Peak Oil is the buzzword among oil critics today, describing the point when global gross oil production peaks and starts on its irreversible decline. Although this is an important turn of the tide, we should not forget that net oil for consumption will peak long before peak oil. Possibly it already has.
There are two aspects of the law of diminishing returns related to oil production to consider.
The more important aspect is the gradually worsening energy net return on energy invested (ENROEI). More oil and other forms of energy are expended in finding, producing and delivering the same amount of oil to the market. The industry must turn to smaller sources of oil that are costlier to exploit.
The few fields still being discovered on the Norwegian shelf are dwarfs compared to the big fields still in production (and that by now have been emptied for roughly three fourths of their extractable oil).
Norwegian oil production has been falling since the year 2000. Total petroleum production fell last year and will do so again this year, while total costs including exploration will soar 60 percent in the period 2003-2006, according to government estimates.
In the Gulf of Mexico, oil companies are now drilling down to 30,000 feet. According to US Congressman Roscoe Bartlett, there are 530,000 producing oil wells in the US today (averaging less than 10 barrels production a day); still production is slowly declining.
Estimates differ, but it seems likely that between 3 and 5 barrels are now required to produce 10 barrels of oil in the US. Of 5 million barrels produced a day, perhaps only 3 million reach consumers.
This trend is global. Even in the Middle East, where this ratio for decades has been estimated to be 1:10, billions of dollars must now be spent just to keep production going.
New techniques, like horizontal drilling, seem to increase the oil output of a field, but they also require more energy. Production drilling takes a lot of energy. You have to drill more and longer wells to get the same amount of oil. Injection of water and gas also takes a lot of energy. Deeper and deeper offshore wells -- the same.
When the global energy costs increase by 10 percent of the total production, practically the whole Saudi-Arabian oil production is down the drain.
The second factor to consider is oil quality, actually another side of the same issue. Oil on the world market is gradually becoming heavier (and increasingly sour, which is an environmental problem). Heavy oil is more difficult, more expensive and more energy intensive to refine into the lighter products demanded by the market, such as gasoline, diesel and airplane fuel.
The situation in the US is now a perfect illustration of the consequences of this trend. Refineries are flooded with heavy oil that they are not able to process. Oil reserves are up, while US imports of gasoline are also up 20 percent from February 2005 compared to the same month this year.
We will seriously misjudge our situation if we only focus on gross production Peak Oil and neglect the worsening quality of oil and worsening energy net return on energy invested (ENROEI).