Why Peak Oil Matters

Somewhat continuing the theme of Friday’s post, it can feel difficult to be a “peak oil believer” at the moment. The narrow-minded retorts of “oil was $147 a barrel in July 2008, now it’s barely a third of that – pah!” seem to blind the average driver/politician/roading-lobbyist into believing that the $2.20 a litre prices of last year were a blip and that things have somewhat returned to normality – even if normality is now $1.60 a litre and not $1.10 a litre they feel it should be. Petrol probably would be $1.10 a litre if we had the same exchange rate we had when it was $2.20 a litre, but that’s a completely different story. Perhaps some of the smarter folk figure that rising petrol prices are an inevitability in the long-run, but they ignore the potential effects of that by simply pointing to hybrids, bio-fuels, electric cars, hydrogen economies and other technological advances. All, seemingly, to avoid the conclusion that throwing all our eggs in the “build more roads for more cars” might be slightly reckless. Others say “but there’s heaps more oil out there we just haven’t found yet!”

First of all, let’s start by disproving the last statement, and then work our way through the rest. My trusty guide this time around is a truly fantastic book called “The Last Oil Shock: a survival guide to the imminent extinction of petroleum man“, by David Strahan. I feel compelled to repeat myself: this book is utterly brilliant in its analysis of peak oil, its causes and effects, and potentially what we can do about it. I absolutely recommend anyone interested in peak oil buy this book. So yeah, let’s start with the whole “there might be masses more oil out there we just haven’t found yet” myth. The easiest way to analyse that is to just have some idea about where we find oil and why – effectively the main point being that oil will only exist in certain favourable geological circumstances. The most important of these is a sufficient type of rock to “trap” the oil in place. Most oil throughout history has bubbled to the surface fairly quickly, or hasn’t even formed in the first place from rotten ancient trees and creatures, because it wasn’t trapped in place for long enough. To cut a fairly long story short, if you have some idea of the geological make-up of what’s under the earth (which we do) you can pretty much rule out the 95% of places where oil will never be. It can’t be in those places because it is simply unable to form and remain in those areas. The main issue now is exploring the remaining areas, to see whether those places where oil “could” have formed, actually has it or not. Most don’t.

So over the past 100 odd years (particularly in recent decades) we have actually done a pretty thorough job of exploring those places. This is particularly true in the USA, where production peaked in 1970 and has been in decline ever since, even though production from Alaskan fields (with huge environmental consequences of course) has somewhat slowed the decline. The Last Oil Shock quotes Richard Hardman – former head of exploration and production of Amerada Heiss – as saying “The world has been surveyed to the extent that it’s very unlikely that very large reserves exist in areas that we haven’t looked.” Discoveries of oil are now way below the levels of production and consumption, and well below the level of discoveries that we had 40 or 50 years ago. Clearly that has a flow-on effect, in that if you keep using stuff you discovered earlier, but don’t discover new stuff – eventually you’re going to run out. Or more to the point, you’re really going to struggle to increase your level of production to match increasing demand, which is really what peak oil is all about. So, there is no magic fix that we’re going to discover another Ghawar any time soon.

Of course there are other ‘non-conventional’ sources of oil – such as the Alberta Tar-Sands. Now while there is clearly masses of potential oil in Alberta, actually getting it out is a mission and can’t happen very quickly – current levels of extraction use around a quarter of Alberta’s water. And that’s for barely 1% of the world’s daily oil use. So while Alberta’s tar sands might mean we have a long-term supply of oil (although a very enviornmentally damaging one at that), they are not a source that can be “ramped up” when other areas of oil production inevitably fall.

Now I think of peak oil as the point where oil prices increase significantly because supply can no longer keep up with demand, due to half the world’s oil having been extracted. This means that the point when oil runs out is actually pretty irrelevant, and what becomes relevant is the point when only half the world’s oil has run out. As oil takes thousands or millions of years to create, we aren’t replacing what we use any time soon, so of course we are depleting it each and every time we use it. Therefore, even if we have only used something like 46 per cent of all the recoverable oil in the world, it’s not actually a point where we can be complacent and say “well more is left in the ground than what we’ve used so far… sweet”, but rather a point where we need to say “yikes another four percent and we’re halfway through it, roll on peak oil!” The fact that oil production wasn’t able to increase significantly last year when prices went through the roof (in fact they went so high that even OPEC was worried about them as they realised people would start looking at alternatives to oil at those kinds of prices) says to me that perhaps we’re either really close to hitting that 50% mark, or perhaps that we’ve already reached it.

