Home Run for Peak Oil

Today, more than the recent past, the peak oil denial industry is making heroic efforts at sidelining peak oil by describing it as controversial. Calling it controversial is an effective way of discrediting the concept, and ignoring its troubling implications for the global economy and human society.

Making sure that there is no full public discourse on why oil prices rise anytime there is the slightest tremor of economic recovery, in lockstep with equities, dragging up all other commodities with oil, peak oil denial is based on a single premise. This basic premise is contrary to fundamental laws of physics – that finite geological resources, of oil, will somehow last forever.

In the past, this effective delaying and confusing tactic was perhaps par for the game. It was not as dangerous and diversive as it is today, because all recent and current movement for world oil indicators, from discoveries corrected for their real recoverability, to oil production trends net of depletion losses, oil stocks and oil prices, show the reality of an imminent energy crisis.

This crisis will get radically worse if ignored too long. The game is over for the peak oil denial industry, of holding back oil prices by any means, all means and proclaiming that happy times are here again.

Stark Evidence

We can start with the stark evidence that the environmental impact and energy cost of ‘winning’ oil is increasing and has been increasing rapidly for at least a decade. Running alongside this, spending on oil exploration and development, although massive, is now locked-in to reworking known oil producer regions, limiting new drilling work in new regions to the barest minimum.

One reason is that oil processing and transport infrastructures will be needed to handle any new production – and oil infrastructures are mightily expensive and slow to build.

Energy costs for producing oil are surely rising, with the depletion-driven shift from ‘conventional’ oil to ‘unconventional’ oil: in fact the forced move to producing deep offshore oil at water depths up to 4 miles (6.4 km), shale and tarsand oil extraction, and synthetic oil from coal or gas all require sharply more energy and increase (sometimes radically) the environmental risks, dangers and costs of oil production.

As BP found with its Mocambo blowout, and Total is finding in its Elgin North Sea field. As the USGS has reported, concerning the probable link between shale gas and oil production and the massive six-fold rise in earthquakes, in midcontinental states of the US, since 2000.

The net energy yield from oil is therefore declining as the costs and risks of oil production rise. Given this, who can deny peak oil or claim that oil prices should fall? Declining energy yields for oil also create a supposedly ‘subtle’ but definitely real negative feedback loop in the energy economy: because oil is used directly or indirectly in just about every economic activity, including energy production, an increase in the energy cost of oil will also increase the energy cost, and therefore price of other energy sources.

The link between rising oil prices, and the very oil-intensive production of uranium, raising its price for operating nuclear reactors, is just one example.

Only for a certain time can the greater abundance of newly exploited resources – notably shale gas and oil resources – overcome this major “declining net energy” trend, driven by factors such as the more complex and expensive, more energy intensive infrastructures needed to produce unconventional oil, and the rising risks of major environmental damage they incur – now including earthquake risks in the US from shale gas and shale oil extraction.

As we know, the so-called ‘exuberant’ traders of oil handle 80 – 100 times the world’s real needs and real consumption of oil on a daily basis, creating an artificial air of abundance, but oil traders now operate their speculation in lockstep with equities. This proves, if proof is needed, that any sign or trace of economic growth will drive up oil demand – and drive up oil prices because supply is so tight.

Peak Oil: When Consumption Exceeds Production

Much sooner rather than later, global consumption of oil is going to exceed its supply; using IEA data, the net increase of world oil supply after depletion losses, in 2011, was a minuscule 0.1 Mbd (million barrels per day) on a forecast by the IEA that global demand will average 89.9 Mbd in 2012. The margin was 0.12%, indicating the ‘allowable maximum’ growth of global demand before prices run away out of control, one more time.

This underlines, to any normal person that there is almost no ‘forward ability’ or potential for global oil demand to grow at even rates of around 1.5% a year for more than 1 or 2 years before actual physical shortage onsets. For some major figures in world oil, not speaking anonymously, the figure for the all-time peak of world production can be set right now. Total Oil’s CEO de Margerie places this all-time high – after which global production will decline – at around 90 Mbd.

Oil demand growth is therefore now out of bounds, but this has to be explained to the Chinese, Indians and other fast-industrializing Emerging economies. Consuming 6 times less per person than the OECD per capita average, in the Chinese case, and 10 times less oil per capita in the Indian case, their fast growing industrial economies can above all pay for the oil they want and need, instead of whining about its price. Through 2001-2011, China’s oil demand increased at an average of 9.7% per year.

