Peak Oil on the Horizon


This article was published by Newsletter, issue #6, 2005-04-10.

The modern world runs on oil and natural gas, whether we like it or not. Not only does oil alone provide 40 percent of the world's energy needs, and almost 90 percent of all transportation power, but petroleum is essential in the production of fertilizer (and thus conventional food production), rubber, plastics (and thus at least half of the items at Wal-Mart), and countless other mainstays of modern living. What would happen if all of the supplies of oil and natural gas, which most Americans take for granted, were to suddenly disappear? Our country would come to a standstill — literally, since gasoline and diesel fuel are required to run almost all of our vehicles. While the chances of that happening are practically nil, we must consider what would happen if the production of oil were to level off, prior to declining, despite the best efforts of such producers as OPEC to maintain past production levels. We need to begin thinking about how our society would be affected by this phenomenon, referred to as "Peak Oil". Why the need to contemplate it now? Because it's already happening.

While many individuals in government and the petroleum industry disagree with the concept of Peak Oil, the signs of a future crisis are popping up like wildcat rigs during the Texas oil boom. It is estimated that our earth is endowed with approximately 2 trillion barrels of crude oil. Unfortunately, we have already used up 900 billion barrels — nearly half of it. More than likely, we will find 150 billion barrels during the next 30 years. But that will not be sufficient to meet the estimated demand of one trillion barrels during those same three decades. By way of comparison, America's 293 million residents already consume 22 million barrels of crude per day, and that number is rising, despite higher gasoline prices, as we buy increasingly wasteful cars and trucks. Asia's 3.6 billion people — 12 times our population — consume nine percent less oil than America. Just imagine the increase in demand for oil if Asian consumers were to double their petroleum usage; yet it still would be less than 1/5 of our usage per capita. The world's thirst for oil is likely to increase rather dramatically as hundreds of millions of Chinese citizens turn in their sweat-powered bicycles for gasoline-powered cars.

While global demand for oil is increasing by two percent per year, existing supplies are being depleted at a rate of over four percent per year. Clearly this trend cannot continue indefinitely. More specifically, it is estimated that new supplies must be increased by at least six percent per year just to keep the demand and supply relationship stable. But this is as likely to happen as the U.S. federal government ignoring the powerful petroleum industry lobbyists, and pushing for national energy independence and a shift to sustainable energy sources. All of the inexpensive oil has already been discovered, and the remaining supplies are in much more costly regions of the globe. These high costs will take many forms, such as growing extraction and transportation expenses, higher prices on the open markets (assuming that all of these politically unstable and often unfriendly countries agree to continue selling to us), or the limitless costs of taking that oil for American purposes (assuming the U.S. takes a more aggressive role, in the form of further "regime changes").

While these problems are plaguing the production of oil, the situation is not improving for another critical step in the process, namely, refining the oil. The recent BP oil refinery explosion in Texas City, Texas, is a tragic and vivid reminder of the importance of refining in the process of getting fossil fuels out of oil fields and into gas tanks. The refinery destroyed by the explosion was the country's third-largest, and produced 460,000 barrels of gasoline per day, 3 percent of the U.S. supply. After the explosion, U.S. gasoline prices reached an all-time high of $1.6080 per gallon on the New York Mercantile Exchange. While this recent refinery explosion is not believed to be an act of terrorism, many security authorities are now warning that the high concentration of oil refineries in Texas, make a tempting target for the nation's enemies.

Critics of these dire warnings claim that we will always be able to find new sources. Yet the Saudis' biggest field, Al-Ghawar, outputs 5 million barrels per day, and they cannot produce more. Iraq, Algeria, and Venezuela are all producing less. This year's oil production growth rate in Russia, the world's second-largest oil exporter, will be the lowest since 1999. Indonesia's oil output is falling so dramatically that it might have to withdraw from OPEC. Prudhoe Bay and the North Sea were the last major oil discoveries in our part of the world, and both of those areas have already begun declining. Canadian oil sands are touted as an alternative, but they will never offset the reductions in Saudi oil output. Some financial commentators and most lay people appear to think that the problems won't start until we hit zero production. Actually, the existing problems will simply get worse as we descend down the oil production curve. Get ready for $5- and then $10-gasoline, in addition to growing demand for hybrid cars (which already have lengthy waiting lists). Or hope for better public transit in the U.S., which is not likely, given the fiscal restraints of our cash-strapped city governments.

Copyright © 2005 Michael J. Ross. All rights reserved.

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