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The peak oil crisis: Connecting the dots

In the months after 9/11 there was much discussion about the American government's failure to "connect the dots." Hints and clues that Al Qaida was about to launch airborne suicide attacks inside the US abounded but nobody put the bits and pieces together into a convincing warning.

Such it may be with peak oil. There are trend lines and clues from across the earth pointing to serious troubles just ahead, but once again they are not generally perceived as making a "convincing case," especially when nobody really wants to contemplate the conclusion.

The "dots" of peak oil cluster into four groups. First, there are the depletion vs. new discovery dots. Every active oil field on earth is giving up some share of the 85 million barrels we burn up each day. New wells are constantly being drilled into existing oil fields in an effort to maintain production as the oil from the field is used up.

As fields mature and new wells are not enough to maintain production, output starts to drop. To offset the loss and maintain or increase our 85 million barrels a day, new fields must be opened and start producing. This balance between old fields drying up and new fields starting up is the heart of the peak oil story. When there is not enough production from new fields or other "unconventional" sources of oil substitutes to offset the decline, it is all over— world production has peaked.

For the last couple of years, new production and depletion have been running just about neck and neck, with production from new fields just offsetting the declines in production and cutbacks from geopolitical factors such as insurgencies and other political disputes. Some knowledgeable observers, after noting the pace at which in production is falling particularly from the North Sea and Mexico's Cantarell fields, believe that new production going on stream during 2007 will not be enough to maintain the production level we have seen during the last two years.

These observers note the cost of extracting oil from new, mostly offshore, fields has been increasing rapidly and that many projects have been slipping due to the unavailability of skilled personnel and equipment necessary to bring them on stream as rapidly as planned.

It should be noted that we don't yet have returns in from the giant Saudi oil fields. Saudi production has dropped about 1 million barrels a day in the past year. The Saudis maintain they are simply cutting production due to a glut of oil and falling prices. Many outside observers, however, are suspicious that there may be more to the story. Various techniques of assessing the course of Saudi oil production suggest these giant fields, some of which have been in production for 60 years, are ready to go into rapid decline. If this is happening, the Saudis sure aren't going to tell us.

Just to be safe, the Saudi dot should probably be flashing amber just as the North Sea and Mexican dots are already flashing bright red.

The next cluster of dots are the one's for the world's oil exporters. Some of these countries are fine, upstanding places like Canada, Norway, and the UK that will keep sending us oil until they run out of exportable surpluses. Unfortunately, for the UK this is already the case. Even America's best friend to the north, Canada, only has a few years before its citizens start to question selling of so much of its oil to the US.

Most large oil exporters are monuments to political instability. Iraq and Nigeria are currently in death spirals that could easily lead to serious reductions in their oil exports during the next year or so. The political leadership of Iran and Venezuela at the moment seems to be doing their best to get bombed by somebody or other. At least they are ideologically screwing up their domestic petroleum industries to the point where their ability to export current quantities of oil has a very short half-life.

Then we have the global warming dots: meltings, droughts, famines, hurricanes, and you name it. While the US, at the minute, seems inclined not to do much about this until Wall Street actually goes under water, a critical mass of public opinion seems to be forming. Short of imposing a 50 mph speed limit, and rationing or taxing the dickens out of fossil fuels, there does not seem to be much the US can do about greenhouse emissions in the short run.

Any serious, rapid, governmental action to cut emissions will of course have a serious impact on the last set of dots: the global economy. Here the question is easy. Do economic hard times come before or after peak oil? It should be obvious to everyone by now that if you take away a share of the world's oil and gas consumption, you are going to have some really serious economic problems. You can pick your own word to describe this phenomenon depending on how bad you think it is going to be— Recession? Depression? Collapse? Armageddon?

The key question is whether the economic troubles come before or after oil, for one reason or another, becomes very expensive and scarce. Many observers think there are serious economic troubles just ahead stemming from negative savings in the US, the housing bubble, collapse of Detroit, balance of payments, value of the dollar, or any number of other factors.

Where does this leave us? To anyone who cares to look, the dots are already connected and they spell big, big trouble just ahead. The dots are flashing bright red. The alarm bells are sounding. The klaxons are blaring. But few are noticing. As a nation, we are so engrossed with Wal-Mart's latest sales figures, interest rates, and surging in the streets of Baghdad, that we have failed to notice the cliff just ahead. Someday, the historians will say "on this one, connecting the dots didn't make any difference after all."

What do you think? Leave a comment below.

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