Review Essay: The View from the Peak
Author: Jérôme Guillet
DOI: 10.1080/00396330701254719
Publication Frequency: 4 issues per year
Published in: Survival, Volume 49, Issue 1 March 2007 , pages 221 - 228
Introduction
The Party's Over: Oil, War and the Fate of Industrial Societies
Richard Heinberg. Forest Row: Clairview Books, 2003. £12.99. 288 pp.
The Age of Oil: The Mythology, History and Future of the World's Most Controversial Resource
Leonardo Maugeri. Westport, CT: Praeger, 2006. $49.95/£28.99. 360 pp.
'Peak oil' has been understood to mean many different things. Sometimes it is directly associated with the end of oil and of industrial civilisation as we know it, a view generated by dire predictions in books with titles like Dieoff , The End of Suburbia: Oil Depletion and the Collapse of the American Dream and others. As usually understood in the industry, 'peak oil' is the moment when oil production reaches its maximum, followed by an inevitable decline. The debate on 'peak oil' entered the wider public consciousness during the summer of 2006.
In July, the combination of the war in Lebanon, fears of a new hurricane season in the Gulf of Mexico and a massive inflow of speculative money into commodities markets brought oil prices to a record level of $78 per barrel. Underlying that price rise was a perceived tightness in the oil supply-demand balance in a context of buoyant demand, notably from China. There was real fear that temporary shortages, triggered by geopolitical events or more mundane reasons like strikes, accidents or weather, could bring about much larger price spikes. In turn, these short-term worries brought a wider audience to the small group of people in or around the industry who had been saying for years that peak oil was imminent, and that prices could be expected to keep on rising. The mainstream media started writing stories explaining these theories, and ominously warning about the 'end of the oil age'.
Then, in September, oil prices dropped quite abruptly, by more than 25%, and the general conclusion was that - once again - the markets had cried wolf too early, and that peak oil was not a serious worry. The dire warnings, seemingly coming from nowhere, followed by victorious cries of summary dismissal from well-organised and established opponents briefly sowed confusion, but generated little actual action. The yo-yo in prices does not seem to have created more awareness of the overall energy situation beyond the unavoidable fact that the price of gas at the pump has increased significantly.
So what can be said about peak oil today? Richard Heinberg and Leonardo Maugeri provide some solid answers - and radically different conclusions.
The Party's Over is one of that increasing number of 'doom and gloom' books warning us about a coming energy crunch. Heinberg, who was writing about issues of sustainability long before it was fashionable, provides a pedagogic overview of what the end of the age of oil could mean for industrial society. Published in 2003, it is one of the earliest of a recent flood of similar efforts. Heinberg provides a clear overview of how our civilisation has bloomed thanks to its ability to harness energy sources - in particular, in the last century, the energy contained in oil. He explains that we will soon run out of that vital resource, that there is no convenient alternative, and offers some suggestions on how to adapt to the fairly sombre future he sees for humanity once oil becomes scarce.
Conversely, The Age of Oil , by an oil industry insider (Maugeri works in the Strategy Department of ENI, the Italian oil major), focuses on the boom-and-bust cycles that have marked the last century of oil history, and contends that today's tightening markets (and higher prices) can be explained by much the same temporary reasons that caused previous price spikes. He relates several episodes when various entities wrongly claimed that oil was about to run out, and comes out with the unambiguous message that today's peak oil theorists will turn out just as wrong.
Oil production in many areas has followed the same pattern. First, the larger, more accessible fields are put in production and generate fast-increasing volumes, as their internal pressure makes the extraction of oil easy and cheap. If properly managed (not usually the case in the past), production can then be kept steady for a number of years or, for the biggest fields, decades. But as the reservoirs are emptied of the most accessible reserves, production slowly starts to sag. To maintain production, other (usually smaller) fields need to be put on line, or new technology has to be used to enhance recovery in existing fields. Increasing investment is needed for smaller and smaller returns.
At some point, the smaller additions are no longer enough to compensate for the decline of the earlier fields, and overall production reaches a maximum, then enters into irremediable decline. Peak oil usually refers to that moment when oil production reaches its absolute maximum; the word 'peak' is slightly misleading, in that the production curve can look like a long plateau and decline can be a relatively gentle slope, but it does convey the fact that a maximum is reached at some point, and that such a production level can never be reached again, despite the industry's best efforts to improve recovery or develop new assets. The concept gained traction when King Hubbert, an oil geologist with Shell, predicted in the mid 1950s that US oil production would peak in the early 1970s - 'Hubbert's peak' - and it duly did. Even significant discoveries like Prudhoe Bay in Alaska and the offshore sector in the Gulf of Mexico have not been enough to reverse the decline.
Peak oil theory does not specifically predict that the peak will occur when half the reserves have been taken out of the ground (which would suggest, inaccurately, that the downward slope will be symmetrical with the earlier growth), but for those regions and fields that have already peaked, they did so fairly close to that half-way mark.
