End of an era
Issue 8 of Cosmos, April 2006by Jim Motavalli
Image: Emrah Elmasli/COSMOS
Global demand for oil will one day overtake our ability to produce it cheaply, and prices will skyrocket as half the world's easily extractable oil is gone. But when? A growing number think soon - if it hasn't already happened.
Since oil was discovered at Dhahran, near the Persian Gulf, in 1938, the small oasis has become a modern city, complete with the sleek headquarters of the Saudi Aramco national oil company.
For the Western oil workers who live there - most of them American or British - life is good in the Dhahran Hills, where homes in the suburban enclaves are made of brick or fieldstone. Despite the desert heat, the gardens blossom with large shade trees, flowering bougainvillea and oleander. There are bike paths, a 27-hole golf course, a rugby field and horse stables
There was a time when life was a lot like this for oil workers in Texas, where roadside oil wells were symbols of a new American prosperity. Oil drillers struck a geyser of black gold at Spindletop, near Beaumont, in 1901, and landowners were soon selling US$100 tracts of land for 200 times that value. Instant millionaires were created, leading to the cliché of the hick in cowboy boots who paid cash for his Cadillac.
But today, after yielding 153 million barrels of oil, old Spindletop is mostly a museum site. Texas still has 129 billion barrels of oil, by some estimates (one 'barrel' is 159L), but it is located deep beneath the ground, making economic recovery difficult. The average well in Texas today produces nine barrels of oil a day; this compares to 6,000 barrels in oil-rich Saudi Arabia.
But this situation, too, may be fluid. Despite the reliance on oil evident in nearly all strategic energy planning, Saudi oil is also a finite resource, and some fear that the desert kingdom may be the next mega-producer to lose momentum.
Is the world running out of oil? Ask that question and the geologists and strategic planners will say you're missing the point: we'll no more 'run out of oil' than we will run out of water in the ocean. About half of the world's known reserves are still in the ground. The real issue, they say, is when will the planet reach the peak of oil production - after which a slow decline will inevitably clash with demand that currently grows at two per cent per year. Finally, they add, we'll stop producing oil altogether because it will become uneconomic, or because technology will have moved on - not because we've pumped out the last drop.
We've reached a dramatic crossroads, with highly credentialled experts coming to diametrically opposed conclusions about the future of the world's oil supply. Unfortunately, the more you talk to experts and immerse yourself in technical data - about R/P ratios and constant decline rates - the more confused you become. Unlike the debate over climate change, where the sceptics lost the argument long ago, the war of words over peak oil is still very much raging, with seemingly solid science on both sides.
But one conclusion is irrefutable: the age of cheap oil is over. And even as our appetite for oil seems insatiable - with world demand likely to grow another 50 per cent by 2025 - petroleum itself will end up downsizing. And it's unlikely that the high oil prices of 2005 will be a bubble, as was the 1970s fallout from the Arab oil embargo. Today, not only is oil getting harder to find in economically exploitable form, but the use of what remains is becoming doubtful wisdom as we come up against the hard reality of rising global temperatures and the first real effects of climate change. Even if we had ample oil, in the long run we'd need to switch to renewables, anyway.
When will oil peak? A growing body of oil company geologists, oil executives and investment bankers, including American geologist L.F. Ivanhoe, see it happening by 2010. The U.S. Department of Energy (DOE) has given various estimates, ranging from 2016 to 2037. And yet, the official position of many oil companies is that they are sceptical it will ever happen at all, putting faith in higher prices and new technology (including horizontal drilling and 4-D exploration) spurring ever more productive exploration.
This would have to be very productive indeed to keep up with world demand, which the U.S. Defence Department's Energy Information Administration (EIA) believes will grow from 81 million barrels per day in 2004 to 118 million barrels in 2025.
But we are not likely to meet that growing demand, says a report by L.B. Magoon for the U.S. Geological Survey. "Technology is great, but it can't find what's not there," he says. "In the last five years, we consumed 27 billion barrels of oil a year, but the oil industry discovered only three billion barrels a year. So only one barrel was replaced for every nine we used." And annual oil discoveries have been declining since 1965.