While there are surely alternatives to oil, such as compressed natural gas as transportation fuel, there is presently no known substitute for petroleum in terms of quality, proven very simply by the case of world petrochemicals. The real question, therefore, is not ‘whether’ peak oil is controversial, but ‘when’ oil will run out as the workhorse of world energy, and be reserved for specialty uses, like the petrochemicals.

Forget yhe So-Called Controversy

Still today, for a mix and mingle of different motives, we are told about the apparent and supposed ‘controversial’ nature of peak oil, how it is relegated to unimportance by the rapid growth of shale gas production, by exaggerated hopes for shale oil output growth, by growing deep offshore oil production, and other unconventional oil output.

These cheerful signs of cornucopia, for those who are not too concerned about the risks and costs, or the reality of the cornucopian myth must be contrasted with the facts of the matter. These include the now well-known and documented over-reporting of oil reserves, oil discoveries, and their recoverability or ‘extractability’ by the world’s larger oil and gas corporations and major producer countries.

Whether it is bragging from the oil majors on their deep offshore oil finds, or lying from Saudi Arabia and Russia about their oil reserves, the real ‘bottom line’ is simple: the amount of recoverable oil now left in the ground is significantly less than what the oil industry would have us believe.

The name of the game is confidence, as in any confidence trick, but the global economy is the patsy.

By confusing and conflating ‘conventional’ and ‘unconventional’ oil resources, and the proportion of these than can be converted to producible reserves, and recovered in a predictable and reasonable forward timeframe, at economically supportable cost, the life expectancy of global oil supplies at anything like current rates – around 32 billion barrels a year – has been vastly exaggerated.

Deliberately setting out to encourage complacency, claimed discoveries and additional production potentials through new or enhanced recovery methods are often set at the equivalent of “100 to 150 years of current annual oil demand”, which simply reproduces the ‘shale gas paradigm’, while completely ignoring the costs of shale oil production compared with shale gas production.

In reality, taking account of recoverability and the costs and the time required for developing unconventional resources of oil at anywhere near the rate needed to compensate the decline of conventional oil output, the world is set to consume at least 5 times more oil than it will discover in the next 30 years or so.

Peak Oil: When Supply Can’t Match Demand

The demonstrated inability of world oil companies to significantly raise net supply is now accompanied by their de facto shift away from oil exploration and development, towards gas. For go-go conspiracy theorists this of course is only ‘artificial scarcity’, to drive up oil prices, but the real reasons for this gas shift are simple. Oil is hard to find, costly to develop, and its production is increasingly risky, notably for the environment, with all the costs this implies in the case of major accidents, such as BP’s Mocambo brush with financial death.

Major “oil” corporations such as Exxon and Shell now produce considerably more gas energy, than oil energy, and this trend will accelerate. Exxon, now at exactly 50% gas and 50% oil in energy output, was at 38%/62% only five years ago.

While conspiracy theorists can gargle their music, plentiful evidence shows the oil majors are ‘turning the page’ on global oil. They are producing more gas even if this sharply cuts into their earnings, in the USA, because of the vast gas supply bubble created by the totally speculative shale gas boom – which will surely be followed by falling gas output, and rising gas prices in the US.

A long history of ‘crying wolf’ by advocates of peak oil, and proclaiming ‘cornucopia around the corner’ by their opponents has furthered the opacity and the supposed controversiality of peak oil, but this nexus is soon due to break apart. Skirmishing polemics on ‘when or if’ peak oil is now or soon could be considered relatively harmless – for as long as real physical shortage of oil was not open and declared.

Underlining that we are now close to the end of all complacency on peak oil, global oil demand is now unhitched from and unlinked or unrelated to oil supply. Certainly in Europe’s debt-wracked PIIGS, and in Japan until the Fukushima disaster triggered growing oil demand to compensate lost power production, and in the USA until the fragile signs of economic recovery became more credible, economic recession is the only known way of reducing oil demand.

Only when global oil demand is provably declining, can oil prices decline. If not, oil prices will only increase. This is fundamentally due to the de-linkage of oil demand with oil supply.

Until and unless open and declared peak oil is present, and oil prices will rise to some hitherto unknown peak that can cause economic recession, and drive down oil demand, oil prices will track equities and will lead commodity price breakouts.

