Special Report: Peak Oil

Slippery Slope: Oil after the Global Peak (Peak Oil, Part I)

As we head into the summer driving season, it seems a good time to take stock of the issue of oil production.

By Ryan McGreal
Published June 16, 2005

Ryan McGreal Special Report

Raise the Hammer has written about energy issues rather exensively in our hammerblog, as well as writing reviews and conducting interviews (see Related Articles at the bottom of this page). However, as we head into the summer driving season, it seems a good time to take stock of the issue in a more coordinated manner.

This is Part 1 of a three part series on oil peak production and its implications for Hamilton's future development. Part 1 provides an overview of the "peak oil" theory; Part 2 will explore the unique properties of oil and the limitations of possible replacements; and Part 3 will examine what cities can do to plan and prepare for the future.

Over the next five years, crude prices will almost double, averaging close to $77/bbl and reaching as much as $100/bbl by 2010. ... Tomorrow's price hikes … will follow from the inevitable collision between surging global crude demand and accelerating depletion of conventional crude supply.

-- CIBC World Markets

The earth consumes about 30 billion barrels of oil a year, while the world's remaining endowment of recoverable oil stands at about one trillion barrels. If humans could continue using oil at the same rate, we would drain our endowment in 34 years.

Of course, this won't happen, because oil production follows a bell curve: output accelerates rapidly after production begins until it peaks at about the mid-point of total reserves. After that, output declines and tapers off until it is no longer economical to extract any more (i.e. it takes a unit of energy to obtain a unit of energy).

The earth has already consumed a trillion barrels of oil, which puts us around the mid-point (a trillion consumed and a trillion to go). Since global production is just an aggregate of all the individual wells, it also follows a bell curve. If we're at or near the global peak now, global daily production will soon start declining. The earth cannot maintain its current annual output of 30 billion barrels.

The world economy has gotten fairly comfortable with oil at $45 a barrel. But how will it react to paying $100 a barrel three years from now? Or $150 in five years?

-- Forbes, paraphrasing Stephen Leeb, president of Leeb Capital Management

The U.S. Geological Survey (USGS) claims the production peak is still two decades away, but don't believe it. The U.S. government has an official policy of calculating reserves based on projected demand, not on projected supply. Yes, you read that correctly. As the Energy Information Agency explains, "estimates are based on non-technical considerations that support domestic supply growth to the levels necessary to meet projected demand levels. [emphasis added]"

The USGS hangs its optimism on undiscovered reserves and technological improvements at extracting oil. However, the former is unlikely, as oil companies have mapped the world extensively and have made no new major discoveries in recent years. (In fact, global discovery peaked around 1964, and new discoveries have been declining ever since, with no large finds at all in the past five years. The production peak follows necessarily from the discovery peak with a four decade delay.)

The much-touted technological improvements, rather than increasing supply, have merely accelerated depletion, draining wells faster and hastening the production peak. After peak, production falls off much more quickly than it expanded before peak. Further complicating matters, pumping oil too quickly can also damage the internal structure of the field, leading to structural collapses and lost potential.

We believe oil markets may have entered the early stages of what we have referred to as a 'super spike' period ... Resilient demand has caused us to revise up our super-spike range to $50-$105 per bbl up from $50-$80 per bbl previously.

-- Goldman-Sachs Global Investment Research

Nearly every reserve assessment not based on suspect USGS data puts the peak somewhere between now and 2010. In fact, there likely won't be a discrete peak per se. It will probably stretch over several years as volatile prices squash demand periodically. We appear to be entering that jagged plateau now, as described by analysts at Goldman-Sachs and CIBC World Markets.

This is also consistent with the investment decisions of the major oil companies. They're keeping mum for the most part, but their cumulative decisions to consolidate and merge rather than search for more oil suggests they're hunkering down for the crunch.

The combination of the news that there's no new Saudi Light coming on stream for the next seven years plus the 27% projected decline from existing fields means Hubbert's Peak has arrived in Saudi Arabia.

-- Bank of Montreal

The evidence is mounting that Saudi Arabia, for many years the world's "swing producer," is losing its ability to continue bridging demand with more supply. The pumps are running full-bore and Aramco is pumping seven million barrels a day of saltwater into its massive Ghawar oilfield just to keep production flat. Ghawar's "water cut" - or the proportion of output made up of water, not oil - is on the increase.

Matthew Simmons, CEO of Simmons International investment bank and advisor to Dick Cheney's Energy Task Force, has written a book on Saudi Arabia's secretive oil industry (Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy) arguing that the world's swing producer has already peaked. Raise the Hammer will review Twilight in the Desert in an upcoming issue.

The, er, good news is that our oil endowment will last longer than 34 years as daily production declines. People may still be pumping conventional oil a hundred years from now. The bad news is that the global economy, powered as it is by cheap, abundant oil, will inevitably go haywire as the supply starts to contract.

Peak Oil means supply never grows and probably begins to decline.
  • Demand then exceeds supply.
  • Prices rise (but supplies do not).
  • Fierce energy competition ensues among key users.
  • Economic rationing will divert supplies to highest price purchasers and highest need areas.
  • Lifestyles have to change to accommodate less supply.
-- Matthew Simmons, Simmons & Company Intl. [emphasis added]

Economists argue at this point that when oil becomes uneconomical, humans will simply segue across to whatever replacement best meets our needs. This article of economic faith is unlikely to occur, at least in the seamless manner in which economists envision. Part 2 of this series will explore the unique properties of oil in more detail.

Next issue: Part II: Unique Properties of Oil

Related Articles

The following articles were not harmed in any way in the writing of this series:

Interviews

Reviews

Articles

Blog Entries

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. 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.

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