Special Report: Peak Oil

Amid Recovery, Peak Oil Will Rear its Head Again

If we can't close the gap between rising demand and flat supply, we will spend the next several years reliving the boom-superspike-bust cycle again and again, while our indebtedness grows steadily and our median standard of living ratchets down.

By Ryan McGreal
Published May 03, 2010

this article has been updated

One of the basic tenets of peak oil theory is that we won't know for certain when the peak takes place until a few years later, when we have clear evidence that production has gone into decline. By that standard, we cannot yet confirm that the global oil production peak has passed, but the evidence strongly points in that direction.

Consider: global oil production has been stalled at around 85 million barrels per day (mbpd) since 2005.

World Oil Production by Month, 2005-2010 YTD (Source: EIA)
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The sharp run-up in oil prices that peaked at $147 a barrel seriously took off starting in 2005, right around the point at which global oil production could no longer increase with growing demand.

WTI Average Spot Price, 2005-2010 YTD (Source: EIA)
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After crashing in the latter half of 2008, oil prices crept back up during 2009 and have been creeping upward in the $75-80 a barrel range since last October.

As the global economy crawls out of recession, demand growth will take off again. If global oil production still has room to increase (a big if), we can expect that oil production will grow by around two percent a year. Production would be around 87 mbpd in 2011, around 88.5 mbpd in 2012, and just over 90 mbpd in 2013.

On the other hand, if we are in peak oil and sustained production can't increase beyond around 85 mbpd, we can expect that oil prices will start to increase again in response to rising demand.

Remember: when demand becomes tight, the price driver is not so much the cost to produce as it is the rate of production.

It's tempting to assume that higher prices will simply bring more non-conventional (read: more expensive and riskier) sources on line - though we're already discovering why these non-conventional sources were undesirable in the first place - but it's by no means safe to assume that some combination of non-conventional sources and conservation can close a steadily-widening gap between supply and demand without painful demand destruction through volatile price spikes.

Can we produce five or ten million barrels of oil-from-coal a day? Can we replace a two or three percent annual drop in oil production rates through some combination of conserving and replacement without recessionary demand destruction? I'm not so sure.

If we can't, we will spend the next several years reliving the boom-superspike-bust economic cycle again and again, while our endebtedness grows steadily and our median standard of living ratchets down by painful degrees.

It's similarly tempting to assume that North Americans will simply shift more quickly from SUVs toward plug-in Priuses, but at this point it's not clear how big an impact this will have on aggregate demand. That might work if the developed world was driving the increase in fuel consumption, but that hasn't been true for quite some time.

US Oil Consumption, 2005-2010 (Source: EIA)
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North American oil consumption is already going into decline, but global demand pressure is coming from the developing world - China, mainly, followed by India - as well as all the oil-producing countries with nationalized industries and artificially low domestic prices (Venezuela and most of the Middle East).

Those consumers will not be buying plug-in Priuses; and with consumption growing rapidly in the oil exporting countries, once they pass their national production peaks their export rates will decline faster than their own production rates.

Update: added table of US oil consumption by month.

Ryan McGreal, the editor of Raise the Hammer, lives in Hamilton with his family and works as a programmer, writer and consultant. Ryan volunteers with Hamilton Light Rail, a citizen group dedicated to bringing light rail transit to Hamilton. Ryan writes a city affairs column in Hamilton Magazine, and several of his articles have been published in the Hamilton Spectator. He also maintains a personal website and has been known to post passing thoughts on Twitter @RyanMcGreal. Recently, he took the plunge and finally joined Facebook.

25 Comments

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[ - ]

By Lurkalicious (anonymous) | Posted May 03, 2010 at 15:34:53

How did you make those graphs?

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By notamoonbat (anonymous) | Posted May 03, 2010 at 16:30:49

Comments with a score below -5 are hidden by default.

You can change or disable this comment score threshold by registering an RTH user account.

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By Ryan (registered) - website | Posted May 03, 2010 at 18:32:31

How did you make those graphs?

