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Peak Oil - Why We need to Plan Now

By Tom Murphy | Fri, 04 November 2011 13:40 | 3

It was by teaching a course on energy in 2004 that I first became aware of the enormous challenges facing our society this century. In preparing for the course, I was initially convinced that I would identify a sensible and obvious path forward involving energy from solar, wind, nuclear, geothermal, tides, waves, ocean currents, etc. Instead, I came out dismayed by the hardships or inadequacies on all fronts. The prospect of a global peak in oil production placed a timescale on the problem that was uncomfortably short. It took several exposures to peak oil for me to grasp the full potential of the phenomenon to transform our civilization, but eventually I was swayed by physical and quantitative arguments that I could not blithely wave off the problem—despite a somewhat unsettling fringe flavor to the story.

Aside from excursions here and there, Do the Math represents—in computer terms—a “core dump” of years of accumulated thoughts and analysis on energy, growth, and the largely unappreciated challenges we face on both short and long terms. During this queued process—with much more to come—I have made references to peak oil, but have refrained from a head-on treatment. As important as peak oil has been in motivating my quantitative exploration of life beyond fossil fuels, it seems overdue that I share my thoughts.

Calling the Bubble

Before I dive into oil—no, not literally—I’ll share a story that has some resonant parallels. When my wife and I moved to San Diego in 2003, we understood that if we wanted to buy a house, we should do so without delay—as prices were climbing fast. Spending a year optimizing a search for the perfect house risked pricing us out of the market. Interest rates were at historic lows, meaning that prices were soaring while keeping the monthly payment—the key determinant of house affordability—roughly constant. We bought a house practically overnight in the summer of 2003. In 2005, I became nervous about the spectre of rising interest rates and the effect this would have on prices. Since we were not yet firmly tied to San Diego, we wanted to keep options open for moving elsewhere. I worried that a fall in house prices—for any reason—could trap us underwater in debt.

I sought articles and analysis on projected house prices, and came across two divergent predictions: level/growth (most stories); and bursting bubble. I noticed a clear difference in the flavor of the articles. The bursting bubble stories used lots of numbers, stats, and analysis. I’m a sucker for that. Specifically, the fact that 60% of new home loans in Southern California were interest-only or otherwise sub-prime worried me a lot, as did the statistic that only 9% of families in San Diego could afford the median-priced home. Unsustainable, I thought.

Meanwhile, the level/growth narratives tended to be hand-wavy: San Diego was such a desirable place to live that homes would not lose their value. The expanding diversity of jobs into high-tech further insulated San Diego against downturn. The activity was not speculative because families—not investors—were actually buying and moving into homes at the elevated prices. We had reached a new normal in prosperity.

Take a look at the home price index published in the New York Times in 2006. There were boom/bust cycles in the 70?s and 80?s, but the tidal wave starting in 2000 is wholly unlike anything that came before: a factor-of-two price adjustment in a few years.

Historical Home Values

Can you believe that rational people were claiming we had hit a new normal? That this fantastic rise would not come down? I certainly couldn’t swallow it. My wife and I decided to sell in mid-2005, and managed to break free in early 2006, at the height of the market in San Diego. Quantitative analysis was on our side.

An Even Stronger Case

A plot of fossil fuel consumption over the long term looks somewhat like the right-hand-side of the house price figure above—in that it has rocketed up in near-exponential fashion over the last couple of centuries. So what? Fossil fuel production has little in common with real estate prices, so the fact that the housing bubble crashed holds no predictive power for fossil fuels. But in this case, the quantitative evaluation of where fossil fuels will go is even more convincing than market predictions for housing. In the fossil fuel case, it comes down to physics, and I’m on my home turf. I am far more confident that finite fossil fuels will peak and decline than I was about the housing market in San Diego prior to the crash. And it should tell you something that I was confident enough in that to sell my house and move into a rental, at significant personal inconvenience.

Despite the certainty of its occurrence, peak oil is such a complex, multi-faceted problem that any one argument is insufficient to seal its fate as either a major turning point in human history or a footnote of history to be smoothly traversed. It is in the balance of ideas that I land on the “major event” side of the spectrum. Establishing any position—regardless of where on the spectrum—inevitably involves some subjectivity. But similar to the housing market assessments of 2005, I find an asymmetry on the quantitative side of the story that ultimately is too compelling for me to ignore. Here, I will walk through some of the issues I have had to sort out in order to establish what I think is likely to be true.

