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What is peak oil?

A lesson from history: what you need to know
By Matthew Wild

It’s a simple concept really: peak oil refers to the time of maximum oil production.

Like an athlete’s peak performances, it will only be obvious in retrospect, judged against diminishing returns.

The term peak oil is essentially a contraction of the term peak production rate. It is often used in the media as a shorthand for resource depletion, but strictly speaking, it refers only to the time of maximun output. Depletion is what follows. Oil production, when drawn on a graph, comes out as a bell curve. ‘Peak’ is when you are sitting at the top of the chart, enjoying record output; the problem of being at the top is that the only way is down.

Peak oil theory does not state that the world is running out of oil. Roughly speaking, it's the half-way point, so much oil still remains in the ground - although this is not essential to the theory of peak oil, which simply relates to maximum output. (It may look like hair-splitting, but some large remaining reserves of oil, particularly unconventional sources such oil sands, have really low flow rates; Canada may claim vast reserves, but would never be able to increase output fast enough to substantially offset the point of peak oil.)

However, being at peak oil essentially means there will soon be a sudden and quite dramatic drop in oil supply. As this is for geological reasons, things like new extraction technology and the demand for oil cannot change this.

Hubbert’s peak

The concept was first suggested by Shell geoscientist M. King Hubbert in 1956 to accurately predict that United States oil production would peak between 1965 and 1970 and subsequently diminish (see graph, right). He was scorned at the time, but in retrospect, US oil production followed the Hubbert curve: it peaked in 1970 and by the mid-2000s had fallen to 1940s levels. Increased technology and the increasing value of oil does not mean the US oil industry can produce at its former rate – if it isn’t there, it isn’t there.

Oilfield output follows this shape because extraction follows a pattern: initially there is little infrastructure in place to extract, remove and refine the oil; then output increases to a peak, which cannot be exceeded, even with more drilling and increased technology. After peak, oil tapers off. Generally speaking, the highest quality and most easily obtained product is extracted first, and the ‘sour’ and more technically challenging oil afterwards. After a while, you have to burn more than a barrel of oil to remove a barrel’s worth from the ground, and the oilfield is abandoned. It is probably not empty at this point, it's just that its uneconomic to continue extraction. Hubbert’s model model projects the decline in output from oil wells, whole oilfields, regions and the world as a whole.

Despite a few valiant attempts to create a theory that oil is still being produced in the Earth’s crust – which can be filed under wishful thinking – everyone knows that oil is a non-renewable resource.

Diminishing returns

Discovery of oilfields peaked in 1964 and has been diminishing since, despite increasing surveying technology. New oil discoveries being touted are minor compared to our appetite for oil. In fact, worldwide oil discoveries have been less than annual production since 1980 – we are now using it three times faster than we can find new supplies, and the demand for oil is predicted to keep on growing. This is clearly unsustainable. Even the recently touted shale oil and oil sands (which used to be called tar sands before getting a PR makeover) are not a viable replacement. We're currently burning 86 million barrels of oil a day, and rising, and the technical problems of operating in the oil sands mean that output is already lagging behind what was initially promissed. At best, they might help cushion the blow of diminishing oil output. Consideration of peak oil includes output from these unconventional sources.

The peak in oil production does not mean we will have run out of oil; just that, with diminishing output, we will switch from a buyers' to a sellers' market. High demand for oil will push the price up. Essentially, peak oil means peak cheap oil, as from that point onwards, oil is going to get more expensive. Mainly, this will be due to the laws of supply and demand, but in addition, the remaining reserves will be the heavier and harder to access oil. Peak will also mean the easy-to-access, high grade oil will be gone.

The key questions here are: when will we reach peak, and how sudden will the subsequent depletion be? (The natural next step, asking what are the likely consequences to us, is handled on Post-peak scenarios.)

Predicting peak

Setting a date for peak oil production is gets controversial, because a lot of vested interests have their own, often mutually incompatible, stories. Oil producers and Western governments are widely accused of talking up reserves for geopolitical reasons, or just – as is the case with Opec members – to be allowed to export more under the quota system and bring some quick cash. Actual oil reserves come under the category of state secrets.

Back in 1956, Hubbert predicted global peak oil would come between 1995 and 2000 (see graph, right). In November 2009, the International Energy Agency's (IEA) World Economic Outlook report stated oil and gas liquid outputs would continue to rise until peaking in 2030. Does this mean Hubbert got was out by three decades? Well, not according to whistleblowers within the IEA itself, who are of the opinion their report reflected political interference rather that scientific inquiry. Supporters of Hubbert suggest he under-estimated by a few years because he never saw the oil shocks of the seventies, which slowed consumption - to which I'd add that newly emerging economies such as China and India are pushing demand higher, so there is no reason for complacency.