They're just styled HTML tables. I wrote a little Python script that takes a list of (label, value) pairs and generates the HTML. Which brings us to:

There you go with you're [sic] peak oil conspiracy theories again!

Kindly take a look at the first table, which plots daily oil production by month for the past four-and-a-bit years.

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By arienc (registered) | Posted May 03, 2010 at 21:45:22

Even the Pentagon is planning for oil production to drop precipitously from current levels.

http://www.peakoil.net/files/JOE2010.pdf

"By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD."

That's a shortfall equal to one Saudi Arabia, or five Alberta's, within 5 years.

Peak oil is past tense.

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By jason (registered) | Posted May 03, 2010 at 21:48:04

Peak oil is past tense.

In the real world, yes. On TV it's not even current yet.

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By canbyte (registered) | Posted May 03, 2010 at 23:46:47

At the Proud Hamilton gig tonight, the speaker noted that IEA is forecasting $200/bbl oil by 2030. Double in 20 years????!!!! How these guys get away with crap like that is beyond me but I guess the public is still in deep slumber. The sycophants gave a rousing cheer for his performance, which to be sure, was quite entertaining.

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By zippo (registered) | Posted May 04, 2010 at 01:00:46

Ryan: I think many of your questions have been dealt with quite well in "the Hirsh Report" produced for the US gov't in 2005 Copy is here, Uncle Sam seems to have pulled it off all gov't sites again http://www.hilltoplancers.org/stories/hi... Bottom line from that report: A crash program equivalent in intensity to the conversion of industry seen during world war 2, carried out for 20 years, would be required to attempt to significantly mitigate the liquid fuel crisis. This would include maximum possible simultaneous adoption of all of the following: Conservation, conversion to electric vehicles, enhanced oil recovery, coal to liquids, natural gas to liquids, & heavy oils (tar sands) development.

So, unless someone is prepared to refute the reports conclusions, since we can clearly see that the measures it requires have not yet begun to be implemented, and we are almost certainly at or near peak now, we can say that the crisis is unavoidable at this point.

Comment edited by zippo on 2010-05-04 00:10:40

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By CuriousFellow (anonymous) | Posted May 04, 2010 at 06:34:50

If the public is not aware or interested in the real possibility of permanent oil shortages and economic havoc, what price do they have to pay to wake up? And will they do meaningful to resolve the energy crisis?

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By randomguy (anonymous) | Posted May 04, 2010 at 07:10:42

Would it not make sense for Hamilton to switch its entire vehicle fleet to natural gas, as natural gas production looks like it is increasing and that the price premium oil commands compared to natural gas for the same amount of energy will also increase?

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By chicklittle (anonymous) | Posted May 04, 2010 at 07:41:22

We need to adapt. Take a look at this article The Great Transition: http://www.scribd.com/doc/21656220/The-Great-Transition-Navigating-Social-Economic-Ecological-Change-in-Turbulent-Times

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By jasonaallen (registered) - website | Posted May 04, 2010 at 08:48:36

Jason - your point about it not being on mainstream TV yet is well taken. The time for debating the 'reality' of Peak Oil is long past. With Climate Change, some might argue that due to the slow nature of change, there was plenty of time for the public to get their heads around the issue - in a fairly leisurely way. With Peak Oil, that luxury doesn't exist. The time for debate is over, it's time for people to start taking practical steps in terms of energy descent for their housholds, neighborhoods and cities. I am a firm believer that if we take appropriate action quickly enough, we can avoid the kind of challenges that Ryan's graphs make seem inevitable. The key might not be to try and get everyone on board at once, but to just start taking action, and others can "pile on to the bus" as we go, and as the difficulties become more and more obvious. Indeed, most major cultural changes happened this way.

'Transition Hamilton' anyone?

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By Ryan (registered) - website | Posted May 04, 2010 at 09:27:53

The key might not be to try and get everyone on board at once, but to just start taking action, and others can "pile on to the bus" as we go

The math of it is actually pretty straightforward: the world is accustomed to 2% annual growth in oil production, but we face a 2% annual decline in oil production. That means each year, the world is going to have to figure out how to run on 4% less oil than the economy would traditionally expect.

