1. Peak oil is inevitable
There is a pretty wide consensus that oil is a finite and non-renewable resource (at least from an economic perspective and in the timescales that we're talking about). Historically, we have seen that any resource that fits these criteria follows a production curve and has a peak. These curves can differ in there shapes (relatively flat or steep, an undulating plateau or a clear crest, etc.) but there will be a point which is the maximum production point for the curve. Indeed, we have seen these production curves when we look at oil production from individual countries (especially from those who have already peaked)..
However, some geologists maintain that there is an abiotic process that creates oil inside of the earth which could renew this resource and thus, theoretically, forestall a peak in production. However, this idea is generally dismissed by the general geological community as being simply incorrect . Others maintain that even if some abiotic process is occurring, it is not likely to generate sufficient amounts of oil to continue to use the massive quantities involved in running a global economy. If we dismiss the abiotic theory of oil creation, then we are left with the eventual peaking of world oil production.
2. Nobody really knows for certain when oil will peak (or if it already has)
You would think that we could get a good idea when this would occur with all of the data, computers, analysts, and mathematical formulas involved here but we can't. The basic problem is an old one that is well known in the IT world: Garbage In, Garbage Out. Basically, a lot of the data we have on oil reserves is either suspect, incomplete, or both . The culprits in this sea of bad information include almost all of the big players: the private oil companies, OPEC member countries and there nationalized oil companies, and even just regular governments who want to hide the problem. To paraphrase Don Rumsfeld, "You work with the information that you have and not the information that you wish you had." The problem is if you have garbage information, then you get garbage predictions. Now the people who analyze the industry are smart and realize that a game is being played so they try and compensate. They do bottom up analyses. They talk to insiders who have sensitive information. They try to divine what every little piece of news means for oil production. Occasionally, a bombshell of information drops like Shell restating their reserves downward by 20% or a report comes that Kuwaiti oil reserves are actually half of what they have been officially reported. Finally, they look at overall oil production curves and (utilizing mathematical formulas) attempt to extrapolate where oil production is going. All of this is helpful to predict the peak, but it is not as good as having transparent access to the real information. If this lack of transparency isn't hard enough to deal with, analysts have to also contend with all of the other factors that can effect oil supply and demand like recessions, wars, hurricanes, changes in consumer's tastes in automobiles, revolutions, worker strikes, etc. Given all of this, making correct predictions seems to be pretty damn difficult. If you want to see a list of incorrect predictions for the peaking of world oil supplies, look here.
3. When oil production starts to drop, it is going to hurt.
This seems to be a commonsense statement, but let me back it up with a bit of economics and history. Right now, we are seeing major increases in oil demand. This is primarily being driven by a combination of suddenly prosperous Chinese and Indian citizens buying their first cars and general economic growth in the developed world. As a general trend, we are seeing increases in oil demand in the +1.4% range. If you take this general upward trend in demand and suddenly drop the supply in oil, the price of oil increases. The percentage drop in oil supply will have a huge impact on how large the price increase will be. For example, a recent wargame that used a sustained 4% drop in world supplies as one of it's conditions saw the price of oil hit $160 a barrel and the price of a gallon of gas reach $5.67 . Currently, the average price of oil is hovering around $60 dollars a barrel and $2.30 a gallon. Needless to say, this is a pretty big jump in the price of crude. Now consider that sustained drops in oil production could be 4% per year for a number of years going forward. With this in mind, it is not hard to imagine the price of gas at the pump spiraling upwards. What do price spikes do to the economy? Historically, they have generally caused recessions . Indeed, five out of the last six price spikes have led to recessions. However, keep in mind that all of the price spikes abated due to changes in political or economic conditions. In a post-peak world, there will be general upward pressure on the price of oil with economic downturns providing the most likely sources of price relief. This is to say the least not a happy scenario.
Could it get worse than mere recessions? Unfortunately, yeah. To quote Roger Booth a former executive at Shell Oil, "A crash of 1929 proportions is not improbable." For those people who flunked history, this was the year of one of the largest stock market crashes in history ( in real terms) and the beginning of the Great Depression. So yes, we are talking about a depression here folks. This means sky high unemployment, food lines, rapid increases in the poverty rate, etc. For those of you who have an ever darker streak, there are some who predict that a Mad-Max reality and a major die-off of the human race is baked in the cake at this point. These individuals and groups are predicting that we are going to go from 6.7 billion people to 2 billion people or less as a result of resource wars, famine, disease, etc.