Independent studies of recent years have been much closer to Hubbert’s projected date. Some suggest oil has already peaked.

The Association for the Study of Peak Oil and Gas (ASPO) suggested regular conventional oil reached an all time peak in 2005 – certainly, Opec production has been flat since then, although this could have been by choice rather than necessity (ie voluntarily limiting output). By adding heavy oil, deep-water, polar and natural gas liquids into the mix, ASPO suggests all liquid petroleum peaked in 2008.

Other notable researchers suggest peaks within a timeframe of 2005-2011. According to Energy Bulletin:

Princeton’s University Professor Emeritus Kenneth Deffeyes, senior advisor to the Iranian National Oil Company A. M. Samsam Bakhtiari, UK Petroleum Review editor Chris Skrebowski, energy banker and former advisor to US President G.W. Bush Matthew Simmons and various researchers published The Oil Drum, have all projected similar peaks within the 2005-2011 range using much varied methodology. A 2007 survey suggests that their perspective has become the consensus among informed observers and industry insiders
Other sources supporting the view that global crude oil has already peaked globally include a study by the German Government sponsored Energy Watch Group, oil billionaire T. Boone Pickens, and the former head of exploration and production at Saudi Aramco, Sadad al-Huseini, and the Wikipedia hosted Oil Megaprojects database. As of January 2010, the peak of all-liquids production was July 2008.
In March 2010, a group of scientists in Kuwait predict that world conventional crude oil production will peak in 2014. Ibrahim Nashawi and colleagues evaluated the oil production trends of the 47 major oil-producing countries, showing that the world's oil reserves are being depleted at a rate of 2.1 percent a year.

A February 2010 report by the UK Industry Task-Force on Peak Oil and Energy Security (representing six major UK companies: Arup, Foster + Partners, Scottish and Southern Energy, Solarcentury, Stagecoach Group and Virgin) warned about a coming energy crisis, an “oil crunch” it compared to the “credit crunch of 2008.”

This looks at depletion rather than peak oil, which suggests we are currently at or around peak. It states resource depletion would be a reality of life by 2015:

The next five years will see us face another crunch - the oil crunch. This time, we do have the chance to prepare. The challenge is to use that time well.

As we reach maximum oil extraction rates, the era of cheap oil is behind us. We must plan for a world in which oil prices are likely to be both higher and more volatile and where oil price shocks have the potential to destabilise economic, political and social activity.

Virtually every sector of our economy is still dependent on oil. This is why it is vital that whichever party forms the next government, they have a coherent set of policies to help the UK adapt. This is especially important for the UK, and other developed economies, which have been so reliant on low-cost oil for decades.
The British government held a behind-closed doors meeting to review this, and other views of peak oil, in March 2010. Participant Rob Hopkins subsequently blogged about this, when he wrote that an oil industry representative at the meeting stated "according to his company, 2004 was what he called the ‘inflection point’, the beginning of the global production plateau for conventional oil. In 2005 oil stopped being cheap, and will never be again. He stated that it is supply flow that is more important than reserves."

In April, the US Joint Forces command produced a Joint Operating Environment report suggesting that the military should have contingency plans as surplus oil production capacity could disappear within two years and that there could be serious shortages by 2015. ("By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day.")

Renewed drilling and the oil sands

Many people deny peak oil is imminent because of renewed US oil drilling and investment in so-called oil sands projects.

Despite all this talk of maintaining US energy security, the fact is that the amounts actually being extracted are insignificant compared to our appetite for oil. In fact, behind the scenes, Western oil companies are struggling to find the reserves to guarantee future profits. (Jim Mulva, CEO of ConocoPhillips has admitted that remaining resources have become too marginal and too expensive, and the competition for them has become too intense.)

What's more, it's beginning to emerge that oil sands production figures do not match up to the hype. An April 2010 report in Canada’s Globe and Mail newspaper, headlined Oil sands awash in excess pipeline capacity, states Alberta cannot produce enough oil to fill its pipeline infrastructure.

Back in 2008, it reports, the industry was talking about expanding production by up to “an extraordinary 1.8 million barrels a day” – but has never “managed to post a single-year increase of more than 40,000 barrels a day.” Latest talk is of a seven-year delay before being able to achieve what was projected for 2011:
The energy industry’s ambitious growth projections back in 2008 were derailed by a myriad of problems. The economic crisis wreaked havoc on the sector. Projects faltered and timelines were extended. Technical issues, for instance, have so far kept both Husky Energy’s Tucker Lake and Nexen Inc.’s Long Lake oil sands projects far from their original production goals.

