Is peak oil upon us?

One interesting story that has now come out via Wikileaks is that there is some apparent disagreement by the US embassy in Riyadh as the veracity of Saudi Arabia’s outlandish oil reserve claims.

This has major implications for the issue of impending peak oil. What is peak oil you ask? The short answer is it’s the point at which we can no longer drill our way out of our energy problems. It doesn’t mean we’re running out of oil, there’s still plenty left, it’s just that the stuff that’s left is often in much smaller fields, in more remote locations or in the form of unconventional reserves, like tar sands and shales.

This means three things. Firstly these remaining sources are much more expensive to exploit, so the price of energy as a whole (oil in particular) will have to rise. I’ve heard many energy industry insiders talking about prices higher than $200 a barrel being a “good” or “fair” price for oil….well good and fair if you’re not the one paying out at the pump I suppose! Also note that when I talk about price I mean both in terms of financial costs but also the energy costs. A typical Middle East oil well provides us with 1-200 times more energy than we initially invest in producing oil from it. The Tar sands have energy return ratios in the order of 9 to 0.7 depending on who you ask, the 0.7 figure (from environmentalists) would mean we spend more energy in the form of natural gas, coal or nuclear power getting the oil out than we get back from the oil, i.e the tar sands could turn out to be a net energy sink rather than a source.

Obviously, beyond a certain point these costs become too large to sustain. If the oil price soon goes south of $200 and stays there more or less permanently, consumption will inevitably fall as it will be too expensive to use oil in the quantities were currently consume it. And if we end up using, say, half the North American Gas reserves to produce oil from Tar Sands that leaves a lot less gas available for other purposes (home heating, electricity, fertiliser manufacturing) and obviously increases the costs of pretty much everything, until consumption is curbed in some way.

Secondly, there is the rise in the environmental costs from continued fossil fuel use. Nevermind the issue of climate change, most of the world’s remaining oil reserves are in remote wilderness locations like the Arctic (or the ANWR in Alaska) or in the Rainforests. The Gulf of Mexico spill is the sort of price we will have to pay for continued oil dependancy. And projects like the Tar Sands or oil/gas shale drilling are far more environmentally destructive than any previous energy projects.

Finally, we cannot simply pump oil out of the ground at any arbitrary rate. There are a host of economic, technical and geological factors that limit how much oil you can produce from any source within any given time period. Once we are passed peak oil maintaining oil output at its current levels, nevermind increasing output will become increasingly difficult as time goes on. Eventually oil production could enter into a state of steady unending decline, which would have very serious economic consequences if it happens unexpectedly.

Now, it should be stated that such disquiet about Saudi oil reserves isn’t anything new, people have been crying foul about the level of OPEC oil reserves for years. Most notably back in the 1980’s many OPEC countries doubled or tripled their reserves more or less over night. This wasn’t due to any new discoveries, but due to the fact OPEC at the time was contemplating new rules, which related a nations ability to export oil to its proven reserves.
Thus the Saudi’s and the other OPEC countries, have a perverse incentive to over state they’re oil reserves, so it would not be entirely surprising to learn that they have done so. To what degree they have over stated reserves is the question. If its a case of 10-20% its no big deal, if its 40-60% its a case of WTF! There is, it should be noted, no auditor who goes around the OPEC states and measures their oil reserves. Its up to them to tell us how much oil they think they have and it all boils down to whether you believe them or not.

One suspicious fact is that the few of the major OPEC states have ever shown a decrease in they’re stated reserves, indeed for several years many claimed exactly the same amount (despite the fact they were producing oil and supposedly depleting these reserves). The only way this could have been accurate was if during that period they had been going out each year and finding exactly the same amount of oil that they produced and sold that year, which seems pretty unlikely. A few lean years and a decline, then a few good years and a rise, okay I can buy that, but exactly the same found as sold for several years in a row, pull the other one! In another example back in the 70’s and 80’s the Saudi’s made aggressive moves to exploit they’re offshore oil reserves, this is despite the fact they still claim large onshore reserves in their South Eastern desert region (which at the time of writing has no oil drilling projects underway). Why go after the stuff offshore if you’ve all this oil left onshore? Is it perhaps because those onshore fields simply don’t exist?

This whole topic is significant, given what was recently revealed in the IEA’s annual energy assessment reports. Go back through previous few year’s reports and do a search for the word peak oil and you’ll come up with no hits, as the IEA stuck to the mantra that peak oil was a long way off. Do it now and you get lots of them! More importantly, the IEA has been saying for years that they expect global oil production to rise from its current levels of 75-80 million barrels/day to 120m bbl/day by 2030. Their latest report slashes this forecast down to just 96 m bbl/day.

