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The View from the Summit of Hubbert's Peak

““Understanding depletion is simple. Think of an Irish pub. The glass starts full and ends empty. There are only so many more drinks to closing time. It’s the same with oil.” – Colin J. Campbell

 

The Organisation of the Petroleum Exporting Countries will try to calm a nervous oil market this week by pledging that it is prepared to meet customer demand by continuing to pump oil above its official quota limits in an effort to cool oil prices, which are trading near record nominal levels of $55 a barrel.  All very fine and well, but even OPEC has all but conceded that there is very little they can do to bring oil prices down substantially.

Algeria’s minister for energy and mines has conceded what many in the “Peak Oil” camp have been arguing for quite some time:  OPEC has reached its production limit, and trying to stretch output by one million barrels per day isn't likely to lower oil prices.  Chakib Khalil said prices were high because of world economic growth – particularly in the United States and China:

"OPEC has reached its production limits. It doesn't have much production capacity.  If it came to a crunch, it has capacity for one million barrels (more per day), and I don't think a production increase would influence the barrel price." he told reporters last week.  Depletion dynamics are, as the geologist M. King Hubbert predicted decades ago, alive and well. 

The problem of increasing supply shortages has also been exacerbated by oil companies' failure to add new refining capacity to keep up with global demand for petroleum products.  This is exacerbating already tight oil supply conditions and fuelling the rise in oil prices to nominal record highs. 

 

With the increasing preponderance of heavy oil on the markets, the need for increased refining facilities is even more acute, but substantial barriers remain: Stricter environmental laws in the US, Europe, China and India are compounding the lack of excess refinery capacity as companies invest in new equipment to reduce sulphur content at the expense of adding new capacity.  Last year's increase of 2.65m barrels a day in global oil demand overshadowed the modest rise of 700,000 b/d in global refining capacity in 2004.  U.S. refineries are working close to capacity, yet no new refinery has been constructed since 1976. And oil tankers are fully booked, but outdated ships are being decommissioned faster than new ones are being built.

Current market conditions have led to the most remarkable Damascene conversion of all:  The rapid rise in global oil demand should lead the industrialised world to promote energy conservation and alternatives to oil, the International Energy Agency (IEA) warned last week.  The cri de Coeur from the West’s leading energy-policy advisor marks a sharp turnaround from an organization which has hitherto dismissed notions of an imminent supply shortages and consistently overstated energy supply.  Indeed, as recently as last year, the IEA was openly expressing the hope that demand growth might slow in 2005, when actual figures already proved this wish utterly fanciful. China's oil demand alone is expected to grow by 33% this year. Industrialized and developing nations are expanding their economies as fast as possible to generate cash and liquidity as a means of securing more oil.

The US is typical in this regard.  Although Americans make up just five per cent of the world’s population, they consume a quarter of the world’s oil supply.  In 2004 alone, US petroleum demand grew at its strongest rate in five years.   Last December alone the daily consumption of refined oil was 21 million barrels in the U.S, a quarter of world use.  For much of the twentieth century, the United States was the world’s largest oil producer, and its profligacy wasn’t a pressing problem. Today, however, the US is only the third-largest producer, behind Saudi Arabia and Russia. In terms of proven reserves (in themselves based on questionable statistical data), America has slipped to tenth place in the international rankings, as reservoirs in Texas, Louisiana, and Oklahoma have started to dry up.

In response to the most recent surge in oil prices, President Bush has called for increased energy conservation (interestingly enough, a stance that was disparaged by his Vice President just 2 years earlier when he was eagerly pressing the case for war in Iraq), as well as using America’s increasing reliance on imported oil (from increasingly unstable regimes) as justification for increased drilling in the Arctic National Wildlife Refuge, on Alaska’s North Slope. The Prudhoe Bay oil field, one of the world’s biggest reservoirs, is just sixty miles west of the refuge. Surveys carried out by the U.S. Geological Survey suggest that anwr may contain about ten billion barrels of recoverable oil.

Even if this estimate turns out to be reliable, and if exploration starts next year (highly questionable given ongoing Congressional opposition), in 2025 anwr could be generating about a million barrels of oil a day. This is a lot of fuel, but it dwindles next to domestic American energy requirements. By 2025, according to the Department of Energy, Americans will be consuming almost thirty million barrels a day. With luck, an anwr oil field operating at full capacity could satisfy perhaps three or four per cent of that total, meaning that the country would still remain heavily reliant on oil imports at a time of rapidly growing depletion abroad, melding with rapidly increasing demand. Consider the following:  The average American consumes 25 barrels of oil a year. In China, the average is about 1.3 barrels per year; in India, less than one.  So as some 2.5 billion Chinese and Indians move to improve their living standards, their demand for energy is likely to become similarly insatiable with all that this implies for prices in the energy complex.