The idea that production may decline is readily appreciated; what is less understood is that at the time of the peak, the half already taken out of the ground will have been the easiest to recover, leaving us with a remainder which will be much less accessible, and much more expensive to bring to the market. A secondary aspect is that the early reserves require very little energy to be produced, but, as time goes by, a lot more is needed for oil extraction, thus ensuring that the energy return on energy invested (EROEI), the useful energy contained in the oil produced compared to the energy it took to produce it, goes down with time. At some point, EROEI reaches one or less, which means that we use more energy than we get out in the extraction process. Oil is a high-quality form of energy - extremely concentrated, easy to transport - and there is no real substitute for tasks like flying aeroplanes. Thus it might be worthwhile to tolerate an EROEI below one to obtain oil, but the larger quantity of lower-quality energy (such as heat) needed in the process will itself need to be generated some other way.
Thus peak oil does not mean the end of oil, but it does mean the end of plentiful, easily accessible and cheap oil. Peak oil will actually be the moment of maximum availability of oil - with problems to come only later. It is highly likely that we will know about the peak only after the fact, as we notice several years of stagnant or declining production. The question as to whether markets will alert us to the fact beforehand, via sharply increasing prices and possible shortages as demand has to adjust to shrinking supply, is open.
The price increases of the past three years have led many to wonder if we are already facing a production peak, but we are actually facing a slightly different problem: oil supply is still going up, but is struggling to keep up with the rapid increase in demand linked to the extraordinary growth of the world economy. Whether that difficulty is a sign that oil is peaking, or a temporary problem linked to underinvestment in the upstream sector, as Maugeri suggests, is also unclear.
In any case, the big question is when the peak will occur, as it will inevitably cause major changes in our economies. To adapt to an age of scarcer and more expensive oil, we might need to change the way our economies are built, and in particular reconsider the massive use of the personal automobile. In turn, this would no doubt call for a hard look at the way we have organised our lives around cars, with the construction of a dominant car-only infrastructure: highways, suburbs, big-box stores, just-in-time logistics and the accompanying social mores (the automobile as fundamental signifier of wealth, social status and personality).
If oil is going to be much less available in, say, the next 10-30 years, it would seem reasonable to start thinking about altering our infrastructure, which takes a long time to build, and lasts even longer, towards public transport (or perhaps electric cars), denser habitat (or at least organised around transportation facilities), renewable energies and, more generally, energy conservation. In the shorter term, dependence on imports from unstable regions of the world is likely to lead to major geopolitical tensions - indeed, many argue that Iraq is the first war of the 'end of oil'. Thus worrying about our domestic oil consumption might be useful, taken in that context - simply to avoid messy compromises or outright conflict with unseemly regimes.
And yet, that is not where the debate is. The question of 'when' seems only to be debated within the 'peak oil camp', via semi-formal non-governmental organisations like the Association for the Study of Peak Oil and The Oil Drum. Such groups organise conferences and run lively websites where many opinions on timetables, economic and political consequences, and potential alternatives are expressed and the only points of agreement seem to be that there will be less oil available at some point in the foreseeable future and that we should plan for it. The other side, led by the main international energy agencies like the US Energy Information Agency and the International Energy Agency or by energy consultancies like Cambridge Energy Research Association, state more or less bluntly that the question is irrelevant, because the date is far enough in the future that it doesn't matter. In their opinion, just as we found substitutes for wood and coal in the past, we'll find substitutes for oil when we need it, or even before, as well as considerable quantities of presently undiscovered oil.
Heinberg, while not taking a position on the date, clearly falls into the first category. He describes in a broad sweep how energy has been a vital component of our civilisation, starting with slave labour, wood and wind and ending with the use of coal and oil during the massive industrialisation of the past two centuries. He points out that population has increased in line with the availability of energy, and underlines the degree to which oil has contributed to this bonanza, by providing all of us (at least in the developed world) with extraordinary amounts of energy at our fingertips. For instance, he notes that a person can sustainably produce one-twentieth of a horse-power during the day, so it would take five people to light a 150W light, or the equivalent of 2,000 people to replace the energy of a car cruising on the highway.
After explaining, in easily understandable terms, the concepts behind Hubbert's peak, he explains why other existing sources of energy will not be able to replace oil. Some of his biases show through: Heinberg insists, for instance, on taking into account the carbon emissions associated with the construction of nuclear plants, but does not discuss the pollution associated with the large-scale manufacturing of solar panels, a technology he lauds. In a second section, he notes the likely consequences of the coming fall in available energy, and suggests a few solutions to avoid them. These chapters, like those in the first section, are meant to provide a broad overview, and cover a wide range of topics. Inevitably, they are a bit short, and sometimes simplistic.
The most damaging weakness, though, is Heinberg's failure to focus on a consistent time frame for the likely future, or to sort out which forms of energy use are likely to be privileged over others. Most of the issues he raises are relevant in the perspective of across-the-board energy shortages, but some will appear before others, and some can easily be delayed or prioritised. Focusing on all the things we won't be able to do when there is no energy at all is not very useful for understanding how decreasing energy availability could hit us in the medium term. For instance, private transport is likely to be impacted more than commercial transport, food production or specialty chemicals, for two simple reasons. First, it is a sector where substitutes can be found (more fuel-efficient cars, car pooling, public transport, etc.), and secondly, consumption by individuals is likely to be more price sensitive - and the price impact will be most directly felt. Glossing over the difference between short-term and very long-term impacts, like the collapse of electricity grids, makes this section weaker, especially as Heinberg also discusses the geopolitical context with a short-term focus on current news.
