About Peak Oil

In the contemporary world, hardly any issue causes more stress, either directly or indirectly, than the exploration, production and consumption of the world’s energy resources, in particular oil. From the war in Iraq to rising food and fuel prices, energy consumption has been a crucial topic.  A direct consequence of the consumption of oil is air-pollution in the form of sulphur dioxide, nitrous oxides, and carbon dioxide, which are a burden on society due both to current health issues, and future costs related to global warming.

Oil is the most strategic raw material.  It can hardly be overstated how crucial petroleum is to our modern industrial society.  Virtually every aspect of modern industrial life requires oil, gas and electricity (largely created from these fossil fuels).  The modern life depends on petroleum as the main energy source for its very existence.  Every day we rely on fossil fuels in one way or another – to transport us to work, to cook our food, to light, heat, and cool our homes, and even to grow our food.  Our lives are so dependent on petroleum that it is impossible to imagine of a world without it.  There is very little we consume or use in our lives that does not use petroleum in its manufacture.

Oil fuels the economy.  It is the largest single traded product in the world.  It provides about 95 % of all transportation fuels and 40 % of the global energy.  Oil is also determinant of national security.  Today’s modern armies are entirely dependent on oil-powered ships, planes, helicopters and armoured vehicles.  Oil also supplies feedstock for thousands of manufactured products and is vital for food manufacturing: 17 % of our energy is used for producing food.  Modern agriculture makes heavy use of oil in a variety of ways.  We use oil for fertilisers, pesticides, and for the packaging and distribution of food.

Since the beginning of the 20th century, global trade and a global economy have developed, and our population has grown in size from 1,000m to 6,000 m by drawing down a massive natural gift of energy in the form of cheap crude oil.  Up until early modern times, miners, scientists, natural philosophers, and other ‘experts’ believed that gold, silver and other minerals were vegetable-like in that, when mined, they would literally grow back like mown grass.  This belief was not wrong in principle in the case of coal and its hydrocarbon cousins in gaseous and liquid form, because they are the remains of ancient organisms.  As a practical maxim, however, it was completely mistaken, because the time it would take normal geological processes to transform organic matter into coal, natural gas and petroleum is of the order of millions of years.  Therefore, for all practical purposes, these fuels are finite, non-renewable energy sources, i.e. in any given region there is a fixed amount of oil at the beginning of the exploration, and after every drop of oil taken out there will be that amount of less oil left under the ground.

Like any fixed non-renewable resource, oil is limited, and its consumption will rise, peak (the point beyond which oil production will irreversibly start declining), and decline.  Oil production follows a bell curve, and after the production reaches its peak (meaning when half the oil is taken out), oil production will inevitably fall.  On the upslope of the curve, there is the first oil, the oil closer to the surface, which is also called ‘cheap oil’ or ‘easy oil’, because it is easier and cheaper to take that oil out and also it is better quality (‘light’, low-sulphur oil, therefore cheaper to refine).  On the upslope of the curve, oil production costs are lower than on the down slope, when extra effort (and cost) is needed to extract the remaining poorer quality oil from deeper in the reservoirs, and extra cost needed to refine this ‘heavy oil’ (which is high-sulphur, very viscous and does not flow easily).  Thus, once oil production reaches its peak, global demand for oil is most likely to exceed the capacity to produce it, prices will rise, oil-dependent economies will face serious problems.  ‘An increasing body of evidence suggests that the era of “easy oil” is over and that we have entered a new period of “tough oil”’.

Today, oil and gas experts around the world are growingly alarmed at current and future scarcity of the ‘black gold’.  As demand for energy explodes worldwide, there is less of it available and, it seems, less exploration for it.  Crude oil prices have doubled since 2001. There may still be times when oil prices temporarily fall due to sharp decline in demand, mainly during the times of serious economic crisis like the current financial crisis in the Western economies, but the general long term trend is unquestionably upward in the price of crude oil.  US refineries are working close to capacity, yet no new refinery has been constructed since 1976.  And oil tankers are fully booked, but outdated ships are being decommissioned faster than new ones are being built.

According to many estimates, the world is depleting oil reserves at an annual rate of 6 %.  At the same time, growth in demand is rising at an annual rate of 2.2 %.  All this means that the world’s oil industry would have to find the equivalent of more than 8 % a year in newly discovered oil reserves to maintain an orderly oil market.  Unfortunately, discoveries are lagging behind, primarily because new large oil deposits are not being found, but also because even if they were, there is a considerable time lag between a discovery and turning the oil into a useable energy product.  Many observers have drawn attention to the extraordinary technological accomplishments of the industry over the past few decades.  Of course, advanced technologies will buy a bit more time before production commences to fall, but it is also important to appreciate that spending more money on oil exploration will not really change this situation.  There is only so much crude oil in the world, and the industry has found about 90 % of it.

