Introduction to Peak Oil – Collection of Articles

Most of you know that I write for TheOilDrum.com; as “Gail the Actuary.” Some of my articles appear both here and on The Oil Drum; others are only on The Oil Drum.

This is a link to a PDF Collection  of several Peak Oil Articles I wrote, which I call “Introduction to Peak Oil.” These articles include some articles from this site and some from TheOilDrum.com.       

Peak Oil: What’s Ahead?

This is Chapter 3 of my booklet that I am working on with the help of folks from TheOilDrum.com. Chapter 1 can be found here; Chapter 2 can be found here; a PDF of Chapter 3 can be found here.

A number of analysts are saying that peak oil is here now (see Chapter 1, Question 8). Suppose they are correct — what kind of changes can we expect to see in the years ahead?

In this chapter, we will look at the implications of peak oil now — how we can expect oil production to change between now and 2030, and how this decline in production is likely to affect the economy. While there are many who believe that peak oil is still a few years away (the newsletter of the Association for the Study of Peak Oil and Gas of Ireland predicts a peak in 2011, for example), this analysis will assume that the peak year is 2006, with the decline starting in 2007. If this assumption turns out to be a little early, the worst that will happen is that we will be a little ahead in our planning.

1. If peak is now, how much of a decline in world oil production can be expected in the next few years?

Figure 1 shows historical world oil production, together with two projections of what the future will bring:

The first of the projections we call the “symmetric” projection. It simply assumes that oil production will decrease in the future in a manner similar to the way that it increased in the past. This method assumes that 2006 is the peak year; 2007 production will be equal to 2005 production; 2008 production will be equal to 2004; and so on. Thus, the future is expected to be a mirror image of the past.

The second projection is what we call the “analyst average” method. Here, we average five projections assuming peak in the 2005 to 2007 period – two made by Ace, one made by Bakhtiari, and two made by Robelius. We have adjusted all of the projections to a “total liquids” basis for this comparison (that is, including ethanol and other liquid fuels that are similar to oil), so that they are comparable to each other and to the historical data.

Figure 1 shows that the projection methods produce fairly similar results. Both methods show production declining fairly rapidly:

• At 2010 – Symmetric: Minus 9%; Analysts Average: Minus 1%
• At 2020 – Symmetric: Minus 21%; Analysts Average: Minus 23%
• At 2030 – Symmetric: Minus 31%; Analysts Average; Minus 42%

2. How likely is it that future production will follow a pattern similar to Figure 1?

The forecasts shown are only rough approximations. Actual production could be higher, especially if there is a major technology breakthrough. Such breakthroughs take a long time to widely implement –an average of 16 years, according to a recent report by the National Petroleum Council–so the benefit occurs fairly slowly. Another possibility for increased production is an increase in an alternative fuel, such as coal-to-liquid. Such an increase might make the decline somewhat less steep.

There is also a significant risk that future production will be lower than indicated. Social unrest can be a problem in countries with declining production, leading to pipeline attacks. Oil fields may not be developed because their owners lack the necessary funds for investment or the technology required to develop the fields. Some countries may choose to limit production, so as to save oil for later. Also, there is some evidence that newer technology may keep production in a field high until close to the end, then suddenly drop off. If this phenomenon is not adequately reflected in the projections, the estimates of future production may prove to be too high.

3. It seems like it is really the amount of oil per person that makes a difference. What kind of change in oil production is expected on a per capita basis?

The number of people in the world has been rising at between 1% and 2% per year. A graph of historical and expected future world population based on US Census Department estimates is shown in Figure 2.

If we use the information in Figures 1 and 2 to calculate oil production per person, the result is as shown in Figure 3.

On a per capita basis, the amount of oil produced has been approximately level, at about 4.6 barrels per person, between 1982 and 2006. The forecasts show that the amount of oil per person is expected to decrease to approximately 2.0 to 2.5 barrels per person, by 2030.

4. Does a decrease in per capita oil production really make much difference? I have heard oil represents only a tiny fraction of world revenue.

There is a surprisingly close relationship between the amount of oil consumed and a country’s standard of living. Figure 4 shows a comparison of current per capita oil consumption, for selected countries.

Of the countries shown, the United States has the highest consumption, at approximately 25 barrels per person per year. (A barrel is 42 gallons, so 25 barrels a year is 1,050 gallons, or 2.9 gallons per day). Canada is close behind, with about 24 barrels. Germany and the United Kingdom are at a level roughly half of that of the United States, partly because they use more public transportation and partly because they drive smaller cars. Mexico and Russia both have per capita consumption of about 7. Note that this is still above the world-wide average per capita consumption of 4.6, from Figure 3. China and India have the lowest per capita consumption of the countries shown – approximately 2 barrels a year for China and 1 barrel a year for India.

Based on this comparison, there is a huge difference among countries in the amount of oil used. Figure 4 also shows a breakdown of US oil between US-produced and imported. If we consider only US-produced oil, oil production of the United States is about 10 barrels per person per year – close to the level currently used by Germany and the United Kingdom.

5. If world oil production decreases as shown in Figures 1 and 3, what impact will this have on the amount of oil the US consumes?

The US currently imports about 60% of its oil supply. The big question with respect to future US oil supply is how much oil we will continue to import in the future, when world supply begins to decline. Figure 5 shows one possible outcome, on a per capita basis.

On Figure 5, we show a a hypothetical situation in which US oil imports drop about 10% by 2010, then drop to about half of the current level by 2020 and disappear all together by 2030. These estimates are not much more than guesses. There are a lot of uncertainties about future imports:

• Will a free market in oil continue the way it does today, when demand is much greater than supply?

• Will oil-producing nations keep a disproportionate share of the oil for themselves and their allies?

• Will the US insist on importing enough oil to fuel its SUVs, when some people are literally starving to death, because their country cannot afford oil for tractors and power plants?

We show a worst case scenario for 2030, with imports disappearing entirely. (If imports continue, oil availability in 2030 is likely to be higher). If imports disappear, a rough estimate is that US oil production will be about 5 barrels per person per year in 2030– a little lower than the current level of 7 for Mexico and Russia. Efficiency advances and other mitigation efforts will presumably provide some benefit, so that the standard of living might be similar to, or somewhat higher than, the standard of living of Mexico and Russia today. The 5 barrels per person per year in 2030 is approximately equal to the US’s oil consumption in 1920 — a very different world than today.

6. Is the decline in availability of oil the only problem the world is likely to face in the years ahead?

No. With all of the years of growth in population and economies, we are reaching limits in many respects.

• Climate change As the result of man’s activities, and in particular the growing use of fossil fuels, the world temperature is rising. Many are now saying that the use of fossil fuel should be limited – particularly coal. In North America, coal is often thought of as a possible substitute for oil, because it is in reasonably good supply and the technology for coal-to-liquids exists. Climate change issues make this substitution more questionable.

• Metal shortages Quite a number of metals are now in increasingly short supply – including copper, platinum, and uranium. Some have suggested that uranium shortages may limit nuclear expansion capabilities, but this is disputed by others.

• North American natural gas A shortage of natural gas in North America starting in a few years appears to be a significant possibility. Natural gas from conventional sources is in increasingly short supply. Gas from shale, which is a major “unconventional” source, is looking increasingly non-economic. Liquified natural gas (LNG) from overseas is sometimes thought to be a substitute, but a lack of investment in overseas facilities to process LNG is likely to limit its availability.

• World food supply and fresh water World food supply is under increasing pressure from competition from biofuels, shortages of fresh water for irrigation, crop failures due to climate change, increasing soil degradation and growing world population. Inadequate fresh water is a serious issue in its own right.

7. What are the immediate impacts of an oil shortage expected to be?

As one might expect, an oil shortage is likely to result in higher prices of goods that contain oil or use oil in their processing. Gasoline, diesel fuel, and residential heating fuel will of course be higher priced. Food will also be higher priced, because a considerable amount of oil is used in growing the food, processing it, and transporting it to market. Other types of energy are likely to rise in cost as well, as people shift to alternative fuels. The inflation rate is likely to rise.

While it is not as obvious, It is also likely that there will be actual “outages” of some oil-related products. Gasoline stations may be without gasoline in some areas, particularly when a nearby refinery is temporarily not available because of a storm or unplanned maintenance. Residential heating oil may be difficult to find in some locations. Asphalt may not be available for paving roads. We are already starting to see a few situations like these, because supplies are stretched tight.

If gasoline or another product is temporarily unavailable, there are likely to be indirect impacts as well. Schools may close because diesel is unavailable for buses, and factories may close for lack of a particular part. Liebig’s Law of the Minimum says that a process is limited by its least available resource. If oil is not available, even temporarily, economic activity can be seriously impacted.

Some areas that are likely to first feel the impacts of oil shortages are

• Commercial airline flights – Cost of fuel and higher debt costs will be a problem
• Food imported by air – Demand will decline because of much-higher cost
• SUV manufacturers – Demand for large cars will decline precipitously
• Third world countries – These countries are already being priced out of the oil market

8. What is the impact of oil shortages on the financial markets likely to be?

Strange as it may seem, some of the biggest and most immediate impacts of oil shortages are likely to affect financial markets:

• End of the growth paradigm. Economic markets now expect continued growth and expansion. With declining supplies of oil and other necessary resources, this expectation will need to change to a steady state, or even to a planned decline.

• Declining credit availability. Debt is provided with the expectation that an individual’s or organization’s income will grow, or at least stay level in the years ahead. If this assumption no longer holds, a shift from the very loose credit standards seen in recent years to extremely tight credit seems likely. A recession or depression is likely to ensue.

• Declining stock prices. The value of stocks reflects the expected future earnings of the company. If these earnings are expected to stop growing, and perhaps shrink, the value of the stock can be expected to decline.

• Deflation and/or Inflation. A reduced supply of oil may lead to inflation, as existing monetary supplies “chase” fewer and fewer goods. Also, countries may adjust monetary policies to encourage inflation, if it becomes too difficult to pay off debt in a declining economy. There may also be huge deflationary pressures, as the value of stocks and other investments decline, debt becomes less available, and the economy shrinks.

• Reduced interest in insurance and other financial products. Volatility in monetary supply, declining values of stocks, and problems with the debt markets will all make insurance and other financial products less attractive.

• Declining globalization Declining living standards in third world countries, declining availability of commercial airline flights, increasing cost of global transportation, and increasing volatility of currencies are all likely to act to reduce globalization.

9. What types of jobs are likely to see growth in the years ahead?

• Small businesses, selling goods close to the customer.

• Recycling of all kinds, including clothing and parts from no-longer-wanted buildings.

• Remodeling homes to make them more energy efficient and to accommodate more people in the same space.

• Food production will require more workers than the few farmers we have today. Some may be more like gardeners.

• Energy related jobs – As energy becomes more and more difficult to obtain, a larger and larger share of workers will need to work in this field.

• Scientist and engineers – Needed to develop more energy-efficient approaches. In agriculture, to develop approaches requiring less energy and less fertilizer, pesticides, and herbicides. In manufacturing, to design factories in this country, to replace factories making goods which can no longer be imported from oversees.

• Manual laborers – As energy becomes more and more expensive, manual labor becomes a more attractive alternative.

10. What are some of the challenges in the years ahead expected to be?

• How do we adapt the transportation system to the new lower supply? Increased fuel efficiency standards for vehicles are unlikely to be enough by themselves. What else can be done without excessive cost– car pooling? bicycles for short trips? expansion of public transportation programs? more use of distance learning and work-at-home programs? Does it make sense to plan for battery operated vehicles?

• How do we plan for a declining economy? Companies will not want to build a factory, if they know that it will need to be abandoned in ten years for lack of fuel. Oil companies will not want to build pipelines, if they know they can only be used for a short time.

• How do we deal with greatly reduced financial services? If mortgages become unavailable, how do we deal with home ownership? If loans are unavailable, how do businesses plan new factories?

• How do we find adequate resources (both capital and physical resources) to handle all of the investment that is needed in infrastructure? The only resources we have available are those we (1) mine, grow, or otherwise produce; (2) recycle; or (3) import. These resources are needed for other uses as well, including transportation and food.

• How do we find substitutes for the many chemical uses of oil – textiles, building materials, pharmaceuticals? Or do we give priority to oil for these uses?

• How do we protect the food supply? Should farmers be given special access to fuel, through some sort of rationing program? Should people be encouraged to start gardens, to supplement the food supply? How should we train people in low-energy agricultural techniques? Will it be necessary to break up large farms into units that are manageable with less energy?

• How can we avoid future shortages that are likely to have wide-ranging effects? For example, some people are concerned that we may not continue to have enough asphalt to maintain roads. Is this really a problem, and how can this be avoided? How can we circumvent shortages of metals needed to make cars and other consumer goods?

• Resources are unevenly divided. People will want to move to areas with greater resources. How do we deal with the conflict that may ensue? Do we forbid immigration all together? How do we keep countries from fighting over limited resources?

Links by Question

Introduction -1: Chapter 1, Question 8
http://www.theoildrum.com/node/2743

Introduction -2: July 2007 Newsletter, Association for the Study of Peak Oil and Gas-Ireland
http://www.aspo-ireland.org/contentFiles/newsletterPDFs/newsletter79_200707.pdf

Q1-1: Updated World Forecasts, Including Saudi Arabia by Ace, July 19, 2007
http://www.theoildrum.com/node/2716

Q1-2: The World Oil Production Capacity Model by Samsam Bakhtiari, December 10, 2003 http://www.sfu.ca/%7Easamsamb/conference/WOCAP.htm

Q1-3: Giant Oil Fields – The Highway to Oil: Giant Oil Fields and their Importance for Future Oil Production by Frederik Robelius, Uppsala University, March 2007
“http://publications.uu.se/abstract.xsql?dbid=7625

Q2: Facing Hard Truths about Energy by National Petroleum Council, July 18, 2007
http://www.npc.org/Facing_Hard_Truths-71807.pdf

Q5: Net Oil Exports and the Iron Triangle by Jeffrey J. Brown, July 13, 2007
http://www.theoildrum.com/node/2767

Q6-1: Intergovernmental Panel on Climate Change – Mitigation of Climate Change, 2007
http://www.mnp.nl/ipcc/pages_media/AR4-chapters.htm

Q6-2: Measure of Metal Supply Finds Shortage by David Biello, Scientific American, January 17, 2006
http://www.sciam.com/article.cfm?articleID=000CEA15-3272-13C8-9BFE83414B7FFE87

Q6-3: Carmakers gear up for the next shortage – platinum, The Mining News, July 6, 2005
http://www.theminingnews.org/news.cfm?newsID=800

Q6-4: Lack of fuel may limit U.S. nuclear power expansion, Massachusetts institute of Technology News Office, March 21, 2007
http://web.mit.edu/newsoffice/2007/fuel-supply.html

Q6-5: Is Nuclear Power a Viable Option for Our Energy Needs? by Martin Sevior, March 1, 2007
http://www.theoildrum.com/node/2323

Q6-6: A Natural Gas Crisis Coming? by Dave Russum, July 21, 2007
http://languageinstinct.blogspot.com/2007/07/natural-gas-crisis-coming_21.html

Q6-7: Facing Hard Truths about Energy by National Petroleum Council, July 18, 2007
http://www.npc.org/Facing_Hard_Truths-71807.pdf

Q6-8: Plank Road fever and the Barnett Shale by Arthur Berman, World Oil Magazine, April 2007
http://worldoil.com/magazine/MAGAZINE_DETAIL.asp?ART_ID=3171&MONTH_YEAR=Apr-2007

Q6-9: Investing in LNG Projects, Dan Amoss, Whiskey and Gunpowder, July 11, 2007
http://www.whiskeyandgunpowder.com/Archives/2007/20070711.html

Q6-10: Limits to Growth: the 30 Year Update by Donella Meadows, Jorgen Randers, and Dennis Meadows, Chelsea Green (June 1, 2004)
http://www.amazon.com/Limits-Growth-Donella-H-Meadows/dp/193149858X/ref=sr_1_1/103-2191911-5834223?ie=UTF8&s=books&qid=1186453612&sr=8-1

Q6-11: Water Tables Falling and Rivers Running Dry by Lester Brown, July 24, 2007
http://www.earth-policy.org/Books/Seg/PB2ch03_ss2.htm

Q6-12: Australia’s epic drought: The situation is grim by Kathy Marks in The Independent, April 20, 2007
http://news.independent.co.uk/world/australasia/article2465960.ece

Q6-13: Soil Degradation: A Threat to Developing-Country Food Security by 2020? by Sara J. Scherr, Food, Agriculture, and the Environment Discussion Paper 27, International Food Policy Research Institute, Washington D. C., February, 1999
http://www.ifpri.org/2020/dp/dp27.pdf

Q7: Liebig’s law of the minimum from Wikipedia
http://en.wikipedia.org/wiki/Liebig’s_law_of_the_minimum

Is This a False Alarm?