Most oil peak proponents point to a theory of fossil fuel extraction and depletion known as the Hubbert Peak. It is named after American geophysicist Marion King Hubbert, who created a model of known reserves and proposed in 1956, in a paper he presented at a meeting of the American Petroleum Institute, that oil production in the continental United States would peak between 1965 and 1970. This was at a time when U.S. oil production was riding high, and Hubbert was widely ridiculed. But it arrived right on schedule, in 1970, when U.S. oil topped out at 9.4 million barrels of oil per day.
An extension of Hubbert's Peak to world oil production would put us right at the very top of an upturned finger, in sharp contrast to the continuing upward climb predicted by the EIA. By 2080, the curve sees world oil slowed to a relative trickle. Hubbert died in 1989, but not before he had predicted that global oil peak would occur between 1990 and 2000.
Might the oil peak have already been reached as Hubbert predicted? Some believe we have, or are on the verge of doing so. "We are reaching the limits of the planet very soon; we can't produce much more oil than [the 81 million barrels per day] we are producing today," said Iranian petrochemical engineer Ali Samsam Bakhtiari, a senior official of the National Iranian Oil Company. In an interview with Australia's ABC Radio in August 2004, he forecast supply would outstrip demand sometime in 2006 or 2007, and that prices at the Australian pump could jump from around A$1.10 per litre to between A$3 and A$4 per litre. Such a rise of between 272 per cent and 363 per cent would drive bowser prices in Britain to between £2.44 and £3.25 a litre, and in the United States to between US$6.40 and US$8.53 a gallon. "You will have a constant 'oil shock' after that. So everything is going to change."
Concurring is Robert Hirsch, whose résumé includes stints at oil companies Exxon and ARCO (Atlantic Richfield Company), and he's now senior energy program advisor at the Science Applications International Corporation. "The 'depletion' folks by and large are not exaggerating the problem, particularly when you add in the risk dimension," he said in an interview. "The oil reserves are very uncertain. Middle East politics and egos are in play, and the rest of the world is at great risk because there will be no quick fixes when depletion starts."
In a report for the Atlantic Council of the United States, a non-partisan think tank, Hirsch wrote that "the age of plentiful, low-cost petroleum is approaching an end," and that "unless mitigation is orchestrated on a timely basis, the economic damage to the world economy will be dire and long lasting." What's more, Hirsch says, we won't have much warning when oil peak is finally reached. Studying the examples of the U.S. (which reached peak oil production in 1970) and Great Britain (peak in 1999), Hirsch concludes that "it was not obvious that production was about to peak a year ahead of the event. In most cases, the peaks were sharp."
So it's business as usual, and many in denial, until we finally see the oil peak in the rear-view mirror. The huge challenge is that, as an analysis by the DOE in 2005 indicated, we risk a 20-year "severe liquid fuels problem" if we delay our planning for a post-petroleum energy economy until peak is actually reached. Even if we began a crisis program 10 years before the peak, the DOE report says we'll still have a decade of hardship.
The chief proponent today of the peak oil scenario is probably oil analyst Matthew Simmons. A sometime confidant of U.S. President George W. Bush on oil matters, he is chairman and chief executive of the investment bank Simmons & Company in Houston, a member of the U.S. National Petroleum Council (an advisory committee to the U.S. government) and of the prestigious foreign policy think tank, the Council on Foreign Relations.
He writes in his book, Twilight in the Desert, that "Saudi Arabian oil production is at or very near its peak sustainable volume (if it did not, in fact peak almost 25 years ago), and is likely to go into decline in the very foreseeable future."
Simmons says that a few 'super giant' oil fields in Saudi Arabia (including the massive Ghawar field, the world's largest, discovered in 1953) account for 92 per cent of the country's crude oil output, and that these fields are ageing and suffering from rising 'water cut': this is when water is injected into mature oil fields to keep the oil flowing; it's a sign they're declining.
"There are basically just five old, mature fields that account for 90 per cent of all Saudi production, and a remarkably small number of wellheads that produce the oil from these fields." Simmons says. "It leaves the Saudis with no diversification if any one of the fields suffer a production collapse."
Since Saudi Arabia has the planet's largest proven reserves and is the world's largest oil exporter, the implications of this are huge. In addition, the EIA estimates that Middle East producers will have to invest as much as US$500 billion in developing their oil industries in order to meet rising demand over the next 25 years.
