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Thursday, April 01, 2010

It's Time to Deal with Peak Oil

by Richard Heinberg

National Post (March 20 2010)

The "Peak Oil" concept - that the world's petroleum-production rate will soon reach its maximum and commence an inevitable decline, with negative economic consequences - has been around in scientifically articulated form at least since 1998; long enough to see it confirmed in significant ways.

The rate of discovery of new oilfields has been falling since 1964. The biggest find in recent years is Tupi, in Brazilian waters, which is claimed to hold five to eight billion barrels of oil; but that's only enough to slake the world's thirst for sixty to ninety days. Most producing nations are past their domestic peaks and are experiencing slowing output, despite every effort to maintain flow rates.

Skeptics point out that total world oil reserves continue to grow. But this may not be a reliable indication of where we stand: Often, in nations that have seen a peak and subsequent decline in production, domestic reserves continued to rise right up to, or even past, the date of peak production. Why? Oil companies replace reserves of high-quality, cheaply-produced oil with reserves of low-quality, slow or expensive to produce oil or tar sands.

Rates of output decline in older, giant oilfields have proven to be more trustworthy indicators of long-term trends. (For instance, they've enabled successful peaking forecasts for the United States, the North Sea and other regions.) For the world, the average decline rate from existing fields has been calculated by the International Energy Agency at 4.5% per year. The world needs to develop the equivalent of a Saudi Arabia's worth of oil production capacity every four years to offset such declines. This is quite a burden for the industry, which must now look for oil in ultra-deep water, in polar regions, or in politically fractured nations, since all the easy-to-find, easy-to-extract oil already has been located and much of it pumped.

So far, the record year for world crude production was 2005, and the record month was July 2008. Tellingly, the leveling-off of extraction rates between 2005 and 2008 occurred in the context of rising oil prices; indeed, in July 2008, the price spiked fifty percent higher than the previous inflation-adjusted record, set in the 1970s. Yet as both oil demand and prices rose, production barely budged in response.

While many commentators believe the jury is still out on Peak Oil, the list of petroleum analysts who say world oil production has already peaked, or will do so in the next five years, lengthens almost daily, and includes CEOs and other well-placed leaders within the oil industry.

The argument that oil production could theoretically continue to grow past 2015 is mainly put forward by organizations such as Cambridge Energy Research Associates and Saudi Aramco, which explain away evidence of dwindling discoveries, depleting oilfields and stagnating total production by claiming that it is demand for oil that has peaked, not supply - a claim that hinges on the observation that oil prices are high enough to discourage potential buyers. But high prices for a commodity usually signify scarcity, so the "peak demand" argument doesn't hold water.

Peak Oil has significant implications for our economy. In response to the 2008 price spike, the global airline industry nose-dived and auto companies suffered. Worldwide shipping slowed drastically and hasn't recovered. Demand for oil plummeted in late 2008, and so did the price - temporarily. But today's price is again high, almost to the point of nipping economic recovery.

What should we do about Peak Oil? Start with what the UK Industry Task Force on Peak Oil (which included Sir Richard Branson of Virgin Airlines) has done: Acknowledge the reality of supply limits. Then study the vulnerabilities of transport and food systems to high and volatile oil prices, and start making those systems more resilient and less oil-dependent.

But do it fast. Adaptation will take decades, and we are starting very late.


Originally published March 19 2010 on National Post

Bill Totten


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