Starting next week posts from Resource Insights / Energy Bulletin will be regularly featured in The Christian Science Monitor on its new "Energy Voices" blog. The highly respected Monitor has a century-long tradition of reasoned, thoughtful journalism which has earned it seven Pulitzer Prizes and many other awards. Its global reach--it stations writers in 11 countries--will bring a large new audience in contact with my work. Most of these new readers, however, will not have the background on energy and resource issues that I have been presuming my current readers do. If I provide no preparation for these new readers, it will be as if they are entering a theater in the middle of a play without knowing any of the preceding action.
Therefore, in an effort to introduce key concepts and ideas to this new audience, I am undertaking a six-part series that will in most cases revisit ground I've already covered. The first installment of that series will be posted this evening to allow ample preparation time for next week's debut of the Monitor's "Energy Voices" blog. While those of you who have been reading me for a relatively short time may find this series a useful refresher, others who are longtime readers may find it occasionally elementary.
I ask current readers to indulge me for the time being because I feel it is critical that this vast new audience be introduced to concepts and ideas that will allow it to catch up quickly. When the series is complete, I will resume my search for new perspectives on the themes of resource depletion, climate change and related topics, hopeful that new readers at The Christian Science Monitor will be able to follow my thinking as readily as longtime readers do now.
Thanks to all of you who read my work regularly. I consistently find your comments and emails thought-provoking and gratifying. Over the next few weeks I ask you to join me in welcoming the readers of The Christian Science Monitor to Resource Insights.
What were the prices of oil and gasoline in 1998? Do you remember? Without looking them up (or looking below this line), make your best guess.
I've been taking an informal poll to find out what people remember about oil and gasoline prices in that year. So far, only one person has correctly characterized prices back then. Most guesses have clustered around $2.50 to $3 a gallon for gasoline (in the United States). Only one person could come up with a crude oil price which she guessed was around $55 a barrel. The answers show a vague recollection that oil and gasoline were cheaper than they are today. But just how much cheaper has been lost down the memory hole.
Okay, I know the suspense is killing you. Here's how gasoline and oil fared in 1998. The nationwide average price of a gallon of gasoline in the United States in December of that year was 95 cents. The closing price for a barrel of crude oil sold on the New York Mercantile Exchange on December 31 was $12.05. Just three weeks earlier the price of oil had hit its nadir for the year at $10.72. Oil had started the year above $17 and steadily slid as the Asian financial crisis slowed the world economy and reduced oil demand. Gasoline prices dropped only a little during the year starting from the January average of $1.09 a gallon.
Why does the oil industry want you to forget this? Because after a 10-fold increase in the price of crude oil and a fourfold increase in the price of gasoline, the industry is once again trying to sell the same story of continued abundance that they were selling back in the late 1990s. But the manyfold increase in oil prices ought to make everyone doubt an industry which has repeatedly told us that huge supplies are just around the corner, and prices are headed for a crash.
Perhaps the best example of the oil industry's "Wrong Way Corrigans" is industry mouthpiece Daniel Yergin, head of Cambridge Energy Research Associates (CERA), a prominent energy consulting firm. For a long time Yergin has been a frequent guest on prominent television news programs and a source for many print journalists. He is a darling of the media on energy issues, a media which is too polite to confront him with his abysmal record of predictions in the oil market. He was wrong in his public pronouncements every step of the way from the 1998 low in oil prices right up to the all-time highs of 2008, frequently predicting a large buildup of new supply and crashing prices. (One wonders why clients of CERA continue to buy the company's research when it has been so wrong for so long. But that's a story for another time.) Only at the end of 2008 did oil prices finally crash and then only because the world economy was headed into the worst economic decline since the Great Depression. But as soon as the economy revived even tepidly, prices rose back to $80 a barrel and then above $100 which is about where they are today.
The reason for high prices is actually quite obvious. Crude oil production worldwide has been stuck between 71 and 76 million barrels per day since 2005 (calculated on a monthly basis). Oil volumes have been tracing out a troubling bumpy plateau that many fear will mark the all-time peak in world production. These numbers are reported by the U.S. Energy Information Administration, the statistical arm of the U.S. Department of Energy, and are widely considered to be the most reliable available. They reflect total production of "crude oil including lease condensate" (which is the definition of crude oil) from all sources worldwide.
Oil production has stalled despite the huge incentive that record high prices are providing for oil exploration and development. And, despite enormous spending by oil companies on exploration and drilling worldwide, we have only just kept production on a plateau for the last seven years. These high prices and enormous capital spending were the reasons given by Daniel Yergin for the expected buildup of production volumes. So what went wrong?
The simple answer is that we've exhausted the easy-to-get oil and are now left with mostly the hard-to-get oil. It only makes sense that the early oil pioneers harvested the easy oil first. Why go after the hard stuff at that point? We've since learned how to extract oil that is much harder to develop. This includes deposits far offshore and deep below the seabed as well as those locked in the Canadian Tar Sands, deposits that must undergo expensive and energy-intensive processing to convert what is really bitumen, a goopy, thick hydrocarbon, into what we call oil.
And, this leads me to a crucial concept which I find myself repeating over and over again in response to all the foolish Daniel Yergins of the world: The critical factor in the oil markets and a global economy dependent on large, continuous supplies of oil is the rate of production. The rate is the key, not the size of the world's reserves. It is the size of the tap, not the size of the tank that matters.
