The Oil Production Peak: Consequences and Costs

The production of oil has not increased since 2005, despite an increase in the demand. This phenomenon, called “Peak Oil”, and its consequences on the price of the oil and for our society, are discussed in a report published in Nature in January 2012.

Oil and Its Importance for Our Society

Petroleum, normally referred to as oil, is essential to modern life in our society.

Oil allows us to use cars and planes, to keep our industries going and our houses warm; this is because the majority of fuels (i.e. gasoline, kerosene, fuel for jet engines) are all derived from oil.

Further to this, the manufacture of other products that are key for our daily lives, such as plastics or pharmaceutical compounds, is based on molecules derived from the processing of the oil.

Oil Production and Demand

For all these different applications, the consumption of oil has been constantly increasing in recent decades. Its production increased accordingly, to match the demand. However, since 2005, there has been a change in the ratio between demand and production for oil, with notable effects on its price and, indirectly, on society as a whole.

A recent article, published in Nature, explains in detail these issues and their implications. The authors are Professor Sir David King , from the Smith School of Enterprise and the Environment (Oxford, UK) and Professor James Murray, from the School of Oceanography of the University of Washington (Seattle, US).

Peak Oil Production

This study shows how the production of oil changed from the year 1998 up to last year (2011). From 1998 to 2005, oil production steadily increased due to higher demand, going from about 64 to 75 million barrels per day. This, however, was the peak in oil production. In fact, since then, the value did not increase anymore, despite the increase in the demand for oil.

Elastic and Inelastic Phases of the Oil Industry

The phase up to 2005, when the production could match the demand, is called “elastic”. The phase from 2005 onwards, on the contrary, with the production not able to fulfill the demand, is referred to as inelastic.

Going from the elastic to the inelastic phase caused a remarkable change in the price of oil; this went from about $40 to more than $100 per barrel. The price peaked at $140 in 2008; then it briefly decreased to $35 in 2009, due to the economic crisis. Immediately after, however, the barrel price started increasing again, going over $100; at present (February 2012) it is about $116 per barrel.

Can Petroleum Production Be Increased?

Overall, the world production of oil from existing fields decreased in recent years. The decrease was different, depending on the countries and the fields considered; values of between 4.5 and 6.7 % decline in production were reported.

The use of new reserves could improve the situation; the effect, however, will not be immediate, as it may take between 6 to 10 years before these reserves can supply oil and its products regularly.

Furthermore, oil from some of the new fields may be more difficult to extract; this would not help in lowering its price, and is likely to have the opposite effect.

In other words, there is still oil in the world, but it will be not be easy or cheap to produce it.

The Future of Oil: Consequences of Reaching the Peak

Professor Sir David King explains:

“An oil price higher than $100 per barrel is a proven risk for the global economy. This has been made very clear by the International Energy Agency.

The so-called credit crunch experienced in 2008 is undoubtedly related to the “oil price crunch” of the same period. This fact, however, does not seem to be reported or considered at all when the global economy is discussed.

Without bringing alternatives to oil into play, as economic recovery begins, oil demand will rise, and oil prices will rise until demand is brought down by a further fall in the economy. Economic recovery will be difficult.   Our economy is very much oil-based, and it cannot grow, with inelastic oil production and high prices, without alternatives being actively pursued.”

Different Approach to Resolving Oil Production Concerns

To begin to solve these problems, a different approach should be implemented. According to Professor King “we should reduce our dependence on fossil-fuel energy sources.”

This idea is already supported by environmental associations, due to the dangers that fossil fuels may generate to the environment, such as climate change. Not everybody agrees on this issue and believes in climate change; it is likely, however, that we may be forced to go this way anyway, not for green but for economic reasons.

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