The future is programmed! Peak oil is now a ‘demand side phenomenon’ with far more meaning than what is usually implied: it is demand side because of the basic inability of the global oil system to increase net supply. Finding and producing oil is more expensive than ever and new supply always takes longer to ramp up.

Secondly, while extreme low rates of oil demand growth prevail in the world’s major economies – the OECD group – this is absolutely not the case for the Emerging economies, whose combined population is nearly four times that of the 32-nation ‘richworld’ OECD group, currently consuming about 46.3 Mbd.

In the Emerging economies, reproducing the ‘near straight line’ oil-based economic growth of the OECD countries during the ‘Trente Glorieuse’ of 1948-73, or the oil-based growth of the Asian Tigers, such as South Korea through 1975-95, when national oil demand increased at 6% or more year-in, year-out, their oil demand potential is almost open-ended.

China, India and other emerging giants could in theory triple or quadruple their oil consumption in a few decades, raising the combined demand of China and India by as much as 85 Mbd by about 2040.

Politics, Economics and Other Things

‘Chindia’s’ possible oil demand in 28 years time is theory, of course, because there is an absolutely zero possibility that global oil supply could increase by 85 Mbd. As already noted, it could or might be raised by 3 Mbd or 4 Mbd, before starting to decline.

Nobody sane, on this planet, says it is possible to expand oil output by double-digit amounts in Mbd terms. Back in another century, in what is almost a ‘lost era’ for us today – in 1998 – global spending on oil exploration and development by the world energy industry stood at about $35 billion. Today it is about $245 billion but the number of wells drilled in entirely new areas has radically shrunk.

Oil discoveries and future production are of course still partly influenced by geology, but exploration activity is now heavily influenced by politics, economics and energy infrastructure availability for transporting any finds that are made.

Exploration work, for oil, is now firmly linked with the further development of known and proven reserves. The almost inevitable result is that net annual additions to global oil supply have trended down, as costs and lead times always grow, to reach the minuscule amount of 0.1 Mbd in 2011, about 0.12% of global oil demand.

To be sure, ‘oil cornucopians’ can explain this away as mostly or mainly political: oil supply lost in 2011 and other recent years has included significant amounts lost in political conflicts, uprisings, rebellions and civil wars, with the implication this supply may be entirely recuperated, later on.

Economics, however, already makes this less sure, due to capacity losses through rebellion or war in producer regions usually incurring damage to infrastructures – requiring costly repair and recovery works when hostilities have ceased.

The position of the oil industry, in fact increasingly ambivalent on the subject of peak oil, on the likelihood of the world running out of oil in the near and medium term, remains officially reassuring – but completely avoids at least two major problems.

One is that the apparently startling large oil finds made in deep offshore regions, even more so than the equally startling large gas finds announced in deep water regions, and forecast on the base of US shale gas reserve estimates – recently cut by 66% by the USGS for the Marcellus formation – have such long forward development timeframes.

They also have massive high costs. Particularly for oil, these two elements – time and cost – mean that there is almost zero likelihood for any significant reduction in oil prices, for at least the next 10 years, and massive potential for oil price breakouts.

Rather like nuclear power, which has lost almost all of its remaining economic credibility, since 2011, oil is surely and certainly ‘pricing itself out’ – but to what we do not presently know.

Secondly, still concerning energy-economics, it is truly remarkable that the pivotal role of oil, coal and gas as high net energy providers – and not effective ‘energy sinks’ – escapes all serious discussion. It is obvious, to any normal person, that energy sources must produce more energy than their supply consumes.

An example of this suddenly becoming known and accepted, even to abnormal persons in the shape of political and corporate deciders, concerns biofuels and nuclear power: when the costs (and energy consumption) of producing fuels from food crops, and decommissioning dangerous nuclear clunkers are recognized as real costs, and wasteful expenditures of energy, the vastly unattractive energy economics of biofuels and nuclear power jump from the figures.

With unconventional oil we are moving rapidly into this domain. Without needing to go the extreme of biofuels, many of which are pure and simple energy sinks, both tarsand and shale oil production are much lower energy providers than conventional oil.

Within a predictable period of time, this will ‘migrate’ into the economics of oil extraction and production project analysis, with a further negative impact on decisions to spend on energy sinks, and an acceleration of existing policy focusing, and economic interest in all rational energy alternatives.

Raise the Hammer