Peak Oil is You
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Page added on September 9, 2013
Peak oil is alive and well, and costing the earth
You might have heard that peak oil s dead. But peak oil is very much alive, and squeezing its hands ever more tightly around the throats of oil-dependent economies.
You might have heard that peak oil – the theory that one day crude oil production will stop increasing, even as demand grows – is dead. Shale oil production is surging in the US. The premiere peak oil website, The Oil Drum, is shutting up shop. Even notoriously left-leaning columnist George Monbiot has announced: “We were wrong about peak oil”.
But he’s wrong about being wrong.
Peak oil is very much alive, and squeezing its hands ever more tightly around the throats of oil-dependent economies. The new economics of oil also have alarming implications for climate change, as Monbiot acknowledged, suggesting this is a subject we dismiss at our own peril.
Peak oil, of course, doesn’t mean that the world is running out of oil any time soon. There is a vast amount of oil left. Over the last 150 years, however, we’ve picked the low hanging fruit, so to speak, meaning that the remaining oil is harder to find and more expensive to extract. This is making it more difficult to increase the “flow” of oil out of the ground.
When the rate of crude oil production cannot be increased, that represents peak oil. This is considered by many to signify a defining turning point in history, because oil demand is expected to increase as the world continues to industrialise. The theory goes that, as the supply of oil stagnates and the demand increases, the cost per barrel will rise, making the consumption of oil an increasingly expensive and debilitating addiction.
So is this theory alive or dead? Well, it’s not a theory, it’s a fact. Around 2005 the production of crude or “conventional” oil stopped growing significantly and has been on a corrugated plateau ever since. This plateau has been acknowledged even by mainstream institutions like the International Energy Agency, a position it recently reiterated through its chief economist, Fatih Birol. Global demand for oil, however, has continued to grow significantly, which has put upward pressure on the price of oil.
This upward pressure on price has changed the economics of several sources of unconventional oil, making them financially viable to produce when once they were not. Shale oil was not produced previously because the costs of getting it out of the ground and refining it were significantly more than the market price for oil, historically around US$25 per barrel.
But now that oil is above US$105 per barrel, producers can make money producing shale oil and other unconventional oils, even though their energy and economic returns on investment are considerably lower than conventional oil.
The fact that unconventional oil is much more carbon-intensive than crude oil – exacerbating an already intractable climate problem – doesn’t seem to trouble oil producers or most politicians.
Driven by high prices, this new production has meant total oil production (conventional plus unconventional oil) has been able to meet increasing global demand, even though conventional oil has shown almost no growth in recent years. Because total oil production has increased to meet demand, many commentators have declared that “peak oil” is dead. These declarations, however, are based on a misunderstanding.
The main reason unconventional oils are economically viable is because crude oil production has essentially stopped growing, causing the price of oil to jump. Geopolitical instability in oil rich regions of the world also keeps prices high, with the current situation in Syria being the latest manifestation of this dynamic. Our industrial economies, however, are addicted to oil – the world consumes 90 million barrels of oil every day – and when oil gets expensive, our economies suffer.
At US$25 per barrel – the historic average – 90 million barrels would be US$2.25 billion every day on oil expenditure. At US$105 per barrel, that amounts to US$9.45 billion per day. This is a difference of US$7.2 billion every day, an extra cost to the global economy which is primarily a result of crude oil having peaked. It lacks credibility to pronounce the death of something costing the global economy US$7.2 billion every day – or US$2.6 trillion every year.
The economic costs of peak oil are especially significant for oil importing nations. Due to the price of oil rising in recent years, the US is now spending an extra US$600 million every day on its net oil imports of 7.412 million barrels, which is money leaving the US economy. Had crude oil not peaked and prices remained low, every day the US would have that US$600 million to spend on things other than expensive, foreign oil. This is hardly a phenomenon to dismiss.
When oil gets expensive, everything dependent on oil gets more expensive: transport, mechanised labour, industrial food production, plastics, etc. This pricing dynamic sucks discretionary expenditure and investment away from the rest of the economy, causing debt defaults, economic stagnation, recessions, or even longer-term depressions. That seems to be what we are seeing around the world today, with the risk of worse things to come.
This should provide us all with further motivation to rapidly decarbonise the economy, not only because oil has become painfully expensive, but also because the oil we are burning is environmentally unaffordable.
If people had listened to the warnings of the peak oil school, we could have broken our addiction to oil and had this money to spend on other things. I, for one, can think of better things on which to spend US$2.6 trillion dollars per year – such as renewable energy, bike lanes, better public transport, and local food production.
We have entered a new era of energy and economics, one in which expensive oil is going to make it increasingly difficult for oil dependent economies to grow their economies. This is alarming because almost no attention is being given to this issue at the macro-economic and political levels. Economists and politicians are still crafting their policies based on flawed, growth-based thinking, but the growth model, which assumes cheap energy inputs, is now dangerously out-dated. The climatic implications of exploiting unconventional oils make the math more worrying still.
Granted, we’re not running out of oil any time soon, but we have already run out of the oil that is economically and environmentally affordable.
Samuel Alexander does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.
14 Comments on "Peak oil is alive and well, and costing the earth"
BillT on Mon, 9th Sep 2013 10:52 am
“… we have already run out of the oil that is economically and environmentally affordable…”
BINGO! Now the addiction is becoming obvious to the world. We are desperate for that next billion barrel fix. But they are getting harder to find and access. At some point we will go into withdrawal and our Western economy will die.
Beery on Mon, 9th Sep 2013 11:53 am
We’ve been running out of oil since the 1850s, so we are running out now and we will still be running out ‘anytime soon’. Oil is finite, and using up finite resources makes them run out.
