Peak Oil's Bell Is Ringing

Includes: OIL, USO
by: Praveen Jaiswal

“Our ignorance is not as vast as our failure to use what we know”.

-- M. King Hubbert

A minority of geologists have long argued that hydrocarbons were formed through inorganic processes operating on carbon sourced from the earth’s mantle. Theories for an inorganic origin ranged from hydrocarbons raining from the sky early during the Earth’s formation and trapped into the surface rocks which, later transformed into petroleum. In all these cases, the presence of organic matter was attributed to the petroleum picking them up as it moved through crystal rocks containing organic material.

Unfortunately for the inorganic theory, all major petroleum discoveries have come from methods that assume an organic formation process. However, hydrocarbons are almost surely derived from organic decay and because of this, the petroleum reserves are limited. We will eventually run out of “affordable” oil, the big question is when? Peak Oil Theory tends to answer this question.

Oil resources are finite; this is irrefutable. It is equally true that no one knows just how finite they are and trying to assess their order of magnitude is a very complicated puzzle. In 1956, geologist M. King Hubbert predicted that U.S. oil production would peak in the early 1970s. Almost everyone inside and outside the oil industry rejected Hubbert’s analysis. The controversy raged until 1970, when the U.S. production of crude oil really started to fall. Hubbert was right. Hubbert predicted that annual oil production would follow a “bell-shaped” curve; the curve which become to be known as “Hubbert’s Peak”.

The bell-shaped production curve, as originally suggested by M. King Hubbert in 1956.

The earth’s endowment of oil is finite and demand for oil continues to increase with time. Accordingly, geologists know that at some future date, conventional oil supply will no longer be capable of satisfying world demand. At that point, world oil production will have “peaked” and begin to decline. It has taken 50 – 300 million years to form, yet mankind has managed to burn roughly half of the global oil reserves in merely 125 years or so. The world is consuming about 86 million barrels of oil per day, or 40,000 gallons per second, and the demand is growing exponentially.

As Albert Einstein said, “One of nature’s biggest forces is exponential growth”. Dr. Colin Campbell, leading geologist says, “It’s quite a simple theory and one that any beer drinker understands. The glass starts full and ends empty and the faster you drink it the quicker it’s gone”.

Statistics prove that oil production in 33 out of 48 countries has approached a “peak”, and if the rate of consumption is not reined in, it can potentially end our Oil Age. The world is not running out of oil itself, but rather its ability to produce high-quality, cheap and economically extractable oil on demand. The rate at which world oil producers can extract oil is reaching its maximum, and possibly that is what is meant by “Peak Oil”. The last few years have had a Reserve Replacement Ratio of less than one – a jargon for saying that more is being drilled out of the ground than being discovered. The Stone Age did not end because of the lack of stones, and the Oil Age won’t end also because of lack of oil. The issue is lack of further growth, followed by gradual, then steep decline.

It is important to recognize that oil production peaking is not “running out” of oil. Reserves are an estimate of the total amount of oil in a reservoir that can be extracted at an assumed cost. Thus, a higher price outlook often means that more oil can be produced, but geology places an upper limit on price-dependant reserves growth.

In the oil world, the prevailing classification system for assessing reserves has been outlined into three categories:

  • Proven reserves – defined as the amount of oil and gas in place, in known reservoirs, that can be estimated with “reasonable certainty”. The concept of “reasonable certainty” is associated with a probability of profitable recovery of at least 90%.
  • Probable reserves – the probability of profitable recovery falls to 50%.
  • Possible reserves – profitable probability of recovery no less than 10%.

Today, all major sources estimate that the world’s proven oil reserves vary between 1.0 and 1.2 million barrels and are geographically highly concentrated. Nearly 65% of oil is found in the Persian Gulf area. As per the present oil consumption of 85 million barrels per day, the life span of proven oil reserves is about 38 years.

Economists argue that this projection is misleading because future demand will be higher than today’s, thus shortening the effective longevity of today’s reserves. This argument is itself flawed as it assures that only consumption grows, while resources are fixed. Technological advances have dramatically increased the recoverability of oil from its reservoirs. On an average, only about 15 to 20% of oil in a given reservoir can be recovered from its rocky prison by relying on natural pressure known as “primary recovery”. Over a period, many new technologies have enabled bringing additional oil to the ground by injecting natural gas and water down into the reservoirs generally referred to as “secondary recovery”.

It goes without saying that we must discover before we can extract. It is also true that if we extract more than we discover, we will eventually exhaust the surplus reserves built over a period of time. Presently, the world is consuming four times as much as it discovers. World oil demand is expected to grow 50% by 2025 i.e. to approximately 120 million barrels a day. Peak Oil as a theory is difficult to prove, until the peaking occurs. Geologists and economists has described three forms of this:

  • The “weak” form. This school believes that global oil production will peak unpredictably at some point in next 10 to 20 years. Until then, oil production will decline in most nations but will be offset by increased production from Middle East and Former Soviet Union (FSU) countries;
  • The “moderate” form of peak oil will occur when the Middle East & FSU countries will be unable to significantly increase the production, although they will maintain current levels of output for many decades; and
  • The “strong” form, the worst predicted, is when the Middle East will prove unable to increase its production, leaving a catastrophic effect on the global economy.

In addition to the above, another, and the most dangerous form of “peak oil” predicted is “political peaking”. The Middle Eastern nations can produce more oil to meet the world’s growing thirst, but will they? Is it better to pump more and invest the surplus? Or leave it in the ground for future generations?

