The trouble with Peak Oil…

Most indications are that world wide oil production is at its peak.  A recent Wikileaks document suggests that the US believes the Saudis are overstating oil reserves and are already at their peak.  If that’s true, the world may be producing more oil now than it ever will in the future.  This could last a few more years, but at some point production will start to drop off.

If you’re an optimist you can hope that oil sands, off shore finds, and alternative energy can pick up the slack.  That’s not very likely.  Oil production drops off relatively rapidly and its not easy to replace the amounts of oil Saudi Arabia produces.  At the time of the Iraq war there was hope that Iraq might have more reserves than thought (Saddam had been inefficient at discovering/drilling for oil, thanks to all his foreign policy adventures), but continued sabotage and instability there assure that any significant Iraqi oil won’t be on line for probably a decade or more.  Off shore finds are modest, and oil sand production is actually down from its highs.  It will take a lot of investment to have enough production to alter the trends.  Even if we opened up Alaska and off shore areas to unrestrained drilling it won’t change the fact that oil production will slow.

The long term problems that could cause are numerous, but right now we’re dealing with the short term. The trouble with peak oil is that any slight change in demand or concern about supply can turn into a major price shift.   Nothing illustrated this better than the price run up of 2008, followed by a massive collapse of oil prices when the recession hit.  Oil prices leaped to over $145 a barrel, though a portion of that was due to the weakness of the dollar.   When the recession was in full bloom after the financial crisis hit, the price went down to about $30 a barrel.   Now with unrest in Egypt and Libya, the price is hovering at near $100 a barrel.   That sounds cheap compared to 2008, but as recently as five years ago people were alarmed by the prospect of $100 a barrel oil.

Consider this graph of oil prices:

From 1996 to 2005 we hovered between $20 and $40 a barrel.  That price indicated that production was still easily meeting demand, as those prices were historically still quite low adjusted for inflation.  Even during the late nineties boom years the price stayed low.   That helped the economy boom, and was one reason the US budget could be balanced for a short while.   Between 2005 and the summer of 2007 price started rising up to consistently around $60 a barrel.  This was considered high, and reflected the increased demand for oil caused by the economic boom – especially continued growth in India and China.  Then in 2008 the price soared.   Some of this was simply increased demand, and some of it was due to factors like unrest in Nigeria, the kinds of oil produced, etc.   But if we’ve hit a peak, this is how it would look.

Because demand for oil will stay pretty much the same if price changes are minor or moderate, a slight imbalance between supply and demand will require significant changes in price to reach a new equilibrium.   For example, if due to stagnant supply or high demand the desire for people to buy $70 a barrel oil increases by 2%, it might require the price to double in order to cut some of that demand so that demand ultimately equals supply.   If a recession causes a drop in demand (which it did), then the price will fall dramatically as suddenly supply easily meets demand.

You’d expect this kind of behavior at peak because if production can increase, states would do so at prices well over $100 a barrel — there are huge profits to be made.  If production were actually dropping, however, decreases in demand would not yield such a dramatic drop in price — the decline in supply would factor in.   Note that even though the world economy did not revert back to the boom years of the early 00′s, oil prices started to climb back to over $80 a barrel by mid-2010, before the unrest in Egypt and Libya.    An increase in economic growth will start a quick and significant increase in oil prices.   That in turn causes recessionary pressures, as money going to pay for oil does not go into the economy.  This will make it much more difficult to grow out of this recession.

In the past when a recession hit you took your lumps, the economy adjusted, and then it was back to onward and upward.   Yet since 1900 our economic health has been increasingly dependent on cheap energy.   The last 100 years has been an era of incredibly cheap, plentiful and easy to transport energy via oil and coal.  Oil has been essential to increased transportation of goods and services, and without it the economy would collapse.  If we’re hitting a peak, high oil prices aren’t only here to stay in the long run, but while we’re at the peak price fluctuations will be common, and higher prices are likely to undercut nascent economic recoveries.

Now add in Libya and Egypt — or other unrest in the region.  A lion’s share of the oil comes from the Mideast and an Arab world that has seen dictatorships and corruption blossom due to oil revenue.  Citizens were paid off with the money that came in, while leaders grew corrupt and spoiled.   Gaddafi could play military games throughout Africa, and fancy himself an anti-western Arab nationalist.  The Saudi Royal family could act like a mafia family, but with the protection of sovereignty and royal titles.   As the youth rise up against those practices, any unrest or shortfall in oil production (Libya’s production is down 50%) can cause significant price increases.   The current $100 a barrel is due less to that than fears of what might yet be to come in the region, but clearly events in the Arab world directly affect our economy.