Keep in mind that I am not making predictions here or demanding that readers are persuaded by the same arguments/analysis that I have found compelling. I’m just laying out a set of reasons why I think the phenomenon deserves our directed attention. I should also clarify that while I speak of “peak oil,” my main concern is the decline that follows a peak (or plateau). The peak itself is nothing but fun!

Getting Calibrated

Any discussion of oil production is much easier if you enter knowing a few basic numbers. The world uses about 86 million barrels per day (Mbpd) of petroleum in its various forms, about 20 Mbpd of which is consumed in the U.S. This comes to 31 billion barrels (Gbbl) per year globally, and a little over 7 Gbbl for the U.S. Conventional crude oil makes up about 73 Mbpd of the 86 total, the rest coming primarily from natural gas plant liquids (NGPL), and some from tar sands and other alternatives.

Sub-subsistence Living

Imagine that your lifestyle demands $30,000 per year for rent, food, travel, entertainment, clothing, etc. in order to “subsist.” Now what if I tell you that your earnings potential amounts to only $10,000 per year, and is almost certain to only go down from here. I expect you should feel distressed. But because you once pulled in a salary of $60,000 and were frugal at the time, you have a bit of a cushion in savings. Still, the current situation and dimming prospects should raise serious concern. This is similar to the case with oil discoveries, or “income.” Just replace “dollars” with “million barrels of oil” and we have our analogy.

Oil discovery & production

Global oil discoveries peaked in the 1960?s, when every year we found far more oil than we consumed. How could one not be optimistic about our future during this era? Starting in the early 1980?s, we crossed the line to finding less new oil each year than we used, and we have never gone back. This causes no immediate problem, since we still have a backlog of discovery to exploit. Nonetheless, the trend is telling, and the obvious statement that a past peak in oil discovery must one day result in peak production is inescapable.

What amazes me is that each time we discover a few-billion barrel deposit in the world, the trumpets come out and the headlines gush with the news. But these just add up to something like 10 billion barrels a year: far short of yearly production. We expect to continue discovering something like 10 billion barrels per year in the near term. The headlines we don’t see are more important:

Yet another year of lackluster oil discovery, far short of break-even.

Why aren’t we hammered with this headline year after year? Instead, it’s always champagne and caviar over the buckets we do manage to find.

Rational people agree on the peaking of conventional oil. The fights are over timing. Most estimates fall between 2005–2020, although a minority of vested voices (with poor predictive track records) speak of a plateau lasting for decades. I will note that we lately appear to be on a plateau that began around 2004.

Peaks Happen

It is well known that individual oil fields universally see a production peak—often early in their production lifetimes—followed by persistent decline. The geological upshot is that oil is not a lake into which we thrust a straw, slurping as fast as we wish. Rather, oil is a viscous fluid in porous, permeable rock that resists rapid recovery. It’s not a spigot or valve that we can turn at will. Nature has a say in how fast we can claim the oil. When economists speak of reserves-to-production (R/P) ratios to set a time scale on oil depletion (usually a few decades), this “lake” is the implied model. The R/P ratio is a useful number, but its use obscures geological limitations to the rate of recovery. In truth, oil will last longer than the R/P indicates, but at a reduced rate of flow. The decline, meanwhile, is closer at hand than the R/P number alone conveys.

The lesson is that we don’t have full control over oil production. If previous discoveries are in decline, and we are not adding new fields at a replacement rate, we should expect aggregate decline. This is why well over half the major oil-producing countries have passed their peak performance (see the Hirsch Report Summary—reporting 33 of 48 in decline, and a 2008 analysis showing similar asymmetry). It is thought that Saudi Arabia is the only country left with any spare production capacity—effectively like a spigot that can be opened wider on demand. Even this is a debatable point, and at most amounts to something like one Mbpd (out of 86 globally).

If It Can Happen Here…

Indeed, it was clear (to some, like Hubbert) as early as the 1950?s that the peak of oil discoveries in the U.S. in the 1930?s portended a peak of domestic oil production around 1970. Since 1970, the U.S. has seen overall decline in oil production, now about half what it once was. Demand has continued to rise, so that we have shifted to an oil supply dominated by imports.

Oil prices

We see above (source: EIA) that oil from Alaska helped stave off a monotonic decline, but that it could not recapture the past glory of the peak. Alaskan oil has diminished now to the point that the pipeline will soon have to be shut off completely, otherwise the rate would become too slow to prevent freezing and seizing up.