The arrival of Peak Oil may be slightly delayed if worldwide demand for oil would fall; a global recession can hit demand for oil-based products. This would result in spare capacity building up again. Furthermore, high oil prices themselves can dampen demand. We have actually taken our lifestyles and the cheap and abundant supply of oil all for granted. The main worry is not the present levels of resource use and ecological impact. It is the levels we want to raise. The supreme goal of all countries is to raise incomes, the “living standards” and the GDP as much as possible.

With this energy base dwindling, there is simply not enough time to replace a fluid so cheap, abundant and versatile. It is rich in energy, easy to use, store and transport. No other form of energy can replace it in time, either separately or in combination. Other renewable forms of energy also require lots of energy to construct and require a petroleum platform to deliver. To cite a few examples:

  • Natural gas is a diminishing resource as well and cannot satisfy the growing demand for energy;
  • Ethanol has a net energy value of zero;
  • Solar energy produces marginal net energy, but is still decades away at best from being a viable substitute given the recent rate of progress in efficiency and costs;
  • The widespread belief that hydrogen is going to save the day, hydrogen fuel cells are not an energy source at all, but are more properly termed a form of energy storage. Free hydrogen does not exist on this planet. It requires more energy to break a hydrogen bond;
  • Coal is abundant, but its net energy profile is poor compared to oil;
  • Obtaining usable oil from tar sands requires huge amounts of energy; and
  • Nuclear power plants are simply too expensive and takes ten years to build, relying on a fossil fuel platform for all stages of construction, maintenance, and extracting & processing nuclear fuels.

The Economic Armageddon

Oil is the fuel that enabled the growth of modern civilization, and the industrialized countries now rely on it to an extraordinary extent. Oil provides 40% of all primary energy, and 90% of our transportation energy. Oil peaking will create a severe liquid fuels problem for the transportation sector, not an “energy crisis” in the usual sense that term has been used. The physical and chemical versatility of oil, combined with its high energy density, cannot replace any other known energy source or even adequate substitute. In short, oil is the lifeblood of the current world. As the chief economist of Morgan Stanley said, “… we have a 90% chance of facing an economic Armageddon.” The bell is ringing for us to wake up and as Albert Einstein said, “you cannot solve this world’s problems with the same thinking that created them”.

The main changes we need to effect are a move away from “too much” globalization towards local economies that values and preserves own natural capital such as local food supplies, traditional skills, protecting the flora & fauna, the practices of optimum land use and urban design. Peak Oil will certainly pose enormous challenge for future generations; we need to respond now for a harmonious future, time now to put our “Plan B” in place. As pointed by Lester R. Brown in his bestselling book Plan B 2.0: Rescuing a Planet under Stress and a Civilization in trouble writes:

Sustaining our early 21st century global civilization now depends on shifting to a renewable energy-based, reuse/recycle economy with a diversified transport system. Business as usual – Plan A – cannot take us where we want to go. It is time for Plan B, time to build a new economy and new world. Our central survival task for the decades ahead, as individuals and as species, must be to make a transition away from the use of fossil fuels and to do this as peacefully, equitably, and intelligently as possible.

Whether Hubbert’s theory is correct or not, we must ensure that our society can function with dwindling supplies of black gold.

From an economist’s perspective, the concept of “peak oil” does not exist. An economist sees the availability of oil as a function of technology and investment i.e. as long as people are prepared to pay the price there is enough material in the earth’s crust to create oil. We have to be ready to pay the price both in monetary and environmental terms.

According to the First Law of Thermodynamics, energy can neither be created nor destroyed; it can only be converted from one form into another. This is also known as the Law of Conservation of Energy. Fuel is the scarce resource, not energy by itself. Crude Oil is also one such scarce resource. How do we choose how much to produce? How do we allocate scarce resources that have alternative uses to their “best” use? And, how do we know what is the “best” use? All these are economic questions. The answer is “the best use is one that provides the greatest satisfaction for the greatest number of people”.

How do we achieve that “best” use? The answer is, “in a free society we achieve that through free markets”. A fundamental economic axiom is that human creativity and inventiveness respond to the incentive of price. In a free society, market prices tell us how much to produce, how much to consume, and how much to conserve, of our scarce resources. In a free society market prices will allocate resources to their best use.

Michael Crichton, the famous novelist, in his novel State of Fear has rightly said:

There are many reasons to shift away from fossil fuels, and we will do so in this century without legislation, financial incentives, carbon conservation programs, or the interminable yammering of fear mongers. So far as I know, nobody will have to ban horse transportation in this century.

The conclusion line is that the wolf is not at the door. Only the inability of the decision makers to grasp this reality and to act accordingly may push the world to that “resource curse”. From Sri Lankan perspective, it is worth quoting Mr. Ashantha de Mel, CMD, Ceylon Petroleum Corporation, who says, “alternative forms of energy is an aspect that we can explore, but it is more important to try and reduce consumption…”

To avoid a crunch, energy policy needs to reduce the demand growth – “fuel switching”, or to increase the supply of unconventional liquids. A major overhaul in the thinking process is desired towards energy policy around the globe. Time is not far when an oil price spike might break down opposition to a much greater interventionist approach by the governments in their energy sectors. Thus it might do for energy policy what 9/11 did for US military and security policy. Greater government intervention might return us to the ‘bad old days’ when much of the intervention was ill informed, unhelpful and positively damaging. The Trojan horse led to the fall of Troy, it is for the policy makers to decide whether they need to be remembered by our generations to come, as the Trojan horse is.

Hence the buzz phrase of the day as posted on Indian Oil message boards is “Save oil today or walk to your destination tomorrow”.