The math may be straightforward, but the economics and politics will be diabolically tricky. Also, bear in mind that the developed world is no longer the driver of global demand - our consumption is already flat and falling. (I added a chart showing US oil consumption since 2005 to illustrate this.)

Affordable small vehicles like this one are going to enable car ownership for millions of people in the emerging economies, and this demand pressure is what's going to drive the next spike in the price of oil - a spike that's going to throw the developed economies into another sharp recession, sure as clockwork.

Only the next time we go into recession, we may find that our governments' enthusiasm for Keynesian stimulus spending is much diminished.

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By CuriousFellow (anonymous) | Posted May 04, 2010 at 10:36:52

“Indeed, most major cultural changes happened this way.” I think that is a little too sweeping. Sure, changes can work along that path, the hula hoop, maybe but fundamental economic and social arrangements? Nope. Take Christianity, for instance, it became the official religion of Rome when it was only practiced by 10% of the population; it was promoted and enforced by the government (Constantine and Theodosius).

I don’t think people will hop on the bus of sustainability but become a source of political strife. “Drill Baby, Drill” is easier to say and think; ergo, politically sell for those who want office than more prudent, self-sacrificing policies. Really, for Peak-Oilers, this is all just preaching in the wilderness for nobody's coming.

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By jasonaallen (registered) - website | Posted May 04, 2010 at 14:01:19

Curious Fellow - we could go back and forth for days about whether sweeping changes come from the top down (Christianity) or the bottom up (The Communist Revolution, the French Revolution) - there are adherents and exceptions to every 'sweeping statement.' Your analysis is right, that it is far more politically expedient to say "drill baby drill", until gas/fertilizer/food costs are through the roof, and you're over at a neighbor's house eating an amazing fresh salad, and when you ask them how they can afford to eat so well, the tell you they grew it themselves... I guess it's the wide-eyed Albertan in me that beleives that effective change can come from small individual steps that aggregate in the same direction, but I think that the Climate Change debate is a good example. 15 years ago, any politician that even broached the idea of conservation or energy reduction would be considered a wide-eyed fringe candidate. Now it's part of the platform of everyone who is serious about getting elected. On one hand - we simply do not have the luxury of time we did with the climate change debate (although many would argue it's already too late), but on the other, the impacts in the wallet from Peak Oil are going to spur people to action far more rapdily than stories of far off islands being threatened with drowning. Paying $150.00 to fill up your SUV is just that much more immediate. I guess in the end, it's just my pathological optimism coming into play. Not an optimism built on "let's all hope for the best and sing kumbayah", but an optimism based on the amazing 'roll up their sleeves' work being done in Hamilton by people like the Transit Users Group, the Food Security Group, The Community Gardens groups, Transition Dundas, and too many more to mention.

Comment edited by jasonaallen on 2010-05-04 13:06:16

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By Kiely (registered) | Posted May 04, 2010 at 14:04:07

Affordable small vehicles like this one are going to enable car ownership for millions of people in the emerging economies, and this demand pressure is what's going to drive the next spike in the price of oil - a spike that's going to throw the developed economies into another sharp recession, sure as clockwork. - Ryan

I was in Indonesia in March and in Sengatta, which is a mining town in Kalamantan (AKA: Borneo), there was "rush hour" traffic and lineups at the gas pumps that stretched for blocks. Sure it was mainly scooters and small motorcycles, but the population of those gas burning modes of transportation had easily doubled since my last trip there three years ago. First thing they buy when they get a chance is a cellphone (another source of global conflict and waste) and then they save their money for a motorcycle or scooter. There are millions of Indonesians all wanting the same things "we" (i.e., first world nations) have and who is going to tell them "sorry, you can't".

Pandora's box has been opened.

Comment edited by Kiely on 2010-05-04 13:55:41

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By d.knox (registered) | Posted May 04, 2010 at 21:32:29

I'm one of the dreadful people hoping that gas prices keep going up. I don't like our lifestyle, and I see that the easiest way to change it is for the price of oil to go through the roof.