But the U.S. Department of Energy is not concerned: its International Energy Outlook 2005 report forecasts that Saudi Arabia could be producing twice its current production by 2025. Officially, the Saudis concur - Saudi oil minister Ali al-Naimi said his country could easily produce more than the current 9.5 million barrels daily, but limited refining capacity restrained the system's ability to absorb more oil. "Give us the customers and we will pump more oil," he said.
In a report for the Ross Smith Energy Group, petroleum engineer Jim Jarrell takes on Twilight in the Desert and other sceptical Saudi onlookers. He cites a 2000 report from the U.S. Geological Survey that ranked Saudi Arabia number one worldwide in terms of undiscovered oil resource potential. Jarrell praises the Saudis for using conservative methods for assigning oil reserves, and for managing resources carefully to allow only an "extremely flat" decline.
"Our report says we could find no evidence to support a concern that current Saudi production levels are near imminent and irreconcilable decline," Jarrell said. "In fact, the evidence tells us that the Saudis are well informed and are operating their wells prudently."
But can the Saudis ramp up to 20 million barrels of oil a day, as confidently proclaimed by many? "I have no idea," says Jarrell.
Neither Simmons nor Jarrell is on the ground in Saudi Arabia, and Jarrell admits that determining actual reserve levels "would require a detailed reservoir-by-reservoir evaluation". As Muhammed-Ali Zainy of London's Centre for Global Energy Studies points out, we'll just have to take Saudi Arabia's word for its reserves and pumping capacity, since the nature of its closed society makes confirmation impossible.
Some of the most trenchant scepticism over future Saudi Arabian oil capacity comes from inside the kingdom itself, from those on the ground. Sadad al Husseini, the newly retired head of oil exploration and production for Saudi Arabia, told Britain's Channel 4 in October 2005 that "it's unrealistic for the world to be expecting such high numbers from all of the producers, including Saudi Arabia". The hope that his country would be producing more than 20 million barrels of oil per day in the next two decades was "unrealistic" and "a dangerous basis for policy" he said. Al Husseini also said that he believed that world oil would peak at 95 million barrels per day in 2015.
"We don't see us as the ones making sure the oil is there for the rest of the world," an unnamed senior Saudi Aramco official told The New York Times in 2004. He further cautioned that even the attempt to get up to 12 million barrels a day would "wreak havoc within a decade," by damaging the oil fields.
Simmons, who believes that major producers Iran, Iraq, Kuwait, Venezuela and Indonesia are "highly likely" to have passed peak, claims that it's more likely that he'll be living on the Moon in 2025 than for Saudi Arabia to be producing 22 million barrels of oil per day.
The reason we're not discovering any new oil, according to conservative intellectual Peter Huber, is that "the cost of oil remains so low". The world keeps buying oil from the Middle East because it's cheaper than developing new sources, such as the 3.5 trillion barrels sunk in Venezuelan clay in the Orinoco basin and the Athabasca tar sands of Canada, he argued in a Wall Street Journal opinion piece in January 2006.
Oil analyst Daniel Yergin, chairman of the Boston-based Cambridge Energy Research Associates and author of The Prize, says that unconventional oil sources - tar sands, ultra-deep-water developments and natural gas liquids - will account for 30 per cent of total capacity by 2010, up from 10 per cent today.
But there are technological and environmental hurdles to overcome before even a fraction of unconventional resources can be tapped. Still, some analysts remain bullish. Paul Kuklinski, an energy analyst with Boston Energy Research, says unconventional sources will increasingly come into production after 2020, when emerging technologies such as horizontal wells "will allow us to recover oil from wells that were considered unrecoverable, with much less impact on the environment."
The peak oil doomsayers have their critics, and among the most combative and pugilistic is Michael C. Lynch, a research affiliate at Massachusetts Institute of Technology's Centre for International Studies and president of the Strategic Energy and Economic Research company. "I scoff at poor analysis and unwarranted alarmism," he said. "I think the current market is driven by speculation, and that we will see relief in the next few months."
Lynch derides Simmons' Twilight in the Desert as "embarrassingly bad. He includes minimal data, but the data actually refutes his arguments." He considers it "illogical" that Saudi Arabia would be pumping its oil reserves dry. "You never have a basin with a few giant fields and nothing else," he says.