 

UK and Norway North Sea production peaked in 1999/2000.  China and Mexico (5th and 6th largest) are both expected to peak soon, if they have not already.  Although Russia is now emerging as a swing producer of comparable importance to Saudi Arabia, this is a temporary phenomenon: the government announced recently that it expects production to peak around 2007, which probably explains President Putin’s increasing reluctance to see this strategically vital industry fall under the control of Western interests.

In April, 2003, just weeks after the invasion of Iraq, Vice-President Cheney echoed many Wall Street predictions that by the end of the year Iraq would be able to raise its oil output as much as fifty per cent over prewar levels. Before the war, the Iraqi National Oil Company was pumping about two and a half million barrels a day. Now, with the help of money, personnel, and equipment provided by the American government, it is pumping about 1.8 million barrels a day—at least, on those days when insurgent attacks on pipelines and storage facilities don’t force a cut in production.

The perception long fostered by the IEA has been that supply has continually exceeded demand.  It has made the behaviour of prices since March, 1999 hard to understand.  By contrast, the work of oil consultants Groppe, Long, & Littell, Matt Simmons and Colin Campbell have consistently constructed their supply/demand data by tracking the physical flow of oil, rather than relying on the politically doctored numbers furnished by the members of OPEC.  Using this method has made today’s high oil prices far easier to understand, particularly in light of the persistent evidence suggesting widespread overproduction of OPEC members in regard to their respective quotas.

 

 

The evidence, however, is becoming irrefutable and the IEA is finally sounding the alarm:  “The reality is that oil consumption has caught up with installed crude and refining capacity," the Paris-based agency said. "If supply continues to struggle to keep up, more policy attention may come to be directed at oil demand intensity in our economies and alternatives”.   It states in its World Energy Outlook 2004 that $3 trillion will need to be invested in new oil production capacity to offset future production declines and meet demand growth to 2030. 

One can, therefore, fully understand the beginnings of what appears a full-blown panic on the part of the IEA.  The nightmare scenario that their analysis only hints at has been sketched out vividly by oil analyst Jan Lundberg, who recently laid out the following scenario in (appropriately enough), Electric Vehicle (EV) Magazine:

“The end of abundant, affordable oil is in sight, and the implications are colossal. About now in our hydrocarbon phase of human history, we have pulled out of the Earth approximately half of the available petroleum (crude oil and natural gas). The other half still in the ground is harder to extract and may not - as assumed - fuel the global economy or even provide a transition to another phase…

This means that the next tough oil shortage, even if it is not acknowledged as a post-peak oil extraction phenomenon of diminishing supply, will cripple the globalized economy. Understanding of both the economics and social dynamics of collapse is rare, and even when it is present there is an absence of taking into account the "market factor" in ushering in collapse…

Despite the need to be prepared for imminent, final energy shortage - which could happen now or in several years at the latest - people persist in focusing too much on the likely date of the passing of the peak. It is already clear that the oil industry and OPEC numbers on oil reserves are suspect.

The scenario I foresee is that market-based panic will, within a few days, drive prices up skyward. And as supplies can no longer slake daily world demand of over 80 million barrels a day, the market will become paralyzed at prices too high for the wheels of commerce and even daily living in "advanced" societies. There may be an event that appears to trigger this final energy crash, but the overall cause will be the huge consumption on a finite planet…

The Earth cannot, as of the world oil peak in extraction, give up ever greater quantities of black gold. Most of the world exporting companies are now reducing extraction rates due to fewer discoveries and depleted fields. Oil production in 18 producer countries has passed its peak and is declining faster than previously thought: at about 1.14 million barrels a day.

International Energy Agency figures put the total spare capacity of all 11 countries in OPEC at just 330,000 bpd (down from 6 million bpd in 2002). Conventional Saudi spare capacity is zero... An IEA report from August 2004 indicates Saudi Arabia needs up to 800,000 bpd of newly discovered oil each year just to offset declining fields and maintain its current production level." [Al-jazeera] - This can't happen, so watch for the ensuing energy crisis.

