Category Archives: peak oil

Oil shocks and oil peaks

Wikileaks and oil peaks. Not a completely surprising combination and this article is a nice read. But, it’s been clear for a long while that the oil market does not have much excess capacity and resource estimates are notoriously uncertain and often exaggerated for political or economic gains.

Peak oil is simply expected, and could arrive sooner than we imagine. Non-OPEC crude oil production has declined since early 2005, despite record-high oil prices. And the shift to unconventional substitutes—a symptom of peak oil, rather than an argument against it—is well underway. These substitutes, such as tar sands, are not an easy substitute for crude oil, as they are hugely capital and energy intensive. One wonders whether energy providers would go to such lengths to fill our gas tanks if peak oil were only a myth.

Both supply and demand for oil are relatively inelastic (that is, they do not respond readily to prices), causing the price of gasoline to rise and fall more rapidly than our other regular purchases. Even small shortfalls in crude oil supply can cause significant price increases. Therefore, when spare capacity is tight, real-world events in far off places can have huge impacts on our economy. This has been observed numerous times in recent decades, and the effect has been worsened in recent years by stagnating production from existing conventional oil fields, as was clearly evident in the strong oil price peak in 2008. I will not be surprised at all if a new oil price shock will happen soon.

As another note to this article, the real risk of peak oil isn’t that we’ll run out of fuel – it lies instead in what we will do to avoid running out of fuel. The risk is that we’ll respond with piecemeal solutions that emphasize one aspect of the problem while making others worse.

But, expect a volatile oil price in the next years, with sudden peaks and slow declines in between. It won’t be pretty, but we don’t need wikileaks to point that out to us.

Crying Peak Oil is NOT Crying Wolf

Last year’s oil price peak, along with the recent oil price increase amidst a severe economic slowdown, have fueled worries about the future availability of oil. Some argue that concerns about peak oil or the end of oil are greatly exaggerated. Lynch (NYT 8/24/09) goes as far to say that such concerns are the domain of fear-mongering environmentalists, or of those without a proper grasp of history and geology.

Certainly the most extreme scenarios, such as societal collapse or endless global war over remaining oil supplies, are exaggerated. The reason? We already produce substitutes for traditional crude oil, including tar sands, biofuels and other synthetic fuels, and their importance will continue to grow as the competition—both economic and political—for increasingly scarce conventional oil intensifies.

But it is fundamentally wrong to say that peak oil is a false threat. Peak oil is real, and it could arrive sooner than we imagine. A new comprehensive report from the UK Energy Research Centre suggests that oil depletion is a significant concern that needs immediate attention. For example, non-OPEC crude oil production has declined since early 2005, despite recent record-high oil prices. And the shift to unconventional substitutes—a symptom of peak oil, rather than an argument against it—is well underway. For example, the production of Canadian tar sands reached 1.3 million barrels per day last year, equal to about 7 percent of total US consumption. But tar sands are not an easy substitute for crude oil, as they are hugely capital and energy intensive. One wonders whether energy providers would go to such lengths to fill our gas tanks if peak oil were only a myth.

Production of a geologic resource such as conventional oil must eventually peak and decline. A finite volume of oil was created over geologic time, and we are using it up much faster than it can be replenished—it’s a matter of decades or centuries versus many millions of years. To suggest otherwise is nonsensical. But to fear that oil and gas will disappear abruptly does not make sense. The United States, for example, is still a large oil producer, despite reaching peak production in the early 1970s. Long-term energy scarcity is not a concern either: coal, gas, oil shale and tar sands deposits contain trillions of barrels of oil equivalent, many times larger than remaining conventional oil reserves. The real risk of peak oil is not that we’ll run out of fuel—it lies instead in what we will do to avoid running out of fuel. Our decisions now will have economic, strategic, and environmental consequences for decades.

