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?
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.’”
The end of “as we know it”
The coming oil descent can be seen as both a crisis and an opportunity.
The end of cheap oil will be the end of living life “As We Know It.” Those who try to continue doing things in the old ways that depend on cheap oil will experience severe hardships.
Yet, there will be opportunities. Those who prepare now will be better able to weather the storm, to see the rainbow on the other side.
The end of … gas guzzlers
To win WWII, Americans had to give up buying new cars, as auto factories were converted to weapons production. The opposite will now be true — we will need to buy different vehicles that use little or no gasoline or diesel.
Think back to 2008. When gas prices hit $4/gallon, families with gas guzzlers suddenly found they were paying $400/month for fuel. Prices for very nice SUVs and heavy trucks plummeted — you couldn’t give them away. Meanwhile, buyers lined up to buy hybrids. The time to unload your gas guzzlers and buy something else is now.
The end of … cheap food?
I love my big burgers, but this too may come to an end if corn-fed beef gets too pricey. To replace a paltry 6 percent of U.S. gasoline, we already feed one-third of the entire U.S. corn crop to the corn ethanol industry, with impacts worldwide on crop prices, conversion of rain forest to cropland, and ocean dead zones from fertilizers. Ethanol corn use is projected to increase to one-half of the entire U.S. corn crop by 2015 under congressional mandates.
If you actually had to raid your refrigerator to fuel your car, you would see the obscenity of feeding food to machines. Yet this is exactly what we are doing. One of the worst decisions ever made was to build the infrastructure to convert food crops to fuel, because we have now directly tied the price of food to the price of fuel. As oil prices rise, so will the price of food.
Even if we were not directly feeding our food supply to our machines, our very production of food is heavily dependent on petroleum. There may be hope — a study just released by Iowa State University shows farmers could be just as productive using half their present fuel use. Yet, lower fuel use depends on crop rotation away from fuel-intensive corn, a move unlikely to happen if corn prices are tied to skyrocketing oil prices.
It is unlikely Congress will find the sanity to eliminate taxpayer subsidies of ethanol. Therefore, a switch away from gasoline to electric vehicles may be the only way to keep food prices affordable.
My big burger days may soon end — but at least my waistline could be better for it. Those whose waistlines are already too thin — the billions of hungry people in the world — will feel the impact of higher grain prices much more. In 2008, food price riots broke out worldwide the last time oil prices skyrocketed. We must stop feeding food to cars.
The end of … globalization?
Higher oil prices mean the world is about to get a lot smaller, as the cost of transporting goods halfway around the world will no longer be cheap. Jeff Rubin, former chief economist at CIBC World Markets, argues “a lot of long-lost jobs are going to be coming home.”
Rubin has written a book Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization. He notes that already in 2008 high oil prices began to make U.S. steel and furniture producers competitive again. Rubin expects China’s economic growth to be fueled more by growth in their own consumption.
Wal-Mart may once again carry products labeled “Made in USA.”
The end of … pristine wilderness?
Millions of us are now viewing once again the movie Avatar — James Cameron’s wonderously beautiful tale of a pristine world. This time, however, we are not magically transported to Pandora in a theater by the magic of 3D. Instead, we may notice ourselves driving a small DVD home from the store in a 3,000-pound vehicle, to view it on our big-screen TV.
If we truly look at ourselves, we will see that we are the voracious society in search of our own “unobtanium.” Our unobtanium is oil, and shouts of “Drill, Baby, Drill!” have shown there are those among us who are willing to do anything, and destroy anything, to acquire it.
As oil becomes scarce and prices skyrocket, these shouts will grow louder, coupled with skapegoating tactics to lay blame for the oil crisis at the feet of those who wish to preserve our most precious natural areas.
There will once again be pressures to open to drilling Alaska’s pristine wilderness, the Arctic National Wildlife Refuge. If this is done, it will not solve the crisis, as EIA projected that ANWR would likely reduce oil prices only 30-50 cents per barrel (about a penny per gallon of gasoline). Yet, hunters take note, a wildlife area critical to scores of species of North American migratory birds would be violated.
Despite the British Petroleum oil gusher in the Gulf of Mexico, expanded offshore oil development in all U.S. coastal waters will likely be approved. Whether another Deepwater Horizon event occurs may be determined by whom we elect — those most beholden to the oil companies, or those willing to strictly regulate them.
Canada has already begun the rape of its northern forests to exploit tar sands, the surface mining of which results in a landscape of complete devastation. Similarly, there will be calls to utterly devastate the forests and water resources of western Colorado to exploit oil shales.
Only a move away from oil as quickly as possible can save these pristine areas from the destructive forces of a desperate society.
We can do it
Though Americans resisted the recognition that WWII was coming, once it came they rose valiantly to the call to action. A similar can-do spirit is needed now for the transition to a post-oil world.
This crisis is coming soon. It is too late to prevent it, so we simply need to get used to it. Peak Oil is happening.
We will need to adapt — but we can do that.
We must repeat this to ourselves, as we face the challenging times ahead:
It’s the end of the world (as we know it) — and I feel fine.
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