I know we would adjust, but many of the dreadful things in our lives would price themselves out of reach - the expensive airfare for hideous, cheap holidays to "exotic" islands full of our neighbours would eliminate all-inclusive Carribean slumfests; expensive oil would eliminate the hoards of zombies congregating around far flung suburban malls; it would no longer be reasonable to visit relatives who live on another continent once a year. At least this could happen in the short-term.

Yes, things would become more expensive, but I think many of us could afford to cut back a little. Perhaps our lifestyles would start to change.

Sadly, or perhaps happily, humans are very adaptable. When we started running out of trees, we burned coal. When we depleted coal, we turned to oil. We'll find something else, the world will change around us again, and in some not distant future, people will listen to stories of the crazy past when we actually put oil! into our cars. That's just how things go.

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By Ryan (registered) - website | Posted May 04, 2010 at 22:07:22

I agree that the oil price needs to be higher, but to get the maximum economic benefit from oil price signals, the price also needs to be stable. Without price-driven demand management, you get super-spikes that trigger sharp recessions. When oil prices collapse, projects that focus on alternatives (both conservation and alt power generation) stagnate and go bust, deterring further investment and leaving the economy more vulnerable to subsequent price spikes.

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By A Smith (anonymous) | Posted May 05, 2010 at 04:53:06

Ryan >> Consider: global oil production has been stalled at around 85 million barrels per day (mbpd) since 2005.

In 1979 world oil supply was 66.9 Mbpd and it wasn't until 1993 that this level was reached again, even while world oil consumption grew from 63.1 to 67.4 Mbpd, or 6.8%. During this time period, oil prices fell from around $70 to less than $30 (2007 USD).

From 2002 to 2008, world oil supply went from 76.9 to 85.2 Mbpd, while oil consumption went from 78.1 to 85.4 Mbpd, but this time oil prices spiked.

The only thing that determines the price of oil are the actions of the buyer and seller of oil contracts. Even if supply is tight, if sellers are willing to sell at $30 per barrel, that will be the price. Similarly, even if there is plenty of supply, if sellers can convince buyers that oil is worth $130 per barrel ("we're running out of oil, buy before it's too late!"), that will be the price that we pay.

Chill out, stop listening to the experts and everything will work out just fine. In other words, have some faith.

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By CuriousFellow (anonymous) | Posted May 05, 2010 at 07:30:48

Yes, Jasonaallen, I’ll give you your due. Small changes in steps can make a difference, like your example of the French Revolution (without qualification whether it was a good change or not); however, your drift-off is seen in your examples. How did those small steps, small number of people do it in France, Russia, etc? By ideology---an overriding and powerful story of where we are and need to go that touched something. It was a REASON whereas rising gas prices are just a motive, which, by the way, can and will be interpreted by different people in different ways. “Gas is so high because those green hippies would not let us develop the oil resources we need.” or “Government regulation blunted the natural market mechanism” or even “This is God’s punishment for the US loosing its way.”

Do you think a website of numbers and charts, re-hashing the same strength of Peak Oil will convince 99% of American, who don’t know what the hell it is anyway? My point is that Peak-oilers will need more to get outside this echo chamber to set down a rational way to respond to the incentive of future rising oil prices. I mean, I’ve heard the arguments for and against Peak Oil. I favor Hubbert, if not for any reason other than as a the smart contingency. Peak-oilers need to ask them selves how Peak Oil fits into the greater scheme of things, socially, politically, economically and find better REASONS than Permaculture, which will strike some as pantheism and others as communism. Seriously, how would you tell the guy, who can’t wait to buy an I-Pad or “Pimp” his gas-guzzler that growing his own food and re-using his plastic bottles were what he was supposed to have been doing all the time? He’s going to be angry, the question is who and what should he be angry at?

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By WRCU2 (registered) - website | Posted May 05, 2010 at 08:23:29

A Smith says,

Chill out, stop listening to the experts and everything will work out just fine. In other words, have some faith.

