Peak Oil Primer

By: André Angelantoni, President, Post Peak Living
Date: May 2008

It's not like we weren't told that this day would come. The warnings were actually quite common, like when 58 national academies of science warned the world that population growth was out of control. Should it be surprising then that with 6.7 billion of us even a good-sized planet like Earth would eventually start to feel cramped and run low on resources?

You probably know what we're doing to the atmosphere to cause global warming, but you may not have been following what's happening to oil. No, it's not running out, but it soon will feel like it. We've reached the half-way point of the easy-to-drill oil. Soon world oil production will decline — and there isn't any amount of technology that we can throw at the problem to stop that from happening.

Like all finite resources, oil production will reach a peak and then decline. Any disagreements are primarily about when the peak will be reached, how severe the decline will be and whether we can leave oil before it leaves us.

A consensus is beginning to form that we are at peak oil now. For instance, the Association for the Study of Peak Oil and Gas (ASPO) has a chapter in Ireland. This is the home chapter of the geologist Colin Campbell who has been tirelessly speaking and writing about peak oil ever since his and Jean Laherrère's 1998 Scientific American article about the topic. ASPO Ireland recently moved its predicted date of peak oil from 2010 to 2007 (here is their May 2008 newsletter, PDF; scroll down to section 1040). Yes, they are now saying that peak oil is in the past. We will never produce more oil than we are producing right now.

As we continue to roll over to the other side of the production curve, prices and availability will be severely impacted:

That's because we're facing a liquid fuels shortage. Take a look at how many vehicles the U.S. alone has and how many years it takes for the fleet to turn over:

As we ride down the right side of the oil production curve, those cars, trucks, busses and airplanes will continue to want ever more expensive oil — but it won't be available:

Take a close look at that graph. It assumes a decline rate of 4% per year. In just five years, the world will lose approximately 20% of its oil production. Some large oil basins, like the North Sea or Cantarell in Mexico are in production free fall, losing as much as 18% production per year.

Alternative Energy Sources

"But what about alternative energy?"

Looking closely, it's not nearly up to the job:

Each alternative has insurmountable obstacles.

The renewables most people think of  — wind, solar, tidal, geothermal — provide electricity or heat. But the world has 800 million vehicles (cars, trucks, bulldozers, etc.) that require liquid fuel. Nuclear energy doesn't help, either, because it provides electricity, too.

The hydrogen economy was always a non-starter for two reasons. First, it is very inefficient to turn electricity into hydrogen then turn it back into electricity. Once all the conversions are done, one is left with only about 25% of the original energy. Second, hydrogen requires building out a completely new infrastructure to support it. If we are going to move away from the existing petroleum infrastructure (refineries, gas stations, etc.), why build a new infrastructure when the electricity grid is already built? We should have pushed hard for electric vehicles, not hydrogen ones, and hydrogen was an unfortunate distraction.

Energy from biomass (biodiesel, ethanol, etc.) can't scale up, even if we were to put every acre of farm land under production. Making this strategy even worse, of course, is the impact on food prices of turning food into fuel.

We could move to cellulosic ethanol once the technology is perfected and advocates of that strategy say that the feedstock can be grown on marginal land, thus reducing pressure on food crops. However just because it can be grown on marginal land doesn't mean that it will be grown exclusively on marginal land. It is fanciful to think that a farmer will not use his best land to grow the feedstock — he will do so even if that means taking food crops out of rotation. If the profit is there, he will use whatever land is available that will provide high yields so as to maximize his returns. That means that any kind of fuel that must be grown will be in competition with our food supply.

It's good to remember that oil shale is a rock. If we are trying to get oil from rock, that should be a strong indicator that we are getting desperate. Shale has roughly the energy of a baked potato and the net energy available after one extracts the oil from shale is so low that, in my view, almost all the shale will stay in the ground forever. There are some small pockets of oil within the shale that seem to be worth getting, but it doesn't amount to much.

