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“Peak Oil” refers to the rate of global oil production and its expected peak. It is caused by the intersection of geological constraints and the practical limits on exploration and production of new resources. Peak Oil is not about running out of oil. Instead, it is about reaching the point of a maximum global oil production rate beyond which we can expect an irreversible trend of ever declining rates into the future.

Why should we care about peaking oil production?

The significance of Peak Oil lies in its consequences for economic growth and what that means for our civilization. In the form of liquid fuels, oil is the primary source of energy in the transportation sector that literally drives economic activity. Historically, there exists a very tight correlation between economic growth and the growth in oil demand. We can, therefore, expect limits on global oil supply to place limits on economic growth. More ominously, we can also expect any significant shortfall in oil supply to cause huge price increases for gasoline, diesel and jet fuel, accompanied by possible fuel shortages and broad-based economic contraction.

Our monetary system, in which almost all money is created as debt, and our highly-leveraged financial sector live together on the assumption of continuous economic growth: the collateral for today’s debts is the promise of increased future wealth with which to make good the debt obligations throughout the system. However, in the aggregate, interest on debt obligations cannot be readily met if wealth does not expand throughout the system. Absent such expansion, debts will be addressed increasingly by means of defaults that will cascade through the financial system. Moreover, with constant to declining total wealth, interest obligations embedded within the very marrow of the money system will constitute a transfer of wealth from broad segments of the economy to the much smaller portion of the population that has control over the majority of financial capital. Economic contraction accompanied by an historic, large-scale transfer of wealth will have significant social and political implications as the middle class becomes progressively impoverished and more of the poor are driven into outright deprivation.

Peak oil not only threatens the health of the economy, but it also threatens current financial systems and, ultimately, national and international socio-political stability. As a result, Peak Oil is assured to be a major driver behind some of the most significant events in the first half of the 21st century.

Why can’t we just find alternatives to oil?

Liquid hydrocarbon fuels have a very high energy density, they are easy to store and transport, and they can be produced in prodigious amounts from geological petroleum reservoirs. These benefits have been responsible for hydrocarbons dominating the transportation sector over much of the last 100 years. As a result, transportation is responsible for the majority of oil use in the United States with gasoline, distillate and jet fuel accounting for more than 70% of consumption. There is no debating the fact that peaking global oil production will hit the supply of liquid fuels and the transportation sector the hardest.

There is extensive interest in alternative liquid fuels, such as ethanol and bio-diesel produced from renewable biological sources, specifically plant-derived carbohydrates and lipids. However, these fuels are very difficult to scale given competing land use issues, exacerbated by their low net energy return (i.e. net energy delivered in excess of the energy necessary to plant, fertilize, harvest, process, manufacture and transport the fuel). Nothing underscores this point more than the following fact: if the entire world food supply were to be converted to biofuels, the energy would be equivalent to only 10%-15% of global petroleum production. Everyone on earth could nearly starve to death to create biofuels and it would make but a small dent in oil substitution.

The simple fact is this: there is no liquid fuel substitute available to match what we obtain from petroleum in terms of fuel quality and sheer quantity.

Isn’t peak oil just a “theory” yet to be proven?

For any finite resource, production rates undergo an initial rapid growth phase as the most accessible and low-cost deposits are quickly identified and exploited. As these deposits become exhausted, the exploration for new resources must continue further toward resources of declining quality and increasing cost resulting in more and more effort to maintain production. As the cycle continuous through to progressively lower quality deposits, there comes a time at which bringing new reserves into production becomes so difficult that they can no longer offset the depletion of earlier, more productive finds. Total production begins to fall past this point. Production rates will then inexorably decline, eventually tending toward zero.

Stated more concisely, the production history of a finite extractive resource begins with small, growing production rates and ends with small, decaying production rates. It is a logical necessity that a peak rate occurs somewhere between these two extreme endpoints.

It is a universally accepted geological truth that oil is a finite and non-renewable resource. A global oil production peak, therefore, is certain to occur.

What is the debate about if peak oil production is a certainty?

Although it is agreed that, as a finite non-renewable resource, the global aggregate of oil production rates must peak, there is a debate as to the exact timing of when this production maximum will occur. The Peak Oil question is entirely about timing and not about whether or not the peak will occur.

Given an unlimited amount of capital equipment, it would be possible to maintain a growing rate of production through ever declining reserve qualities up until the point of complete resource exhaustion, after which production would suddenly crash to zero. In reality, however, exploration and production resources are limited and the rate at which new oil can be found and brought online is constrained. Thus a tug of war exists between depletion rates of existing reservoirs in production and the ability to find new ones and to bring them online. History has shown that the point of equilibrium between these two forces tends to occur around the mid-point of production history, i.e. production peaks once roughly 50% of available reserves have been extracted; however, there is no geological rule that makes this so. Increased investments in production technology can skew this peak closer to the point of exhaustion, but technology cannot eliminate the peak altogether. It can only delay the inevitable.