This is Chapter 2 of a booklet I am writing with assistance from folks at TheOilDrum.com.

Chapter 2: Is This a False Alarm?

As we look at the answers to these questions, we will see that the production decline discussed in Chapter 1: What Is Peak Oil? appears to be nearly immediate. Available methods for offsetting this decline appear to be too little, too late. This time the alarm is real.

1. It seems like people thought we were running out of oil in the 1970s, and then all of our problems went away. Why is the situation different now?

Let’s look again at the graph of oil production for the US-48 states, Alaska, and the North Sea:

When US oil production began decreasing about 1970, there were still several sources of oil that could be ramped up:

• Saudi oil production could be increased, in a very short time frame.
• Alaskan production could be ramped up, once the pipeline was finished
• North Sea production could be started

Now we have reached the point where both Alaskan and North Sea production are declining. Saudi production also is declining, and there is suspicion that this is for geological reasons as well.

Discoveries in recent years have been mostly small fields or have been in places where oil is very difficult to obtain. In either of these situations, huge expense is required for very modest payback. We are running out of reasonable places to drill more wells.

2. What is the situation with current world oil production? Are major oil-producing regions having problems with production?

Six out of seven of the major oil producing areas are either reporting declining production, or have reported problems that are expected to lead to declining production in the near future. These six areas account for nearly half of world oil production. There are many other smaller areas with declining production as well. Thus, it appears that peak oil is very near at hand, and that large production increases from new sources will be needed in the next one to four years to prevent peak oil.

Based on data of the US Energy Information Administration, the largest oil producing countries / areas in 2006 were

• Russia – Increasing production, but future problems expected (9,247,000 barrels per day)
• Saudi Arabia – Declining production (9,152,000)
• United States – Long-term declining production (5,136,000)
• Iran – Declining production (4,028,000)
• China – Slight increase in production (3,686,000)
• Mexico – Largest oil field peaked in 2006 (3,256,000)
• North Sea (Norway, Great Britain) – Declining production (4,343,000)

Saudi Arabia used to be the world’s largest oil producer, but its production has been declining since late 2005, so it is now second to Russia. Its production decline is supposedly voluntary, but analyses such as this one and this one suggest that there is a geological basis to its decline.

Russia is now the world’s largest oil producer. The fact that its production has been increasing is one of the reasons we are not yet in deep decline. Russia’s Alfa Bank is now warning that “production stagnation is unavoidable” reflecting “a higher proportion of water in the declining output”, so it appears that this source of increase will be disappearing soon.

Mexico’s production is now declining because of the decline in its largest field, Cantarell. The one country not included as having production problems is China. Even this classification is borderline. Oil production in China for the first three months of 2007 increased by only 0.3% over the corresponding period a year ago–hardly enough to matter.

With six of the seven major oil-producing areas having production issues of one type or another, a huge amount of oil from new sources is needed very quickly if worldwide production is to continue to increase. This oil is needed in a short time-frame — the next one to four years. Production later will help mitigate the decline in production but is unlikely to prevent peak oil.

3. If we really want more oil, can’t we just increase production in the areas where we have been drilling? I’ve heard that there is still quite a bit of oil left in the ground when we finish drilling.

Yes, there is still quite a of bit oil left in the ground – generally at least 50%, and sometimes as much as 90%, of the oil originally in place. But wanting to get more oil out doesn’t seem to have a big impact. This is a graph from a report prepared for the US Department of Energy by Robert Hirsch, Roger Bezdek, and Robert Wendling in 2005. It shows that US energy oil production in the lower 48 states continued to decline between 1970 and 2004, regardless of external events.

4. Won’t higher prices result in greater production?

This is another graph from the report mentioned above by Hirsch, Bezdek, and Wendling.

This graph seems to indicate that for US-48, price changes have had very little impact on oil production.

Also, if we look at world oil production in Chapter 1, Figure 3, we see that volumes have been approximately flat over the past two years, even though prices have been in the $60 to $75 per barrel range – very high by historical standards. With these high prices, OPEC has not offered to raise production and, in fact, reduced production targets effective November 2006.

5. Won’t better technology solve our problems?

Given where we are today, it seems unlikely that technology will prevent peak oil. It may help mitigate the down-slope after peak. Some considerations in saying this:

• Technological changes seem to have had relatively little impact on US 48 states production, as shown in the graph in Q4 above.

• Liquid fuel substitutes for oil all have challenges of their own. All are expensive using today’s technologies and are expected to be slow to scale up. Biofuels tend to be very land intensive; coal to liquid has serious climate change issues.

• Technological advances are having some benefit (for example, deepwater drilling), and this is reflected in the numbers we are seeing. We need much, much more, however.

• If a major technological advance is made, such as inventing a way to extract significantly more of the oil that has been left behind, it will almost certainly take several years to produce the new equipment to implement the solution widely. Because of the likely timing of peak oil, such a new solution is much more likely to affect the down-slope after peak, than to prevent it. If the technological advance is significant enough, it is possible that it will permit oil production to increase again at some point in the future.

6. How about the Canadian oil sands? I’ve heard that production may triple by 2020.

While we hear a lot about the oil sands, the amount of oil they produce is not all that large. In 1997, oil sands accounted for 0.8% of world production. By 2005, production had grown to just under 1 million barrels per day, or 1.2% of world production. Even if production tripled, it would still be small compared to what is needed.

One factor impeding growth is the fact that current production methods require large amounts of natural gas, and this is in short supply. One idea under consideration is to build nuclear plants – eight would be required if production were to scale up to 4 million barrels a day. Given the time and expense of building nuclear plants, development is likely to take several years.

7. How about oil shale in the western United States? I have heard that there is a huge amount of this available.

Extraction of oil shale appears to be a very slow and expensive process. The methods under consideration require large amounts of energy plus a lot of water. In the West, the shortage of water is likely to be a major issue, even if the required energy can be obtained by building nuclear power plants, or by some other approach. At this point, no one is able to produce oil from oil shale in commercial quantities. It seems likely that it will take many years before even the level of production of the Canadian oil sands can be achieved.

8. How about the Jack 2 field? Newspaper articles in September 2006 seemed to say it would solve a lot of our problems.

The Jack 2 field is located in a very difficult-to-service location, five miles below the surface of the Gulf of Mexico and 175 miles from the Louisiana coast. It represents, at best, a small contribution to the oil needed to prevent a decline in world production. Newspaper production estimates of 3 billion to 15 billion barrels are for the whole region (rather than just Jack 2) and include natural gas as well as oil. If the estimated 3 to 15 billion barrels is actually oil, rather than mostly natural gas, it corresponds to 5 months to 2 years’ oil usage by the US.

It is not yet clear that production will be economically feasible — more appraisal wells are needed, and new equipment will need to be designed and built to handle oil in such a deep water location. If production is possible, it will almost certainly come too late to prevent peak oil. The cost of oil from such a location will also be extremely high, considering the cost of all the special equipment and the cost of insurance against hurricane damage in such a vulnerable location.

9. How about drilling in the Arctic National Wildlife Refuge (ANWR) in Alaska?

According to Wikipedia, the US Department of Interior under Gale Norton estimated that ANWR contained 10.4 billion barrels of oil, and that the maximum production from ANWR would be 1.4 million barrels a day. The US currently uses about 7.5 billion barrels of oil a year, so ANWR represents the equivalent of 17 months oil usage by the United States. The actual production would be spread out over a long period – at least ten years, but not starting until several years after work is begun. Maximum production of 1.4 million barrels would equate to about 7% of current US oil usage (or about 1.4% of world oil production).

Thus ANWR’s contribution is likely to be small and come after peak has arrived.

10. How about drilling on the outer continental shelf around the United States? I understand that there is supposed to be quite a lot of oil there.

Based on this article from TheOilDrum.com, the Outer Continental Shelf (OCS) seems unlikely to contribute much oil for many years, because of the long lead times required in deep water locations. Special equipment will be needed, which will need to be designed and built. Thus, nearly all production is likely to occur after peak oil arrives.

The amount of oil available on the OCS is very uncertain. The current estimated amount of 115 billion barrels is the equivalent of about 15 years of US oil usage, or a little less than 4 years of world oil usage. It is not clear how much of this can be economically produced – production is expected to be very expensive. In some areas, ice cover for part of the year is expected to be a problem.

11. Aren’t there quite a number of countries whose production is declining, simply because they are not investing in sufficient infrastructure and don’t have modern techniques – for example, Iraq, Iran, Venezuela, and Mexico. If the US could help these countries with our techniques, wouldn’t our oil problems be solved?

This would be great, but it is questionable whether it would work:

• The basic issue of peak oil is the fact that large oil fields that need minimal infrastructure are mostly tapped out. The remaining fields are less desirable for a number of reasons — they are very small, are located in deep water or near the arctic, or involve very viscous oil or oil mixed with poisonous chemicals.

• In order to tap these remaining fields, a huge amount of infrastructure is needed. This will be very, very expensive.

• One of the major types of infrastructure needed is drilling rigs. Based on a presentation of Matthew Simmons, the supply of these is limited. Also, many of these are very old, and appear to be near the end of their working lives.

• US oil companies are very small in size compared to the National Oil Companies that are having difficulty developing the fields in question. With the lack of rigs, and the huge investment likely to be required, it is doubtful that our oil companies could do much to help these countries with lagging production, if they wanted. Furthermore, the petroleum engineers that would be needed to oversee such operations are also in very short supply.

• It is doubtful whether these countries would welcome our expertise. As a major purchaser of oil, it would seem to be in our best interest to abide by their preferences.

Links by question:

Q2-1: “International Petroleum Monthly-Oil Production” from US Energy Information Agency
http://www.eia.doe.gov/ipm/supply.html

Q2-2: “Nosedive Toward the Desert” by Stuart Staniford
http://www.theoildrum.com/node/2331

Q2-3: “The Status of North Ghawar” by Stuart Staniford
http://www.theoildrum.com/node/2441

Q2-4: “Alfa Report Sees Trouble Looming in Oil Sector”, Moscow Times, 7/10/2007
http://www.themoscowtimes.com/stories/2007/07/10/042-full.html

Q3: R. Hirsch, R. Bezdek, and R. Wendling, “Peaking of World Oil Production: Impacts, Mitigation, and Risk Management”, for US Department of Energy, February 2005.
http://www.hilltoplancers.org/stories/hirsch0502.pdf

Q6: Nuclear Power for the Oilsands
http://canada.theoildrum.com/node/2572

Q7: Oil Shale and the Future
http://www.theoildrum.com/story/2006/7/6/0472/48972

Q8: Jack-2 and the Lower Tertiary of the Deepwater Gulf of Mexico
http://www.theoildrum.com/story/2006/9/8/11274/83638

Q9: Wikipedia – Arctic Refuge Drilling Controversy
http://en.wikipedia.org/wiki/Arctic_Refuge_drilling_controversy

Q10: Deep Ocean Energy Resources-A Critical Analysis by Dave Cohen
http://www.theoildrum.com/story/2006/7/12/101236/478#more

Q11-1: The Peaking of OffShore Oil and Gas by Matthew Simmons
http://www.simmonsco-intl.com/files/Offshore%20Technology%20Conference%20April%2030,%202007.pdf

Q11-2: “Labour and Skills Crisis Could Stall Oil and Gas Boom” by Booz, Allen & Hamilton
http://www.boozallen.com/media/file/Labour_and_Skills_Crisis.pdf

Link to a PDF of this chapter

Is This a False Alarm?

What Is Peak Oil?

This is Chapter 1 of a Peak Oil Booklet I am working on, with the assistance of folks from TheOilDrum.com.

Chapter 1: What Is Peak Oil?

In this chapter, we discuss some of the basic issues relating to peak oil and the expected worldwide decline in oil production.

1. What is peak oil?

“Peak oil” is the term used to describe the situation when the amount of oil that can be extracted from the earth in a given year begins to decline because geological limitations are reached. Extracting oil becomes more and more difficult, so that costs escalate and the amount of oil produced begins to decline. The term peak oil is generally used to describe a decline in worldwide production, but a similar phenomenon exists for individual countries and other smaller areas.

2. Why would oil production begin to decline? Can’t we extract oil as fast as we want, until it finally runs out, many years from now?

What happens isn’t quite as simple as “running out”. Oil production in an oil field usually starts at a low level and increases as more oil wells are added. Eventually some of the older wells start producing more and more water mixed with the oil, and pressure declines. Oil companies do what they can to maintain production – drill new wells nearby, inject gas or water to maintain pressure, and apply other newer production techniques. Eventually, the proportion of oil in the oil/water mix becomes very low and the cost of extraction becomes very high. When it costs more to produce the oil than the oil is worth, production is abandoned.

On a worldwide basis, the phenomenon of peak oil can be thought of as a crisis in resources needed to produce oil. It’s the size of the tap, not the size of the tank. As we deplete the large, easy-to-produce fields and move to ever-more-difficult fields, it takes more and more oil rigs, more petroleum engineers, and more investment dollars. Eventually we reach a point where we are out of equipment, out of trained personnel, and the investment cost for expanding production becomes prohibitive. When production begins to drop because of all of these pressures, we reach “peak oil”.

3. Aren’t we continuing to discover more and more oil every year?

We are continuing to discover oil, but the quantity of oil discovered is lower now than it was 50 years ago, and much lower than the amount of oil we are now using. A graph of oil discoveries by ten year periods is as shown below:

We often read in the news about finding new fields, but these fields tend to be smaller and harder to reach than those discovered in the past. We are now so concerned about finding oil that even small discoveries are reported as news.

4. Do we have any historical reason to expect that oil production will begin to decline at some point?

When we look at oil production in a given area, production tends to rise until approximately 50% of the oil that will eventually be extracted is gone, and then begins to decline. For example, Figure 1 shows oil production of the 48 states of the United States, of Alaska, and of the North Sea. Production in all these areas increases for a time, and then begins to decrease.

We have now reached the point where oil production is declining, apparently for geological reasons, in the majority of oil-producing countries. It is logical to expect that world oil production will eventually begin to decline.

5. What does world oil production look like?

Figure 3 shows recent world oil production, plus a rough estimate of future demand for oil. The future demand line assumes prices equivalent to those in early 2005 ($50 dollars a barrel for West Texas Intermediate) and an adequate supply of oil. This price level was chosen because it represents the price before the recent stall in production and the resulting escalation in petroleum costs. It also reflects the fact that there are many current reports of oil shortages around the world.

On this graph, a person can see that world oil production was rising fairly steadily, but recently has “stalled out”. Based on data of the United States Energy Information Administration (EIA), oil production for the 2005 to 2007 period is level or drifting slightly downward.

Because of this “stalled out” condition, there is a growing gap between what the world would like for petroleum production and what is actually being produced. At this point, the countries that are suffering a shortfall because the current price is too expensive are mostly third world countries from Africa and Asia. The International Energy Agency (IEA) in June 2007 expressed concern that oil production is not high enough, and wanted Organization of Petroleum Exporting Countries (OPEC) to produce more.

6. Can OPEC raise its production of petroleum?

Many people suspect that the answer to this question may be no. Some publications report that Saudi Arabia is having production difficulties, as are several other OPEC countries (Kuwait, Iran, Nigeria and Venezuela). Saudi Arabia does not admit to any production problems. EIA data indicates declining oil production for Saudi Arabia, even before OPEC production cuts were announced in the fall of 2006.

It is likely that we will learn the truth about OPEC’s ability to raise production this winter. OPEC has its next planned meeting in September. Unless something very unusual happens, there will be a need for significantly higher oil production. OPEC’s actions at that time will tell what the real situation is.

7. Doesn’t OPEC report very large oil reserves? It seems like those high reserves would assure us that OPEC can increase its production at will.

No, the high reserves aren’t all that helpful. First, there are serious doubts about the accuracy of OPEC’s oil reserves. The reserves are not audited numbers. Analyses such as this one suggest that the reserves are likely overstated.

Second, even if OPEC reserves are accurate, the reserves tell us nothing about the flow rate. If the reserves include much very viscous oil, or if there are other production difficulties, it may take years to produce a relatively small flow of oil.

