Finally, Peak Oil

(Posted by John)

(Part of a series. Earlier posts here: 1, 2, 3, 4.

If you're watching the news today, you'll notice that New Orleans is facing the punishment of God for it's sinful ways. (You know that's what Pat Robertson is thinking.) As bad is this is for the people who live in New Orleans (and I do hope we don't see any more deaths) there's some things we should consider for oil prices. Katrina hit land sometime this morning, and when it did something like a quarter or third of US oil imports were hit with an incredibly powerful force of nature. This is why oil just hit $70 tonight in Asian trading.

Why did this happen? After all, this is hardly the first time a hurricane has hit the Gulf of Mexico - even if this is unusually strong. The root cause is that at this moment, there is zero slack in the oil market. Demand is actually exceeding supply slightly, so when something like this act of God hits, the entire market is thrown in to chaos. Why is there zero slack? Well, this is where we get in to the subject of Peak Oil, or Hubbert's Peak.

When we looked at reserve/consumption ratios, I said this is the wrong way to look at fossil fuel usage. The important number, when we're talking about oil, is not how much oil is left in the ground but how much oil we can actually pump out of the ground on any given day. Currently, we use 85 million barrels of oil globally every day. We pump slightly less out of the ground every day, meaning we're currently depleting existing stocks. (This is a bad thing on it's own - winter's coming, and normally we'd be trying to build up stocks for heating homes in the US northeast.) There are serious questions being asked about how we're going to meet oil demand in the 4th quarter of 2005. So why can't we just ramp up production? Well, because unlike previous shortages, there's no new capacity to build. Time was, back when the price of oil got too high, the Saudis would open up some more supply. Everyone is currently producing flat out, and has been for most of the last 2 years. There's no extra tap we can turn on this time.

When an oilfield is first discovered and pumping begins, oil output begins climbing very quickly. In the largest, most easily exploited fields, the oil is literally bursting from the ground. After a time, production levels off, and you get a long period of stable high output. But then something happens, usually when you've half-emptied the oilfield. Underground pressure begins to drop, and suddenly the oil output falls off dramatically. You can start injecting gas or water in to the field to keep the pressure high, thus prolonging the life of the oilfield, but this doesn't last long. Eventually, the oilfield has to be abandoned because you're either a) spending more money pumping oil out then you're likely to get from it, or b) the oil simply stops coming up altogether. When you graph the production of a single well, it looks like a truncated pyramid - a sharp climb, a long flat plateau, and a sharp decline.

If you combine the output of multiple fields in your analysis (say, if you're looking at national domestic production) then the graph looks very different. The aggregate of multiple fields isn't a truncated pyramid, but rather a curve which climbs, peaks, and begins declining. The Peak is the most oil that nation will ever produce in a single day, and every day after is going to mean less and less oil from that country.

It should be stated explicitly that this isn't a theory. Nation after nation has watched it's production climb, peak, then decline. In the US, the peak happened in 1971. In China, it was earlier. In Russia, oil production peaked in 1987. Canada's conventional oils peaked in the 1970s as well. Some optimists have called Peak Oil a theory. This just isn't the case. We can argue over when the peak will come, what form it will take, how severe the decline will be, but not over the facts. Indonesia's oil production peaked in 1998, and Indonesia now imports more oil than it exports - as a member of OPEC! So clearly, The Peak is going to occur.

So The Big Question is when will The Peak arrive, with the secondary question being How Bad Will It Be? Let's take these questions in order. The two most important official bodies for estimating this kind of thing - the Department of Energy and the International Energy Agency - both have estimated oil will peak sometime in the 2020s or later. However, the DOE study was ridiculously biased, and few people take it very seriously - it assumes a 5% chance of a Saudi-sized oil field in Greenland, and bases it's projections on that.

On the other end are predictions from various geologists and petroleum engineers that we have already passed the Peak of production, or that it will occur later this year. So the extremes in this debate are either "Now" or "2030". Most of the more moderate voices I've read predict a peak in or before 2010. My personal belief is that we're almost certain to see a peak before 2010, and I'm leaning toward 2007-8. But that based only on some reading, and I'm not an engineer.

What happens then? Well, as with national production, daily oil production begins to decline. If 85 million barrels per day is our peak production, we'd see the next year decline by a certain amount, say to 84 million barrels. The year after that, we'd see 83, etc etc. (This isn't a prediction, just an example.) Now at the moment, prices are heading skyward just because supply and demand are just about equal. Imagine what happens when demand is actually substantially more than supply. Goldman Sachs has said that, with the market as tight as it is, we could face $105/barrel oil.

This brings us to the second question about Peak Oil, How Bad Will It Be? To put it another way, how severe will the decline be once it begins? This is one I'm not competent to actually predict, but let's take the extremes again. The worst case scenario is that global production begins dropping severely, in the range of 5-10% per year. Even in the low end of that range, this would mean dramatically less oil over a few years. If we lose 5% of world production, that's close to 5 million barrels of oil we lose in one year. It's difficult to see how the global economy - or any national economies - could sustain those kind of losses without collapsing.

The more optimistic scenario is a gentler decline - less than 1% per year. This is close to what the US has historically experienced (roughly 30% decline since 1971) and is obviously a lot less of a shock for the global economy. This scenario relies on high oil prices spurring much better technology to extract the remaining oil, keeping the decline much shallower than it would otherwise be.

But, even in this "optimistic" scenario, oil production declines and never, ever reaches it's pre-Peak levels. For a civilization based on growing oil production, this is a huge change. In the next post, I'm going to talk about what we can do about oil peaking. However, today my girlfriend and I are celebrating our fifth anniversary (though it's actually tomorrow) so the next post will be later tonight at least.