Half a Tank: The Impending Arrival of Peak Oil

by Mark Floegel

Simple lessons are not necessarily easy to learn. For example: oil is a non-renewable and limited resource. Students learn this in grade school, but people in the United States got their first real instruction during the 1973 oil embargo, when Middle Eastern nations restricted the flow of petroleum in response to U.S. military support for Israel. A second lesson was delivered during the 1979 Iranian revolution, when that country’s internal turmoil temporarily disrupted its oil output.

Sudden hikes in the price of gas and the resulting recession in the early 1980s made it clear the world had begun to change. Fuel-efficient cars, many of Japanese design, appeared on roadways supposedly owned by what were then called “the Big Three auto makers.” Congress imposed corporate average fuel efficiency standards in 1975, northern residents dialed back thermostats in winter and President Jimmy Carter installed solar panels on the White House roof.

While the world energy landscape is more complicated than “oil is non-renewable,” it’s not that much more complicated. The other key factor is also a staple of grade-school economics: the law of supply and demand. Mideast political crises passed, which increased supply; demand was reduced by domestic fuel-efficiency programs. The price of oil dropped, the recession ended and Ronald Reagan yanked the solar panels off the White House roof. (They wound up heating water for a dining hall at Unity College in Maine.)

Oil prices began ripping the roof off again in summer 2005, and that roller coaster is still at full velocity. If the 1970s oil crises were a glimpse of the future, the future may be here.

Peak Oil

The life of an oil field’s production can be plotted on a curve. The first oil comes from the ground easily. Many oil fields don’t even need to be pumped initially; the pressure of the field will force the oil to the surface through any hole poked into it. The cost of obtaining the oil is almost zero. Later, pump jacks need to be installed or water is pumped into the field to keep pressure up. As time passes, the field produces less oil and the cost per barrel rises until further production is unfeasible. Production curves for these fields are shaped like parabolas; production rises steeply, peaks and falls as quickly as it rose.

In 1956, when the United States produced 2.6 billion barrels of oil, M. King Hubbert, a Shell Oil petro-geologist, extrapolated a typical field-production curve to assess crude oil production for the United States as a whole. Putting down his slide rule, he predicted that the production of U.S. crude would peak in the early 1970s. It was a bold prediction, since many of his colleagues thought new discoveries and improved recovery techniques would keep oil yields growing long after that date.

U.S. oil production did peak in 1970, with 3.5 billion barrels pumped. Production then began to fall, but because production and consumption trends are only clear in hindsight, the peaking of U.S. production was not an accepted fact for several years after. In 2005, according to the federal Energy Information Administration (EIA), domestic production was 1.8 billion barrels, about as much as 1947.

Given the state of petroleum geology and economics, predicting the peak (and eventual end) of global oil production should be a matter of a few simple equations. It is in the interest of oil companies and oil-producing nations, however, to keep hidden the true state of oil reserves. On one hand, oil producers want to foster confidence in their supplies and discourage competing sources of energy. On the other hand, the same interests want to deliver the message that oil is sufficiently scarce to justify continuous price hikes. A nation or corporation can hide how much it has on hand, but how much oil it brings to market is a public fact. Sooner or later, the price of oil will rise higher than before and the usual suspects of the oil world won’t increase production, because they can’t. Then it will be clear that the world has passed the peak.

This arena of doubt is the stage for “peak oil” theorists, who believe the global peak is at hand, or perhaps has already occurred. In August 2004, Ken Deffeyes, geologist, Hubbert acolyte and professor emeritus at Princeton University, told National Public Radio’s Steve Inskeep that global oil production would peak around Thanksgiving, 2005. (He later amended that to mid-December 2005.) Deffeyes was wrong, apparently. The EIA reports daily oil production in the third quarter of 2006 was higher (by 170,000 barrels) than the highest quarter of 2005.

A stouter buttress of peak oil theory is “Peaking of World Oil Production: Impacts, Mitigation and Risk Management,” commonly called “the Hirsch report” after its principle author, Robert Hirsch. Commissioned from defense contractor SAIC by the Department of Energy, the report polled a dozen experts — Deffeyes among them — on global oil’s expected peak. Predictions ran from almost immediately to beyond the horizon.

The thrust of the Hirsch report is that an oil peak will occur at some point. The sooner society recognizes this peak and energy diversification is realized, the less severe the economic effects. The report’s authors estimate 20 years of preparation are needed to fully mitigate the effects of an oil peak. Of the 12 experts polled, only one — energy economist M.C. Lynch — predicted the peak is more than 20 years in the future.