The tar sands are also low net energy sources of oil. Current production is only 1.5 million barrels/day (2008) and because of the enormous quantity of water and natural gas used to clean and cook the sand, it is unlikely to go above 3 million barrels/day, according to the Canadian government. For a thorough examination of the tar sands, see Tar Sands: The Oil Junkie's Last Fix at The Oil Drum. (Just remember that tar sands are a mining operation, not a pumping operation. That's a world of difference.)

Converting coal to a liquid, besides being an environmental disaster, is breathtakingly expensive. According to its industry lobbying group, it costs $1 billion to make a plant that produces just 10,000 barrels a day. As the economy declines, how many of these plants can realistically be expected to be built? And at what environmental cost?

Newer technologies like algae can't be ramped up in time, either.

If you examine the alternatives, as I have, you'll see that there is no combination of technologies that can be deployed to make up for the energy we get from oil before world oil production rapidly declines.

That's because the world is overwhelmingly dependent on fossil fuels in general, and oil in particular:

As the oil increases in price, to say that the consequence to the U.S. (and world) economy will be severe is no understatement. It won't be a smooth runup in price: there will be hoarding and shortages, which will cause stutters in our just-in-time manufacturing and delivery systems.

Let's look at just the United States for the moment.

Higher Oil Prices Impact the Economy

The American economy uses roughly 21 million barrels a day of oil. Over a year, that's 7.6 billion barrels, or about one quarter of the world's total oil usage. Every $10 increase in a barrel of oil thus removes $76 billion from the American economy that could be put toward productive use.

As oil continues to increase in price, this growing drag on the world economy will continue to lower worldwide economic growth (which we think was unsustainable anyway) until it starts shrinking; the U.S economy has already started to shrink because it is in a recession that will soon be recognized as a depression.

Potential for Economic Collapse

Making things worse, this is happening when total private debt in the U.S. alone is about $48 trillion dollars or just over three times the size of the current U.S. gross domestic product.

A shrinking economy due to permanently declining oil means that the debt on the books will never be repaid. It can't be paid back because oil is really a form of stored work. Less oil means less ability for businesses and individuals to make a profit and thus service the debt.

When the world's financiers realize that because of peak oil the debt they counted on being repaid will never be repaid, we expect the entire financial system to respond extremely poorly.

What about pensions and entitlement programs that depend on a functioning (and ever-growing) economy?

That's a very good question. We believe they won't exist. At all. They require a functioning and growing economy to be worth anything.

We believe that we are at the beginning of the next great depression. This time, though, it's a depression that will take centuries to climb out of.

If you are interested in the details of this line of thinking, we recommend watching The Crash Course, an excellent video primer about the economy and unsustainable levels of U.S. (and global) debt by Chris Martenson.

Our Decaying Infrastructure

As James Kunstler has pointed out, we built our world around us assuming that we would always have access to cheap energy to maintain it. Our water systems, sewer systems, highways and electric grids all require energy to be kept in good repair.

What happens when that cheap energy disappears? How will we keep our systems running? In most areas of the country, an enormous amount of energy is required to keep the water and sewage moving and the bridges maintained.

Popular Mechanics, though unaware of peak oil, has a good overview of the size of the task to remediate the nation's infrastructure, which is currently in disrepair.

Oil and Population

It won't be just the economy that is affected. Here is a graph of world population and oil production:

The orange curve is human population. It is in what ecologists would call a "population bloom." The population bloom occurred in part because of easily accessible fossil energy, particularly oil. Oil allowed us to send our fishing ships far out to sea, to drill deep water wells to irrigate our crops and to grow, harvest, refrigerate and distribute vast quantities of food. It enabled us to feed 6.7 billion people. In fact, Dr. Pimentel of Cornell University estimates that every calorie of food we eat uses at least 10 calories of energy from oil.

As oil production declines, will we be able to feed all 6.7 billion of us?

Here is a better question: what always happens after a population bloom?

The Near Term

The world is currently using 86 million barrels per day (mb/d) of all liquid fuels. The International Energy Agency (IEA) has warned the world governments of an oil shock by 2012 for a variety of reasons.