The world needs to produce another 2,723,530.2 barrels per day by the end of 2005 just in order to stand still…” (The Global Nutcracker Called Peak Oil; EV World, Feb. 20 2005, as sourced from: http://www.fromthewilderness.com/free/ww3/031005_globalcorp.shtml#0)

 

Even Wall Street, long in the camp projecting a return to $25 per barrel oil (on the back of what now appear to be absurdly optimistic predictions regarding Iraq’s future potential production of crude), is reflecting the new analytical paradigm.  Thus, Deutsche Bank warned in a recent piece that the hydrocarbon era was “increasingly likely to be coming to an end", and “politicians, company chiefs and economists should prepare for this in good time, to effect the necessary transitions as smoothly as possible.”  Citing evidence of an approaching peak in world oil production within just a few years, the paper (“Energy prospects after the petroleum age”, - December 2, 2004) suggested that "strong reactions in prices and economic upheaval are possible" when output starts to decline.  "The possibility of realigning the energy mix without radical economic disturbance would be all the more likely," the paper concludes, "the sooner politicians, industry and private consumers respond to the signs of the times on the markets for hydrocarbons."

 

The problem, as energy investment banker Matthew Simmons - long a smoke alarm for Peak Oil - has said repeatedly, "is that the world has no Plan B." Simmons is absolutely correct.  He further notes, The world's network of crude oil pipelines also is now operating at virtually 100% capacity. For almost all of 2004, the world's tanker system operated at full capacity too. This sparked an unprecedented rise in taker rates, which added up to $5 to $6 per barrel to the wellhead price of oil in some key long-haul export routes. Why are no more tankers being built? Because, as Simmons, Campbell, Groppe, Michael Ruppert and others in the “Peak Oil” camp have argued, soon there won't be enough oil to ship to cover what it would cost to build them.

What about alternative energy sources? America possesses just three per cent of the world’s known natural gas reserves; Iran, Russia, and Qatar together possess more than fifty per cent. Given rising levels of American antipathy in that part of the world, one can envisage future government in Tehran, Moscow, or Doha ultimately adopting energy policies inimical to American interests (if that isn’t already occurring).  With continued talk of a pre-emptive strike on Iranian nuclear facilities, history might repeat itself with Iran seeking to exercise its market power in the natural gas market in much the same way that opec (ironically, led by the Shah of Iran) did for crude in the late 1970s. 

Coal represents a politically safer alternative, but burning coal inevitably generates carbon dioxide, the gas primarily responsible for global warming, which even the Bush Administration has now conceded to be a genuine phenomenon.  The world is also well familiar with the attendant problems of “clean energies” such as nuclear power, but even certain leading members of Greenpeace are conceding that increased resort to nuclear power will be part of the West’s response to decreasing reserves of oil and natural gas, as necessity overrides any political opposition.  Moreover, the gestation period to deciding to embrace nuclear energy and the commissioning of new plants is still considerable and therefore unlikely to bridge the gap from future oil price shocks.

By the same token, however much higher oil prices might act as a spur to further development of alternative energy technologies, that solution is unlikely to be cheap.  Power generated from waves, windmills, and solar panels, for example, is weak, intermittent, and expensive—at least twice the cost of electricity produced from coal or gas. When it is cold or dark, solar panels don’t produce energy; when it is calm, wind turbines don’t turn. To insure continuity of supply, renewable power plants have to budget for large amounts of overcapacity, a problem that isn’t going to disappear. 

Clearly, it is not an overstatement to say humanity’s way of life is on a collision course with the basic facts of oil geology.  The descent from the peak of Hubbert’s summit is likely to be far more painful than the ascent, yet few have offered anything in the way of serious contingency planning to deal with this oncoming problem. Of course, it is likely that over the longer term, the global economies might find the necessary resolve and unity of purpose to develop a new non-fossil fuel economy.  But this is unlikely to occur in the absence of crisis first: More industries will likely be forced to the wall as a consequence of rising energy costs.  Further environmental degradation is likely, as is mass starvation in some countries, since (as professor emeritus of geosciences at Princeton University, Kenneth Deffeyes notes) the 6.4 billion people living on the earth today are fed thanks largely to the successes of the 20th century’s green revolution, which, among other innovations, brought petrochemical-based fertilizers into wide use. The competition for energy security will, as we noted last week, almost invariably lead to further global conflict.   This is nothing new.  After all, it was the saintly Jimmy Carter, not George W. Bush, who first warned that “an attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.”  The subsequent crash in oil prices made such threats seem superfluous, but the prospects for a cheaper, peaceful alternative, short of a renewed embrace of an economic stone age, look decidedly threadbare in the early stages of the 21st century.  Abundant energy from fossil fuels was a one-time gift, as even the IEA is implicitly conceding today.  No one has yet suggested a realistic and pain-free alternative.

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