Figure: World Oil Resources (BP Statistical Review of World Energy 2003)

There are some indications that, in the years to come, the search for new sources of oil maybe transformed into a quest for entirely new sources of energy.  The replacement of fossil fuels by alternatives such as solar, wind, geothermal, biomass, hydrogen and nuclear fission does not yet seem to be a viable alternative.  So far, the available energy alternatives, mostly solar and wind power, offer only diluted energy substitutes, i.e. not as powerful a fuel source as oil.  For solar and wind energy to come close to providing the same amount of energy as oil does, would require a truly massive scale up in production and deployment of such technologies and still they would come nowhere near to match the convenience and density of oil.  Therefore, while conservation and renewable energy are much in the news, the reality is that neither of these factors is likely to have any significant impact on the steadily growing demand for oil products. 

Figure: PRODUCTION OF OIL, both conventional and unconventional.  This model, based in part on multiple Hubbert curves, is prepared by Colin J. Campbell and Jean H. Laherrère,  March 1998

Many analysts, looking at the current discovery and production levels of oil fields around the world suggest that within the next decade, the supply of conventional oil will be unable to keep up with demand.  We are also witnessing the impact in the increasing scarcity and cost of food and other critical resources that rely on oil. There are some reports that there has been a surge of motorists running out of fuel because they could not afford to fill their tanks.  Airlines are cutting back on flights, and some even are beginning to charge extra for checked baggage.  During the last couple of years, in some parts of the world, rising fuel prices led to massive protests and strikes.  Many leading economists and oil experts claim that the price of oil generally reflects the fast rising demand from China and India, and stagnant production as reserves of accessible oil become less plentiful.  According to some experts, even a shortfall between demand and supply as little as 10 or 15 percent is enough to wholly shatter an oil-dependent economy.  There were serious oil-related crises in the 1970s, but these ‘oil shocks’ were due to political effects rather than the decreasing amount of oil.  Unlike the oil shocks of the 1970s, this time there seems to be a permanent decline.  It is becoming clear that cheap fuel is no longer something that we can take for granted.  The economy is already suffering for it.  The end of cheap oil indicates a potentially spectacular reshaping of the globalized trade flows that have emerged in the last two decades.

Without volume energy we have no sustainable water, we have no sustainable food, we now have no sustainable healthcare. And since five-sixths of the world still barely uses any energy it really is an important issue. And since five-sixths of the world is still growing fast or too fast it’s even a more important issue.

What peaking does mean, in energy terms, is that once you’ve peaked, further growth in supply, is over.  Peaking is generally, also, a relatively quick transition to a relatively serious decline at least on a basin-by-basin basis.  And the issue then, is the world’s biggest serious question.

Recently energy (and food prices) have sharply declined but only because of the severity of the recession.  Despite the current fall in prices, the latest report by the International Energy Agency(IEA), 2008 World Energy Outlook (WEO), paints a depressing picture of an oil industry having to run faster and faster, like a hamster trapped on a wheel, just to keep pace with burgeoning oil demand over the next 20 years.  The first paragraph of the IEA report reads as ‘the world’s energy system is at a crossroads. Current global trends in energy supply and consumption are patently unsustainable – environmentally, economically, socially’.  The report, released in November 2008, estimates that the industry will need to find 64 million barrels per day (bpd) of new oil production capacity to meet the expected growth in demand by 21 million bpd by 2030 and offset 43 million bpd of expected declines from existing fields. The total cost is put at around $5 trillion at today’s prices.  The study, based on detailed data for the world’s 580 largest oilfields and an extrapolation to the remaining 70,000 smaller fields, estimates output from existing and future fields will decline by 6.7-8.6 percent a year.

In the report “Global Trends 2025: A Transformed World”, the National Intelligence Council speculates that ‘Countries capable of significantly expanding production will dwindle; oil and gas production will be concentrated in unstable areas.  … As a result of this and other factors, the world will be in the midst of a fundamental energy transition away from oil toward natural gas and coal and other alternatives’.The world economy was able to enjoy impressive growth in the 20th century, largely because it benefited from cheap and abundant oil, and could afford ignoring environmental costs.  The severe effects of global environmental damage have now risen to the point that the very survival of the humanity is at stake.  By far the most controversial feature of environmental damage relates to potential atmospheric damage, that is, damage to the gaseous membrane that maintains all life on earth.  Especially the combustion products of fossil fuels are the major source of danger to earth’s atmosphere.  The problems arise because some of the key gaseous components of the atmosphere are becoming excessively concentrated, and many experts believe that this situation is dangerously upsetting the delicate balance between various gaseous in earth’s atmosphere.  This human-induced global warming is only one among many serious environmental consequences caused by the never-ending drive of accumulation under the existing system.  A quarter of all deaths in the world today have some links to environmental factors.

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