It's the End of the World as We Know It. Should I Feel Fine?

Peak oil production coming much sooner than expected

by Craig Severance

19 May 2010 12:25 PM

A storm is quickly approaching, and the world is not ready for it.

The permanent end of the era of cheap oil is coming as soon as next year, according to a raft of official reports that have made their way into energy media over the last few months. Governments are now beginning to acknowledge the looming crisis. Yet, perhaps because they waited too long to prevent it, leaders are not yet alerting the public.

The entire world economy is built on cheap oil. A permanent oil production shortage will thus lead to The End of The World (As We Know It). What will come on the other side of this -- will it be good or bad?

Public unaware

Except for a few stories in financial pages such as London's Financial Times, this earth-shaking news has yet to reach the Mainstream Media. While "Peak Oil" researchers have long warned of approaching oil shortages, the difference now is these dire warnings are being validated by the highest government and oil company officials. Yet, no political leader has had the courage to make a major announcement to prepare the public for what lies ahead.

This public blindness is tantamount to the isolationism that gripped the U.S. in the years preceding WWII. While the highest government leaders did their best to prepare for inevitable war, they were hamstrung by the resistance of a public unable to accept what really lay ahead. Similar to today, some politicians advanced their own careers by feeding on the public's desire to believe no coming storm could ever reach them. Yet, the storm came anyway.

Graph: Peak Oil PrimerThe limits of oil

The looming crisis we now face is often referred to as "Peak Oil" -- a status where global oil production will reach a plateau, then begin its irreversible decline.

Oil fields follow a production curve where output increases at first, then reaches a plateau or "peak," after which a steep decline occurs. Because existing oil fields decline, oil companies must continually develop major new finds just to maintain existing production. If these new projects do not exceed the decline of existing fields, it becomes impossible to maintain oil production, let alone grow oil output to fuel economic growth.

The problem in recent years is that new oil finds have been smaller, deeper, and in more difficult to reach places. Cheap oil prices simply won't support the investment needed to develop them, so oil companies have not invested heavily enough to keep up with demand. Lester Brown of Worldwatch Institute notes that major oil companies, awash in cash, have instead spent billions buying up their own stock, aware their existing reserves will soon increase greatly in value.

Did global oil production permanently peak in 2008?

Until 2008, world energy forecasters had always assumed global oil production would keep up with economic growth. According to classic economic theory, as world economies grew they would demand more oil, and oil companies would respond by investing in more exploration and development. "Peak Oil" was considered decades away.

Beginning around 2005, however, world oil production began to hit a brick wall, and by 2008 global oil demand actually exceeded supply. With only a 2 percent shortfall of supply compared to demand, oil spiked to $147/barrel, and U.S. gasoline prices soared to over $4/gallon.

That same year, the International Energy Agency for the first time published a "bottom-up" oil analysis, evaluating each of the world's major oil fields to see if production actually could continue to increase.

After looking at the oil field data, the IEA revised its forecasts of future oil production downward, yet still took a very optimistic official view, by using rosy projections of as-yet-undiscovered oil fields.

Independent researchers, however, using IEA's same "bottom-up" data, have now stated the IEA was wildly optimistic. The Global Energy Systems Group has concluded the world actually reached Peak Oil in 2008, and global oil production will now begin to decline. Investment alone cannot fix the problem as the decline rates of existing fields are accelerating.

Significantly, though IEA's official forecasts remained rosy, IEA's Chief Economist Dr. Fatih Birol began urgently telling anyone who would listen the era of cheap oil is over, and "we have to leave oil before oil leaves us." If we do not "leave oil" behind us fast enough, economic growth may be choked off as oil prices rise to unaffordable levels.

From "tin hat" theory to "crikey!"

In the last few months, there has been a sea change in attitudes about global oil supply among top officials. The U.K. government, the U.S. Department of Energy, and the U.S. Joint Forces Command, among others, have begun to acknowledge the seriousness of the situation.

On March 25, the French publication Le Monde reported on a semi-private U.S. Department of Energy Roundtable held in April 2009, where top U.S. DOE energy analyst Glen Sweetnam presented the graph below summarizing prospects for world liquid fuel production vs. demand:

Graph: Sweetnam, DOE, April 2009 [PDF]

The chart includes all known sources of supply, including undeveloped projects and "unconventional" sources such as tar sands. It politely labels the expected gap as "unidentified projects." The gap occurs very soon (beginning in 2011) and is very large -- roughly 10 million barrels/day by 2016. To put this in perspective, 10 mbd is roughly equivalent to the entire output of Saudi Arabia, and is well over 10 percent of total world demand. (Recall $147/barrel in 2008 occurred with only a 2 percent shortfall.)

DOE still avoids any use of the words "Peak Oil," instead talking of an "undulating plateau" of oil prices and production. Shortages will lead to higher prices and more investment, spurring more production and lower prices. However, oil price volatility discourages new investment, so production plateaus. Richard Heinberg of Post Carbon Institute asks "What's the difference?" in "Quacks Like a Duck ..."

Whatever you call it, there is now a growing official consensus the world faces serious oil supply shortages beginning in the 2011-2015 time frame and continuing. Rick Monroe of the staff of Energy Bulletin has provided links to the growing list of official warnings here.

Peak oil analyst Jeremy Leggett, who participated in a closed-door U.K. government summit on oil supply on March 22, summarized the recent awakening of official realization: "Government has gone from the BP position -- '40 years of supply left, the price mechanism works, no need to worry' -- to 'crikey.’"

READ THE REST AT: http://www.grist.org/article/2010-05-19-peak-oil-production-coming-much-sooner-than-expected/