Prices of gasoline behave differently than prices of most of our other regular purchases. Even small shortfalls in crude oil supply can cause significant price increases because demand does not readily respond to price changes. Seemingly insignificant events in far off places can therefore have huge impacts on our economy when spare capacity is tight. We have observed this phenomenon, and its impacts on our economy, many times in past decades. Recent stagnating production from conventional oil fields is worsening this effect, clearly evident in the oil price peak last year.

A decline from existing fields need not cause oil price shocks if we invest in oil alternatives now. But such rapid investment will be difficult to come by. Because of the decades-long time scale of economic returns from major energy projects, risk-averse producers will make serious investment only if they expect sustained high prices for oil. And high prices will be required, because current alternatives are generally more expensive to produce than conventional oil.

Peak oil poses risks to our national security as well. Over 95 percent of the energy supplied to global transportation systems comes from oil products, a level of dependence unmatched in any other sector of the economy. Because transport (and by extension, petroleum) is fundamental to both our economic system and our national defense, we have made ourselves vulnerable to gamesmanship, international tensions and jockeying among consuming nations for the favor of exporting countries. As has been frequently noted by Thomas Friedman and others, this often unseemly behavior does little to advance democratic ideals in exporting countries.

Lastly, the environmental risks of declining conventional oil are profound, and very much upon us already. Fossil-fuel based oil substitutes, such as tar sands and oil shales, have generally higher greenhouse gas emissions than conventional oil (with some natural-gas based substitutes excepted). This is due to fundamental inefficiencies in converting such resources into synthetic fuels. And the largest danger results from the most abundant resources: fuels made from tar sands using current technology result in greenhouse gas emissions per mile of travel that are 10-30 percent larger than conventional fuels, while those produced from coal have emissions up to 90% larger. Many of these substitutes have significant environmental impacts on lands, water and the atmosphere.

We should not respond to peak oil with piecemeal solutions that emphasize one aspect of the problem while making others worse. As just one example, in late August the US State Department approved a new, 1000-mile pipeline to bring synthetic crude from Canada’s tar sands to the Midwest. While this new supply might help offset some of the strategic risks of depending on hostile nations for oil, producing fuel from the tar sands increases greenhouse gas emissions enough to offset near-term fuel economy gains in the vehicles using the fuel.

We must instead develop technologies and policies that address all three risks of peak oil—economic, strategic and environmental—at once. One such opportunity exists in partially or fully electrified vehicles fueled by diverse domestic resources. Our goal should be to supply them with electricity from renewable resources as quickly as possible. In the interim we can use a combination of nuclear power and fossil fuels, preferably natural gas, with greenhouse gas capture and storage. Wholesale conversion to electric vehicles will be challenging and cannot be done overnight, but beginning now will provide many benefits—not least reducing the need for long-lived investment in the inflexible, polluting infrastructure of unconventional oil production.

“Peak oil” is hardly the cry of politically motivated Chicken Littles, as some claim. Indeed, the “do nothing” approach of ignoring the end of easy oil sounds very much like the advice of an ostrich sticking its head in the sand.

(this opinion piece was written in collaboration with my colleague Adam Brandt.
The report referred to above can be found at
here)

Must read: Oil exploration and discovery – are we peaking or not?

Is global oil production peaking? The peak oil debate has been going on for a number of years. Depending on how production and exploration numbers are presented, and also depending on who you talk to (NGO, oil industry, government, economist), you may either be convinced that oil will peak soon, or that we have plenty of it.

My colleague Roland Horne recently wrote an excellent summary of this problem, which he presented at the International Forum on Higher Education and Energy at China University of Petroleum last month. You can download it here. A very highly recommended read. It will help you put this debate in perspective.

Whatever is happening at this time, there is no doubt in my mind that we must reduce demand (efficiency!), and make a bold move towards electric transport. To enable electric transport we must invest heavily in renewable energy production. An electric transport future based on coal paints a very bleak picture also.

Read the document, and send me any comments and questions. This is a very important topic and a good one to debate further.