This is Part 1 of two. Read Part 2 here.


Oil well pump jacks – Richard Masoner/flickr. Creative Commons License 2.0.

The story of America’s new energy abundance has been accepted uncritically by too many people.  A closer look at the realities of today and the last decade, coupled with a better understanding of our energy and oil systems, reveals risks that must be discussed and included in planning for the years ahead. 

This brief paper presents key information on the role of oil in the economy, the fact that world oil production has not increased meaningfully since 2005, the failure of high prices to create new supplies, the nature and limits of the oil being produced through fracking, the global challenges to oil supplies, and the likelihood that the United States will never be a net oil exporter again or truly “energy independent.”

People who are part of the energy or economic debate – whether as policy makers, journalists, academics, community planners, conference organizers, or citizens who will be living through the consequences of decisions being made – should be sure to consider all the facts, uncertainties, and choices involved in assessing the future of oil supplies.
 
WHY IT IS IMPORTANT TO KNOW ABOUT OIL SUPPLIES
 
Whether we will have adequate supplies of affordable oil and other energy supplies is one of the critical questions of our time.  Ultimately this question will not be answered by our wishes, but by the realities of the physical world.  In this report, we show why we believe there is a substantial risk that the United States and the world will not have the abundant supplies of inexpensive energy that many people assume.  Planning by individuals, communities, businesses, and governments should take that risk into account.

There is a tight relationship between energy supplies generally, especially affordable quantities of oil, and the level of overall economic activity.  Simply put, economies stop growing when their use of energy stops growing.  The world moves with oil, and petroleum lubricates the global economy.  It is not simply a natural resource, but the substance that allows all other systems – from food to cities to (unfortunately) war – to exist at the massive scales of today. 

For most of the Twentieth Century, the world’s supply of oil grew steadily, while the price generally declined.  This enabled the world’s GDP to expand by a factor of 15, a rate vastly greater than at any time in human history.  The opening years of the new century have broken these trends.  The price of oil is higher (even adjusted for inflation) than it has been since the opening days of the oil age, but supplies of oil are growing very slowly, if at all, and economic growth is stalling all over the world.

A debate rages: can we return to “business as usual” relying on abundant oil supplies?  Is oil going to become increasingly scarce and dear?  Will new technologies blunt the impact of oil declines?  If the net rate of oil extraction cannot be increased as it was throughout the Twentieth Century, what might happen to the overall economy?  What responses are available?

Every big decision we make is shaped by our expectations for the world to come, the world in which the impacts of that decision will play out.  We build new highways and airports assuming that there will be sufficient demand in the future to justify the investment today.  We undertake commitments around health care, education, housing, corporate debt, or retirement plans with the assumption that incomes and jobs will be sufficient to satisfy the obligations in the future when they become due.

When it comes to energy, the investments and time frames are substantial.  It can take billions of dollars and a decade or more to turn a newly discovered oil field into a flow of actual oil.  Refineries and pipelines, export terminals, and new technologies similarly require major commitments, not just by the companies making the investment, but by the communities affected and all of society.

ASPO-USA wants to help decision-makers make informed judgments regarding these large-scale commitments based on the best available information on energy supplies, especially oil.  Overly optimistic projections and talk of “energy independence” by people whose economic and political interests require assumptions of plenty can lead to terrible long-term impacts that the rest of us will have to pay for for years to come if the promised cheap energy never appears. 

A Framework For Understanding Net Oil Supplies
We – society, “the economy” – need energy to get anything done, and we especially need oil to move people and things. This report intends to help readers understand how much “oil energy” the non-energy part of the economy and society will have to work with.  It also shows why ASPO is concerned that future supplies are likely to be tighter and more expensive than many think today. 
 
There is a big gap between the gross number of barrels of oil the world takes out of the ground and the amount of oil available to operate society.  Here’s how it works:
 
Merely defining “oil” turns out to be difficult.   Crude oil is a liquid made up mostly of a mixture of molecules of carbon and hydrogen (hence, “hydrocarbons”), once any water and contaminants are removed.  Some “oil” is so thick – like the bitumen from the Canadian tar sands – that it doesn’t flow freely and even sinks in water.  Other “oil” is so light that it evaporates easily and can’t be turned into motor fuel.  Biofuels like ethanol are substitutes for oil, but are manufactured from plants that require energy inputs to grow and be processed.  Different kinds of liquid fuels have different amounts of energy per gallon, even though we measure oil in barrels (42 gallons), not by the energy provided. 