Faith in what Mr. Smith, the Buyers and Sellers? A manipulated (free) market environment? Mr. Smith also stated,

From 2002 to 2008, world oil supply went from 76.9 to 85.2 Mbpd, while oil consumption went from 78.1 to 85.4 Mbpd, but this time oil prices spiked.

It would help to know that from 2002 to 2009, the US national debt rose from $6 to $12 TRILLION. Funny how it took 213 years to reach $6T and only 7 years to double. It is also interesting that shortly after oil spiked at $147 per barrel, we find ourselves in this recession, which hasn't gone away yet.

Higher oil prices will get us out of our cars and flat on our feet in the street, but not in a way we would call discreet.

Mr. Smith's optimism is little more than blindass faith, like trying to pin a tail on a donkey and then eat cake. A more holistic view was expressed by Mr. Allen,

I guess in the end, it's just my pathological optimism coming into play. Not an optimism built on "let's all hope for the best and sing kumbayah", but an optimism based on the amazing 'roll up their sleeves' work being done in Hamilton by people like the Transit Users Group, the Food Security Group, The Community Gardens groups, Transition Dundas, and too many more to mention.

Another demand produced from (peak) oil is grease or to be more succinct, take a peek at Greece;-)

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By Kiely (registered) | Posted May 05, 2010 at 09:23:52

I agree that the oil price needs to be higher, but to get the maximum economic benefit from oil price signals, the price also needs to be stable. - Ryan

Excellent point Ryan.

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By A Smith (anonymous) | Posted May 05, 2010 at 17:20:14

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By canbyte (registered) | Posted May 05, 2010 at 20:29:57

A good place to start:

"The Department of Defense is the single largest consumer of petroleum in the U.S and the US military is the biggest purchaser of oil in the world. In 2006 the US Military consumed 117 million barrels or 320,000 barrels per day."**

http://www.newlaunches.com/archives/top_...

** possibly double in 2009

On the bright side:

"The Air Force is the largest renewable energy power purchaser in the U.S. and third largest in the world. Four Air Force bases rely entirely on renewable energy for power, while several others use a combination of solar, wind and land gas production for power."

http://www.energybulletin.net/node/29925

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By Donald J. Lester (anonymous) | Posted May 06, 2010 at 18:09:52

Re A Smith, comments brings debatable issues to the forefront; one has to ponder how much of this is simply marketing manipulation. In the mid 60s it was predicted that by the year 2000, oil would be depleted. Setting up this long history and at every opportunity a touch of paranoia is added, for value. Those first cries we that oil was in short supply, in the last 10 years the industry proclaimed it was due to the lack of refineries.

What's interesting is that when one considers the dept of many countries that find themselves in a position of failing to meet their financial obligations, government who will be left on the hock for those other countries failure to meet their dept; and when one adds the total taxes on oil, fuel, it most of this is simply a boondoggle. Most are sharp enough to recognize that the price of oil is more posturing and political that real, all we have to do is examine the profits of the oil industry. Including if these are the facts as a society we would be already be building more atomic energy plants.

"Consider: global oil production has been stalled at around 85 million barrels per day (mbpd) since 2005." this may be so, but is this simply a standby bar in order to maintain the present price? The facts are we are not really sure of whom is pulling the string or why?

"China, mainly, followed by India - as well as all the oil-producing countries with nationalized industries and artificially low domestic prices (Venezuela and most of the Middle East)." Does any one really know what is artificially low or high...Based on much of the hype the base line for logic is difficult to find. Though I think that we to develop a secondary means of energy, if only to bring some balance to the situation. From Canada's perspective perhaps we should stop exporting oil, using said oil for our own use until we develop other resources.
A Smiths suggestion, I think is don't panic as that's what this industry survives on...almost like terrorism.

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By Kiely (registered) | Posted May 07, 2010 at 15:01:56

That might work if the developed world was driving the increase in fuel consumption, but that hasn't been true for quite some time. - Ryan

Case in point:

India sets high highway targets

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