So what's the bottom line phasmatis? Is this stuff reasonable or what? Personally, I believe that the economic hardship scenarios are much more likely than a major die-off due to some factors that I am about to discuss. On the other hand, I can't totally dismiss the worst-case scenario as outright pessimistic survivalist fantasy. When the s*** hits the fan, sometimes the merely awful can turn into the downright horrific with the wrong choices. Bottom line, it's going to hurt. How much it hurts depends on the oil supply dropoff rate ( 0.5% yearly declines can be handled by the economy while 8% yearly declines is a clear sign to head for the hills), what we do to prepare before the peak, and what we do to adapt to the peak. If the dropoff rate in oil production is not too high and some good choices are made before the peak, a large amount of economic pain can be averted. If the dropoff rate is high and/or we do nothing to prepare before the peak, the chances are that it is going to be downright ugly.
4. The problem is time not technology or resources
This is probably the most contentious of my statements so let me back it up. Let's talk about technology. There are essentially three ways that technology can address the peak oil challenge. The first is to reduce demand for oil. The second is to bolster oil production through alternative methods and sources. The third is to promote a switch to alternative fuels (non-hydrocarbon based). Let's turn to demand reduction first.
One of the more obvious responses to peak oil is to simply use less oil. There are a variety of technologies that can help us increase the fuel efficiency of our vehicles including diesel engines, hybrid technology, thermoelectric power, and lightweight high-strength materials. All of these technologies can help improve fuel-efficiency performance. Indeed, there are prototype sedans that can reach over 80 miles per gallon. If you compare the 80 mpg figure with the average fuel efficiency of U.S. sedans and light trucks (20 mpg), you can see there is a lot of room for improvement. If you want to look a little further down the car development road and consider plug-in hybrid vehicles, you can even reach higher mpg performance into the 100 to 200 mpg range.
At this point, let's look at a major criticism leveled by the peak oil pessimists against fuel efficiency: Jevon's Paradox. This argument is based on some historical data and basically asserts that drops in fuel usage stemming from fuel efficiency gains will eventually be negated by changes in consumer behavior. The rationale is that fuel efficiency gains will cause less fuel to be used which will cause a drop in price. A drop in price will reduce pressures to conserve fuel through fuel efficiency strategies and behaviour and fuel usage will go up due to more miles being driven. There are two problems with this argument as it relates to peak oil. First, there will be tremendous pressures on the price of oil to keep rising which will necessarily limit the Paradox effect. Second, modern economists (who have renamed Jevon's Paradox to the less sexy ""Rebound effect") point out that most studies only indicate 10-30% of the drop in fuel usage is given back due to an increase in miles driven. Consequently, I feel pretty confident in saying that fuel efficiency has the potential to be a powerful strategy for dealing with peak oil.
The second strategy to address the peak oil challenge is to simply bolster refined oil production through alternative methods and unconventional oil resources. There are several ways to bolster oil production, but I will address just a few of the major ones. The first is to use Enhanced Oil Recovery (EOR) to squeeze more oil out of abandoned oil wells and currently producing wells (approximately 70-80% of the oil is left in the well using primary and secondary methods of recovery). The reasons for more oil not being extracted have to do with price (it is more expensive to use EOR to get more oil) and the actual recoverable limit of the well ( some place the figure at 60+% of the oil can be extracted utilizing primary, secondary, and tertiary recovery). Another way to bolster oil production is to utilize unconventional sources of oil.
In industry parlance, there are two types of oil reserves: conventional oil reserves and unconventional oil reserves. In extremely simplistic terms, conventional oil is the "cheap oil" that is pumped out of the ground. Unconventional oil is the "more expensive oil." This is because unconventional oil is more difficult to produce and process. Some examples of unconventional oil resources are the Alberta Tar sands (300 billion recoverable barrels of oil),the heavy oils of Venezuela ( up to 235 billion recoverable barrels of oil), oil shale in the United States, etc.
Now, when we talk about oil production peaking, the focus of the discussion is usually on conventional oil reserves since these sources of oil make up the vast majority of oil resources being exploited. However, it should be point out that worldwide unconventional oil reserves are quite extensive: tar sands (1.8 trillion barrels), heavy oils (1.2+ trillion barrels),etc. These reserves have not been widely exploited because they are at a cost disadvantage when compared with conventional oil sources. Cost concerns, however, will no doubt lessen as the scarcity of conventional oil drives conventional oil prices upward. There are still questions over whether the infrastructures that are involved in extracting and processing these resources can be scaled sufficiently to deal with declines in conventional oil extraction. Analysts who think that they can tend to be more optimistic about the prospects of oil production and avoiding a peak (like CERA) while other analysts are less sanguine over unconventional oil resources and overall oil production.