We’re going to have to get used to this volatility.  It reinforces the fact that this recession can only be cured by restructuring our economy, and ultimately by preparing for much more expensive (and perhaps hard to get) oil.   From behavioral changes to policies designed to create a more energy efficient economy, the need for major adjustment cannot be ignored.   There’s no magic spell either — “drill baby drill” won’t cut it, and just investing in alternatives isn’t enough either.   We have to question policies, regulations, and our very way of life.

Because, even though things still seem normal now, this challenge is coming just as sure as change is coming to the Mideast.  The ride has just begun.

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  1. #1 by Black Flag on March 1, 2011 - 06:03

    Peak oil, that is a lack of global oil, is a fallacy. We are awash with so much hydrocarbons … heck, it is one of the most abundant molecules in the Universe. Frankly, it would be utterly preposterous to run out of “oil”.

    Current oil prices is completely due to government – either by war or by writ.

    That is, it is illegal to get to it, or government guns make it too dangerous to reach it.

    I do not see these two conditions being relieved any time soon. Prepare for higher prices.

  2. #2 by Scott Erb on March 1, 2011 - 12:40

    Well, I know fossil fuel geologists who disagree with you, and they’re the experts. One has come to speak to my class, and he made a very strong case. I’m not sure where you are getting your information. I hope you’re right, but for now I have to go with the experts.

  3. #3 by Black Flag on March 1, 2011 - 16:50

    Scott,

    One merely has to look into space – where “oil” rains on the moons of Saturn, comets ‘sweat’ the stuff off and Uranus and Neptune have 2.3% of its atmosphere made up of the stuff (or 10,000 times the concentration in the Earth’s atmosphere). Obviously, the “fossil” theory of hydrocarbon has some holes in it.

    Further, I do not dispute a problem with access which will create an equivalent condition of “Peak Oil”.

    If I physically stop you from getting to the oil vs. the oil simply does not exist both ends with you having no oil.

    If oil is awash in the Solar System (and on Earth), then the access issues is the cause – though the consequences are like “Peak exhaustion“.

    Just a couple of info details – Google has thousands of other hits.

    (Comets/Methane)
    Methane in Oort cloud comets

    E. L. GibbCorresponding Author Contact Information, E-mail The Corresponding Author, a, M. J. Mummab, N. Dello Russob, c, M. A. DiSantib and K. Magee-Sauerd

    a NAS-NRC, Laboratory for Extraterrestrial Physics, NASA Goddard Space Flight Center Code 690, Greenbelt, MD 20771, USA

    b Laboratory for Extraterrestrial Physics, NASA Goddard Space Flight Center Code 690, Greenbelt, MD 20771, USA

    c Department of Physics, The Catholic University of America, Washington, DC 20064, USA

    d Department of Chemistry and Physics, Rowan University, Glassboro, NJ 08028, USA
    Received 17 December 2002;
    revised 18 June 2003.
    Available online 11 September 2003.)

    (Saturn’s Titan Raining Oil)
    Titan is just covered in carbon-bearing material — it’s a giant factory of organic chemicals.”

    “We are carbon-based life, and understanding how far along the chain of complexity towards life that chemistry can go in an environment like Titan will be important in understanding the origins of life throughout the universe.”

    ~Ralph Lorenz -Johns Hopkins University Applied Physics Laboratory

    Picture of lakes of methane and ethane on Titian

  4. #4 by Black Flag on March 1, 2011 - 16:54

    Cassini has mapped about 20 percent of Titan’s surface with radar. Several hundred lakes and seas have been observed, with each of several dozen estimated to contain more hydrocarbon liquid than Earth’s oil and gas reserves. Dark dunes that run along the equator contain a volume of organics several hundred times larger than Earth’s coal reserves.

    Proven reserves of natural gas on Earth total 130 billion tons, enough to provide 300 times the amount of energy the entire United States uses annually for residential heating, cooling and lighting. Dozens of Titan’s lakes individually have the equivalent of at least this much energy in the form of methane and ethane.

  5. #5 by henitsirk on March 3, 2011 - 02:08

    When we have the technology to mine the lakes of Titan or harness the methane in Oort cloud comets, then maybe we’ll be “awash” in hydrocarbons.

