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Peak Oil

Published: 26-January-2008
By: Abbas Chagani

 

Peak Oil, like Climate Change, is a term that gives rise to speculation, anxiety and confusion. We know that it is an issue that must be addressed but the implications are bewildering. Doomsday forecasters perceive Peak Oil as the end of the world as we know it. However, even more traditional anti-peak oil theorists, including BP and Energy Information Administration, are now accepting that oil production will peak.1 Energy supply security, price risk and business continuity planning will all be affected by the question of Peak Oil.

One of the first problems that we encounter is to understand exactly what we mean by the term Peak Oil. It doesn’t simply refer to oil running out. Rather, the term refers to the point at which world oil production plateaus before we hit a decline in the amount of oil that can be extracted from the Earth in a given year because geological limitations are reached. Consequently, extraction becomes more difficult and declines so that extraction costs escalate. At some point in the future then we will effectively reach a peak in the rate at which we can pump oil out of the ground. This is the notion that Peak Oil refers to and it is generally global in scope.


Fig.1: World Oil Production and expected future demand
Demand can no longer keep up with actual production rates
2

There are two theories behind the prediction for Peak Oil. Peak Oil Lite, endorsed by the International Energy Agency (IEA) in the 2007 Mid-Term Oil Market Report, is one idea.3 In this theory, Peak Oil is “peak” because there is not enough supply to meet demand but it is “lite” because production can still grow in this period and people can underestimate the scale of the problem.4 Peak Oil Lite results in the end of cheap oil, though oil can still be produced. Peak Oil Full, on the other hand, does not predict an increased production rate in this period; oil production will simply decline.

Extraction costs have been rising since 2001 and the Oil Market is currently facing its first deficit since 2003. Yet, there is some disparity over when the peak may occur. The Association for the Study of Peak Oil believes global production will peak in 2008 whereas BP Geologist, Colin Campbell, and Texas banker, Matt Simons, estimate it will occur in 2012.5 The US Department of Energy suggests a much wider spectrum that optimistically puts the date between 2021 and 2112.6 Either way, the certainty is that oil is a finite resource and so this peak will happen in the future, and probably sooner rather than later.


World oil production (EIA Monthly) for crude oil + NGL. The median forecast is calculated from 13 models that are predicting a peak before 2020 (Bakhiarti, Smith, Staniford, Loglets, Shock model, GBM, ASPO-[70,58,45], Robelius Low/High, HSM). 95% of the predictions sees a production peak between 2008 and 2010 at 77.5 - 85.0 mbpd (The 95% confidence interval is computed using a bootstrap technique).
Fig. 3 Peak Oil Predictions7

In many ways Peak Oil does signal the end of the world, as we know it. Oil provides 39% of the world’s energy mix and is vital for manufacturing so many products, including plastics and medicines. There are, of course, alternative energy sources and technologies that could potentially replace or replicate oil. We already have the technology available that makes it possible to produce diesel from coal after all. And solar power and wind power are attracting increasing attention and investment. But the real problem remains: these alternative sources are not widely available or affordable yet. The real problem that we face, therefore, is the peaking of cheap energy, which is what so much of our economy and society in North America is organized around. However, as Figure 3 below illustrates, North American Oil production has been in decline since the 1970s. This also applies to North Sea Oil production.


Fig. 3 US Oil Production8

Increasingly many other countries are also organizing their economies and societies around the idea of cheap energy. This is particularly true of oil producing countries in Southern and Central America and the Middle East. Production has actually recently increased in the Middle East but this has been met with increased domestic demand and so export rates to North America are down. This is the Export Land Model, devised by geologist Jeffrey Brown. Fast growing economies, including China, are also experiencing an increased demand for oil and so compete with North America for oil exports from the OPEC (Organization of Petroleum Exporting Countries) countries.


Fig. 4 Global Oil consumption 1965-20059

This has serious implications for the US since nearly two-thirds of all oil consumed is imported.10 Oil available for export should be the US’s biggest concern.


Fig 5 Sources of US Oil imports11

If we compare this map with Fig. 4, we see that many of the areas that the US traditionally imports from are experiencing increased domestic consumption and demand and the Export Land Model applies. The biggest drop in exports is expected to come from Mexico. Export levels from OPEC countries are anticipated to decline by 3 million barrels per day until 2012. Mexico will account for 2 million barrels per day of those dropped.12

Some sceptics believe that OPEC is deliberately limiting production, based on the notion that if they do ramp up production, they would build capacity and subsequently lose their political negotiating power. USEI certainly advocates OPEC producing more oil based on OPEC figures that suggest abundance of oil fields. However, OPEC statistics are not entirely reliable. And getting OPEC to produce more now isn’t going to solve the long-term problem; it will merely delay the peak for a little while longer.

So, what might happen if we reach a high-cost energy future, and how can we plan for such a scenario?

The immediate challenges faced by different organizations will vary. For municipal and local governments the main problems will centre on urban planning and transport. A worst-case scenario would see outer city suburbs being abandoned, as higher prices will make travel impossible if transit connections are not improved. There remains, however, the problem of powering the transit connection. Industries and manufacturers that all depend on cheap energy to fuel their businesses will be affected in obvious ways. Other companies will face problems in terms of actually getting their employers to the workplace and meeting overheads. Supply chains and distribution channels may have to be completely re-designed into smaller local networks.

Energy Management is one positive move towards diminishing the impact of a high cost energy future. And where there are challenges, there are opportunities. According to recent work done by competitive strategist Michael Porter the joint issues of energy supply & climate change are imminent strategic threats and opportunities to build competitive advantage.13 Transitioning your organization to a less oil-dependent operation provides an opportunity to achieve a more holistic approach to land use, transportation and energy use, for which the advantages include a healthier workforce and community and lower greenhouse gas emissions, which is, in turn, a step towards tackling another great challenge of our time: Climate Change.


1http://www.eia.doe.gov/pub/oil_gas/petroleum/feature_articles/2004/worldoilsupply/oilsupply04.html
2http://www.theoildrum.com/node/2693#more
3http://www.theoildrum.com/node/2757
4http://www.theoildrum.com/node/2757
5http://peakoil.blogspot.com/2007/09/confessions-of-ex-peak-oil-believer.html
6http://www.eere.energy.gov/buildings/building_america/pdfs/db/37796.pdf
7http://www.theoildrum.com/tag/update
8http://www.theoildrum.com/node/2693#more
9http://people.hofstra.edu/geotrans/eng/ch5en/appl5en/worldoildemand.html
10http://www.businessweek.com/magazine/content/07_26/b4040074.htm?campaign_id=rss_magzn
11http://www.heritage.org/Research/Features/NationalSecurity/bg1926.cfm
12http://peakenergy.blogspot.com/2007/10/end-of-cheap-oil.html
13http://webuser.bus.umich.edu/ajhoff/2007%20HBR.pdf