Since the February 2005 release of the Hirsch report, two events have underlined suspicions of an imminent oil peak. In November 2005, the Kuwaiti oil ministry announced that the Burgan oil field — the second largest in the world — had peaked at 1.7 million barrels per day. This announcement came years earlier — and hundreds of thousands of barrels lower — than expected by the oil industry.

A month later, the New York Times reported Saudi Arabia was backing away from its traditional role as the world’s swing oil producer. (A swing producer is one with substantial supplies of a given commodity on hand. Swing producers stabilize prices by ramping up production in times of scarcity and scaling back in times of glut.) This news came not only on the heels of the Burgan peak announcement, but shortly after energy investment banker Matthew Simmons published Twilight in the Desert, a book accusing the Saudis of having far fewer oil reserves than the kingdom claimed. Simmons sees Saudi reluctance to continue its swing producer role as a tacit admission that his suspicions are correct.

Destroying Demand

That’s a sketch of what is known — and not known — about the supply side. Demand is constantly increasing. Despite the introduction of conservation and efficiency measures in some parts, rich nations continue to use more oil each year. Developing nations are increasing oil use at a much higher rate. From 2000 to 2005, oil consumption in the United States and Japan grew by 1.5 percent each year; in China, oil consumption grew by 8.5 percent per year.

Even if world oil production has not yet reached its peak, but demand grows faster than supply increases can keep up, the result will be an economic state that mimics post-peak oil. The Hirsch report contains an augury of this. One table displays additional oil reserves as a function of increasing demand. It shows excess capacity began to decline in 1987. In 2002, that excess oil production, the world’s “oil cushion,” averaged over five million barrels per day. By 2006, excess production was down to one million barrels per day, according to the EIA.

While the reports show oil production continues to increase, the rate of increase is beginning to slow. The EIA reports oil supplies increased by an average of 2.61 million barrels per day in 2003. In 2004, supplies increased by 3.43 million barrels per day and in 2005, oil supplies increased by 1.56 million barrels per day. The 2006 figures show the oil supply increased by a distressingly small average of 30,000 barrels per day.

The news gets worse. The easy-to-access, desirable oil was accessed first. “Light and sweet” are the adjectives used to describe the best crude oil. The terms mean the oil is relatively free of impurities and easy to refine into gasoline, kerosene, jet fuel and other petroleum products. Light, sweet crude oil was often found in subterranean pools not too far below the surface of the ground and was easy to pump out, often rising to the surface under its own pressure.

Even those who believe the global oil peak is many years away agree easily accessed, light, sweet crude is substantially gone. Indeed, there are a number of ways in which society can continue with a “business-almost-as-usual” scenario for some time, but the costs, both economic and environmental, will be steep. Rising prices means oil companies are able to afford injecting steam into old wells to increase their output; how long that increased output can be maintained remains to be seen. Much of the petroleum remaining underground tends to be heavy (containing petroleum waxes, which make the oil harder to pump) and sour (meaning high in sulfur and other contaminants). What is not heavy, sour crude oil may be trapped in shale — which must be fractured through hydraulic pressure in the mineral formation, an added cost — or embedded in “tar sands.”

Since 2003, the price of oil has made it economically feasible to mine oil from tar sands. If one counts tar sand oil, Canada has the second-largest reserve of oil in the world, after Saudi Arabia’s. It covers an area the size of Maryland and Virginia combined. Tar sand strip mines are already being operated near Fort McMurray, Alberta, where oversized machines scoop the sand for processing. The refining process is nothing John D. Rockefeller would recognize. To obtain one barrel of oil, four tons of soil are steamed in two to four barrels of fresh water (removed from local rivers), using substantial amounts of natural gas to heat the process. The environmental result is a devastated landscape, horribly polluted water and added emissions of greenhouses gases into the atmosphere — even before the oil is used for transportation or heating.

Supply-and-demand theory holds that if the price for a commodity rises too high, consumers find a way to “destroy demand,” by reducing their consumption of the commodity, either by doing without the commodity or finding ways to use less of it.

As the price of gas rises from three to four to five dollars per gallon, sales of gas-stingy vehicles such as the Toyota Prius will rise, as will demand for a supply of “plug-in hybrids.” Plug-ins can be charged with electricity and only resort to gasoline engines when their electrical charges have been spent. Hybrid technologies (although not plug-in hybrids) are currently on the market for vehicles from compact passenger sedans to SUVs to delivery trucks to 18-wheel semi-trailers. Mass transit, light and inter-city rail will likely surge.