  1. People commonly discuss oil production, but oil is not “produced” by nations or oil companies; it is “extracted.”  The actual creation of oil takes millions of years, starting with algae trapped underwater and subjected to massive pressure and just the right geology.  We extract oil from the ground, and that phrase reminds us that we are draining a fixed and limited resource.
  2. The total volume of oil extracted is usually reported, but energy is used to extract, move, and process the oil. The useful remainder is called “net energy” or “energy profit.” We tend to extract the most accessible oil with the most net energy first, and then pursue harder-to-get sources.  Thus, the energy cost of extraction goes up over time, and the “energy profit” goes down.
  3. “Conventional oil” is what most of us think of as oil, a liquid coming out of wells drilled into the earth, either on land or in relatively shallow water.  The oil flows to the well pipe.  These wells are typically productive for many years, or even decades.
  4. Unconventional oil” comes in two basic forms, but what they have in common is typically much higher costs per barrel than conventional oil.  One form is stuff that is not quite oil, like the bitumen in the tar sands, which requires lots of expensive processing before it can be used.  The other is hard-to-get oil.  Some of that is in shale or other rocks that have to be fractured to release the oil.  Other oil fields are deep in the ocean, under a mile or more of water and miles more of rock, where everything required to extract this oil is much harder and more expensive.   There is potential for oil extraction in the Arctic, either on- or off-shore, but the temperatures are bitterly cold, support facilities are far away, the environment is dangerous, and any extracted oil must be moved thousands of miles over difficult terrain.  It is a measure of the oil situation that most new sources of oil are in one of the “unconventional” categories, and the extraction efforts require high oil prices to be economically feasible.
  5. Oil is traded globally, but only a dozen or so countries export significant amounts of oil.  When considering the supply of oil available to major importing economies – including the US, Europe, Japan, China, and India – we cannot look at total world extraction amounts, or even the amounts after expenses, but we also have to subtract the amount the exporting countries use for their own people, and see what the “net exports” are.  Since Saudi Arabia and the Gulf States have rapidly growing economies and populations, the amount of oil available for the rest of the world has been declining steadily since about 2005.
  6. The price of oil is initially set by the cost of extracting and processing it, subject to production limits set by producing cartels, whether Rockefeller’s Standard Oil of long ago or OPEC more recently.  The value of the energy in oil to users has historically been much greater than the price, with the difference propelling economic growth.  As oil has become harder to find and extract, the cost of new oil has risen to approach the value to buyers, reducing the benefit to the economy.  There can come a time when the price needed for extraction exceeds the price users are willing to pay, so new investment in extraction will slow or stop.
  7. There is another potentially important source of oil:  fuel switching.  Most of the energy use of oil in the US is for transportation. Oil was once used in the US to generate electricity, but that mostly ended with the 1970’s oil shocks.  More recently, the share of oil used for fuel oil, heating oil, asphalt, and power generation has declined sharply again, protecting the supply of gasoline and diesel fuel.  Similarly, increased efficiency and new technologies in the transportation sector in the US and Europe can move more goods and people further on the same amount of oil. 
  8. Ten years ago, most oil statistics applied only to oil, or “crude and condensate.”  More recently, the numbers include “all liquids,” adding natural gas liquids (NGLs) and biofuels to the mix.  However, while NGLs have value, they cannot be used for most transportation applications, so should be considered on their own, not as part of a total.

The key question about oil is whether we will have enough oil available at prices that will allow us to operate and grow the economy and society.  We will never run out of oil, but rather soon the rate of extraction of oil priced to support prosperity will decline, and the energy profit we enjoy will shrink from current levels.
 
“Peak Oil” will occur when society is using – or the nations of the earth are extracting – oil at the highest rate ever, and at a higher rate than can be sustained in the future.  High prices can have an impact on the economy even before the “peak” is reached, and the “peak” is likely to look more like a plateau than a sharp rise and decline.  For “peak oil” to be “dead,” as some optimists claim, the supply of affordable oil would have to continue to grow for decades to come.  The following section outlines why we think that is unlikely.  [Part 2 here]
 
Prepared for ASPO-USA by Richard E. Vodra ([email protected]).  Information used in this two-part report came from writings, conversations, and emails from many people, including the following (and others):  Art Berman, Jan Lars Mueller, Tad Patzek, Kurt Cobb, Jim Baldauf, Ron Swenson, Charles Hall, Colin Campbell, Jim Hansen, Doug Hansen, Nancy Deren, Troy Jones, Gail Tverberg, Jeff Brown, Mark Lewis, Richard Heinberg, David Hughes, Chris Nelder, Steven Kopits, John Howe, Ron Patterson, and Tom Whipple and the ASPO Peak Oil News and Peak Oil Report.   None of them may agree with everything that appears here, but most or all would concur with the major themes.