One important piece of detective work regarding Saudi oil reserves was done a couple of years ago. Matthew Simmons analyzed published scientific papers relating to Saudi oil wells and determined that Saudi wells were reaching a serious state of depletion. He documented his findings in the book Twilight in the Desert. This book is now available in paperback, and has been translated into German and Chinese.

8. What is the pattern of world oil production in the next few years expected to look like?

We can’t know for certain, but Figure 4 shows three possible oil production scenarios as dotted lines.

If OPEC production is now falling, it is likely that we are at “peak oil” now, because production for the rest of the world is flat. If we are at peak oil, we might expect future oil production to follow a pattern similar to Scenario 3 (the lowest dotted line, with production falling immediately) or possibly Scenario 2 (the middle dotted line, with production falling after a plateau). Several respected energy industry insiders, including Matthew Simmons, energy investment banker and author of Twilight in the Desert, and Samsam Bakhtiari, retired Iranian oil executive, believe that we are at peak oil now.

Scenario 1 (the top dotted line) shows a scenario in which peak oil is still a few years away. Some scientists believe that this is a more likely scenario. The Newsletter of the Association for the Study of Peak Oil and Gas forecasts peak oil in 2011, four years from now. The PhD thesis of Fredrik Robelius showed that peak oil is expected to occur between 2008 and 2018. Chris Skrebowski, author of the Megaprojects analysis forecasts a worldwide peak in 2011/2012.

9. When was peak oil first predicted?

M. King Hubbert, in 1956, first predicted that US oil production for the 48 states would peak in 1970. This prediction turned out to be correct, to everyone’s surprise. He also predicted a worldwide peak around 2000.

10. Will alternative energy sources be able to make up for the shortfall in petroleum production?

At this point, it seems unlikely that they will make up the shortfall.

On Figure 4, the gap that needs to be filled is the gap between future demand (the top line) and actual future production (something in the vicinity of the dotted lines). Clearly, the sooner oil production begins to drop and the steeper the decline, the bigger the gap that needs to be filled. Even if oil production stays level, there can be a gap because demand continues to increase.

At this point, there does not seem to be any “silver bullet” for replacing lost oil production. Oil is unique in its abundance, its high energy density, and its portability. There do appear to be a number of approaches that may solve small parts of the problem, however. These include:

• ethanol from corn,
• ethanol from sugar (generally imported),
• biodiesel,
• cellulosic ethanol from biomass, and
• coal-to-liquid.

None of these appears to be able to replace more than a small fraction of the oil we use, especially in a short timeframe. In addition, there are other drawbacks — cost, environmental damage, and for coal-to-liquid, climate change issues. Indirect approaches to circumventing the shortage, like using battery operated cars, may be part of the picture as well. If these are used, they will probably need to be phased in slowly, as existing cars are retired. It is likely that conservation will need to be part of the mix.

Links by question:

Q5-1: Canaries in the Coal Mine
http://www.theoildrum.com/node/2749#comment-209910

Q5-2: Click on June 2007 IEA Highlights Report
http://omrpublic.iea.org/archiveresults.asp?formsection=highlights&formdate=2007&Submit=Submit

Q6: Oil Market Under Pressure, Supply Not Able to Counter Demand
http://www.resourceinvestor.com/pebble.asp?relid=33010

Q7-1: “Lies, damned lies and BP statistics” by Euan Mearns
http://europe.theoildrum.com/node/2666

Q7-2: Twilight in the Desert by Matthew Simmons
http://www.amazon.com/Twilight-Desert-Coming-Saudi-Economy/dp/0471790184/ref=pd_bbs_sr_1/103-2191911-5834223?ie=UTF8&s=books&qid=1182286565&sr=8-1

Q8-1: Matt Simmons on Bloomberg: Peak Oil is Now (video)
http://www.theoildrum.com/node/2310

Q8-2: “World Oil Production Capacity Model Suggests Output Peak by 2006-07″ by AMS Bakhtiari
http://www.energybulletin.net/147.html

Q8-3: Association for the Study of Peak Oil and Gas- Ireland Newsletter Shows Projections
http://www.aspo-ireland.org/contentFiles/newsletterPDFs/newsletter79_200707.pdf

Q8-4: PhD Thesis by Frederik Robelius – Giant Oil Fields and Their Importance to Future Production
http://publications.uu.se/theses/abstract.xsql?dbid=7625

Q8-5: “Magaprojects Planned Capacity Listing” by Chris Skrebowski
http://sydneypeakoil.com/downloads/PR_APR06_Megaprojects.pdf

Q8-6: “How close to peak oil are we?” by Chris Skrebowski
http://www.energybulletin.net/30930.html

Q9: Nuclear Energy and the Fossil Fuels by M. Hubbert King, 1956
http://www.hubbertpeak.com/hubbert/1956/1956.pdf

Q10-1: “Corn-Based Ethanol: Is This a Solution?” by Gail Tverberg
http://www.theoildrum.com/node/2615

Q10-2: “Lessons from Brazil” by Robert Rapier
http://www.theoildrum.com/story/2006/5/31/175512/149

Q10-3: “The Myths of Biofuels” Interview with David Fridley (45 minutes)
http://globalpublicmedia.com/the_reality_report_the_myths_of_biofuels

Q10-4: Whither Cellulosic Ethanol?
http://www.theoildrum.com/story/2006/8/15/13634/6716

Q10-5: Coal-to-Liquid Boondoggle
http://www.washingtonpost.com/wp-dyn/content/article/2007/06/17/AR2007061700945.html

PDF of Chapter 1: What is Peak Oil?
What Is Peak Oil?

Speech from 1957 Predicting Peak Oil

Rear Admiral Hyman Rickover gave an amazing speech in 1957 that predicted many of the energy-related issues we are now dealing with. Among other things, the speech talks about

• The relationship between fossil fuels and economic growth.

• The relationship between fossil fuels and military power.

• The fact that oil, natural gas, and coal are expected to peak, and the approximate timeframe.

• The responsibility of Rickover’s generation to tell later generations about the fact that fossil fuels will deplete, so that they can start very early making plans for the difficult transition away from fossil fuels.

Rear Admiral Hyman Rickover is known as the father of the nuclear submarine. He was also instrumental in getting the United States started using nuclear power to generate electricity. He was an advisor to Jimmy Carter, who is known for his interest in renewable energy. The world would no doubt be much different if we had listened to Mr. Rickover’s ideas from more than 50 years ago and acted on them.

This speech was posted in December 2006 on the Energy Bulletin. This speech was made available by the work of two people: Theodore Rockwell, author of The Rickover Effect: How One Man Made a Difference, who had this article in his files, and Rick Lakin, who sought out the article and converted it to digital form.

This is the text of Rear Admiral Hyman Rickover’s May 14, 1957 speech to the Minnesota State Medical Association:

Energy Resources and Our Future

I am honored to be here tonight, though it is no easy thing, I assure you, for a layman to face up to an audience of physicians. A single one of you, sitting behind his desk, can be quite formidable.

My speech has no medical connotations. This may be a relief to you after the solid professional fare you have been absorbing. I should like to discuss a matter which will, I hope, be of interest to you as responsible citizens: the significance of energy resources in the shaping of our future.

We live in what historians may some day call the Fossil Fuel Age. Today coal, oil, and natural gas supply 93% of the world’s energy; water power accounts for only 1%; and the labor of men and domestic animals the remaining 6%. This is a startling reversal of corresponding figures for 1850 – only a century ago. Then fossil fuels supplied 5% of the world’s energy, and men and animals 94%. Five sixths of all the coal, oil, and gas consumed since the beginning of the Fossil Fuel Age has been burned up in the last 55 years.

These fuels have been known to man for more than 3,000 years. In parts of China, coal was used for domestic heating and cooking, and natural gas for lighting as early as 1000 B.C. The Babylonians burned asphalt a thousand years earlier. But these early uses were sporadic and of no economic significance. Fossil fuels did not become a major source of energy until machines running on coal, gas, or oil were invented. Wood, for example, was the most important fuel until 1880 when it was replaced by coal; coal, in turn, has only recently been surpassed by oil in this country.

Once in full swing, fossil fuel consumption has accelerated at phenomenal rates. All the fossil fuels used before 1900 would not last five years at today’s rates of consumption.

Nowhere are these rates higher and growing faster than in the United States. Our country, with only 6% of the world’s population, uses one third of the world’s total energy input; this proportion would be even greater except that we use energy more efficiently than other countries. Each American has at his disposal, each year, energy equivalent to that obtainable from eight tons of coal. This is six times the world’s per capita energy consumption. Though not quite so spectacular, corresponding figures for other highly industrialized countries also show above average consumption figures. The United Kingdom, for example, uses more than three times as much energy as the world average.

With high energy consumption goes a high standard of living. Thus the enormous fossil energy which we in this country control feeds machines which make each of us master of an army of mechanical slaves. Man’s muscle power is rated at 35 watts continuously, or one-twentieth horsepower. Machines therefore furnish every American industrial worker with energy equivalent to that of 244 men, while at least 2,000 men push his automobile along the road, and his family is supplied with 33 faithful household helpers. Each locomotive engineer controls energy equivalent to that of 100,000 men; each jet pilot of 700,000 men. Truly, the humblest American enjoys the services of more slaves than were once owned by the richest nobles, and lives better than most ancient kings. In retrospect, and despite wars, revolutions, and disasters, the hundred years just gone by may well seem like a Golden Age.

Whether this Golden Age will continue depends entirely upon our ability to keep energy supplies in balance with the needs of our growing population. Before I go into this question, let me review briefly the role of energy resources in the rise and fall of civilizations.

Possession of surplus energy is, of course, a requisite for any kind of civilization, for if man possesses merely the energy of his own muscles, he must expend all his strength – mental and physical – to obtain the bare necessities of life.

Surplus energy provides the material foundation for civilized living – a comfortable and tasteful home instead of a bare shelter; attractive clothing instead of mere covering to keep warm; appetizing food instead of anything that suffices to appease hunger. It provides the freedom from toil without which there can be no art, music, literature, or learning. There is no need to belabor the point. What lifted man – one of the weaker mammals – above the animal world was that he could devise, with his brain, ways to increase the energy at his disposal, and use the leisure so gained to cultivate his mind and spirit. Where man must rely solely on the energy of his own body, he can sustain only the most meager existence.

Man’s first step on the ladder of civilization dates from his discovery of fire and his domestication of animals. With these energy resources he was able to build a pastoral culture. To move upward to an agricultural civilization he needed more energy. In the past this was found in the labor of dependent members of large patriarchal families, augmented by slaves obtained through purchase or as war booty. There are some backward communities which to this day depend on this type of energy.

Slave labor was necessary for the city-states and the empires of antiquity; they frequently had slave populations larger than their free citizenry. As long as slaves were abundant and no moral censure attached to their ownership, incentives to search for alternative sources of energy were lacking; this may well have been the single most important reason why engineering advanced very little in ancient times.

A reduction of per capita energy consumption has always in the past led to a decline in civilization and a reversion to a more primitive way of life. For example, exhaustion of wood fuel is believed to have been the primary reason for the fall of the Mayan Civilization on this continent and of the decline of once flourishing civilizations in Asia. India and China once had large forests, as did much of the Middle East. Deforestation not only lessened the energy base but had a further disastrous effect: lacking plant cover, soil washed away, and with soil erosion the nutritional base was reduced as well.

Another cause of declining civilization comes with pressure of population on available land. A point is reached where the land can no longer support both the people and their domestic animals. Horses and mules disappear first. Finally even the versatile water buffalo is displaced by man who is two and one half times as efficient an energy converter as are draft animals. It must always be remembered that while domestic animals and agricultural machines increase productivity per man, maximum productivity per acre is achieved only by intensive manual cultivation.

It is a sobering thought that the impoverished people of Asia, who today seldom go to sleep with their hunger completely satisfied, were once far more civilized and lived much better than the people of the West. And not so very long ago, either. It was the stories brought back by Marco Polo of the marvelous civilization in China which turned Europe’s eyes to the riches of the East, and induced adventurous sailors to brave the high seas in their small vessels searching for a direct route to the fabulous Orient. The “wealth of the Indies” is a phrase still used, but whatever wealth may be there it certainly is not evident in the life of the people today.

Asia failed to keep technological pace with the needs of her growing populations and sank into such poverty that in many places man has become again the primary source of energy, since other energy converters have become too expensive. This must be obvious to the most casual observer. What this means is quite simply a reversion to a more primitive stage of civilization with all that it implies for human dignity and happiness.

Anyone who has watched a sweating Chinese farm worker strain at his heavily laden wheelbarrow, creaking along a cobblestone road, or who has flinched as he drives past an endless procession of human beasts of burden moving to market in Java – the slender women bent under mountainous loads heaped on their heads – anyone who has seen statistics translated into flesh and bone, realizes the degradation of man’s stature when his muscle power becomes the only energy source he can afford. Civilization must wither when human beings are so degraded.

Where slavery represented a major source of energy, its abolition had the immediate effect of reducing energy consumption. Thus when this time-honored institution came under moral censure by Christianity, civilization declined until other sources of energy could be found. Slavery is incompatible with Christian belief in the worth of the humblest individual as a child of God. As Christianity spread through the Roman Empire and masters freed their slaves – in obedience to the teaching of the Church – the energy base of Roman civilization crumbled. This, some historians believe, may have been a major factor in the decline of Rome and the temporary reversion to a more primitive way of life during the Dark Ages. Slavery gradually disappeared throughout the Western world, except in its milder form of serfdom. That it was revived a thousand years later merely shows man’s ability to stifle his conscience – at least for a while – when his economic needs are great. Eventually, even the needs of overseas plantation economies did not suffice to keep alive a practice so deeply repugnant to Western man’s deepest convictions.

It may well be that it was unwillingness to depend on slave labor for their energy needs which turned the minds of medieval Europeans to search for alternate sources of energy, thus sparking the Power Revolution of the Middle Ages which, in turn, paved the way for the Industrial Revolution of the 19th Century. When slavery disappeared in the West engineering advanced. Men began to harness the power of nature by utilizing water and wind as energy sources. The sailing ship, in particular, which replaced the slave-driven galley of antiquity, was vastly improved by medieval shipbuilders and became the first machine enabling man to control large amounts of inanimate energy.

The next important high-energy converter used by Europeans was gunpowder – an energy source far superior to the muscular strength of the strongest bowman or lancer. With ships that could navigate the high seas and arms that could outfire any hand weapon, Europe was now powerful enough to preempt for herself the vast empty areas of the Western Hemisphere into which she poured her surplus populations to build new nations of European stock. With these ships and arms she also gained political control over populous areas in Africa and Asia from which she drew the raw materials needed to speed her industrialization, thus complementing her naval and military dominance with economic and commercial supremacy.

When a low-energy society comes in contact with a high-energy society, the advantage always lies with the latter. The Europeans not only achieved standards of living vastly higher than those of the rest of the world, but they did this while their population was growing at rates far surpassing those of other peoples. In fact, they doubled their share of total world population in the short span of three centuries. From one sixth in 1650, the people of European stock increased to almost one third of total world population by 1950.

Meanwhile much of the rest of the world did not even keep energy sources in balance with population growth. Per capita energy consumption actually diminished in large areas. It is this difference in energy consumption which has resulted in an ever-widening gap between the one-third minority who live in high-energy countries and the two-thirds majority who live in low-energy areas.

These so-called underdeveloped countries are now finding it far more difficult to catch up with the fortunate minority than it was for Europe to initiate transition from low-energy to high-energy consumption. For one thing, their ratio of land to people is much less favorable; for another, they have no outlet for surplus populations to ease the transition since all the empty spaces have already been taken over by people of European stock.

Almost all of today’s low-energy countries have a population density so great that it perpetuates dependence on intensive manual agriculture which alone can yield barely enough food for their people. They do not have enough acreage, per capita, to justify using domestic animals or farm machinery, although better seeds, better soil management, and better hand tools could bring some improvement. A very large part of their working population must nevertheless remain on the land, and this limits the amount of surplus energy that can be produced. Most of these countries must choose between using this small energy surplus to raise their very low standard of living or postpone present rewards for the sake of future gain by investing the surplus in new industries. The choice is difficult because there is no guarantee that today’s denial may not prove to have been in vain. This is so because of the rapidity with which public health measures have reduced mortality rates, resulting in population growth as high or even higher than that of the high-energy nations. Theirs is a bitter choice; it accounts for much of their anti-Western feeling and may well portend a prolonged period of world instability.