One other possible major source of oil that is not being really utilized is coal. Coal can be converted to oil via the Fischer-Tropp process (also known as CTL or Coal-to-Liquid). Historically, both Nazi Germany and South Africa have used the Fischer-Tropp process to generate large quantities of oil. There are advantages to CTL (large U.S. coal reserves, scalable process, located in the U.S.) and disadvantages (potentially environmentally dirty, costly infrastructure for processing, more expensive than oil pumped from the ground). These two diaries go a bit deeper into the subject: here and here.
The third strategy is to promote fuel switching to other fuel sources. The big possibilities are hydrogen, ethanol, biodiesel, and electricity. Hydrogen faces a number of technical and logistical hurdles at this point and will probably take quite some time to make a difference (if ever). Cellulosic ethanol and biodiesel have the potential to contribute to mitigating the peak oil problem. A full discussion of all of their pro's and con's would take a considerable amount of space (the debate over EROEI and energy quality for these would be a whole diary in itself) and this diary is too long as it is. I'll address these possibilities at a later time. Electricity, suprisingly enough, could provide be a very signficant alternative to oil to power our cars. First, we already have the infrastructure to create and distribute electricity. Second, we can generate electricty from a large variety of sources including non-fossil fuel sources such as solar, wind, tidal, and nuclear. Third, because significant amounts of power are generated but not used during off peak hours, an estimate by the Electric Power Research Institute indicates that tens of millions of cars could recharge during off peak hours without requiring an expansion of our national electrical grid. Fourth, significant advances in battery technology that utilize carbon nanomaterials are set to dramatically increase the range of plug-in hybrid cars during their electric motor mode. All of these factors point to electricity as an alternative or supplement to petroleum to power our cars. Additionally, it is possible to imagine (with additional advances in biofuel and electric battery technologies) to have cars that run on a mix of electricity for short to mid range distances and ethanol or biodiesel liquid fuels to extend the range of the car to 250-300 miles before refueling.
As the above discussion shows, there are a number of technologies, methods, and resources that can be harnessed to deal with a drop in oil production. However, the problem is that the widespread adoption of these strategies will take time. A recent report commissioned by the Department of Energy ( the Hirsh report ) that studied the peak oil scenario and looked at all of these strategies came to the conclusion that it would take 20 years of preparation for peak oil to avoid a liquid fuels shortage. 10 years of preparation can allows us to avoid the harshest consequences of peak oil but we will still be faced with a liquid fuels shortage at a certain point in the future. The bottom line is that we need a lot of time to prepare for this and we may not have it. Indeed, if we are to believe many of the predictions concerning the onset of peak oil, we will definitely not have enough time to avoid some harsh economic consequences. This leads me to my last conclusion.
5. Action needs to start right now
While it would be nice to know the exact year when peak oil hits, it is ultimately not that important. What is important to realize is that the peak is inevitable and will likely occur in many of our lifetimes. We might be lucky and have a good bit of time to deal with it as the optimists claim (CERA claims a peak sometime in the 2030's though they introduce a caveat that predicting beyond 2020 is difficult). However, even if you accept this optimistic scenario, there is not a lot of leeway between 2006 and 2020 or 2030 if it takes 20 years to get ready. In addition, there are also some very real and quite grave concerns about global warming. A move towards an affordable and environmentally sound energy infrastructure and transportation network is long past due. One of the questions, of course, is how do we get there.
Some will argue at this point that the market will make all of the necessary adjustments. I must respectfully disagree for two reasons. Markets depend on accurate information to make their decisions. Right now, there is a problem of transparency in the oil markets regarding true oil reserves. This poses a problem for the markets to adequately price oil to reflect the true nature of its scarcity. This point is further reinforced by the observation that oil and gas supplies have peaked in various countries with little or no warning. Given this information problem, I am concerned that the markets won't work as well as we would like to prepare for the problem. Second, investors are interested in profits and want to avoid highly risky situations unless there is a high return on their investment. Consequently, investors may not choose to act to invest in say costly alternative fuel plants until it becomes clear that they are going to make money on them. By that time, the ramping up of alternative fuel may be too little too late to do much good.
In my view, it is going to take the government and the markets to do this together. Some thoughts on how to do this will be the subject of my next post.