But this isn’t about running out. As the author says it’s about the price, so why the need to ‘grant’ that we’re not running out of oil? We don’t need to ‘grant’ anything of the sort – the idea that we’re ‘running out of oil’ is not a battle that peakists have lost: it was never a battle that we needed to fight, and no matter how much the cornucopians claim victory on that battleground, the ‘battle’ there was all in the cornucopians’ imagination.
ohanian on Mon, 9th Sep 2013 12:38 pm
Bullshit! Peak Oil is a theory just like Gravity is a theory. Has anyone seen gravity? Nope! You can’t see gravity, you can only see the effects of gravity. That’s why we need a theory to explain it.
BillT on Mon, 9th Sep 2013 1:05 pm
ohanian, when you go to the gas station and there is no gas, you can call it whatever you want, but it will be the end of the age of petroleum and the easy way of life for many in the West. We passed the Peak of easy to get, cheap and plentiful oil. All we have left is the economy killing sludge.
shortonoil on Mon, 9th Sep 2013 3:07 pm
Samuel Alexander , PhD has stated this very well. What is meant by “cheap” oil is actually best described as “high quality” oil. High quality oil is a “window” in the petroleum spectrum. It lies between API 30 and API 45. Crude below API 30 has much higher processing energy requirements, crude above API 45 has much lower energy deliver capabilities (in thermodynamics this is know as Exergy, or Available energy, it is what the EIA uses to determine energy production). The depletion state of this “high quality” petroleum determines the price of crude.
Since this high quality crude only accounts for 41% of the world’s total reserve of 4,300 Gb, and it is what has been pursed by the petroleum industry for the last century, it is depleting rapidly. The effect on price of this continuing depletion is not linear, it is an exponential function.
GregT on Mon, 9th Sep 2013 3:29 pm
“The effect on price of this continuing depletion is not linear, it is an exponential function.”
Exactly! and as Albert Bartlett has so succinctly pointed out:
“The greatest shortcoming of the human race is our inability to understand the exponential function.”
Maybe we should start listening to our scientists, instead of corporate controlled media shills, and politicians.
J-Gav on Mon, 9th Sep 2013 4:52 pm
GregT – Bartlett’s always a good reminder. After reading him some years ago, I more recently ran across David A. Coutts’ extension of his work. Boils down to this: Bartlett uses a constant rate of change in his talks on the exponential function. Coutts points out that it is rarely the case that we find such in the real world and proposes to reword Bartlett’s statement: “The greatest shortcoming of the human race is our inability to understand variable-rate exponentials.” A detail? Maybe, and it does complicate things a tad, but it sounds like it might correspond a little more closely to reality. On the other hand, my quarrel with Coutts concerns his view that we should be working more on sending humanity to the stars … Supposing enough suicidal volunteers could be found, where does he think the investment capital for such a venture would come from, a Cracker-Jack Box?
I think you, BillT and some other commenters here on PO would agree that, if we can’t cut it on this Earth (energy, climate and ecosystem-wise), what’s the point of trying to set up shop somewhere else?
DC on Mon, 9th Sep 2013 6:36 pm
Is it safe to assume you have seen his(Proff. Bartletts) video lecture on You-tube J-Gav?
actioncjackson on Mon, 9th Sep 2013 6:57 pm
To the politicians, bankers, and CEOs defense, it’s probably hard to see with all those $$$ in their eyes. /sarc
J-Gav on Mon, 9th Sep 2013 9:09 pm
DC – several times, actually … in fact, more than one of his lectures. I’m not dissing Bartlett here.
shortonoil on Tue, 10th Sep 2013 12:43 am
When I referred to an exponential function, I was referring to any mathematical equation that contains the term e^kt. That is, the rate of change is not constant with time. In actuality the price function is a complex exponential function. This avoids the confusing terminology of a “variable rate” as x is time, which is of course, constantly changing.
The price function referred to is derived from a model that is based on three quantities: the physical properties of petroleum, a Second Law statement, and the cumulative production function (CDF). The number of variables needed to construct the model is, therefore, reduced to one. The CDF is a logistic curve, and as is shown there is some skewness in that curve. The problem with a skewed logistic curve is that it has no explicit CDF, or PDF. That is, there is no mathematical equation to describe it. All calculations must be done numerically. The price curve mentioned is derived from the normal logistic curve, and is then adjusted to compensate for the skewness. The result is a complex exponential function.
curlyq3 on Tue, 10th Sep 2013 4:50 am
Hello ohanian … “Has anyone seen gravity? Nope! You can’t see gravity, you can only see the effects of gravity. That’s why we need a theory to explain it.” … gravity is the result of a measureable magnetic field(energy) … the energy force may not be visible to the human eye(or any other eyes I’m not sure of) … it is very real and therefore is scientifically factual … curlyq3
ohanian on Tue, 10th Sep 2013 6:57 am
Hello curlyq3,
No scientist will ever say “Gravity is the result of a measureable magnetic field”.
Here is what wikipedia has to say about fundamental forces.
Four fundamental interactions are conventionally recognized: gravitational, electromagnetic, strong nuclear, and weak nuclear.
Notice that gravity does NOT depend on electrical or magnetic forces.
Newfie on Tue, 10th Sep 2013 11:29 pm
Gravity is just a theory ? No, gravity is a fact. There may be a mathematical model to describe and “explain” that fact, and the model may be called a theory, but gravity itself, the effect, the force, is a fact that anyone can verify for themselves (Drop an apple or jump off a building).