How closely energy consumption is related to standards of living may be illustrated by the example of India. Despite intelligent and sustained efforts made since independence, India’s per capita income is still only 20 cents daily; her infant mortality is four times ours; and the life expectance of her people is less than one half that of the industrialized countries of the West. These are ultimate consequences of India’s very low energy consumption: one-fourteenth of world average; one-eightieth of ours.

Ominous, too, is the fact that while world food production increased 9% in the six years from 1945-51, world population increased by 12%. Not only is world population increasing faster than world food production, but unfortunately, increases in food production tend to occur in the already well-fed, high-energy countries rather than in the undernourished, low-energy countries where food is most lacking.

I think no further elaboration is needed to demonstrate the significance of energy resources for our own future. Our civilization rests upon a technological base which requires enormous quantities of fossil fuels. What assurance do we then have that our energy needs will continue to be supplied by fossil fuels: The answer is – in the long run – none.

The earth is finite. Fossil fuels are not renewable. In this respect our energy base differs from that of all earlier civilizations. They could have maintained their energy supply by careful cultivation. We cannot. Fuel that has been burned is gone forever. Fuel is even more evanescent than metals. Metals, too, are non-renewable resources threatened with ultimate extinction, but something can be salvaged from scrap. Fuel leaves no scrap and there is nothing man can do to rebuild exhausted fossil fuel reserves. They were created by solar energy 500 million years ago and took eons to grow to their present volume.

In the face of the basic fact that fossil fuel reserves are finite, the exact length of time these reserves will last is important in only one respect: the longer they last, the more time do we have, to invent ways of living off renewable or substitute energy sources and to adjust our economy to the vast changes which we can expect from such a shift.

Fossil fuels resemble capital in the bank. A prudent and responsible parent will use his capital sparingly in order to pass on to his children as much as possible of his inheritance. A selfish and irresponsible parent will squander it in riotous living and care not one whit how his offspring will fare.

Engineers whose work familiarizes them with energy statistics; far-seeing industrialists who know that energy is the principal factor which must enter into all planning for the future; responsible governments who realize that the well-being of their citizens and the political power of their countries depend on adequate energy supplies – all these have begun to be concerned about energy resources. In this country, especially, many studies have been made in the last few years, seeking to discover accurate information on fossil-fuel reserves and foreseeable fuel needs.

Statistics involving the human factor are, of course, never exact. The size of usable reserves depends on the ability of engineers to improve the efficiency of fuel extraction and use. It also depends on discovery of new methods to obtain energy from inferior resources at costs which can be borne without unduly depressing the standard of living. Estimates of future needs, in turn, rely heavily on population figures which must always allow for a large element of uncertainty, particularly as man reaches a point where he is more and more able to control his own way of life.

Current estimates of fossil fuel reserves vary to an astonishing degree. In part this is because the results differ greatly if cost of extraction is disregarded or if in calculating how long reserves will last, population growth is not taken into consideration; or, equally important, not enough weight is given to increased fuel consumption required to process inferior or substitute metals. We are rapidly approaching the time when exhaustion of better grade metals will force us to turn to poorer grades requiring in most cases greater expenditure of energy per unit of metal.

But the most significant distinction between optimistic and pessimistic fuel reserve statistics is that the optimists generally speak of the immediate future – the next twenty-five years or so – while the pessimists think in terms of a century from now. A century or even two is a short span in the history of a great people. It seems sensible to me to take a long view, even if this involves facing unpleasant facts.

For it is an unpleasant fact that according to our best estimates, total fossil fuel reserves recoverable at not over twice today’s unit cost, are likely to run out at some time between the years 2000 and 2050, if present standards of living and population growth rates are taken into account. Oil and natural gas will disappear first, coal last. There will be coal left in the earth, of course. But it will be so difficult to mine that energy costs would rise to economically intolerable heights, so that it would then become necessary either to discover new energy sources or to lower standards of living drastically.

For more than one hundred years we have stoked ever growing numbers of machines with coal; for fifty years we have pumped gas and oil into our factories, cars, trucks, tractors, ships, planes, and homes without giving a thought to the future. Occasionally the voice of a Cassandra has been raised only to be quickly silenced when a lucky discovery revised estimates of our oil reserves upward, or a new coalfield was found in some remote spot. Fewer such lucky discoveries can be expected in the future, especially in industrialized countries where extensive mapping of resources has been done. Yet the popularizers of scientific news would have us believe that there is no cause for anxiety, that reserves will last thousands of years, and that before they run out science will have produced miracles. Our past history and security have given us the sentimental belief that the things we fear will never really happen – that everything turns out right in the end. But, prudent men will reject these tranquilizers and prefer to face the facts so that they can plan intelligently for the needs of their posterity.

Looking into the future, from the mid-20th Century, we cannot feel overly confident that present high standards of living will of a certainty continue through the next century and beyond. Fossil fuel costs will soon definitely begin to rise as the best and most accessible reserves are exhausted, and more effort will be required to obtain the same energy from remaining reserves. It is likely also that liquid fuel synthesized from coal will be more expensive. Can we feel certain that when economically recoverable fossil fuels are gone science will have learned how to maintain a high standard of living on renewable energy sources?

I believe it would be wise to assume that the principal renewable fuel sources which we can expect to tap before fossil reserves run out will supply only 7 to 15% of future energy needs. The five most important of these renewable sources are wood fuel, farm wastes, wind, water power, and solar heat.

Wood fuel and farm wastes are dubious as substitutes because of growing food requirements to be anticipated. Land is more likely to be used for food production than for tree crops; farm wastes may be more urgently needed to fertilize the soil than to fuel machines.

Wind and water power can furnish only a very small percentage of our energy needs. Moreover, as with solar energy, expensive structures would be required, making use of land and metals which will also be in short supply. Nor would anything we know today justify putting too much reliance on solar energy though it will probably prove feasible for home heating in favorable localities and for cooking in hot countries which lack wood, such as India.

More promising is the outlook for nuclear fuels. These are not, properly speaking, renewable energy sources, at least not in the present state of technology, but their capacity to “breed” and the very high energy output from small quantities of fissionable material, as well as the fact that such materials are relatively abundant, do seem to put nuclear fuels into a separate category from exhaustible fossil fuels. The disposal of radioactive wastes from nuclear power plants is, however, a problem which must be solved before there can be any widespread use of nuclear power.

Another limit in the use of nuclear power is that we do not know today how to employ it otherwise than in large units to produce electricity or to supply heating. Because of its inherent characteristics, nuclear fuel cannot be used directly in small machines, such as cars, trucks, or tractors. It is doubtful that it could in the foreseeable future furnish economical fuel for civilian airplanes or ships, except very large ones. Rather than nuclear locomotives, it might prove advantageous to move trains by electricity produced in nuclear central stations. We are only at the beginning of nuclear technology, so it is difficult to predict what we may expect.

Transportation – the lifeblood of all technically advanced civilizations – seems to be assured, once we have borne the initial high cost of electrifying railroads and replacing buses with streetcars or interurban electric trains. But, unless science can perform the miracle of synthesizing automobile fuel from some energy source as yet unknown or unless trolley wires power electric automobiles on all streets and highways, it will be wise to face up to the possibility of the ultimate disappearance of automobiles, trucks, buses, and tractors. Before all the oil is gone and hydrogenation of coal for synthetic liquid fuels has come to an end, the cost of automotive fuel may have risen to a point where private cars will be too expensive to run and public transportation again becomes a profitable business.

Today the automobile is the most uneconomical user of energy. Its efficiency is 5% compared with 23% for the Diesel-electric railway. It is the most ravenous devourer of fossil fuels, accounting for over half of the total oil consumption in this country. And the oil we use in the United States in one year took nature about 14 million years to create. Curiously, the automobile, which is the greatest single cause of the rapid exhaustion of oil reserves, may eventually be the first fuel consumer to suffer. Reduction in automotive use would necessitate an extraordinarily costly reorganization of the pattern of living in industrialized nations, particularly in the United States. It would seem prudent to bear this in mind in future planning of cities and industrial locations.

Our present known reserves of fissionable materials are many times as large as our net economically recoverable reserves of coal. A point will be reached before this century is over when fossil fuel costs will have risen high enough to make nuclear fuels economically competitive. Before that time comes we shall have to make great efforts to raise our entire body of engineering and scientific knowledge to a higher plateau. We must also induce many more young Americans to become metallurgical and nuclear engineers. Else we shall not have the knowledge or the people to build and run the nuclear power plants which ultimately may have to furnish the major part of our energy needs. If we start to plan now, we may be able to achieve the requisite level of scientific and engineering knowledge before our fossil fuel reserves give out, but the margin of safety is not large. This is also based on the assumption that atomic war can be avoided and that population growth will not exceed that now calculated by demographic experts.

War, of course, cancels all man’s expectations. Even growing world tension just short of war could have far-reaching effects. In this country it might, on the one hand, lead to greater conservation of domestic fuels, to increased oil imports, and to an acceleration in scientific research which might turn up unexpected new energy sources. On the other hand, the resulting armaments race would deplete metal reserves more rapidly, hastening the day when inferior metals must be utilized with consequent greater expenditure of energy. Underdeveloped nations with fossil fuel deposits might be coerced into withholding them from the free world or may themselves decide to retain them for their own future use. The effect on Europe, which depends on coal and oil imports, would be disastrous and we would have to share our own supplies or lose our allies.

Barring atomic war or unexpected changes in the population curve, we can count on an increase in world population from two and one half billion today to four billion in the year 2000; six to eight billion by 2050. The United States is expected to quadruple its population during the 20th Century – from 75 million in 1900 to 300 million in 2000 – and to reach at least 375 million in 2050. This would almost exactly equal India’s present population which she supports on just a little under half of our land area.

It is an awesome thing to contemplate a graph of world population growth from prehistoric times – tens of thousands of years ago – to the day after tomorrow – let us say the year 2000 A.D. If we visualize the population curve as a road which starts at sea level and rises in proportion as world population increases, we should see it stretching endlessly, almost level, for 99% of the time that man has inhabited the earth. In 6000 B.C., when recorded history begins, the road is running at a height of about 70 feet above sea level, which corresponds to a population of 10 million. Seven thousand years later – in 1000 A.D. – the road has reached an elevation of 1,600 feet; the gradation now becomes steeper, and 600 years later the road is 2,900 feet high. During the short span of the next 400 years – from 1600 to 2000 – it suddenly turns sharply upward at an almost perpendicular inclination and goes straight up to an elevation of 29,000 feet – the height of Mt. Everest, the world’s tallest mountain.

In the 8,000 years from the beginning of history to the year 2000 A.D. world population will have grown from 10 million to 4 billion, with 90% of that growth taking place during the last 5% of that period, in 400 years. It took the first 3,000 years of recorded history to accomplish the first doubling of population, 100 years for the last doubling, but the next doubling will require only 50 years. Calculations give us the astonishing estimate that one out of every 20 human beings born into this world is alive today.

The rapidity of population growth has not given us enough time to readjust our thinking. Not much more than a century ago our country – the very spot on which I now stand was a wilderness in which a pioneer could find complete freedom from men and from government. If things became too crowded – if he saw his neighbor’s chimney smoke – he could, and often did, pack up and move west. We began life in 1776 as a nation of less than four million people – spread over a vast continent – with seemingly inexhaustible riches of nature all about. We conserved what was scarce – human labor – and squandered what seemed abundant – natural resources – and we are still doing the same today.

Much of the wilderness which nurtured what is most dynamic in the American character has now been buried under cities, factories and suburban developments where each picture window looks out on nothing more inspiring than the neighbor’s back yard with the smoke of his fire in the wire basket clearly visible.

Life in crowded communities cannot be the same as life on the frontier. We are no longer free, as was the pioneer – to work for our own immediate needs regardless of the future. We are no longer as independent of men and of government as were Americans two or three generations ago. An ever larger share of what we earn must go to solve problems caused by crowded living – bigger governments; bigger city, state, and federal budgets to pay for more public services. Merely to supply us with enough water and to carry away our waste products becomes more difficult and expansive daily. More laws and law enforcement agencies are needed to regulate human relations in urban industrial communities and on crowded highways than in the America of Thomas Jefferson.

Certainly no one likes taxes, but we must become reconciled to larger taxes in the larger America of tomorrow.

I suggest that this is a good time to think soberly about our responsibilities to our descendants – those who will ring out the Fossil Fuel Age. Our greatest responsibility, as parents and as citizens, is to give America’s youngsters the best possible education. We need the best teachers and enough of them to prepare our young people for a future immeasurably more complex than the present, and calling for ever larger numbers of competent and highly trained men and women. This means that we must not delay building more schools, colleges, and playgrounds. It means that we must reconcile ourselves to continuing higher taxes to build up and maintain at decent salaries a greatly enlarged corps of much better trained teachers, even at the cost of denying ourselves such momentary pleasures as buying a bigger new car, or a TV set, or household gadget. We should find – I believe – that these small self-denials would be far more than offset by the benefits they would buy for tomorrow’s America. We might even – if we wanted – give a break to these youngsters by cutting fuel and metal consumption a little here and there so as to provide a safer margin for the necessary adjustments which eventually must be made in a world without fossil fuels.

One final thought I should like to leave with you. High-energy consumption has always been a prerequisite of political power. The tendency is for political power to be concentrated in an ever-smaller number of countries. Ultimately, the nation which control – the largest energy resources will become dominant. If we give thought to the problem of energy resources, if we act wisely and in time to conserve what we have and prepare well for necessary future changes, we shall insure this dominant position for our own country.

Peak Oil Overview – June 2007

The message that “peak oil” may be a problem is now reaching respected publications like Business Week. But how can a person learn more? Information about peak oil is often fragmented, and the quality of the sources is questionable. The purpose of this article is to document some of what is known about peak oil, so that readers have a better framework for understanding our current situation. Many links are provided, so that readers can dig deeper if they like.

1. What is peak oil?

“Peak oil” is the term used to describe the situation when the amount of oil that can be extracted from the earth in a given year begins to decline, because geological limitations are reached. Extracting oil becomes more and more difficult, so that costs escalate and the amount of oil produced begins to decline. The term peak oil generally relates to worldwide production, but a similar phenomenon exists for individual countries and other smaller areas.

2. Why would oil production begin to decline? Can’t we extract oil as fast as we want to, until it finally runs out, many years from now?

What happens isn’t quite as simple as “running out”. Instead of running out, oil gets progressively more difficult to extract. When a well is first drilled, the oil is often under pressure, so comes out quickly with virtually no effort. Later, pressure drops, and it becomes necessary to inject one of several gasses to repressurize the wells. Finally, when even this ceases to keep production up, the remaining oil is pumped out at a slow rate.

Another reason for production tapering off is that oil companies tend to develop the fields which are expected to have the highest return first, and save the smaller fields and fields with more challenging production profiles (such as deep sea oil, very viscous oil, and oil combined with toxic chemicals) until later.

3. Do we have any historical reason to expect that oil production will begin to decline at some point?

When we look at oil production in any given area, the production tends to rise until approximately 50% of the oil that will eventually be extracted is gone, and then begins to decline. For example,
Figure 1 shows oil production of the United States.

A similar pattern holds for North Sea oil production (Figure 2).

We have now reached the point where oil production is declining, apparently for geological reasons, in the majority of oil-producing countries. It logical to expect that world oil production will eventually begin to decline.

4. What does world oil production look like?

Figure 3 shows recent world oil production (blue line), plus a rough estimate of future demand for oil (red line), assuming world oil desired usage continues to grow at 2% per year.

On this graph, a person can see that world oil production was rising fairly steadily, but recently has “stalled out”. Based on data of the United States Energy Information Agency (EIA), oil production for 2005 was a little higher than that for 2006. Partial 2007 data suggests that 2007 production may be a little lower than that for 2006.

Because of this “stalled out” condition, there is a growing gap between what the world would like for petroleum production, and what is actually being produced. At this point, the countries that are suffering a shortfall because the current price is too expensive are mostly third world countries from Africa and Asia. The International Energy Agency (IEA) has expressed concern that oil production is not high enough, and believes that Organization of Petroleum Exporting Countries (OPEC) should produce more.

5. Can OPEC raise its production of petroleum?

Many people suspect that the answer to this question may be no. Some publications report that Saudi Arabia is having production difficulties, as are several other OPEC countries (Kuwait, Iran, Nigeria and Venezuela). Saudi Arabia does not admit to any production problems. EIA data indicates declining oil production for Saudi Arabia, even before OPEC production cuts were announced in the fall of 2006.