And, in a 2003 article for Oil & Gas Journal, Lynch also took on the Hubbert Peak itself. Lynch outlined a "major theoretical flaw" in the "very simplistic" curve. He says that the oil pessimists rely too heavily on geology, when in fact "demand determines production, not geology."
Lynch says the Hubbert Peak only appears to have validity, since mature oil production grows very slowly, with new fields representing no more than a small proportion of existing fields. Peak oil theorists, he says, "have apparently rediscovered the Hubbert curve, but without understanding it". He denies that oil production necessarily follows a Hubbert-like bell curve, pointing to U.K. geologist, Colin Campbell's work that shows production for 51 non-OPEC (Organisation of the Petroleum Exporting Countries) nations "and only eight of them could be said to resemble a Hubbert curve even approximately". The Hubbert curve, Lynch argues, "originally held as scientific and inviolable, is of no particular value".
The truth is, Lynch is one of the last bears on oil prices. He regards oil crises as short-term affairs, and the general price trend is actually downwards. "The possibility of a price drop so rapid that OPEC can't stabilise the market at the level they want is real," he said in May 2005. In this, Lynch directly challenges such respected oil observers as investment house Goldman Sachs, whose analyst Arjun Murti in March 2005 suggested crude oil prices might go as high as US$105 a barrel by 2007. "We believe oil markets may have entered the early stages of what we have referred to as a 'super-spike' period - a multi-year trading band of oil prices high enough to reduce energy consumption meaningfully and to re-create a spare capacity cushion only after which lower energy prices will return," Murti forecast.
It's impossible to escape the conclusion that we're steaming full speed into a train derailment of monumental proportions. Obviously, the world made do without oil for millennia; petroleum has been critical for a very brief period in human history. But there are many more of us today, and we are incredibly dependent on it now - and not just for transportation.
Consider the fact that the average food item travels 2,400km before it reaches your plate. Geologist Dale Allen Pfeiffer has pointed out that it takes 10 calories of fossil fuel to produce one calorie of food eaten in the United States. Pesticides are made from oil, and commercial fertilisers from natural gas. Farming machinery runs on oil and was built using it.
Building a desktop computer consumes 10 times it weight in fossil fuels. A single 32-megabyte computer chip requires 1.6kg of fossil fuels to make. The average car consumes 27 to 54 barrels of oil … not on the road, but in the factory.
Because our way of life is so intimately connected to cheap oil, critics such as James Howard Kunstler, author of The Long Emergency, see a profound realignment of society ahead. "We are going to have to live a lot more locally and a lot more intensively on that local level," Kunstler said in a 2005 speech in Hudson, New York. "Industrial agriculture … will not survive the end of the cheap oil economy. The implication of this is enormous. Successful human ecologies in the near future will have to be supported by intensively farmed agricultural hinterlands. Places that can't do this will fail … What goes for the scale of places will be equally true for the scale of social organisation. All large-scale enterprises, including many types of corporations and governments, will function very poorly in the post-cheap-oil world."
Kunstler may be understating the human capacity for ingenuity, and he quickly dismisses the potential for alternative energy, from wind power to solar and biofuels. It's hard to imagine, as he does, big cities and suburbs emptying out because we simply won't have access to cheap oil and can't keep the air-conditioning running. But it's far more likely a scenario than the cheerful Energy Information Administration charts showing ever-rising oil reserves in the Middle East, with production meeting demand simply because, well, it has to.
Jared Diamond discusses one of the critical stops on the road map to societal failure in his book, Collapse: "It turns out that societies often fail even to attempt to solve a problem once it has been perceived." What happens, he writes, is that "some people may reason correctly that they can advance their own interests by behaviour harmful to other people … The perpetrators know they will often get away with their bad behaviour, especially if there is no law against it or the law isn't effectively enforced. They feel safe because the perpetrators are typically concentrated (few in number) and highly motivated by the prospect of reaping big, certain and immediate profits, while the losses are spread over large numbers of individuals." (see also COSMOS Issue 3, p54)
Diamond's scenario offers a precise explanation for the West's failure to act in the face of clear and present energy danger. With our leaders ignoring the issue as if it didn't exist, we may very well drift toward the kind of abrupt collapse Diamond documents as having taken down the Vikings, the Mayans and the mysterious people of Easter Island.
Instead of cryptic stone statues, we may leave behind rusting oil derricks and highways that lead nowhere.
cosmosmagazine.com |
