply gap in petroleum could have horrible effects on all kinds of markets, not just gasoline.

    My sincere fear is that the ongoing atrocities in Iraq may look like pleasant memories when compared with the energy wars that could be coming a few decades down the line. Biology shows over and over again that competition for resources is a part of survival. We’d like to think that we as a civilization would have developed ways to deal with this fact of life beyond warmongering and economic bullying.

    But the evidence doesn’t support such a notion. I believe that a transition from an oil-based economy to one based on anything but can be achieved. But I also believe that the transition will be much, much rougher and of more consequence than our leadership is comfortable with having us believe. And the really disgusting thing is that, as the conflict sharpens, so will the nationalist ugliness.

    Thanks for your comments and for the link.

  5. Gracie said, on 9/29/06 at 9:56 pm

    “Biology shows over and over again that competition for resources is a part of survival. We’d like to think that we as a civilization would have developed ways to deal with this fact of life beyond warmongering and economic bullying.”

    All empires collapse eventually and for the same reasons. They destroy their natural resources by raping and pillaging the lands causing environmental disaster. Empires overstretch their military plus spend enormous amounts of money on defense. Before Poppy Bush, we had 46,000 active troops at more than 725 bases (not including the secret ones) in 38 countries around the world, including a military presence in 153 countries, on every continent with the exception of a few. Hmmm.

    Also our current economic situation should cause any thinking person to be concerned. We sustain a nearly $630 billion trade deficit with the rest of the world, an increase of 500 billion since 1993 and $180 billion since Bush took office in 2001. In order to pay for that we have to have an inflow of cash from the rest of the world of about $1 billion every day. That kind of excess is simply unsustainable, especially when you think that it is the other world empire, China, that is necessary to support it at a cost of $83 billion on loan to the U.S. treasury. Ouch!

    Bush has made the people of this country fearful.

    Iraq will look pleasant at some point. Like every other empire since recorded history, America will collapse. It’s only a matter of time.

  6. peoplesgeography said, on 9/30/06 at 7:15 am

    As that great door sign says …

    PLEASE DO NOT DISTURB

    (already disturbed enough)

    Good reading your post and the excellent comments as well. I first “discovered” peak oil about a year and half ago and it crashed into my psyche and shattered my equanimity. There may be some upsides as well and it doesn’t all have to be doom and gloom, but as members of Generation Y and X, our lives and futures looks very different to the baby-boomers that’s for sure … (but that opens a whole new doorway, so I’ll bid you adieu for now :)

  7. tellitlikeitis said, on 9/30/06 at 8:05 am

    That’s a very good point, and I think the upside of the scenario can be quite positive. I believe it doesn’t take much imagination to see a good picture on the other side, for sure.

    The worrisome thing is how the transition is being handled, because that will determine how many of us are there to enjoy it.

  8. peoplesgeography said, on 9/30/06 at 10:36 pm

    I think what you say is key: the next five to ten years are a transition crossroads that will set the parameters for longer-term generations. Do we in the richer states continue in denial (publicly at least, the Cheney energy task force documents suggest they have been well aware of this since the early to mid 1990s) and continue our mall-rate, over-consumption profligate lifestyles based on oil (which is responsible for so much, not simply fuel, from our food to our computers) or do we “power-down” sensibly in Richard Heinberg’s phrase. Aloready many cities and countries are doing their darndest to take this latter half. Sweden notably has declared it wants to go “oil=free” before 2020 I think, and other cities are energetically putting into place energy smart policies that include innovative mass transit systems, such as Curitiba Brazil and Bogota, Columbia.

    On a less serious note, a good friend of mine who is a sustainability researcher once quipped that the Amish in the US won’t feel a thing – civilisation as we know it may be collapsing around them but they’ll go on quietly.

    Have you seen the doumentary End of Suburbia? Oil Depletion and the Collapse of the American Dream (2004)? Its recommended as a good visual record and summary of peak oil and its implications.


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