It is likely that we will learn the truth about OPEC’s ability to raise production this winter. OPEC has its next planned meeting in September. Unless something very unusual happens, there will be a need for significantly higher oil production. OPEC’s actions at that time will tell what the real situation is.

6. Doesn’t OPEC report very large oil reserves? It seems like those high reserves would assure us that OPEC can increase its production at will.

No, the high reserves aren’t all that helpful. First, there are serious doubts about the accuracy of OPEC’s oil reserves. The reserves are not audited numbers. Countries may be motivated to exaggerate them, so as to increase their OPEC production allocations. Analyses such as this one suggest that the reserves are likely overstated.

Second, even if OPEC reserves are accurate, the reserves tell us nothing about the flow rate. If the reserves include much very viscous oil, it may take years and large amounts of other resources to produce a relatively small flow of oil.

One important piece of detective work regarding Saudi oil reserves was done a couple of years ago. Matt Simmons analyzed published scientific papers relating to Saudi oil wells, and determined that Saudi wells were reaching a serious state of depletion. He documented his findings in the book Twilight in the Desert. This book is now available in paperback, and has been translated into German and Chinese.

7. What is the pattern of world oil production in the next few years expected to look like?

We can’t know for certain, but Figure 4 shows three possible oil production scenarios as dotted lines.

If OPEC production is now falling, it is likely that we are at “peak oil” now, because production for the rest of the world is flat. If we are at peak oil, we might expect future oil production to follow a pattern similar to Scenario 3 (the lowest dotted line, with production falling immediately) or possibly Scenario 2 (the middle dotted line, with production falling after a plateau). Several respected energy industry insiders, including Matt Simmons, energy investment banker and author of Twilight in the Desert, and Samsam Bakhtiari, retired iranian oil executive, believe that we are at peak oil now.

Scenario 1 (the top dotted line) shows a scenario in which peak oil is still a few years off. Some scientists believe that this is a more likely scenario. The Association for the Study of Peak Oil and Gas Newsletter forecasts peak oil in 2011, four years from now. The PhD thesis of Fredrik Robelius showed that peak oil is expected to occur between 2008 and 2018. Chris Skrebowski, author of the Megaprojects analysis forecasts a worldwide peak in 2011/2012.

8. Does everyone forecast peak oil within approximately the next 10 years?

No. The US Energy Information Administration’s model is based on an approach that does not consider geological constraints. Instead, it is based more on expected demand. In Figures 3 and 4, expected demand is the red top line. Forecasts on this basis tend to be higher than those considering geological constraints. Forecasts of the IEA appear to use similar logic, since IEA also assumes that OPEC can meet supply shortfalls.

Another organization that is known for its rosy production forecasts is Cambridge Energy Research Associates (CERA). CERA’s production forecasts are widely quoted in the news media, but it is not clear that they are particularly accurate. Some concerns:

• CERA’s clients are companies in the energy field. One would expect that these companies would like to hear “good news” about future growth prospects. Thus, CERA is likely to be under more pressure to produce favorable forecasts than are independent scientists.

• CERA’s forecasts do not appear to be reproducible by independent scientists. Chris Skrebowski and Fredrik Robelius (see Question 7) both use field-by-field analyses that are in many ways similar to CERA’s approach, but come to very different conclusions.

• Where it is possible to test actual production against forecasts, CERA’s forecasts seem high. Euan Mearns notes that in March 2006 CERA presented a model for UK 2006 oil production capacity showing around 2,350,000 barrels per day — around 700,000 barrels per day higher than the actual production figure.

9. When was peak oil first predicted?

M. King Hubbert, in 1956, first predicted that US oil production for the 48 states would peak in 1970. This prediction turned out to be correct, to everyone’s surprise. He also predicted a world-wide peak around 2000.

10. Will alternative energy sources be able to make up for the shortfall in petroleum production?

At this point, it seems unlikely that they will make up the shortfall.

On Exhibit 4, the gap that needs to be filled is the gap between future demand (the top line) and actual future production (something in the vicinity of the dotted lines). Clearly, the sooner production begins to drop and the steeper the decline in oil production, the bigger the gap that needs to be filled. Even if production stays level, there can be a gap because demand continues to increase.

At this point, there does not seem to be any “silver bullet” for replacing the lost oil production. Oil is unique in its abundance, its high energy density, and its portability. There do appear to be a number of possible silver BBs, however. These include:

• ethanol from corn,
• ethanol from sugar (generally imported),
• biodiesel,
• cellulosic ethanol from biomass, and
• coal-to-liquid.

None of these appears to be very scalable, especially in a short time-frame. In addition, there are other drawbacks — cost, environmental damage, and for coal-to-liquid, climate change issues. Indirect approaches to circumventing the shortage, like using battery operated cars, may be part of the picture as well. If these are used, they will probably need to be phased in slowly, as existing cars are retired. It is likely that conservation will need to be part of the mix.

11. What is “Energy Returned on Energy Invested” or “EROEI”?

This is a concept that a person runs into frequently, if one reads any of the more advanced articles about peak oil on the internet. Analysis based on EROEI helps to explain why many scientists are discouraged about the newer energy prospects – both alternatives like ethanol and “unconventional” oil like oil sands.

EROEI is a measure of how much energy an investor gets out, compared to how much energy the investor puts in. Some of the energy invested is not in fuel directly, but in things that are made using fuel, like oil rigs and refining equipment.

In the early days of oil, much of the oil extracted came from highly pressurized wells, so little effort was required to get the oil out. At that time, the typical EROEI was about 100. As those wells became depleted, more and more effort was required to get the oil out. A typical EROEI for oil is now about 15, considering additional costs like repressurization of wells and drilling in underwater locations.

One problem that we are running into with “unconventional oil” and alternatives is that it takes a huge amount of effort (in terms of energy expended) to get the energy out. EROEI is in the low single digits for oil sands, and is barely above 1 for ethanol from corn. Oil in very deep sea locations is also expected to have a low energy return (assuming it can be extracted at all), because of all the very fancy equipment required.

If we had a huge amount of other energy from a readily available source that we could use for producing oil and oil alternatives, such as natural gas or coal, a low EROEI would not necessarily be a big issue. But it is now becoming clear that natural gas is in nearly as short supply as oil, at least in North America. And coal has a lot of issues as well — it is implicated in climate change, is mixed with toxic pollutants, is not as easy to transport, and is not in as unlimited supply as most believe.

When we have energy sources with a low EROEI, we are using a lot of fuel to get oil or oil alternative. The energy we have left to do everything else we do — build roads, build shopping malls, produce food — is less. I once heard an estimate that it takes an average EROEI of 6 to have enough energy left over to fuel today’s society. If new energy sources all have EROEIs of 3 or less, we are likely to

• Need a large share of workers to work in energy-related occupations

• Have less energy left over for other uses

• Experience a significant fall in our standard of living

12. What are the indirect impacts of peak oil likely to be?

We don’t know for certain. Some issues that have been raised include:

• Will the food supply be adequate, if farmers are not able to get fuel for for their equipment and transportation is disrupted?

• Will it be possible to supply all of the products that are currently made with petroleum, including asphalt, many chemicals, fabrics, and building supplies?

• If there is a shortage of oil, will the new alternative energy sources really be sustainable? For example, will it be possible to service windmills adequately, if there is a severe shortage of oil? Will it be possible to produce enough corn for ethanol?

• Will people be able to repay their debt, if standards of living fall? Will lenders be willing to provide more long-term loans, if it appears likely that future transportation will be disrupted?

• Will there be problems with the monetary system, if there are major debt defaults?

• Will the many economic concepts that we hear so frequently continue to apply, such as “globalization”, “companies should grow”, “fungible oil supply”, and “increased price will lead to greater supply or substitution”?

• Will countries fight about the remaining oil supply?

13. If the peak oil story is really this important, why haven’t we been reading about it in the newspapers for years? Are you claiming there has been some sort of conspiracy?

No conspiracy. Just of a lot of things that seem to work together:

• Oil = Power. A country with lots of oil (and other fossil fuels) has great power. It can manufacture what it wants, outfit big armies, and generally be at the top of the pecking order. For this reason, government officials may be tempted to exaggerate strengths and gloss over weaknesses on the energy front. This is true for almost every country with oil — US, Saudi Arabia, Russia, Venezuela, and others.

• Embarrassment about the drop in US oil production. Prior to 1970, the US was the world leader in oil production. It was the undisputed world leader in manufacturing, and the economy was growing rapidly. In 1970, oil production started to drop. This was a shock, because very few believed the prediction Hubbert had made in 1956. The drop in oil production meant a changing world role – to more of a service economy, and relatively less power. This whole discussion was left out of textbooks. If it had been included, people would have realized that a decline in world oil production would be coming some day, just like the decline in US production.

• Faith in OPEC oil reserves. The Saudi oil company Aramco was taken over by Saudi Arabia in 1980. Shortly thereafter, the amount of oil reserves was doubled, without finding any more oil. Other OPEC countries soon followed suit, since higher reserves meant higher oil production targets under OPEC rules. Current OPEC reserves appear to be seriously overstated, but they are repeated endlessly as fact, in news media and textbooks.

• Faith in technology. The fact that oil production would eventually decline has been known for about 50 years. But many people who were aware of this problem assumed that technology would somehow overcome the problem. If peak oil is viewed as an easily solvable problem, there is no reason to tell the public about it.

• Faith in economic theory. Economic theory says that if there is a shortage, higher prices will encourage greater production or substitution. Therefore, there should be no reason to worry.

14. Even with all of these things going on, it seems like the peak oil story would be better publicized than it has been. What else has kept the story off the front page?

There are number of other things:

• The people who have discovered the peak oil story are by and large technical people — people working in academia, people working for oil companies, and scientists who are close enough to the situation to say:

Wait a minute. We see a huge change coming. Oil is near the point where world-wide production will drop and we aren’t finding any major technological solutions. All we are finding is some little things that together don’t look like they will cover more than a small percentage of the problem. The economy cannot continue to grow the way it has grown. In fact, it looks like a major cutback is in store.

• Peak oil people are not well funded. Their organizations are volunteer organizations. Some of their work is done on internet blogs. It is hard for them to match well-funded organizations like CERA.

• Peak oil does not mix well with standard economic theory. Economic theory is repeated so often that nearly everyone takes it as science or fact. It is only when people step back and realize that economic theory is just a theory, and that it does not necessarily apply in a resource constrained world, that they can understand the peak oil situation.

• Newspapers have a happy story to tell — one of growth, entertainment, selling lots of SUVs. It is hard for a news organization to publish the peak oil story when it is so much at odds with the main message of the paper.

15. So who are the people who know the peak oil story?

In Washington D. C., Representative Roscoe Bartlett (R – MD) is the leader on the issue of peak oil.

There are many others who are peak oil aware. The Association for the Study of Peak Oil and Gas (ASPO) now has organizations in 11 countries. There are also quite a number of local peak oil organizations.

There are quite a few people involved with internet sites that publish peak oil information and discuss the peak oil story. A few of note:

• TheOilDrum.com – “Discussions about energy and our future” Features well-researched articles written by its staff. 40% of its readers have postgraduate degrees.

• EnergyBulletin.net – Publishes peak oil and related articles that others submit. Has good indexing features. No discussion.

• Globalpublicmedia.com – Publishes speeches and other audio media related to “a postcarbon world”.

• Speeches by Matt Simmons Slides for the speeches by the author of “Twilight in the Desert” can be found at this site.

• aspo-usa.com – The web site of the US version of the Association for the Study of Peak Oil and Gas. Offers a weekly and daily newsletter.

There are also many others web sites dealing with peak oil. Many of these can be found by searching for the words “Peak Oil”.

16. Are governmental leaders aware of peak oil?

Many of them seem to be.

We know that the leaders of OPEC are aware of peak oil because OPEC’s magazine talks about the issue. A speech by one of their members on peak oil is printed on page 58 of the November 2006 OPEC Bulletin.

We strongly suspect that Russian and Venezuelan leaders are peak oil aware, because of their aggressive recent actions. They know that because of peak oil, they have more power, and are acting accordingly.

Representative Roscoe Bartlett (R-MD) reports that based on his meetings in China, Chinese leaders are very peak oil aware. He reports that they have a five point plan for dealing with peak oil and are buying up all of the oil assets they can.

George W. Bush and Dick Cheney do not talk about peak oil, but there are many governmental reports relating to peak oil. Some of these include

• Uncertainty About Future Supply Makes it Important to Develop a Strategy for a Peak and Decline in Oil Production. US Government Accountability Office, February 2007.

• Energy Trends and Implications for U. S. Army Installations E. T. Westervelt and D. F. Fournier, September 2005.

• Peaking of World Oil Production, Impacts, Mitigation, and Risk Management R. L. Hirsch, R. Bezdek, and R. Wending, February 2005. For US Department of Energy.

A number of people have noted that both Iraq and Iran report significant oil reserves. The question has been raised whether the US involvement in these countries is more than coincidence, given peak oil concerns.

Corn-Based Ethanol: Is This a Solution?

Many people have high hopes for ethanol made from corn–that it will prevent future gasoline shortages, prevent global warming, be a wonderful investment, and improve the income of farmers, among other things. Other observers raise a whole host of concerns including scalability, impact on the environment, and impact on food prices. Why is there such a huge disparity in views? What is the real promise for corn ethanol?

1. Why don’t we see more stations selling E85 (85% ethanol/15% gasoline mixture)?

In 2006, about 20% of the US corn crop was used to produce ethanol. Even with this huge share of the corn crop, US corn-based ethanol amounted to only about 3.5% of the US gasoline supply by volume, and 2.4% of the supply by energy contribution.

Even if all the corn-based ethanol that was produced were used as E85, there would not be many gasoline stations selling E85. In fact, only a very small portion of the corn ethanol that is produced is used to make E85 — the remainder is used as a fuel additive, in concentrations up to 10% of the gasoline.

2. Why is so much ethanol used as a gasoline additive?

There are two reasons:

a. E85 isn’t very popular. The fuel is quite corrosive, and only a small percentage of cars that have been specially manufactured (or adapted) can use it. E85 is also quite expensive for the energy it provides. It is often priced similarly to gasoline, but gets about 25% worse mileage.

b. MTBE is being phased out, and ethanol can be used as a substitute. Until recently, methyl tertiary-butyl ether (MTBE) was used as a gasoline additive, to raise octane of gasoline and to make fuel burn more cleanly. MTBE does not biodegrade and often gets into the ground water, where it gives a bad taste and smell. Furthermore, laboratory tests suggest it may cause cancer. MTBE was banned in some states, and is being phased out in other states because of liability concerns.

Ethanol can be used as a substitute for MTBE. The amount of ethanol needed as an MTBE substitute is huge — roughly equal to the 5 billion gallons of corn based ethanol produced in 2006. With so much ethanol used as a substitute for MTBE, there is very little left over for E85. One advantage of using ethanol as an additive is that in concentrations up to 10%, it can be used in any car without modification.

3. How does ethanol compare to MTBE as a gasoline additive?

Ethanol is clearly better than MTBE in one regard — Ethanol biodegrades well, so there is no issue with it contaminating the ground water.

In other regards, ethanol’s score is mixed. Ethanol makes gasoline somewhat cleaner burning, so it helps oil companies meet emission standards.

There are several areas in which ethanol is not as good as MTBE:

a. Ethanol, when blended with gasoline, tends to evaporate in summer, causing smog. This tendency can be partly overcome by modifying the gasoline base to which it is added.

b. Ethanol needs to be shipped separately from gasoline. Because of its corrosive nature and tendency to combine with water, ethanol needs a separate truck/barge/train shipping system (or a dedicated pipeline, but this would be very expensive). MTBE can simply be added to gasoline at the refinery, and shipped by pipeline.

c. MTBE acted as a US-produced non-petroleum gasoline extender. While it may seem strange, ethanol is not as good as MTBE in this role. MTBE (made from natural gas) was relatively plentiful, and could be added in quantities up to 15% to gasoline as required. Ethanol is less available, and can only be mixed to a concentration of 10% of gasoline. Adjustments must also be made to the gasoline base, in order to minimize ethanol smog problems.

4. What kind of impacts did the US Energy Information Administration (EIA) expect when oil companies phased out MTBE and increased the use of ethanol as an additive?

The EIA expected that phasing out MTBE and substituting ethanol would tend to decrease the amount of gasoline available and raise prices, as discussed in this report. It would also somewhat negatively impact air quality.