This alone is cause for concern, that 120 bbl/day in 2030 figure was a reflection of what was needed to sustain our current levels of economic growth, if it’s been cut, how are we supposed to sustain such growth levels? There is you see a direct link between oil production and global trade, as so much of the transport infrastructure globally runs on oil, not to mention the fact that so many products we use from Nylon shirts, to pesticides (needed to maintain food production), plastics, pharmaceuticals, etc. are all derived from oil. Consequently we could well face a protracted slow down in global economic activity if these projections prove accurate.

And if that didn’t give energy industry people goose bumps, there was another twist. Conventional oil production (that’s the regular black stuff coming out of the ground) has been more or less flat since 2004 (with a slight peak in 2006), even though prices went through the roof back in 2007. If the OPEC countries had all the oil they claim to have, then with prices at $147 a barrel why didn’t they pump more onto the global market? While Saudi production did increase to a maximum of 10.5m bbl/day (they’re current output is 9.2m bbl/day) just prior to the recession it was a tiny rate of increase given the economic conditions and very small compared to what the Saudi’s frequently claim – that they can raise production up to 20m bbl/day and keep it there for years if necessary. If so, then why didn’t they (or the other OPEC states) increase production when oil prices recently skyrocketed? There are three possible answers:
1) They didn’t increase production because the Saudi’s and their OPEC allies want to maintain an artificial shortage in order to increase profits. If this is true then we need to think twice about getting hooked on OPEC oil in the future, as they clearly have no qualms about engaging in blatant price gouging the like of which would have Rockefeller shaking his head in disgust. This is important because If there’s one fact about oil that everyone agrees, it’s that between 60-70% of the world’s conventional oil reserves lie within the Middle East (they currently produce just 35% of the world’s oil).

2) They didn’t raise production because the valves were already fully open! 10.5m bbl/day is the most we’re ever going to get out of the Saudi’s. Once they do peak, production will decline well below this figure.

3) The Saudi’s do have some spare capacity, but not nearly as much as they claim. A figure closer to 12m bbl/day is probably closer to reality (according to many energy insiders) and they could probably only maintain this for a short period of time (months, rather than years). Obviously if this is true, the Saudis realise they need to maintain some spare capacity to deal with any future emergency (external or domestic) and hence, they aren’t going to put this spare capacity on the market any time soon, regardless of what the price does. Indeed if consumption continues to rise then eventually even this “spare” capacity will be eaten away. If they exceed peak production soon, then demand will outstrip supply all the sooner.

If you look at the graph for the IEA I’ve linked to you’ll note this big grey wedge labelled “crude oilfield yet to be developed” and another blue one labelled “…yet to be found”….here’s the punchline, the bulk of those are supposed to be in the Middle East…..indeed they are specifically meant to be held within 3 countries – Iraq, Saudi Arabia and Iran. If these wikileak speculations are correct, and we are forced to, say, subtract half of these two wedges, you will see that global oil production will likely begin to fall sometime between 2012 and 2020. Indeed if it weren’t for a recent increase in the output from “unconventional oil reserves” we would already be into the post-peak oil era. So, ya this is pretty big news….which seems to be getting scant attention from the media….. Although with all the stuff going on in Libya right now that’s probably not a big surprise.

The Libya situation does however highlight another problem with peak oil – the erosion of any “swing” capacity. The world relies on several major producers of oil, such as the Saudi’s, the Russians and (increasingly) Iraq to maintain some “spare” capacity which can be brought online quickly to offset some temporary supply shortage (such as the current unrest in Libya right now). As we approach and exceed peak oil this “swing” capacity will be depleted (as we need it just to meet daily demand) and eventually disappear. This means that anytime there is a major interruption to supplies in the future (a revolution in an oil rich country for example), it will have fairly serious economic consequences (a spike in prices, queues at petrol pumps in some countries….with the odd inevitable fist fight, food prices rises, economic downturns, etc.).

Obviously I’m not saying it’s time to start panicking or anything (we should have started doing that back in 2006!), the oil isn’t running out, it’s just going to become an increasingly severe pain in the a$$ to meet our “addiction” to the stuff (as even G. W. Bush admits). And if anthropogenic climate change isn’t enough of an a reason for us to move away from fossil fuels then the consequences of peak oil are reason enough.

The real danger with peak oil you see is we won’t see it coming. The US peaked in 1971, but they didn’t work out that they’d peaked until the early 1980’s. It’s too early to say yet if 2006 was the peak in conventional oil production (as the IEA 2010 report speculated), we’d need a few more years data to be sure. Similarly, as far as the global peak in total oil production (conventional and unconventional), we’ll only know it happened probably a good decade after the event…in other words when it’s too late to do anything about it.

The 2005 Hirsch report made clear that in order to see off any economic disruption the world needed about 20 years to prepare for peak oil. Waiting until after the event would lead to “a significant period of severe economic discomfort”. So, as with climate change, a wait and see policy is simply not acceptable.

“the American way of life is not negotiable” – G.H.W. Bush

“beyond a certain point, nature doesn’t negotiate” – Richard Heinberg


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