a place to rant about energy, environment and all things John Howard

Monday, September 04, 2006

Peak Oil Primer

I used to think of people who believed in Peak Oil as nutcases who stockpiled food in backyard bunkers and were a little too interested in guns. But after following the debate for a few months, I'm beginning to believe Peak Oil may happen in the next 5-10 years. This is what I have learned...

What is the theory Peak Oil?
Its not the world running out of oil (as many people think) its the point at which oil reaches its maximum rate of production after which production goes into a decline and never recovers.

Why is this significant?
World demand for oil is growing at ~2% p.a. Much of the recent growth in oil consumption has come from the rapidly industrialising economies of China and India. If production cannot be increased to meet demand the price of oil will increase very rapidly. There are obviously many possible consequences of extremely high oil prices and ever-shrinking supply, but this is pure conjecture best left to the Peak Oil 'doomer' sites.

Oil Demand


Why can't oil production be increased?
Most of the world's oilfields that are older than ~50 years have peaked and declined. The 'lower 48 states' of the USA peaked in 1970. The North Sea peaked in 1999. The Cantarell oilfield in Mexico (the 2nd largest in the world) peaked in 2005. There are rumours that Saudi Arabia has recently peaked or will peak soon. Despite all their modern technology, the Americans have not been able to increase oil production in the lower 48 states, and neither have the Brits in the North Sea. I don't pretend to understand the geology, but it seems to be accepted as fact by both sides of the Peak Oil debate that all oil fields peak and eventually decline.

Oil Production



Yes, but they're discovering lots of new oil fields aren't they?
No. The peak year of oil discovery was 1965 (around 60 billion barrels). In recent years they have been discovering around 10 billion barrels per year. For comparison, the world consumes 30 billion barrels per year (~84 million barrels/day).

The gap between oil production and discovery



Yes, but aren't world oil reserves enormous?
Yes they are. 2-3 trillion barrels of oil, enough to keep us going for 100 years at the current rate of consumption. The problem is, once the rate of production goes into decline it cannot be increased (according to the theory of Peak Oil). So we have lots of oil, but it might take 500 years to extract all of it.

Yes, but aren't there alternatives to oil?
Yes. Oil from tar sands, oil from coal, oil from gas, oil shale, biofuels etc. Problem is, none of these technologies can be ramped up fast enough to compensate for reduced rate of production from conventional oil fields. Canada has vast reserves of a bitumen-like substance called 'tar sands'. Billions of dollars are currently being invested in the Canadian tar sands, but even with all this investment the most optimistic estimate is they will be producing 4 million barrels/day by 2010. (Remember, the world uses ~84M barrels/day). In addition, all so-called 'non-conventional' sources of oil are extremely energy intensive. You might have have to burn 2 barrels of oil to make 3. Suffice to say, non-conventional oil on a large scale has disastrous implications for climate change.

What is the mainstream view of Peak Oil?
Most governments and oil companies do not see any problem with oil production until 2020-2030. The mainstream view is that as oil becomes more scarce the market will solve the problem. i.e. Much higher oil prices will drive innovation in fuel efficiency and alternative means of transportation. As the head of the Australian Bureau of Agricultural and Resource Economics (ABARE) said recently "If the price of eggs is high enough even the roosters will start laying". Most governments see current high oil prices as a consequence of lack of refining capacity and underinvestment in oil exploration during the 1980s-1990s when oil prices were very low.

Nothing to worry about here




If this is such a serious issue, why isn't it front page news?
Global warming isn't front page news every day either and it probably should be. I suspect governments have been assuaged by the enormous size of global reserves without understanding that (if the peak oil theory is correct) the rate of production must fall even though reserves are huge. Its also a case of the "boy crying wolf" too many times. The doomsayers said oil was going to run out during the oil shocks of the 1970s but everything was fine for 30 years, so it must be fine this time.

Who does take Peak Oil seriously?
Peak Oil is not taken seriously by most governments, oil companies and oil industry analysts, but here are some that do:

Bill Clinton:
Clinton raises alarm about oil depletion

The Prime Minister of Sweden:
Swedish government embraces peak oil and looks towards biofuels

The New York Times:
The end of oil (front page story March 1st 2006)

If you're still unconvinced this is something you should give serious consideration watch this interview with Dr Robert Hirsch on 4 Corners (click the interview box third from left). Who the hell is Robert Hirsch? He was commissioned by the US Department of Energy to write a report on Peak Oil in 2005. This guy just doesn't strike me as a some kind of apocalyptic nutcase.

Still unconvinced? Watch this presentation by Chris Skrebowski, editor of the London Energy Institute's Petroleum Review magazine. Skrebowski is a Peak Oil convert who initially argued against supporters of the Peak Oil theory.

I dunno, I've tried hard to poke holes in the idea, but I can't find too many.

24 Comments:

Anonymous Tim Burrows said...

One interesting anecdote that Chris Skrebowski made at the CEDA lunch the other day: apparently it now costs around $3,000 per hour to hire a bulldozer at the Tar Sands project.
This was an example of the massive local inflation that is blowing out the cost of this project and making it less viable.
One other point of clarification: As I understand it, peak oil is when global production hits its peak. All of the fields in the world peak and fade, but it's when the sum of these production curves peaks that the problems start.
As I see it, it is however fundamentally a supply-demand issue. The root problem is the ever increasing demand for oil. If demand for oil was to drop, then there won't be an issue.

Tue. Sep. 05, 11:20:00 am

 
Blogger David Michie said...

Yes its fundamentally a supply and demand issue, but this assumes substituting conventional oil with something else (tar sands, biofuels, electrified transportation) will be easy, or indeed possible. It sure as hell won't be easy, and for some applications (such as jet aircraft) it is doubtful that it is even possible. Tim, you're an engineer, find me a fuel that can match the energy density of jet fuel.

Tue. Sep. 05, 12:20:00 pm

 
Anonymous James said...

David, I have recently come to similar conclusions to yourself regarding the merits of the Peak Oil. I first heard about in the early 1990's and the facts regarding oil production are now looking very much like the earlier predictions from some Peak Oil theorists. I'm convinced it will result in more disruption than the economic market utopians admit. I think it is crucial that we all, including business & gov'ts take it serious. But exactly how significant the impacts will be are not yet clear to me at all.

Tue. Sep. 05, 01:44:00 pm

 
Blogger David Jeffery said...

Nice summary David. Good to stumble upon your blog.

Tue. Sep. 05, 01:56:00 pm

 
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