Currently, most ethanol is used between the months of May and September. It seems likely that the use of ethanol during this time-period contributes to the higher gasoline prices experienced in recent summers.

5. To what extent can the production of corn-based ethanol be increased?

We are currently using 20% of the corn produced in the United States to produce ethanol. Under the most optimistic scenarios, this amount could be tripled, to the equivalent of 60% of our 2006 corn production. At this production level, corn-based ethanol would replace about 10% of the volume (or about 7.2% of the energy content) of the US gasoline supply. This is still not very much, and there are serious questions whether this optimistic production level can in fact be reached.

If this level of production can be reached, the full amount of corn-based ethanol produced could be used as a fuel additive (as the 10% level), with no ethanol left over for E85.

6. What impact does corn-based ethanol have on global warming gasses?

Many people believe that using ethanol from corn would greatly reduce the emission of gasses implicated in global warming. This belief is based on the observation that if a corn plant grew, and then was burned, without any fossil fuel inputs or fertilizer, there would be no net gain in global warming gasses. This is because the carbon dioxide released in the burning of the plant would be offset by the carbon dioxide absorbed by the plant while the plant was growing.

This simplistic model is not correct for the production of corn-based ethanol because fossil fuels are used in the growing of corn and the production of ethanol, and these contribute to global warming gasses. Nitrogen used in fertilizer also tends to produce nitrous oxide, which is 300 times as potent a global warming gas as carbon dioxide.

There are also secondary impacts — for example, increasing US corn production is likely to result in less US soybean production. If this occurs, Brazil, the largest producer of soybeans, is likely to increase its soybean production. Space for this increased Brazilian production is likely to be obtained by cutting down rain forests, which will tend to increase global warming gasses.

One review of the impact of ethanol on global warming gasses found “ambiguous” indications, with some studies indicating small increases, and others indicating small decreases. The authors’ best estimate was a 13% decrease relative to the emissions made by gasoline. This implies that burning ethanol still contributes to global warming gasses — but to a slightly smaller extent than gasoline.

7. What other biological/ environmental impacts does the production of corn-based ethanol have?

• Huge use of water. Approximately 4 gallons of water are used for every gallon of ethanol produced. Water use is much greater if irrigation is required. If ethanol production is in an arid region, non-renewable aquifers may be drawn down.

• Increased soil erosion. Even when corn is grown using the latest “no till” methods on flat land, there is some soil erosion. The amount of erosion increases if land in hilly or low-lying areas is tilled. Since soil regenerates very slowly, soil loss is a serious concern.

• More fertilizer use. Nitrogen fertilizer use is associated with increased global warming gasses and its run-off causes “dead” areas in the sea. Nitrogen fertilizer is made from natural gas, which is is in declining supply in North America. In the future, we will depend more and more on foreign imports of nitrogen fertilizer.

• More herbicide and pesticide use. Causes pollution problems. Also, since these are made from oil and natural gas, future supply is likely to depend on imports.

8. To what extent does the use of corn-based ethanol reduce fossil fuel use?

Studies vary in the extent to which the extent to which corn-based ethanol can be expected to reduce fossil fuel use, depending on how the corn is grown, and the “boundaries” considered in the analyses. Some studies show that more fossil fuel energy is used in the production of ethanol than is provided in the ethanol produced. Other studies show a small net gain – typically about 20% of the fossil fuel inputs. Thus, the ratio of energy output to fossil fuel input is about 1.2 to 1.0.

One concern is that this net gain is much lower than for many other liquid fuel sources. For oil produced from wells, typically 15 gallons of oil are produced for each gallon of fossil fuel used in production. For ethanol from sugar cane produced in Brazil, the net energy gain is about 8 or 9 to 1. For most types of biodiesel, the net gain is about 2.0 and 3.0 to 1.0. Thus, even when the best planting areas are available, ethanol from corn appears to be inefficient compared to other liquid fuels.

9. Does it matter whether there is a net energy loss in the production of corn-based ethanol -– that is, it takes more fossil fuel energy to produce ethanol than the ethanol itself produces?

Some argue that we need liquid fuels, and we have large amounts of coal and natural gas, so it does not matter if we use an inefficient way of converting these fuels to a liquid form. Thus, having a net energy loss is the production of corn-based ethanol is OK.

This argument is wrong for two reasons. First, our fossil fuels are much more limited than most people believe. Natural gas is in especially short supply. If we use large amount of natural gas for ethanol production, we risk shortages for other purposes, including electrical production and home heating. We also drive up the price of natural gas.

Second, using large amounts of fossil fuels to produce ethanol is likely to exacerbate global warming. One argument for using ethanol is that it (hopefully) reduces fossil fuel use, and thus produces less carbon dioxide, which contributes to global warming. If instead of decreasing fossil fuel use, it really increases fossil fuel use, the effect is reversed – more carbon dioxide is produced, rather than less.

10. To what extent does corn-based ethanol replace imported foreign oil?

As discussed above, ethanol in the quantity produced today is almost exclusively a replacement for MTBE. MTBE is made from natural gas, and was primarily US produced. Thus, what we are doing is replacing one US produced item with a more expensive US produced item. Since some diesel fuel is used in the production of ethanol, one might argue that we may even be slightly increasing our use of foreign oil.

11. What economic impact does corn-based ethanol have?

Since at this point we are replacing one US-made product (MTBE) with a more expensive US-made product performing a similar function, the basic impact is inflationary. We are reducing the amount of corn available for export abroad, so we are most likely making our balance of payments worse. It is not clear that there is any savings on the amount of petroleum needed to be imported from overseas.

The price of corn, and in fact many food products, is expected to increase with the greater use of corn ethanol. This tends to raise the income of farmers. Costs to farmers are also expected to rise, as the price of land rises and the cost of other inputs, such as fertilizer and fuel oil, rise. Consumers are likely to have to pay more for food products, so this transfers more of their wealth to those producing food.

The overall effect is expected to be a slightly lower standard of living for Americans, because a less efficient approach is being used to produce a fuel additive. Resources which might have been used for goods with higher value to consumers are now being devoted to ethanol production. There will be some transfer of wealth among groups, with farmers and ethanol producers perhaps being winners.

12. Is there a possibility of a better economic outcome, if the production of corn-based ethanol is greatly expanded?

It is not clear that corn production can be greatly expanded, without harmful impacts. At this point, nearly all of the land that can reasonably be used for corn without undesirable impacts is already being used for that purpose. To increase corn production, one or more of the following approaches are likely:

• Grow corn on land that needs to be irrigated. Result: more fossil fuel energy used than obtained from ethanol; may deplete aquifers.

• Grow corn on hill sides, or on other areas subject to erosion. Result: soil loss; not sustainable.

• Grow corn without crop rotation. Result: much more fertilizer used; more fossil fuel energy used than obtained from ethanol. Soybean production shifted overseas, resulting in increased imports of soybeans.

Even if expansion of corn production is accomplished, it is not clear that it can be maintained for long. The amount of natural gas available is expected to decline in the next few years, making fertilizer less available, and reducing the fuel available for producing ethanol.

If ethanol expansion occurs, transportation of the ethanol is also a question. Existing train/rail/barge systems are being strained with the current volume of ethanol. Significant investment in infrastructure may be needed if much larger volumes of ethanol are produced.

13. There are a number of new approaches to producing corn-based ethanol, using more renewable energy in the production of ethanol (such as methane from waste products or wind energy). What role do these efforts play in corn-based ethanol’s future?

These efforts are to be applauded. To the extent that they are successful, they can perhaps be substituted for some of the natural gas and coal used in producing ethanol today. The use of the renewable fuels in ethanol production will tend to give corn-based ethanol a more positive energy balance and will reduce the use of fossil fuels. Some of these efforts may prove to be cost-effective as well.

It is not clear that these new methods will have a significant impact on the total amount of ethanol that will produced. Current ethanol production seems to be guided by a government plan to increase production to the maximum amount which can produced. This maximum amount apprars to be governed by factors such as the amount of corn that can be grown and the amount of transportation that is available for the final product. Whether or not it is economic to produce fuel in this way does not seem to enter into the decision.

14. What do recent analyses say about expanding ethanol production?

There recently have been two major studies looking at the question of expanding biofuels, one by the Congressional Research Service for Congress and one by the United Nations. Both urge caution in the expansion of biofuels because of the likelihood of unintended consequences. The Congressional Research Service Report looked specifically at the issue of ethanol from corn; the UN report report looked at biofuels more generally.

One concern raised in the Congressional Research Service Report is that corn-based ethanol is likely to be quite variable in supply, depending upon the weather. Thus, if we expand corn-based ethanol production, we will be exchanging the variability associated with foreign oil with the variability associated with weather.

15. Is there any reason why corn-based ethanol should continue to receive tax subsidies?

No. Corn-based ethanol does not appear to have any particular advantage over other biofuels, and it is questionable whether it can be significantly expanded without adverse consequences. If other types of biofuels make more economic sense, they should be given a level playing field. Corn-ethanol will continue to be produced if it makes economic sense, without tax subsidies. The subsidies in place currently benefit the corporations that produce ethanol, with little benefit for individual farmers.

One potential disadvantage of removing tax subsidies is that this may tend to raise the price of gasoline at the pump. If higher prices encourage consumers to conserve fuel and companies to explore other types of biofuels, the higher prices may in fact be an advantage.

To Learn More

Congressional Research Service Report for Congress, “Ethanol and Biofuels: Agriculture, Infrastructure and Market Restraints Related to Expanded Production”

Supply Impacts of an MTBE Ban, US Energy Information Agency

Refining 101: Summer Gasoline, Robert Rapier on TheOilDrum.com.

Discussion Questions

1. Read the section in Robert Rapier’s Refining 101 article about Senator Diane Feinstein’s campaign to limit ethanol blending in California, because of smog problems. Would you side with Senator Feinstein or the Environmental Protection Agency? Why?

2. How would the market be different today, if, instead of providing subsidies only for corn ethanol, subsidies had been provided over the years for any type of biofuel, including potato based ethanol, diesel from soybeans, and any other type of biofuel considered?

3. How would the market be different today, if no subsidies had been provided for any type of biofuel?

4. Does it ever make sense for the government to select one “winner”, such as corn ethanol, for subsidies?

5. Suppose the government taxes gasoline, but not biofuels. What is likely to happen to government revenue if gasoline production declines and biofuel use increases? Would this make public officials happy or unhappy? Is there any way of avoiding this problem?

Our World Is Finite: Is This a Problem?

We all know the world is finite. There number of atoms is finite, and these atoms combine to form a finite number of molecules. The mix of molecules may change over time, but in total, the number of molecules is also finite.

We also know that growth is central to our way of life. Businesses are expected to grow. Every day new businesses are formed and new products are developed. The world population is also growing, so all this adds up to a huge utilization of resources.

At some point, growth in resource utilization must collide with the fact that the world is finite. We have grown up thinking that the world is so large that limits will never be an issue. But now, we are starting to bump up against limits.

Where are we reaching earth’s limits?

1. Oil
Oil is a finite resource, since it is no longer being formed. Oil production in a given area tends to increase for a time, then begins to decline, as the available oil is pumped out. Oil production in the United States has followed this pattern (Figure 1), as has oil production in the North Sea (Figure 2). This decline has taken place in spite of technology improvements.

There is now serious concern that world oil production will begin to decline (“peak”), just as it has in the United States and the North Sea. I discussed this earlier in Oil Quiz – Test Your Knowledge . A congressional committee was also concerned about this issue, and asked the US Government Accountability Office to study it. The GAO’s report, titled CRUDE OIL: Uncertainty about Future Supply Makes It Important to Develop a Strategy for Addressing a Peak and Decline in Oil Production confirmed that this is an important issue.

Exactly how soon this decline will begin is not certain, but many predict that the decline may begin within the next few years.

2. Natural Gas
Natural gas in North America is also reaching its limits. United States natural gas production reached its peak in 1973. Each year, more and more wells are drilled, but the average amount of gas produced per well declines. This occurs because the best sites were developed first, and the later sites are more marginal. The United States has been importing more and more natural gas from Canada, but this is also reaching its limits. Because of these issues, the total amount of natural gas available to the United States is likely to decline in the next few years – quite possibly leading to shortages.

3. Fresh Water
Fresh water is needed for drinking and irrigation, but here too we are reaching limits. Water from melting ice caps is declining in quantity because of global warming. Water is being pumped from aquifers much faster than it is being replaced, and water tables are dropping by one to three meters a year in many areas. Some rivers, especially in China and Australia, are close to dry because of diversion for agriculture and a warming climate. In the United States, water limitations are especially important in the Southwest and in the more arid part of the Plains States.

4. Top soil
The topsoil we depend on for agriculture is created very slowly – about one inch in 300 to 500 years, depending on the location. The extensive tilling of the earth’s soil that is now being done results in many stresses on this topsoil, including erosion, loss of organic matter, and chemical degradation. Frequent irrigation often results in salination, as well. As society tries to feed more and more people, and produce biofuel as well, there is pressure to push soil to its limits–use land in areas subject to erosion; use more and more fertilizer, herbicides, and pesticides; and remove the organic material needed to build up the soil.

Are there indirect impacts as well?

Besides depleting oil, natural gas, fresh water, and top soil, the intensive use of the earth’s resources is resulting in pollution of air and water, and appears to be contributing to global warming as well.

Can technology overcome these finite world issues?

While we have been trying to develop solutions, success has been limited to date. When we have tried to find substitutes, we have mostly managed to trade one problem for another:

Ethanol from corn
Current production methods usually require large amounts of natural gas and fresh water, both of which are in short supply. Increasing production may require the use of land which has been set aside in the Conservation Reserve Program because of its tendency to erode.

Oil from oil sands and oil shale
Oil from oil sands requires large energy inputs, currently from natural gas, as well as fresh water, and creates pollution issues. Oil from oil shale is expected to require even more energy and fresh water.

Coal to liquid and coal substitution for natural gas
“Clean coal” and sequestration of carbon dioxide from coal are not yet commercially available, and are expected to be very expensive if they become available. Thus, coal production is likely to exacerbate global warming and raise pollution levels. If coal is used to replace both oil and natural gas, it is likely to deplete within a few decades, like the natural gas and oil it replaces.

Deeper wells for fresh water
If deeper wells are used, they will requires more energy to pump the water farther. In locations that use aquifers that replenish over thousands of years, the available water will eventually be depleted.

There are a number of promising technologies — including solar, wind, wave power, and geothermal — but the amount of energy from these sources is tiny at this time. Nuclear power also seems to have promise, but has toxic waste issues and is difficult to scale up quickly. A general introduction to alternative technologies is provided in What Are Our Alternatives If Fossil Fuels Are a Problem?

What if we don’t find technological solutions?

We can’t know for sure what will happen, but these are some hypotheses:

1. Initially, higher prices for energy and food items and a major recession.

If the supply of oil lags behind demand, we can expect rising prices for oil and gasoline and possibly other types of energy. Prices for food may also rise, because oil is used in the production and transportation of food. Recession is likely to follow, because people will cut down on their purchases of discretionary items, so as to be able to afford the necessities. Layoffs will follow. People laid off will find it difficult to pay mortgages and other debt, so banks and other creditors will find themselves in increasing financial difficulty.

2. Longer term, a decline in economic activity.

With fewer resources, economic activity is likely to decline. We will need to find replacements for many products in a relatively short time frame — heating fuel, transportation fuel, plastics, synthetic fabrics, fertilizer (currently made from natural gas), and asphalt, among other things. Living standards are likely to drop, because we don’t have infinite resources for replacing all the things that are declining in availability.

A graphic representation of how this might happen is shown in Figure 3. Real gross domestic product (GDP) gives a measure of how much goods and services the United States is producing in a year, in constant (year 2000) dollars. The “Fitted” line in Figure 3 shows the expected growth in real GDP, if growth continues as in the past. Scenarios 1 and 2 show two examples of how limitations on oil and natural gas might impact future real GDP. Scenario 1 shows a fairly rapid decline, starting very soon. Scenario 2 shows a slower decline, starting in 2020. If the downturn is still several years away, we have longer to plan, and a better chance that the decline will be more gradual.

3. Transportation difficulties and electrical outages.

Since transportation generally uses petroleum products for fuel, a reduction in the amount of oil available is likely to cause transportation difficulties. These difficulties may extend to all forms of transportation–automobile, trucks, airplanes, boats, and railroads, to the extent that fuel is unavailable due to shortages, cost, or rationing.