Heinberg leaves the inescapable impression that we are all doomed and that any effort is essentially pointless. And some of the suggestions he offers, like starting an herb garden to prepare for the collapse of the health care system, seem oddly unsubstantial given the potential consequences he outlines. To be fair, others are more relevant, such as the need to switch transport investment towards rail rather than to roads or air travel, but the lack of prioritisation both of likely problems and possible solutions makes the book less authoritative than it could have been.
Despite this shortcoming, The Party's Over is an excellent introduction to the questions that come with the realisation that some of the resources we rely upon heavily are finite.
The Age of Oil comes from a totally different perspective, with the explicit goal of contradicting the entire gist of Heinberg's book: that we are likely to face lower availability of oil in the near future.
Maugeri first takes us through the history of the oil industry. While less detailed on the political side of things than Daniel Yergin's The Prize , The Age of Oil offers a comprehensive overview of the commercial side of the business over the past century and a half. Maugeri also does an excellent job of showing us how the oil industry has been driven more than anything else by perceptions of where the markets were rather than by the actual situation of these markets - and how a surprising number of people at various times have gotten things spectacularly wrong. In particular, he notes how the oil industry has been marked by regular predictions that production was due to fall, followed by long periods of glut and overproduction (the 1930s, the 1950s, the 1990s) where prices, not production, collapsed. Rather than an all-powerful oil industry, he describes often clueless companies struggling vainly to bring order to a chaotic market dominated by shortsighted governments preoccupied by short-term revenue or cheap politicking, and market pundits repeatedly getting it wrong.
Maugeri's description of many aspects of the complex technical underbelly of the oil world (how reserves are measured, the various qualities of crude and how they can be used by refineries, the growing role of financial markets, and the importance of regulations and the temporary mismatches they can create between oil supply and refinery capacity, for instance) is an excellent course on the economics of the industry. He also shows how domestic politics, international politics, technological progress and market psychology combine to make predictions almost impossible.
Yet Maugeri indulges in the very behaviour he criticises, by expressing very definitive opinions about peak oil - or rather the absurdity thereof. While he makes solid arguments about how geopolitical factors can hide the reality of oil supply-and-demand balance, and about how price signals do work over the long term (higher prices lead to more investment and higher production, as well as lower demand, thus ultimately bringing prices down), his abrupt dismissal of several arguments made by the peak-oilers is much weaker.
He correctly notes four arguments made by the pessimists: the global decline in oil discoveries since the 1960s, the artificial changes in OPEC country reserves in the 1980s, the inability of the Western oil majors to renew their reserves in recent years, and the shrinking spare capacity worldwide. Maugeri essentially concedes the first point, noting that despite a couple of big finds in recent years, numbers are down, and resorts to the hope that more investment will change the trend. He claims that OPEC countries had reason, after kicking out the Western oil companies, to upgrade their claimed reserves (which the oil companies voluntarily downplayed in their attempts to limit supplies on the global markets), but he does not explain why these have remained strictly constant since, despite significant volumes being produced over the last 20 years - an improbable evolution that can only lead to doubts about what the real numbers are. For quoted companies, he correctly explains that reserve numbers are extremely complex to calculate and are constrained by US Security and Exchange Commission rules, and by the unwillingness of many countries to open up their resources to outside investment.
While these arguments are true, they do not change the fact that oil majors have really been struggling with their reserve replacement numbers in recent years - as they have with their production levels, which have essentially remained constant since 2000, despite skyrocketing prices. Maugeri's argument that this trend, along with the related shrinking spare capacity of the market, is caused by the refusal of the largest holders of oil reserves to invest enough or to allow investment indirectly concedes the point but implies that this is a temporary phenomenon wherein political factors trump economic realities, as they have in the past. But increasing production costs and the difficulty to bring online many supposedly promising areas (like the Canadian oil sands which, despite huge reserves, will not contribute more than a few percentage points of world production by 2030) underline the fact that, so far, market signals have failed to correct the tightness of the markets.
And meanwhile, those countries that hold most of the aces - because they now hold most of the reserves that can easily be put on stream - can and do keep the prices going up slowly but steadily. They do so by playing a delicate game of brinkmanship, limiting investment and production while keeping an outward attitude of responsible cooperation.
One can only hope that the debate that briefly burst into the open last summer will be given the prominence it deserves. These two books are an excellent introduction to the arguments on both sides. The next few years will tell us if, as The Age of Oil argues, current circumstances are just a temporary blip in a long-term trend towards higher oil use, or as The Party's Over asserts, the end of the phase of growth before a phase of stagnation or retrenchment. Both books are highly readable, well written, and they will provide all readers with excellent information - even if it is unlikely that both will be right for more than a couple of decades. Our whole civilisation depends on knowing which one it will be, and it would appear irresponsible not to plan seriously for both - which, since the alternative would only be a continuation of current trends, means thinking hard about getting ready for a lower-energy world.
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