Thursday, June 22

Peak Oil

Peak oil describes the point in time when oil production declines. Peak oil theory assumes demand will outstrip supply as future deposits become increasingly costly to extract, ensuring price escalation and an end to oil dependant economies with catastrophic results. Nobody can tell reliably when that will happen but a groundswell of current opinion suggests it is already upon us. In June last year the prediction was $46 a barrel for oil, compared to our actual average cost so far of $67.

It is an undeniable fact that reduced oil use, particularly in agriculture and most types of transport require huge societal shifts to sustainable limited alternatives. Alternative technology is far from encouraging. Man made fuels such as ethanol, derived from plants or diesel from coal only partially cover the gap and are much more expensive. There is no viable alternative other than to drastically curtail our use of oil, with less dependence on transport and requiring communities to become more self sufficient.

But is the peak oil theory creditable? Are we at the end of the oil age?

In the past we have encountered similar sharp price increases in the 1970’s when OPEC curtailed production, in 1981 when Iraq was at war with Iran, and in 1991 during the gulf war. This time proponents of the peak oil theory say it’s a different scenario because our reserves have been in decline and new fields will be increasingly costly. We cannot change geology. Oil and gas will become increasingly expensive to extract from dwindling reserves. It seems creditable enough to believe we have reached this point in the cycle where oil prices can only escalate rapidly.

However recent statistics on world reserves show a small net increase, cementing a continuing trend of the oil industry each year to find more oil then it produces. In other words the net effect of new discoveries of economically feasible oil fields and assessment of the life of existing reserves of what’s left in the ground showed an incremental increase over previous years, in line with a positive continuing trend. The proponents of the peak oil theory argue countries like Saudi Arabia deliberately lie about their level of reserves, overstating the figures to justify pumping more oil. But their motivation for doing this is at odds with their investment plans, as they implement large scale infrastructure spending. Why spend vast sums of money to increase your capacity if your reserves are running out!!

Herein then lies the confusion, assuming there is a fudging of figures than the theory remains creditable, if not we have time to adjust. And if the latter be correct than the price of oil will actually fall back to somewhere in the range of $50 per barrel, or even below within a year, assuming countries don’t simply turn off the pump and also barring another War or a cataclysmic event.

What of the future? No one knows!

Maybe there is a window of opportunity over the next 30 years to finally make some headway in reducing our reliance on oil, time for consumers to adjust. Either way the key is to change towards a sustainable pollutant free lifestyle.

Oil markets and futures contracts are going to be in for a very rocky ride in the meantime. The same analysists who predicted $46 for this year are now predicting $60 for 2007.


madcapmum said...

We live right in the heart of oil-country in Alberta here, and absolutely, they're expanding like crazy. Having a refinery is like a license to print money, and the cost of building a refinery for several billions is a very good deal considering how much they can get out of it even in the short term. They're making money hand over fist even if it only operates for 5 years.

However, the oil they're getting at this point is a much lower grade than it was 15 or 20 years ago, and generally they're having to dig deeper for it. The refining process is protracted because of increasing levels of impurities. They're piping the stuff 600+kms from Ft. MacMurry to the Ft. Saskatchewan refineries.

Alberta is hardly a hotbed of environmental concern. The cancer rates in our area, particularly downwind of the refineries, are horrifying. The water is unsafe for bathing. Certainly you don't drink it or eat the fish. Even the refineries themselves, masters of spin, tell people not to eat plants grown within a certain distance. Still, very few people speak with their votes or their money in favour of a general move towards cleaning things up. The money's just too good.

Living in the middle of it all, I see just how manic the industry has become, trying to get in on a good thing before it (in my opinion) all goes splat. And as a family we're trying like mad to make ourselves scarce before it does us more damage than it already has.

Granny said...

Bakersfield, CA is oil country and you can smell it ten miles out.

I'd rather put up with the cows here.

abhay k said...

Genuine concerns Lindsay but I have immense faith in human resources that make all other resources possible...there would be problems for a while then we would adapt...if not let's not worry about moves on..

Wendy A said...

What a tangled web we weave. I really think it is political. Someone, somewhere is taking profits.

We will run out of oil someday however it will be more gradual then this.

bohemiantroubadour said...


Lindsay Lobe said...

Hi Madcap
Interesting to realise oil is now yielding a lower grade in Canada and they have to dig deeper for it.
Corporate social responsibility to communities nearby doesn’t obviously rate! Little wonder you have itchey feet !!
Granny- I dont CA would put up with it !!
I still have some hope, in the spirit of mankind.
Politics figures heavily in the production of oil, now largely owned or controlled by individual States. I suspect that has a lot to do with pricing.
Yes they do …..But will the pace of change be enough!!

Best wishes

JuBlue said...

I heard an interesting discussion the other morning on NPR that you would have enjoyed, Lindsay, as it was focused more or less on this topic.

One point that came up in that discussion was this: if countries like the United States do try to cut way back and pursue alternatives, which you note are expensive, at THIS point in time, then the price of oil will fall, and other coutries (and they mentioned India and China, although I can't remember why it was those 2), will buy the cheaper oil and be able to operate at a lower cost and undercut us that way. We won't be able to compete was the bottom line. What do you think?

Also, they did talk about the OPEC nations changing their numbers around depending upon how they want to influence the market. Sometimes they estimate they have more oil, sometimes less. That was an interesting discussion, too.

Lindsay Lobe said...

Hi Jublu

In there past there was a very cosy arrangement between the USA and the Saudi’s where any shortfalls would be covered by increased pumping and oil was kept cheap.

I don’t think the alternatives would make that amount of difference, since you would need to absorb half the current farming land for corn for ethanol to make a big impact. Certainly I think the argument is true, those that take their more expensive sustainable energy route suffer disadvantage if the rest of the world continues to use the cheaper( and made cheaper by alternatives) pollutants. Thanks for your insightful comments. I would have loved to listen in !! from what I can gather all true !!
Best wishes

bohemiantroubadour said...

Canada is the biggest supplier of oil to the United States. Alberta is the land of opportunity.

laura said...

Peak is a misnomer, too, because that implies that things will come down at the same rate they went up and that's not true - they will fall far more quickly.

I have hope that we'll adjust in time. Texas is the land of hold-outs, but people are starting to make much bigger changes even here. Hopefully, globally, it will be enough and in time.

Lindsay Lobe said...

Those oil field I think you will find are either owned or soon to be owned by China.

Yes-time will tell !!

Best wishes

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