Peaking production and a subsequent steady roll-off in production has been observed in some of the most significant oil producing regions in the world. For example, oil production in the U.S. lower-48 states and Alaska has a well documented history (see Fig. 1). American oil fields have had access to the best technology for exploration and production, financed by some of the richest corporations in the world. Despite this fact, oil production peaked in 1971-72 and has been on a steady downward trajectory ever since. Since 1972, the nominal price of a barrel of oil has increased from $3 to $30 by 2000 and, most recently up to $60-$70 (2009). The 20-fold increase in nominal price becomes an increase of “only” 300% in inflation-adjusted terms. Economic theory would suggest that such significant price increases should bring more oil into production. U.S. lower-48 oil production continued to decrease nevertheless.

A similar pattern of production history can be seen for the North Sea. The field saw major production begin in the 1970s with rapid rise through the 1980-90s and an all-time peak occurring in 1999. Similar to the U.S., North Sea production was not constrained by political factors or an inability to access resources: it was developed by the western multinational oil companies with the best equipment, expertise, technology and financial resources available anywhere. It is clear, however, that depletion eventually wins.

Figure 1: Historical Production Rates, United States and the North Sea
New oil fields must be discovered before they can be brought into production to help stem declines from older existing fields due to depletion. It can take several years to get a major new deposit into production, and many years more for the field to achieve peak production, i.e. for approximately half of the reserves to be produced. The pattern of discovery will, therefore, lead the pattern of production that will follow with an appropriate time delay. Based on the typical behavior of major oil producing regions that have now peaked, the delay between peaking discoveries and peaking production typically ranges between 30 and 40 years.

Figure 2: Historical Oil Discoveries Per Decade

Figure 2 paints a grim picture as global oil discoveries peaked more than 40 years ago. Current consumption is approximately 300 billion barrels per decade. Discoveries exceeded this only during the period of 1950s, 60s and 70s. Current oil consumption is twice the rate of discovery in the 90s, and triple that of this decade (2000s). This picture alone tells us that the writing is on the wall.

Many experts have closely studied the depletion rates of major oil fields currently in production, and new development projects around the world that will bring new supply. Below is a sampling of quotes from a variety of notable figures and petroleum experts regarding peaking global production.

The consensus opinion of many experts is that global peak production is either happening now or will arrive in the near future (5-10 years):

Dick Cheney, former Vice President of the United States, former CEO of Halliburton (a major oil services corporation), speaking at the Institute of Petroleum, London (1999):

“For the world as a whole, oil companies are expected to keep finding and developing enough oil to offset our seventy one million plus barrel a day of oil depletion, but also to meet new demand. By some estimates there will be an average of two per cent annual growth in global oil demand over the years ahead along with conservatively a three per cent natural decline in production from existing reserves. That means by 2010 we will need on the order of an additional fifty million barrels a day. So where is the oil going to come from?”

A.M. Samsam Bakhtiari, former senior advisor to the National Iranian Oil Corporation, in a paper presented at the International Oil Conference (Copenhagen, Denmark — December 10, 2003):

“The main feature therein is the oil production peak predicted for the years 2006/2007 at around 81 million b/d (mb/d). This peak can also be interpreted as being part of the ‘bumpy plateau’ stretching over the period 2005 to 2008… All in all, the WOCAP model was developed to predict global oil production levels and capacities for the 21st century. Its main simulation results clearly show that global oil production should come to peak during the present decade — inevitably leading to a revolution in worldwide energy consumption and societal matters.”

Al Gore, former Vice President of the United States and Nobel Laureate (2006):

“We almost certainly are at or near what they call peak oil, defined as having recovered a majority of the oil reserves at a certain price, affordability range.”

Matthew Simmons, chairman, Simmons & Co. International (Investment Bankers to the Energy Industry, Houston, TX), former energy advisor to G.W. Bush, during an Interview on Bloomberg TV (May 2008):

“We’ve hit peak oil on a global scale.”

Colin Campbell, retired petroleum geologist, author of 2 books and 150 papers, founder Association for the Study of Peak Oil and Gas (2009):

“I don’t think new technologies will have any impact on the date of peak, which I estimate to have been passed in 2008 (“all liquids”), but they can of course ameliorate the subsequent decline. I think most of the necessary technologies are already well known, so the issue is more about applying them than inventing a magic wand.”

Dr. Fatih Birol, Chief Economist, International Energy Agency in an interview with The Independent (U.K.), Aug. 3, 2009:

“The public and many governments appeared to be oblivious to the fact that the oil on which modern civilization depends is running out far faster than previously predicted and that global production is likely to peak in about 10 years – at least a decade earlier than most governments had estimated. But the first detailed assessment of more than 800 oil fields in the world, covering three quarters of global reserves, has found that most of the biggest fields have already peaked and that the rate of decline in oil production is now running at nearly twice the pace as calculated just two years ago. On top of this, there is a problem of chronic under-investment by oil-producing countries, a feature that is set to result in an “oil crunch” within the next five years which will jeopardize any hope of a recovery from the present global economic recession.”