If natural gas supplies decline, electrical outages are likely, especially during high-use times of the year. Electrical outages may also result from interruption of transportation of other fuel, such as coal, to power plants, because of petrolum shortages. Outages may be one time events, or may be planned outages at certain times of the day, to compensate for an inadeqacy in the fuel supply.

4. Possible collapse of the monetary system.

This is perhaps the biggest single issue, and the most difficult to understand.

There is a huge amount of debt in the world today. When loans were made, the expectation of the lenders was that the economy would continue to grow as in the past–that is like the “Fitted” line in Figure 3 above. If this continued growth occurred, people, on average, would be a little better off financially when the time came to pay off their loans than they were when the loans were taken out, so they would have a reasonable chance of paying off the loans with interest. Corporations would continue to grow, and because of this continued growth, most would be able to pay off their debt with interest.

What happens if a scenario like that shown as Scenario 1 or Scenario 2 on Figure 3 occurs? When it comes time to repay the loans, people and corporations will be on average, worse off, rather than better off, than when they took them out. It is likely that many people will be unemployed, and cannot pay back their debt. Companies manufacturing goods that are no longer in demand are likely to be bankrupt, and thus will be unable to repay their debt. Organizations holding this debt, such as banks, insurance companies, and pension funds will find themselves in financial difficulty, because of the many defaults on the loans that are the assets of these organizations.

Two possible outcomes of widespread defaults come to mind. One is that there is so much debt that cannot be repaid that banks, insurance companies, and in fact the whole monetary system fails. The other alternative is that the government guarantees all the debt, so that the institutions do not fail. The latter approach would likely lead to hyper-inflation.

In either event, people and businesses would lose their savings, because money either wouid either be no longer available (first approach), or would be worth very little due to inflation (second approach). In either event, foreign countries would be unlikely to accept our currency in trade. Simple transactions, such as purchasing food or paying an employee, would become very difficult. Eventually, some approach would likely be found to circumvent these difficulties–perhaps a more barter-based approach–but this would be a huge change from our current system.

5. Failure of economic assumptions to hold.

We have been raised in a world where supply and demand are generally in balance. An increase in demand results in a greater price, which in turn leads to a greater supply. If the particular item isn’t available, substitution is generally available.

Once we reach geological limits, these basic principles seem much less likely to hold. An increase in energy demand isn’t likely to translate into greater supply. Distribution of the limited available supply seems likely to reflect considerations other than price, such as rationing and long-term alliances. There may also be military conflict over available supplies.

6. Changed emphasis to more local production.

Two factors are likely to encourage local production and discourage international trade. One is the higher cost and/or unavailability of fuels used for transportation. The other is difficulty with the monetary system–either hyper-inflation or complete failure of the system. If there are monetary system problems, other countries are likely to want actual goods in trade, rather than IOUs or money. This requirement is likely to greatly reduce the amount of trade with foreign countries.

Food production is likely to be more localized, since this insures a continuous supply, and reduces the amount of fuel needed for transportation. If there are problems with shortages, people may choose to have gardens, so as to grow a few of the foods they need themselves.

7. Reduced emphasis on debt.

Once it is clear that future production is likely to be less than current production, as in either Scenario 1 or Scenario 2 of Figure 3, it will be very difficult to find any lender willing to provide long term loans, since if the loan is paid back at all, it is likely to be paid back in money that is worth very much less than it was at the time the loan was taken out.

If governments still have debt at this point, they will find it difficult to sell new bonds to replace the ones that mature. Businesses desiring to build new plants may find it necessary to accumulate resources for new plants in advance of their construction. Mortgages may not be available for prospective home owners, either.

8. Reduced emphasis on insurance and pensions.

If there are difficulties with the monetary system, insurance companies and pension plans will be among the hardest hit, since thy take in funds and invest them, and pay benefits later.

It is possible that a limited form of Social Security coverage may continue, but this is by no means certain. If a high level of inflation occurs (see point 4 above), benefits that have been promised to date will be worth very little. If a new monetary system is in place, it will be up to the government at that time to determine the level of benefits. Because total goods and services will be lower in the future (Figure 3 above), benefits to retirees will almost certainly be lower as well.

9. More people will perform manual labor.

As the amount of oil and natural gas becomes less available, more work will need to be done by hand, since the fuels to run machines will be less available. In order to encourage people to take jobs involving manual labor, manual labor will pay better in relationship to desk jobs. Because food is such ain important commodity, farming may be particularly highly valued, and may pay especially well.

10. Resource wars and migration conflicts.

If there is is an inadequate amount of a resource (water, oil, natural gas, or food), countries may fight over the limited supplies that are available. Conflicts are likely to spring up regarding areas where resources are plentiful.

Alternatively, people may choose to migrate from an area if resources become less abundant–for example, migration may occur if water supplies dry up, or if land is flooded due to global warming, or if declining oil supplies limit transportation. Receiving areas may not welcome the newcomers, leading to more conflict.

11. Changes in family relationships.

Families are likely to see more of each other, because of reduced transportation availability. Families may work more closely together, tending gardens and running small family businesses. Co-operation may be more highly valued by society. Divorce rates may decline.

12. Eventual population decline.

The food supply produced in the world today is many times greater than the food supply 100 years ago, before oil and natural gas were used in tilling crops, pumping water for irrigation, making fertilizer and pesticides, and transporting food to market. As oil and natural gas become less available, the food supply is likely to decline. Eventually, world population is also likely to decline, reflecting the lower food supply.

Conclusion

We cannot know exactly what the future will hold, if technology is not able to overcome the many issues associated with a finite world, including declining oil and natural gas supply, decreasing fresh water supply, and climate change. Whatever changes occur are likely to differ from location to location, as the world activity becomes more localized.

We tend to think of governments as fairly stable, but these too may change. Countries may subdivide into smaller units. Some have even suggested that groups of states may break away from the United States.

Educational institutions will most likely change. Fewer students will probably attend colleges and universities, and the subjects of interest will likely change. The sciences and agriculture or permaculture are likely to be topics of interest. More students may want to live on campus, if transportation is a problem. Adult education may become more important, as people seek to develop skills for a changing world.

Businesses will also change. Local businesses will become more important, while multinational companies recede in importance. Manufacturing will become less important, and recycling will become more important. Providing necessities will get top priority, while nice-to-have items will not sell well. Barter, or a new monetary system that substitutes for barter, may be the way business is done.

People may choose to live closer to work, or may work at home, so as to minimize costs associated with commuting. Some people may choose to live with relatives or friends, so as to save on utility costs. Eventually, many homes in undesirable locations may be left empty, and the parts of these unoccupied homes that can be used elsewhere will be recycled.

The next 50 years will certainly be interesting ones. Perhaps, with technological advances, some of the potential problems can be avoided. But we will need to work hard, starting now, to develop ways to work around the problems which seem to be ahead.

To Learn More

The Power of Community: How Cuba Survived Peak Oil 53 minute film, available for $20, tells the story of how Cuba adapted to losing over half of its petroleum imports after the collapse of the Soviet Union.

Closing the Collapse Gap: The USSR Was Better Prepared for Peak Oil than the United States Humorous talk by Dmitry Orlov

The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century Book by James Howard Kunstler

Discussion Questions

1. What are five things that might improve after world oil production begins to decline? (Hint: Consider exercise, weight problems, family situations, etc.)

2. If there is a decline in oil and gas production, how do you expect the large amount of debt outstanding to resolve itself? Do you think there will be monetary collapse, hyper-inflation, or some other solution?

3. Do you expect that families will have more or fewer children after oil and natural gas production begin to decline? Why?

4. How can businesses prepare for interruptions in electrical service?

5. What types of buildings are best adapted to frequent outages of electrical service? Which buildings are likely to have the most problems?

6. What vocations appear to be most likely to be useful for supporting a family, after oil and gas production begin to decline?

7. What changes might a college make to its curriculum, to better prepare students for the changing world situation expected after production of oil and natural gas begin to decline?

8. In Figure 3, real GDP in Scenarios 1 and 2 are shown as changing in relatively straight lines. Could alternative scenarios have the lines zig-zag or drop suddenly? What real world situations might cause different patterns?

What Are Our Alternatives, If Fossil Fuels Are a Problem?

1. I love my SUV. Why can’t we continue to use oil and gas as in the past?

George W. Bush has given us one reason why we need to make changes – Unstable foreign oil supply. Al Gore has given us another reason – Climate change.

There is a third reason that trumps the first two – WE DON’T REALLY HAVE A CHOICE. Demand for both oil and natural gas continues to rise each year, as the result of China, India and other countries wanting to adopt a lifestyle more like that in the United States. As we saw in Oil Quiz – Test Your Knowledge, world oil supply is likely to decline in the near future. With demand increasing and supply decreasing, there is certain to be a significant gap in the not too distant future.

Natural gas is similar. Like oil, we started with a finite quantity of it, and it is now depleting. The main difference is that we are dealing primarily with a gap between North American supply and demand, rather than world supply and demand, because natural gas is difficult to transport. Demand is rising, because natural gas is viewed as a less-polluting source of energy.

Natural gas supply is likely to decline in the next few years, because most of the larger, more productive sites have already been tapped. New natural gas wells are getting smaller and smaller, so that more and more new wells need to come on line each year, just to stay even. For a while, we were able to make up our shortfall with imports from Canada, but these have begun to decline. In the next few years, both US production and imports from Canada will be declining. It is doubtful that liquified natural gas imports from overseas will be able to fill the gap.

2. How much of the fuel we use is oil? How much is natural gas?

For the United States, 40% of our energy use is petroleum and 23% is natural gas, as shown in Figure 1. In total, these fuels which are expected to be in short supply comprise 63% of our energy supply.

Another 23% is coal, which is the other fossil fuel. Because of its high carbon content, it generates more carbon dioxide than petroleum and natural gas, contributing to global warming. If climate change is a major issue, coal usage should be reduced as well. Together, the three fossil fuels comprise 86% of our fuel supply.

The remaining fuels are nuclear at 8%, and renewables at 6%. The largest renewable is hydro-electric. Other renewables include wood, landfill gas, biofuels, geothermal, wind, solar, and many other new types of energy. Since renewables total only 6%, all are very small in comparison to fossil fuels.

3. Won’t ethanol cover our fossil fuel shortfall? I know we are growing a lot of corn for ethanol and it is supposed to be a clean fuel.

A few years ago, corn ethanol looked like a very good idea. It would provide an additional market for farmers’ corn, thereby helping to hold the price up. Also, as a fuel additive, it would act as a substitute for MTBE (methyl tertiary-butyl ether), which makes gasoline burn cleaner, but does not easily biodegrade, so tends to pollute the groundwater.

While corn ethanol works as a replacement for MTBE, it does very little to increase the liquid fuel supply. It takes a huge amount of corn to produce a small amount of ethanol (20% of the 2006 corn crop added the equivalent of 2.4% to the US gasoline supply energy level.) When the fossil fuels used in growing corn and making ethanol are considered, the net energy gain to the fuel supply in 2006 was virtually nothing (0.4% or even negative, depending on the study).

Ethanol from corn has increased greatly in recent years, because of the significant subsidies it receives. The wisdom of increasing corn ethanol production further is now being questioned because of its poor net energy gain, its indirect impact on food costs, and its adverse environmental impacts (including soil erosion and aquifer depletion, due to its high water usage).

4. How about Brazilian ethanol from sugar cane? Will this cover our fossil fuel shortage?

Brazilian sugar cane ethanol is a little better than corn ethanol, but is still unlikely to be more than a small part of the solution to the fossil fuel shortage. It is better than corn ethanol, in that it requires less fossil fuel input, because manual labor is used to harvest the sugar cane and because the unused stalks (“bagasse”) are burned to provide the heat for the ethanol processing.

It is likely to be only a partial solution to the fuel shortage for many reasons. The amount of sugar ethanol produced in Brazil currently is similar to the amount of corn ethanol produced in the United States. Even if Brazil doubled its production, and sent the entire increased production to the United States, we would be talking about only a 2% to 3% increase in our gasoline supply.

Furthermore, we are again taking about a foreign source of fuel. Climate change issues have been raised regarding the clearing of land for the use in planting more acres of sugar cane. The United States cannot easily follow this sugar cane model, because we do not have much land suitable for growing sugar cane, our growing season is shorter, and our minimum wage would result in much higher labor costs.

5. Could we solve our problem by replacing our SUVs with very energy-efficient models, like Priuses?

This would certainly be a step in the right direction. A couple of things to keep in mind – First, it would be very difficult to do this in practice, except over many years. Once SUVs are viewed as problematic, their resale value will drop greatly, so that they will have little trade in value. Manufacturers will need to produce a huge number of the high milage cars – many more than they would normally sell in a single year. It would take them several years to manufacture the number of cars needed.

Another point to consider is that even if we solve our fuel shortage with respect to transportation, we will still have major shortages in other areas. Figure 2 shows energy use in the United States, divided among buildings, industrial, and transportation. Surprisingly, transportation is the smallest of the three.

One reason for the high amount of energy used in buildings is that our houses are very large, and we expect them to be heated and cooled to a constant temperature year around. Another area where a large amount of energy is used is in producing our food — diesel is used for tractors and transportation; natural gas is used to make fertilizer. Manufacturing goods for sale, whether they are cars or appliances or new houses, takes a large amount of energy as well. We will either need to expand our energy sources to meet the needs of these sectors, or we will need to find ways to use the available energy more efficiently.

6. What are our best options for offsetting expected shortfalls in oil and natural gas production?

In Oil Quiz Question 10, we learned that implementing even a known technology on a large scale takes 10 to 20 years. Since implementing a new technology takes even longer, and since declines in oil and gas production are expected in the next few years, our best options for offsetting the shortfall are technologies that already are available. These include:

• Coal – “Coal to liquid” technology for producing liquid fuel has been available since World War II, but technology for sequestering carbon dioxide (necessary to prevent global warming) has not yet been perfected.

• Nuclear – Can be expanded, but waste disposal is an issue.

• Hydroelectric – Most good sites for dams already taken, but a few smaller sites may be available.

• Waste products used as liquid and gas sources, including landfill gas and biofuels from waste products can likely be expanded.

• Geothermal heat pumps. Can only be used in certain locations.

• Wind. Can be expanded.

• Thermal solar energy and photovoltaic solar energy. Can be expanded.

• Biomass such as wood burned for fuel. Difficult to expand significantly.

• Biofuels from food crops, such as ethanol. At best, a very small part of the solution.

Some technologies which may be developed in the next few years include:

• Biofuels from plant material other than foods, including algae.

• Improved batteries, to permit electric cars. May possibly be powered by solar panels on roofs of garages.

• Improved electrical storage, to permit more extensive use of wind energy.

• Electrical power from more distributed sources, to reduce power loss in line transmission.

• Technologies to capture wave energy and tidal energy.

Some of these possible technologies will be discussed more in later posts. It might be noted that hydrogen powered vehicles appear to many years away, so are unlikely to be part of any solution. Hydrogen is very bulky, making fuel storage in a vehicle difficult.

7. What is the likelihood that the technologies described in (6) will allow the US energy supply to continue to grow?

Not very high, considering the portion of energy supply that is declining, and the sources available to make up the shortfall. We are expecting a decline in petroleum and natural gas production. These sources together comprise 63% of the US energy supply. This leaves only 37% of energy resources which might be increased (Figure 1).

The largest of the remaining resources is coal, which comprises 23% of the total. While we have all heard stories that the United States has 200 years worth of coal in reserves, some recent analyses suggest that this estimate is very much overstated, and that coal production may also decline in a few years. Even if there is an adequate supply, it is difficult to increase coal production quickly, because of the need to build additional railroad capacity to transport the greater supply. There are also global warming issues with increasing coal production.

Nuclear energy can probably be increased, but lead times for new facilities are very long and there are waste disposal issues.

If we exclude coal and nuclear, we are down to renewables, which comprise only 6% of the energy supply (Figure 1). Starting from such a small base, it is difficult to increase production enough to make up for a shortfall in the oil and gas supply.

8. What can be done, if the various sources for increased energy production do not fully offset the decline in oil and gas production? If this happens, our total energy supply is likely to decline, instead of continuing to increase.

Conservation will likely need to be a part of any future energy plan, to make the best use of the energy that is available. We currently are very wasteful in the way we use energy, so there are likely ways to reduce energy usage, without hardship.

This also will be discussed at greater length in a future post.

To Learn More

Ethanol and Biofuels: Agriculture, Infrastructure, and Market Constraints Related to Expanded Production Report by Congressional Research Service, published March 16, 2007.

Richard Heinberg’s Summary of the Coal Situation, published March 22, 2007.