The Replacements

As the price of oil soars, a market opens for potential “replacement fuels.” Vegetable-based ethanol has received much attention, because it can be mixed with gasoline and burns cleaner than oil-based fuels. Ethanol in the United States is made from corn, which makes it popular in politically important farm states like Iowa.

Unfortunately, corn ethanol is not particularly efficient as a fuel, so gas mileage suffers. Also, it is unclear how economically competitive corn ethanol will be if the price of petroleum-based pesticides (used to grow the corn) rises in a post-peak scenario. More efficient ethanol can be made from soybeans, sugar cane and palm oil, but like corn, all those crops either remove acreage from food production for fuel production or result in forests being cut to make room for the crops, two undesirable environmental consequences.

Hydrogen is an efficient, clean medium for transferring energy for use in vehicles, but almost all the hydrogen on Earth is bound up in complex molecules; substantial amounts of energy are needed to render hydrogen into a usable state. Some have advocated using nuclear power to accomplish this. The environmental and safety drawbacks of nuclear power are clear.

Replacing the energy used to get around on the ground, however, will be easy, compared to finding new ways to fly through the air. If no alternative to petroleum-derived jet fuel emerges, consumers will likely destroy demand by finding ways to do without flying.

Airlines have already instituted every imaginable fuel-conservation technique — “winglets” on wing tips increase efficiency 3 or 4 percent, ovens have been stripped from galleys, fewer cans of soda are brought on board to save weight. Airlines carried more passengers and cargo in 2005 than in 2000 and did it with 400 million fewer gallons of fuel. Airlines have consolidated routes and cut jobs to save money. The six major airlines cut 167,000 jobs between 2001 and 2006.

With all that efficiency, airfares still rise, because airlines remain at the mercy of fuel costs. As the price of tickets rise, fewer families will fly for vacations and business travelers will replace face-to-face meetings with video conferences. Fewer fliers will probably mean more airline closures, mergers and possibly another federal bailout. It will ultimately mean air travel will be an increasingly rare experience for the average person.

A World Without Oil

When the peak comes, the effects on people’s lives will be profound, because so much of the economy is subsidized by cheap oil. The post-war “green revolution” in agriculture was based on petroleum-based pesticides. Industrial agriculture, dependent on economies of scale, is also dependent on gas-powered farm machinery and mega-farms miles from markets. Fresh fruit in every season, courtesy of growers in Chile and Argentina, relies on low-cost fuel for freighters, as do bargain wines from Australia.

Cheap-oil subsidies reach their apotheosis in Fiji Water. Drawn from an aquifer in Fiji, the water is packaged in cheap, lightweight bottles made of petroleum-derived plastic. The bottles are shipped around the globe to first-world consumers, almost all of whom have sources of drinking water within a few miles of their homes. It is hard to see Fiji Water surviving peak oil.

But much more significant economic activities will be threatened or transformed as well. Besides Fiji Water bottles, cheap, light, disposable plastic packaging further reduces the cost of food and goods. Petroleum-based plastics account for a substantial portion of electronics gear, auto interiors, plumbing, siding, window frames, flooring, furniture, cookware and tools. After the peak, those products will all cost much more, or be made instead from glass, cloth, wood and metal (or potentially non-petroleum-based plastics). Those omnipresent plastic-shelled electronic gizmos are mostly assembled in low-wage nations in East and South Asia, then floated to big-box stores on a wave of cheap oil.

Post-peak life will extract many costs for consumers by raising the price of almost everything, but at the same time, jobs will be created for local production of things that are now grown or made far away. “Relocalization” is what peak oilers call it.

The economics of peak oil are as simple as those of supply and demand. The debate is about when the peak will arrive and how ready the world will be when it does. There is little debate about the one timeline the Hirsch report makes clear: it will take 20 years to adequately prepare society for the passing of the global oil peak.

Industrialized nations of the Northern Hemisphere have lived off cheap oil’s subsidy since the end of the Second World War. It will take two decades to find and perfect the production of alternate fuels, to invent new or relearn old ways of feeding ourselves, to find new or old materials for building tools and essential goods.

For consumers, the law of supply and demand is about choices: how much are we willing to pay? Peak oil theory presents society with a choice. If peak oil theorists are wrong and the peak is well into the future, say 50 years, what advantage is lost by beginning to prepare now? If peak oil theorists are right, even moderately right, and the global peak is, say seven years away, what is risked by failing to prepare?