The importance of that 50% mark is down to the way oil from an individual field is extracted: with the first half extracted at an increasing rate (due to more wells being put in it), but after that first half has gone the pressure in the oil field decreases and more work is necessary to squeeze the rest of it out. Once you hit the 50% mark you can’t usually increase the rate at which you extract the oil, no matter how hard you try. Aggregate that up for all the oil fields in the world and it explains why it will be really difficult to increase the rate of production after we hit that 50% mark. The USA already hit the 50% point in 1970, and has had declining production ever since. Many other non-OPEC countries have hit that point in recent years, including the entire North Sea oil field. We’re all now effectively relying upon Saudi Arabia, Iraq and Iran to have not reached that magical point so they ARE able to increase production enough to off-set the ‘post-peak’ countries. One could say that they didn’t manage that in mid 2008.

Of course, there is the question of “how come oil prices have come down so much in recent times then?” Page 177 of The Last Oil Shock has some sobering news on that front, linking the current recession with peak oil and some pretty nasty long-term consequences. Keep in mind this book was written in 2007.

Paradoxically the very worst short-term outcome might be not a sudden shock, but a milder recession. If this were to create some temporary spare oil production capacity by depressing demand, the economists would claim it was all back to business as usual, and the urgency of the need to prepare for the impending peak could easily be forced off the policy agenda – assuming it ever gets there – by apparently more pressing problems. The world might roll over and go back to sleep again, only to suffer a far more brutal awakening later on.

Now I don’t think many people are calling the current recession “mild”, but its effects are certainly similar to what is outlined in the quote above. The recession has knocked back the growth in demand for oil, which has also created some spare oil production capacity. Combined with an over-inflated price for oil in any case (largely the result of traders becoming aware of oil as something to make money off last year, and then everyone jumping on the bandwagon), the recession has depressed demand. Economists, seemingly those favoured by the New Zealand Government in particular, do appear to have the outlook of “business as usual”, with a private-car based transport system being the way of the future.

In some ways, what’s even more fascinating is how The Last Oil Shock links the spike in oil prices last year with the current recession. Remember, this book was written in 2007 so what is being proposed was just hypothetical at the time (from page 180-181):

The first major oil price spike is likely to send a series of violent quakes through the economy. Quite how violent will depend on the level of awareness of investors on the currency and stock markets. For as long as most continue to labour under the misapprehension that every short-term spasm in the oil supply is simply some disconnected local difficulty, the response of the financial markets may be relatively subdued – perhaps with the exception of Iran. But the moment the money men get it, the price of oil and other energy assets will soar, and almost everything else will go into meltdown.

Hmmmm… sounds a lot like June-September last year to me. Eventually the money-men started to realise that rising oil prices were not just one-off events linked to someone letting off a bomb in Iraq, but were linked to something longer-term. So they all rushed to throw their money at oil, its price soared – cue meltdown.

A major spike in the oil price is recessionary not only because of its direct effects on the global economy, but also because it is likely to cause stock markets around the world to crash, further reinforcing the recessionary pressures. This in turn will lead to second order effects, such as the deepening insolvency of many pension funds, which hold the bulk of their investments in stocks and shares… As the crisis deepens, pension payments may be slashed to derisory levels in both money purchase and the supposedly more secure final salary schemes. The value of endowment policies will collapse too, with devastating effect on the borrowers who were counting on them to repay their mortgage, and the housing market as a whole. The banking sector will also act as a multiplier: since so much lending is “secured” against future economic growth, as the outlook worsens lending will fall, leading to further contraction.

Far out. That sounds an awful lot like the last few months.

The worry here seems to be that peak oil causes recessions, which then themselves create a situation where oil prices are lower. Lower oil prices make people forget oncoming peak oil, which therefore means that necessary changes aren’t made. Once the economy recovers, we see oil prices skyrocketing again (made even worse by low investment in oil exploration during times of recession). As we haven’t adjusted ourselves to living without the need for cheap oil, we get slammed again by the high oil prices, get thrown back into recession, and the cycle continues. The only way to escape the cycle is to break our oil-dependency.

And how does this link back to transport? Well of course it is oil that drives just about all methods of transport in New Zealand. Private cars use the vast majority of New Zealand’s oil, and because our transport system is extremely auto-oriented, and heading more that way thanks to our current government, this leaves us extremely vulnerable to the oil-spike, recession, oil-spike, recession cycle that is so worrying.

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