Crude Oil: Uncertainty about Future Oil Supply Makes It Important to Develop a Strategy for Addressing a Peak and Decline in Oil Production GAO Report published February 2007

Questions for Discussion

1a. In Oil Quiz (Question 7), we said that most geologist predict that oil production will begin to decline between now and 2012, but some predict the decline will begin as late as 2020. We said that governmental agencies, like the US Energy Information Agency, are projecting that oil production growth will continue until at least 2030. Some of the independent oil companies are also projecting long-term growth in production.

Print out pages 13, 47, and 48 of the GAO report listed in the “To Learn More” section. Mark each of the graph items on page 13 as “governmental agency”, “oil company”, or “probably geologist”, based on the information on pages 47 and 48. Also, print out page 8 of the Hirsch Report, prepared for the Department of Energy in 2005. Based on the projections shown in these reports, would you agree or disagree with our description of the situation?

1b. Is there any reason why an oil company might want to show rising oil production for an extended period? A government agency? If you were preparing the GAO report, would you give equal weight to the predictions of the oil companies, governmental agencies, and independent geologists?

2. The GAO report was issued to the public on March 28, 2007. How much press coverage do you expect it to get? Why?

3. Divide up into two groups. Based on what you have learned in the press and what you have learned here, debate whether corn ethanol production should be expanded.

4. In total, what percentage of the gap between supply and demand for oil and natural gas do you expect to be made up by alternatives of the types listed in Question 6? How much of the gap will be made up by conservation? What will happen if neither of these are very successful?

Oil Quiz – Test Your Knowledge

Quiz:

1. United States oil production has been increasing at about 2% per year since 1960.

a. True
b. False

2. Saudi Arabia is currently the largest producer of oil in the world.

a. True
b. False

3. Each country publishes information about its reserves. This gives us pretty good information about future oil production.

a. True
b. False

4. The following were the largest oil producing countries in 2005: Saudi Arabia, Russia, United States, Iran, China, Mexico, Norway, and Venezuela. Of these, which showed declining production in 2006?

a. None of them. Oil production is growing almost everywhere.
b. Only Norway and Venezuela
c. Six of the eight: Saudi Arabia, United States, Iran, Mexico, Norway, and Venezuela.
d. All of them

5. Increases in Canadian oil production as a result of developing the Canadian Oil Sands can be expected to offset declines in oil production elsewhere.

a. True
b. False

6. If oil production in an oil-exporting country declines by, say, 5% per year, oil exports are expected to decline by a similar amount.

a. True
b. False

7. Geologists are in agreement that worldwide oil production can be expected to continue to rise, at least until 2030.

a. True
b. False

8. If worldwide oil production were to decline at 2% per year for several years, this could easily be accommodated with little disruption.

a. True
b. False

9. If there is a worldwide shortage of oil, the richest countries can be expected to get the majority of the oil, and within those richest countries, the wealthiest people can be expected to get the largest share.

a. True
b. False

10. If we know that a major oil shortage is on the horizon, we can make necessary changes (develop alternative fuels and plug in electric vehicles, for example) in a five year period.

a. True
b. False

11. Even after oil production in an area declines, there is still a substantial amount of oil remaining in the ground.

a. True
b. False

12. Technological solutions will overcome the likely oil shortfall.

a. True
b. False
c. We can’t know yet.

Answers:

1. United States oil production has been increasing at about 2% per year since 1960.

Answer: False

Above is a graph (Figure 1) of US oil production. The blue line shows US 48 states total production; the red line shows the US total, including Alaska.

A person can see from this graph that oil production for the United States reached a peak in 1970, then began declining. The addition of oil from Alaska allowed production to reach a second lower peak in 1985, after which it began to decline again. The current rate of decline is about 2% per year.

In most areas, oil production initially rises, then declines after about 50% of the available oil in the area has been recovered. For example, Figure 2 shows a graph of production from the North Sea (that is, near Norway and Great Britain). Production grew for several years, then reached a peak and began declining in 1999.

If the United States does additional drilling in new locations, such as Alaska National Wildlife Refuge, or Jack 2, or along the outer continental shelf near Florida, geologists expect that US oil production (Figure 1) will show a modest increase for a few years, but will not approach the level of production seen in 1970 or 1985.

2. Saudi Arabia is currently the largest producer of oil in the world.

Answer: False.

Saudi Arabia was the largest producer of oil up until 2005, but its production recently has been declining. Russia is now the largest producer of oil. In 2006, Saudi Arabia produced 9,152,000 barrels per day while Russia produced 9,246,000 barrels per day, based on March 2007 US Energy Information Agency data.

Saudi Arabia is the still the largest oil exporter. While Russia produces more, its population is greater, so it has less to export.

3. Each country publishes information about its reserves. This gives us pretty good information about future oil production.

Answer: False

There are three reasons the published reserve numbers give very poor information about expected future production:

1. Reserve numbers appear to be seriously overstated for some countries, based on geological information from other sources. This is particularly an issue for Mideastern countries, such as Saudi Arabia and Iran. Questions have also been raised with respect to Russia’s reserves. Since reserve data is unaudited, there is no direct way of checking the accuracy of the reported amounts.

2. Even if oil is theoretically available, the amount of production in any one year may be very low because of technical issues. If oil is very thick, as in the Oil Sands of Canada and in Venezuela, it may be impractical to recover more than a very small percentage in any one year, because of the large inputs of heat (usually from natural gas) and fresh water required. Oil that is in very deep water, or that is in an area near icebergs, may also be difficult to recover very quickly, because of the need for special equipment.

3. Even if the oil is in the ground, a country can choose to delay production until later. We are used to countries producing as much oil as they can sell. If it becomes clear that there will be an oil shortage in future years, countries may decided to husband their resources (keep part of their oil in the ground, in case they need it later).

4. The following were the largest oil producing countries in 2005: Saudi Arabia, Russia, United States, Iran, China, Mexico, Norway, and Venezuela. Of these, which showed declining production in 2006?

Answer: c. Six of the eight: Saudi Arabia, United States, Iran, Mexico, Norway, and Venezuela, as shown in Figure 3 below.

The fact that six of the eight largest oil producers have declining oil production in the first 10 months of 2006 is of concern because oil production in an area tends to rise for several years, and then decline year after year, once geological limits are reached. The fact that these six countries are showing declining production could mean than many (or all) of them have reached the point of geological decline, and thus can be expected to show declining production in the future. It is also possible that some of the declines in production are due to temporary situations, such as intentional reduction of production or equipment breakdowns.

On the exhibit, we note that the United States, Mexico, and Norway have all indicated that their production declines are for geological reasons, and thus can be expected to continue. The situation is less clear for Saudi Arabia, Iran, and Venezuela, all of which are members of OPEC.

The reason the comparison in Figure 3 is made for the first 10 months of 2006, rather than the whole year, is because OPEC announced a reduction in production as of November 1, and cutting off the data at October 31 eliminates this potential distortion. Thus, this exhibit shows that even before the announced cutbacks, the three large OPEC producers (Saudi Arabia, Iran, and Venezuela) were all showing declining production.

5. Increases in Canadian oil production as a result of developing the Canadian Oil Sands can be expected to offset declines in oil production elsewhere.

Answer: b. False

If we look at production from the Canadian Oil Sands, we find that it is only a tiny percentage of world production — 0.8% of world production in 1998, rising to 1.2% of world production in 2005, after billions of dollars of investment.

Oil from the Oil Sands is extremely difficult to produce. Production requires large inputs of fresh water and natural gas, both of which are in short supply. There is also a shortage of workers and housing for workers. There is discussion about eventually replacing part of the natural gas with nuclear energy, but this will not overcome all of the difficulties. Given how low production is today, and how slow it has been to scale up, it seems unlikely that production will ever be large enough to offset a significant oil production shortfall elsewhere.

Production of Oil Shale in the Western United States is expected to be even more challenging than Oil Sands production. The concentration of potential fossil fuel is much lower in Oil Shale than in Oil Sands, so even more production problems of the type encountered with Oil Sands can be expected. Given the slow progress with Oil Sands, Oil Shale seems even less likely to offset a major oil shortage.

6. If oil production in an oil-exporting country declines by, say, 5% per year, oil exports are expected to decline by a similar amount.

Answer: b. False

When a country increases its oil production, its internal usage tends to rise even faster than exports, as the population grows and some of the wealth filters down to the citizens of the country. When the oil production starts to decline, residents expect to continue their standard of living. As a result, countries tend to keep their own consumption at close to the same level, and reduce exports. This pattern was true for the United States when its production began to fall, and it seems to be happening in a number of other countries.

Given these considerations, if a country’s oil production decreases by 5%, we should expect that country’s exports will decrease by more than 5%.

7. Geologists are in agreement that worldwide oil production can be expected to continue to rise, at least until 2030.

Answer: b. False

We have already seen evidence that in a given area, oil production tends to rise for a number of years, then decline. Most geologists believe that on a worldwide basis, production will also eventually begin to decline. Opinions vary as to when the decline will begin. Typical dates are between 2007 and 2012, although some believe the decline will not begin until 2020 or later.

One reason why geologists are predicting a decline in production is the fact that oil discoveries (excluding Oil Sands, Oil Shale, and other “unconventional” sources) began declining over 40 years ago. The fields that have been found recently, including the much publicized Jack 2 field, tend to be fewer and smaller than the fields found years ago.

While geologists generally believe that oil production will begin to decline in only a few years, governmental agencies, like the US Energy Information Agency, are projecting that oil production growth will continue until at least 2030. Some of the independent oil companies are also projecting long-term growth in production.

Economists have had a surprisingly large say in this discussion. Their view is that it doesn’t matter whether oil production begins to decline or not. They believe that oil is like any other commodity, and that substitutes will be found. They also believe that scarcity will lead to higher prices which will lead to greater production and/or demand destruction, so that declining oil production will never be a significant issue.

8. If worldwide oil production were to decline at 2% per year for several years, this could easily be accommodated with little disruption.

Answer: b. False

One might think that a 2% decline in world oil production could easily be accommodated, but several issues arise:

1. In recent years, worldwide oil usage has been increasing by about 2% a year. Much of this increase in demand is from China and from other oil-producing countries that have previously had a low standard of living. Because we are used to a 2% annual increase in oil worldwide oil usage, the 2% a year expected decrease needs to be compared to the prior increase of +2% per year. This amounts to a change of -4%, relative to what we are accustomed to — quite a big decline.

2. If worldwide production oil decreases by 2% per year, the amount of oil available to importers is likely to decrease by more than 2% a year, for reasons discussed in the answers to Question 6. Because the United States’ own production is dropping at 2% a year, in recent years our imports have been increasing at 5% a year, to keep up with demand. If imports suddenly become less available, US supplies are likely to drop by much more than 2% a year.

3. The US economy and the world economy use very large amounts of debt. When the economy is growing by several percentage points per year, there are enough funds available that most debtors can repay their debts with interest. If, because of oil shortages, the economy ceases to grow, or if it begins shrinking by a few percentage points a year, it is not clear this system can continue. There are likely to be many defaults on loans, and long-term loans, including mortgages, may become very difficult to obtain.

4. Once it becomes clear there are likely to be oil shortages in the future, the behavior of countries is likely to change. We are already seeing oil producing nations, like Russia and Venezuela, unilaterally adjusting oil contracts to terms that are more favorable to themselves, because of their new, greater power. If it is clear that prices will be higher in the future, oil producers have an incentive to hoard their supplies for the future. Some countries with inadequate supplies may choose military approaches for obtaining oil, if the alternative is economic decline.

9. If there is a worldwide shortage of oil, the richest countries can be expected to get the majority of the oil, and within those richest countries, the wealthiest people can be expected to get the largest share.

Answer: b. False

For reasons discussed previously, oil exporting countries are likely to get a disproportionate share of the remaining oil, since they are likely to meet their own needs first. With oil shortages, oil producing countries find themselves with more power, and are able to rewrite contracts on terms more favorable to themselves. Thus, it seems likely that the amount of oil available to oil-importing countries will decline disproportionately to the overall decline.

Within countries, governments are likely to allocate oil to what they consider their country’s most basic needs first – most likely agriculture, the military, and perhaps emergency services. If there is a shortage to begin with, once these allocations are taken off the top, the remaining amount of oil available to consumers is likely to be considerably lower than the total demand. It is possible the remaining oil will be sold to the wealthiest individuals, but if elected officials are involved, rationing may be more likely.

10. If we know that a major oil shortage is on the horizon, we can make necessary changes (develop alternative fuels and plug in electric vehicles, for example) in a five year period.

b. False

The US Department of Energy commissioned a study titled Peaking of World Oil Production: Impacts, Mitigation, and Risk Management, by Robert Hirsch, Roger Bezdek, and Robert Wendling, published in early 2005. This study indicated that if existing technology is used, it would take at least 10 years to begin to mitigate a decline in oil production. Twenty years would produce a much better level of mitigation.

The reason mitigation is expected to take so long is that there is so much infrastructure in place that uses the current technology. If a decision is made to increase fuel efficiency standards for cars, for example, it takes many years before this decision has a significant impact. First, it takes several years for manufacturers to begin making new models, then many more years before enough autos are sold to comprise a significant share of the US total. If liquid fuel is made from coal (a technology that has been around since World War II), it takes several years for factories to be built and new coal facilities to be developed.

Because of these considerations, it is difficult to make any major change very quickly. If we are talking about developing new technologies, like plug-in electric vehicles or cellulistic ethanol, we should expect even longer lead times, since new technologies need to be developed and tested, before they can be implemented on a large scale.

11. Even after oil production in an area declines, there is still a substantial amount of oil remaining in the ground.

Answer: a. True

Even after production ceases, a substantial amount (typically 50% to 75% of the oil originally in place) remains in the ground. New production techniques have been developed over the years, but these have generally had only a minor impact on the percentage of oil in place that can be produced. If one looks at the graph of the production for the US-48 states shown in Figure 1 above, or the production for the North Sea shown in Figure 2, one can discern little impact of new techniques in the last few years. Some believe that the primary impact of new techniques has been to remove oil more quickly, rather than to significantly raise the percentage of oil that can be recovered.

Given that there is still a substantial amount of oil is the ground, there is a possibility that new techniques will be developed that will be able to remove a much larger portion of the oil in place in an economical fashion. If this can be done, an oil shortage can perhaps be avoided for quite a few more years.

12. Technological solutions will overcome the likely oil shortfall.

Answer: c. We can’t know yet.

Since there are many people working on the problem, and since there is still a lot of oil in place, there is a possibility that solutions will be found to the likely shortfall in oil production. There are many issues that make the problem particularly difficult, however:

• There is a very long lead time for any new technology to be implemented.

• It appears likely that there will be a shortage of natural gas in North America, in roughly the same time frame as the expected decline in worldwide oil production.

• Global warming is becoming a serious enough issue that it is questionable whether we should burn the additional fossil fuels that are in the ground, if we can get them out.

• We have a large world population and limited fresh water and top soil, limiting the amount of biofuels that can be produced.

The above issues all relate to the fact that we live in a finite world and are approaching its limits. Researchers will need to understand all these various issues, in addition to the problem of oil shortages, to avoid trading one problem for another.

To Learn More

Dr. Colin Campbell – Peak Oil Presentation – The End of the First Half of the Age of Oil (33 minute video for Windows/Mac or IPOD/mp3)

Peaking of World Oil Production: Impacts, Mitigation, and Risk Management (US Department of Energy report mentioned above)

“Energy Sources and Our Future” – Remarks by Rear Admiral Hyman Rickover in 1957

Labor and Skills Crisis in Oil and Gas Industry Booklet by Booz, Allen, and Hamilton

Questions for Discussion

1. If your family were permitted to purchase only five gallons of gasoline per week, how would this change your lifestyle?

2. Geologists and economists seem to have very different ideas regarding the importance of the decline of oil. Who would you agree with? Why?

3. Oil production in Mexico began to decline in the past year, and is expected to continue to decline in the future. In the past, revenue from oil income has been one of the country’s primary sources of tax revenue. What kinds of changes would you expect in Mexico, as production declines in the next few years?

4. If you were the President of the United States and knew about the likelihood of oil shortages, what policies would you recommend? If you knew that it was likely that worldwide oil production was about to decline, would you tell the American people?

5. Some people have suggested that there may be a link between expected future oil shortages and the war in Iraq. How likely do you consider such a connection to be?

6. Given the likelihood of oil shortages in the future, what might be good careers for young people making choices today?