Let me offer another analogy to help explain. If you inherit a million dollars with the stipulation that you can only withdraw $500 a month, you may be a millionaire, but you will never live like one. That is increasingly the situation we face with oil. There may be huge resources of tight oil (often mistakenly referred to as shale oil) and of oil-like substances such as tar sands. But the expense, the necessary energy and increasingly, the amount of water required to extract and process them is so great that we have been unable to lift the worldwide rate of production significantly above its current plateau for a sustained period during the last seven years. Even with all our vaunted new technology, we have only just barely been able to replace the capacity lost each year to the inexorable decline in the rate of production from existing oil fields.
Recently, the head of a company well placed to judge trends in the worldwide rate of oil production said he believes that the all-time peak is in. Core Laboratories CEO Dave Demshur told attendees at the Denver Oil & Gas Conference last month that "[t]he maximum yearly oil production of the planet is taking place now." Core provides well analysis and reservoir management to oil and gas companies in practically every major oil region of the world. Demshur's statement is an unusual admission from an industry insider with access to information that spans the entire industry.
The truth is we won't know for sure that we've passed the peak in world oil production until long after it occurs. It may be a decade after the event before oil production turns down definitively and the peak becomes obvious for all to see.
Just to clarify, here's what peak oil does NOT mean:
The industry and its paid spokespersons try to dazzle the public with talking points that include the notion that we have more oil reserves than we've ever had. That is questionable, and I'll explore that claim in a later piece. But again, I emphasize that reserves are not the salient point. It is and always will be the rate of production that matters more. If oil production stopped for a sufficiently long period--enough to drain all aboveground supplies--modern civilization as we know it would collapse. The amount of reserves would not matter since the rate of production would have dropped to zero.
What matters is how much we can produce for continuous input into the world economy. As you might intuit, we've built a financial system and physical infrastructure premised on continuous and rising levels of oil consumption. That's why peak oil matters so much, and why flat oil production has been a large contributing factor to the unstable world economy in recent years.
To further illustrate the importance of rate, consider the following: Half of all oil consumed since the beginning of the oil age has been consumed since 1985. We consumed exponentially larger amounts nearly every year until 2005 when a number of factors conspired to constrain supplies. We frequently hear about multi-billion barrel discoveries and think (wrongly) that oil must surely be plentiful as a result. So, here's another question to ponder: How long does one billion barrels of oil last the world at current rates of consumption? If you guessed something close to 12 days, you have a sense of the enormous challenges humans face in extracting finite resources at ever higher rates. Just multiply those multi-billion barrel discoveries by 12 to find out how many days the oil age might be extended by each discovery. You'll find the answer is, "not many."
Perhaps it will seem puzzling that experts inside the industry--with a few notable exceptions--cannot grasp that the rate of production is the central issue. The best explanation I can offer is to quote author Upton Sinclair: "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"
And, here is where we get to the motivations behind the sunny optimism of the oil industry. If the public understood that oil supplies might be nearing an irreversible decline, it would demand the deployment of alternative fuels and efficiency measures to soften the blow in order to give us time for a transition to a society based on something other than oil. That would ultimately reduce demand for oil products and eventually end our dependence on oil. Oil companies might get stuck with significant inventories in the ground that they cannot sell, at least not at the prices or in the quantities they would like.
The more immediate problem for oil company executives is that their companies may soon find it impossible to replace all their oil reserves. Oil companies strive to replace at least 100 percent of what they produce so that their reserves don't fall. If investors come to believe that a failure to replace reserves will be ongoing year after year, they will mark down oil company share prices significantly. In fact, it's already happened, and it's likely to happen with more frequency as more companies struggle to reach 100 percent replacement. Such share price declines would, of course, make a lot of oil executives significantly poorer as the value of their stock and stock options plummet. Essentially, oil companies would be recognized as self-liquidating businesses.
All of this the oil industry wants you to ignore as it undertakes yet another public relations campaign to convince the world that supplies will only grow from here. Naturally, with prices near $100 a barrel, the public needs reassurance. The campaign is designed to lull both the public and policymakers into a somnolent surrender to a business-as-usual future that will leave us unprepared for the momentous challenges ahead.
Oil is the central commodity of the modern age. As of 2011 it provided one-third of the world's energy and the basis for countless petrochemicals necessary to the functioning of modern society. Oil's role in transportation remains critical; 80 percent of the world's road, rail, air and sea transportation fuel is derived from petroleum, and in the United States the number is 93 percent. Good substitutes for oil in transportation are still hard to come by.
No one can know exactly when world oil production will peak--not me, not the world's oil companies, not any government agency. The dangers we face if we are unprepared are potentially quite severe. With worldwide oil production essentially flat for the last seven years, the sensible thing to do would be to get ready now as quickly as we can.
Given what's at stake for oil company managements, it should be obvious why they are telling us not to worry. Given the publicly available production data, the persistently high price of oil, and the failure of oil companies to expand worldwide production even after enormous expenditures and effort, it should also be obvious why we shouldn't fall for the industry's beguiling but wildly misleading tale.
Kurt Cobb is the author of the peak-oil-themed thriller, Prelude, and a columnist for the Paris-based science news site Scitizen. His work has also been featured on Energy Bulletin, The Oil Drum, 321energy, Common Dreams, Le Monde Diplomatique, EV World, and many other sites. He maintains a blog called Resource Insights.