Starting in late 2008, fully 1.2 million barrels a day of future projects were deferred or cancelled in the oil sands, as soaring costs and tumbling crude prices scared away investors. The economic recovery has brought some of that work back to life, but even industry projections now show a sobering new reality. According to the Canadian Association of Petroleum Producers, the volume of oil previously expected by 2011, the first full year of operation for Alberta Clipper, will now not likely flow until 2018 or later.
A seven-year delay is fatal to an expensive venture built on borrowed money. It begs the question, what about the initially projected figure for 2018? When will that come in?

Hiding peak

What confuses things is that the world economic slump of 2008 cut demand, like the seventies oil shocks in reverse. This may have masked the actual global oil production peak, or it may have bought us more time.

Opec cut production after the price of crude collapsed in the winter of 2008-2009, and optimists believe members currently have some spare productive capacity - oil wells that are mothballed. This will be tested out soon, as the demand for oil is souring again.

In November 2007 – before the price collapse - King Abdullah of Saudi Arabia (left), a long-time advocate of stabilized oil prices, announced that his country would not increase production to lower prices, which were then above $98 a barrel. Some commentators suggested Saudi in particular and Opec in general lacked the spare capacity to increase production. On the other hand, it was not in Abdullah's economic interest to flood the market, ensuring that he sold more of a diminishing resource at a lower rate. Oil producers are a cartel – by restricting the amount sold, they effectively control the price.

There has been further speculation that oil producers will become more nationalistic when faced with diminishing oil output, ensuring their home economies are served first. It makes sense, as this will give them a huge economic and military advantage. The reality for the rest of us would be that our access to oil would decline at a faster rate than the actual rate of resource depletion.

The situation today: rising demand

One thing is for certain – the demand for oil is rising again. All this speculation about peak will soon be put to the test.

World oil production is currently running at around 85 or 86 million barrels per day (down around two million barrels a day from before the 2008 credit crisis).

According to retired CIA analyst and longtime peak oil writer Tom Whipple

World oil production, including about 10 million barrels a day (b/d) of various forms of combustible liquids such as biofuels that are usually counted as "oil," currently stands at about 86 million b/d. This number got as high as 87 or 88 million (depending on whose numbers you like) back in the summer of 2008, fell to 83 or 84 million b/d in the winter of 2009, and then has been climbing back slowly as China, India, and the oil exporting countries step up their demand.
A Business Week report in March 2010 states oil demand is likely to rise “by 70,000 barrels a day to 86.6 million barrels a day.” This reads:

The International Energy Agency raised its forecast for global oil demand this year for a second month as fuel consumption in Asia rises more than expected.

The IEA increased its estimate for world demand in 2010 by 70,000 barrels a day to 86.6 million barrels a day. That would mean a gain of 1.6 million barrels a day, or 1.8 percent, from 2009 levels, it said. Economies outside the Organization for Economic Cooperation and Development continue to lead the recovery in consumption, the IEA said.

“Global oil demand resumed growth on a yearly basis in the fourth quarter of 2009 after five consecutive quarters of decline,” the Paris-based agency said in its monthly oil market report today. “This year’s global oil demand growth will be driven entirely by non-OECD countries, with non-OECD Asia alone representing over half of total growth.”

China will account for almost a third of global oil demand growth this year, according to IEA estimates, offsetting stagnant consumption in developed economies, particularly Europe. This growth could be revised upward as the Chinese government signals it will continue to foster economic growth as long as inflation pressures remain moderate, according to the agency.
It refers to China’s “astonishing” 28 percent year-on-year spike in demand to nine million barrels a day.

Equating demand with supply

presentation made by the Energy Information Administration, at the group’s April 2009 Energy Conference, included this stark PowerPoint slide:

Despite the EIA's official optimism about oil reserves remaining high for another 30 or 40 years, this clearly predicts oil production peaking in 2012 and then declining sharply - against rising demand. The widening distance between the two is marked ‘unidentified projects.’ (And note, the diagram does include non-Opec unconventional supplies such as the much-hyped oil sands.)

According to this projection, by 2016 there will be a gap between supply and demand of 10 million million barrels per day. And the EIA has absolutely no idea how that shortfall will be met.

A gathering of global energy ministers and leaders from oil producing companies in March 2010 - the International Energy Forum - heard various models of rising future demand for oil. A report written by strategic advisors PFC Energy reviewed three oil supply projections: the official IEA view of “total oil demand reaching 111 mmb/d in 2030,” those of Opec, at “a slightly higher 113 mmb/d,” and its own scenario that, irrespective of demand, “global crude oil output is likely to be constrained just below 100 mmb/d.”