Here is what the Chief Economist of the IEA said in November of 2007:

"By 2015, 37.5 mb/d new production will be needed; only 25 mb/d worth of projects are on the books leaving a gap of 12.5 mb/d that will cause an 'oil crunch' by 2012."

In a later interview, he said, "Unfortunately, there's a lot of talk, but very little action. I really hope that consuming nations will understand the gravity of the situation and put in place radical and extremely tough policies to curb oil demand growth."

It's actually much worse than he is saying. Take a look at the projected worldwide new oil production based on the major oil projects on the books:

(Chart retrieved May 19, 2008; click here for the most up-to-date numbers)

At first glance, it looks like there is a lot of oil production coming online. The reality is much different:

• almost 4 million barrels per day (mb/d) of production is needed just to make up for the decline of existing fields
• the world demand for oil is still increasing at just over 1% per year
• why aren't there more projects in 2013?
• major oil projects take between 5 and 10 years before first production, so they should be showing up now. That number will go up, but it has to go up a lot.

John Hess, the CEO of Hess Oil, recently said this at the 2008 CERA oil conference:

"Given the long lead times of at least 5-10 years from discovery to production, an oil crisis is coming and sooner than most people think...It is imperative that we change our mindset, our sense of urgency, or the consequences will be severe."

What's in Store for the U.S.?

What will the U.S. look like in ten years, with oil availability declining, unable to pay back its debt, little money to maintain its infrastructure (the American Society of Civil Engineers gives the infrastructure a D on its report card) and wave after wave of newly unemployed?

It will look like a third-world country.

In fact, we believe that the human race is at the peak of energy availability, the peak of the economy, the peak of what the atmosphere can tolerate (i.e. global warming), the peak of population and the peak of resource usage.

You and I have had the opportunity to live in one of the most fantastic periods in human history. It was relatively brief — just a few centuries really — and it produced an economy that allowed you to buy almost any product we wanted from any country in the world. We could fly to the other side of the planet in just a few hours (and then complain about ride!).

This globalization was possible because of the immense amount of energy we took from underground and put in our factories, our cars, our planes, our tractors and more.

Globalization Unwinds

Now we're moving into a period in which globalization is going to unwind. Life will become very local, very soon. In my public talks I call is hyperlocalization.

You probably will be disoriented and unsure of how to live in this new world. What does this mean for your kids? Will you have work? What will the nature of work be without all that energy to run the machines?  You will undoubtedly need to learn new skills.

In our forums, you will get to explore what the future will bring. We think it's an opportunity to reassess how we are living our lives. There were many great aspects to living during the Age of Oil — but the costs were high, too. The planet in particular paid dearly for our oil binge.

Create Community Where You Are

There are lots of people who want you to be successful in your preparations (including us!). Get to know your neighbors and start thinking in terms of your community, not just you and your family. You truly can't do this alone.

Join or form a group at Relocalize.net or TransitionTowns.org. We are moving into a period in which once again we will rely on each other's generosity and skills to live.

Start preparing now — there isn't a moment to lose.

Further Research          

National Geographic has a good overview of what's happening with oil. I have another primer located here with links to good videos.

To get a feel for the economic decline we're about to experience, see my blog entry on that topic. I cover some of the most important papers that examine the relationship between oil and the economy.

For excellent, in-depth discussion about oil, see The Oil Drum. To get to the gold mine of information there, use the Best of The Oil Drum Index that I maintain here.

Daily updates of the world of energy are always at Energy Bulletin.

I am greatly indebted to the wonderful contributors and commenters at The Oil Drum and to Richard Heinberg (author of The Party's Over) and all the peak oil educators, from Dr. Hubbert to Dr. Colin Campbell, for opening my eyes to Energy Descent. I'd also like to acknowledge the courage of Dr. Hirsch, Dr. Bezdek and Dr. Wendling in releasing their landmark 2005 paper on peak oil mitigation when it was unfashionable to say that world oil production has a limit.