    • #6 by Scott Erb on March 3, 2011 - 02:20

      True story — back in grad school I got a one year job at St. Olaf College in Northfield, MN. That meant I had to get a new car as my very gas efficient Geo Metro was not likely to handle the winter commutes from Minneapolis. I went and looked at a Hyundai, a Saturn, a Dodge, a Ford, and could not choose. The Saturn was the most expensive, and was the only one I’d ruled out. So I said, “well, I’ll ask the universe.” So I closed my eyes and randomly picked a CD from my collection, and then put it in my CD player and pushed random track. The CD was “Modern Times” by Al Stewart, and the song was “Sirens of Titan,” with the line “under the shadow of Saturn…” I realized of my 150 plus CDs at the time, no other song would contain the word Saturn. So I bought the Saturn, which was a great car for the next ten years.

      • #7 by henitsirk on March 3, 2011 - 02:46

        Way to tie that all together! lol

    • #8 by Black Flag on March 3, 2011 - 03:18

      To believe that the Earth -somehow- is lacking in one of the most abundant molecules in the Universe requires some pretty strong argument.

      So far, none forthcoming.

      We are awash in oil.

      A short video, showing how year after year, we find more of the stuff…..

      • #9 by Scott Erb on March 3, 2011 - 04:18

        Well, oil is not an element. And we don’t seem to be awash in it. They’ve been drilling everywhere trying to find new oil fields, but no significant oil find (massive oil field) has been found since the sixties. So I still have to stick with the fossil fuel geologists here. If you know where to drill, you can make yourself rich. Otherwise, if there is a lot of oil, it’s pretty well hidden.

        I’ve interacted with Steve from your video clip on alt.music.rush. The proven reserves rose recently because OPEC countries in the 80s doubled their estimates of proven reserves so they could produce more. But the reality is that there hasn’t been significant new reserves. Steve’s point relies on faith — that somehow more oil will be found as prices rise. It could happen. But it might not.

      • #10 by Black Flag on March 3, 2011 - 05:21

        Scott

        Well, oil is not an element.

        Right, which is why I called it a “molecule”.

        And we don’t seem to be awash in it.

        The total of the top 17 proven reserves is 1.2 TRILLION barrels.

        The world has 187,800,000,000,000 cubic meters (187 trillion) proven natural gas reserves. We have so much of the stuff most of it is burned off at the sites.

        They’ve been drilling everywhere trying to find new oil fields, but no significant oil find (massive oil field) has been found since the sixties.

        Where are you getting your info?

        A quick search on Wiki brings up the largest fields and date of discovery

        Ghawar Field Saudi Arabia 1948[3]
        Burgan Field Kuwait 1938
        Ferdows/Mound/Zagheh Field Iran 2003
        Sugar Loaf field Brazil 2007
        Cantarell Field Mexico 1976
        Bolivar Coastal Field Venezuela 1917
        Azadegan field Iran 2004
        Tupi Field Santos Basin, Brazil 2007
        Safaniya-Khafji Field Saudi Arabia/Neutral Zone 1951
        Rumaila Field Iraq 1953
        Tengiz Field Kazakhstan 1979

        …and on and on.

        So I still have to stick with the fossil fuel geologists here.

        I suggest you investigate his sources a bit more thoroughly if this is where you got your “1960′s” info regarding oil finds.

        If you know where to drill, you can make yourself rich.

        There is more to oil then just drilling.

        Otherwise, if there is a lot of oil, it’s pretty well hidden.

        Oh, that may be true – that is takes effort to get to it.

        The Earth suffers large tectonics and erosion issues and no doubt tosses and turns all our resources. And given that most of the Earth is under water, that posses a bit of a challenge to.

        I’ve interacted with Steve from your video clip on alt.music.rush. The proven reserves rose recently because OPEC countries in the 80s doubled their estimates of proven reserves so they could produce more. But the reality is that there hasn’t been significant new reserves.

        Well, given a quick Wiki search shatters your claim here, I’m certainly not worried “even a little bit” that oil is “everywhere” under our feet.

        Steve’s point relies on faith — that somehow more oil will be found as prices rise. It could happen. But it might not.

        It has always happened

        You have no instance where such a thing has happened. Nada. Zip. Zero. Never.

        There is no resource – not even the most valued, like gold – that has been exhausted.

        I believe you hold too zealously to Malthusian hearsay.

  6. #11 by Black Flag on March 3, 2011 - 06:35

    ….thing has NOT happened… … but I know you knew I missed the “not”.

  7. #12 by brucetheeconomist on March 7, 2011 - 06:40

    I suspect what we may see in the near future is more use of natural gas. While oil is becoming much more expensive, natural gas prices are tanking.

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