PFC Energy's presentation predicted oil "peaking between 2020-2025 around 95.0 mmb/d," although with demand - if it continues at 1.5 per cent – outstripping supply slightly ahead of this date. (Diagram left - click to enlarge.)

This poses an interesting question: can demand for oil outstrip supply before peak oil? Most writers - myself included - see peak oil happening first.

Another question regards the projected rising line - in both charts - to represent demand for oil. How can demand outstrip supply like that? To my mind, it's a theoretical projection: how demand would continue rising if oil doesn't peak. If oil peaks, supply will, at best become very expensive - at worst, very unreliable. This rising cost will obviously have an impact on demand.

Looking ahead: life after peak

The estimates of the date of peak oil vary - largely because leaders of oil producing nations are so obsessively secretive about their true reserves, and those of oil consuming nations fear a stock market collapse if the truth get out - but there is no avoiding the fact that it is going to happen, and soon. It may already be underway. Within a few short years we will start to see demand for oil greater than supply.

What then? Well, the controversies of predicting peak oil are nothing compared to those of speculating about the likely consequences. . .

Many people downplay peak oil, and the subsequent energy crisis - it is denied in the media until it can't be ignored, and then dismissed out of hand along the lines that the free market will prevail. Yet cheap oil is central to our lives, and the functioning of our markets. According to Energy Bulletin:
Our industrial societies and our financial systems were built on the assumption of continual growth – growth based on ever more readily available cheap fossil fuels. Oil in particular is the most convenient and multi-purposed of these fossil fuels. Oil currently accounts for about 43% of the world's total fuel consumption, and 95% of global energy used for transportation. Oil and gas are feedstocks for plastics, paints, pharmaceuticals, fertilizers, electronic components, tyres and much more. Oil is so important that the peak will have vast implications across the realms of war and geopolitics, medicine, culture, transport and trade, economic stability and food production. Significantly, for every one joule of food consumed in the United States, around 10 joules of fossil fuel energy have been used to produce it.
According to the Hirsch report – published as The Inevitable Peaking of World Oil Production - by Robert L. Hirsch for the US government in 2005 (see Free resources), the world may have “less than a year’s warning” of peak oil due to the nature of outputs to plunge rather than plateau once peak has been reached. It states:

Over the past century, world economic development has been fundamentally shaped by the availability of abundant, low-cost oil. Previous energy transitions (wood to coal, coal to oil, etc.) were gradual and evolutionary; oil peaking will be abrupt and revolutionary.

The world has never faced a problem like this. Without massive mitigation at least a decade before the fact, the problem will be pervasive and long lasting.
It states that “recent analysis for the U.S. Department of Energy addressed the question of what might be done to mitigate the peaking of world oil production.” This looked at commercial-based procedures including
       1. Fuel efficient transportation,
       2. Heavy oil/oil sands,
       3. Coal liquefaction,
       4. Enhanced oil recovery,
       5. Gas-to-liquids.

“It became abundantly clear early in this study that effective mitigation will be dependent on the implementation of mega-projects and mega changes at the maximum possible rate,” which, according to Hirsch, is a 20-year process:

The reason why such long lead times are required is that the worldwide scale of oil consumption is enormous – a fact often lost in a world where oil abundance has been taken for granted for so long. If mitigation is too little, too late, world supply/demand balance will have to be achieved through massive demand destruction (shortages), which would translate to extreme economic hardship. On the other hand, with timely mitigation, economic damage can be minimized.
This never happened, of course. We’re left with the free market.

In many ways the market is more reliable than governments, but the question is whether skyrocketing oil prices will cause a massive, global Great Depression, and thus leave the markets unable to invest in alternatives. This all depends on how quickly oil output drops compared to demand (which will determine prices and the level of economic chaos). According to Energy Bulletin:

Whether or not we've passed the peak, a more significant question may be: What will be the future rate of decline of oil production? Some form of co-ordinated adaptation might be possible if the annual drop in available oil was no more severe than 1-2 per cent a year. Whereas 10 per cent or more would soon implode the global economy. Most models project decline rates of 2-4 per cent.

Nations dependent on imports are likely to find that their access to oil will fall at a far sharper rate than the global decline rate. During shortages, higher oil prices stimulate the economy of exporting nations which increases their internal consumption. Combined with a national peak in oil production, exports from any particular nation can drop to zero disturbingly quickly.
I’ll look into this more in the next section, Post-peak scenarios, examining the possible outcomes of peak oil. After that I'll examine what you can do to survive the coming energy crunch.