Note that the U.S. decline happened not for lack of stability (wars on our turf), lack of technology, lack of management acumen, or lack of political will to be more self-sufficient in energy. The decline happened because geology is in the driver’s seat. Dramatic price shocks in 1973 and 1979—amounting to a factor of 8 price increase—were insufficient to drive production beyond the 1970 peak. The shocks played a role in stimulating the Alaskan oil flow, which indeed arrested the decline for a time. Yet the overall story is one of increasing demand atop declining production.

Straining at the Plateau

Since about 2004—well before the economic disasters of late 2008—global oil production hit something of a plateau, oscillating within ±3% of 86 Mbpd (source: EIA).

Global oil production

During this time, prices steadily climbed, signaling increasing demand. A common argument is that oil reserves—in contrast to resources—are a function of price. A greater fraction of the total resource is economically viable at a higher price. This is used to advocate the view that we can maintain a plateau indefinitely (or even climb higher). The basic mechanism does function, but is it sufficient?

Oil production

Above is a plot of oil production as a function of price from 1997 to 2011, inspired by Gail Tverberg (data source: EIA). On the left-hand side, we see a familiar correlation of price and production: if spare capacity exists, higher prices stimulate increased production. But something dramatic happens at about 84 Mbpd. Increasing the price by a factor of three is insufficient to budge production by more than a few percent. There appears to remain a slight positive slope (economics still works in the normal sense), but the thing is incredibly inelastic. I interpret this as empirical evidence that we are straining the limits of production capacity. Where was the relief valve?

As an aside, a compelling story about the financial collapse of 2008 puts this production limit at center stage. As supply failed to meet demand and prices rose (amplified by speculation, yes), the transportation, airline, tourism, automotive, and other directly related industries began to suffer and fold under pressure. The resulting economic slowdown deprived the sub-prime racket of oxygen, forcing the house of cards to collapse on itself. The racket worked as long as growth continued and housing prices did not falter. So we may have seen our first peak-oil economic disruption. The sub-prime tinder-box added to the pop.  A recent article in Mother Jones touches on this interplay.

Logistically Speaking

I am additionally swayed by the frequent success of logistic functions to predict total amount of resource well before it is exhausted. This does not always work (i.e., don’t pepper me with exceptions, of which there are plenty). But the fact that it has worked so well for major resources in the past is interesting and compelling.

If for each year, we plot the amount of resource produced in that year as a fraction of the total resource extracted to date against the total extracted resource, a logistic function makes a straight, descending line intercepting the horizontal axis at the value of the ultimate resource. The peak production rate occurs at the half-way point along the trend. By contrast, constant-growth exponentials (infinite resource) follow a flat line: same fractional production every year. Below are four such examples for prized Pennsylvania anthracite coal, British coal, U.S. oil (including Alaska), and global oil.

Pennsylvania Athracite Production
UK Coal Production
U.S. Oil Production
Global Oil Prodiction - 2

The two coal cases are amazing to me: whole development histories follow the logistic curve strikingly well. No one commanded them to do so. Well before the resource was fully exhausted, it would have been possible to draw a line and predict the amount of ultimately recoverable resource with some accuracy.

For U.S. oil, we are far enough along to estimate that the total recoverable resource is in the neighborhood of 240 billion barrels. According to this, we have about 40 billion barrels yet to produce. For comparison, the proven reserves in the U.S. currently total 21 billion barrels, so the logistic plot suggests we have about the same amount yet to find (or to become economically viable). For scale, the (discovered) resource in the Arctic National Wildlife Refuge (ANWR) is approximately 10 billion barrels. The 40 billion barrel estimate is in no way set in stone, but a conservative approach suggests it would not be prudent to count on there being more—at least not at historically “reasonable” prices.

For global oil resources (all liquids), we have consumed 1.2 trillion barrels so far. The data did not follow a logistic path in its early years, but has done so for the past three decades. If this portion is predictive, it says that our total resource is about 2.4 trillion barrels, putting us half-way along (therefore around the peak of the logistic rate). This by itself is a weak prediction. But the discovery rate we have seen (peaking in the 1960?s) does not lay the groundwork for us to expect a radical departure from the logistic line any time soon.

Possible Reaction to Oil Decline

It is rather clear that conventional oil is fated to peak (or plateau) and decline. The worry, then, is that economies are forced into ramping-down use of liquid fuels while oil prices skyrocket. Recession ensues; demand flags; prices return to almost normal; rinse and repeat. If you’ve ever watched a hummingbird (or some large insects) trapped inside, they repeatedly crash into the ceiling. Economic attempts to resume growth likewise will soon rediscover the ever-declining oil supply ceiling. Like the confused bird who does not notice the open window, those who would establish expensive new ventures for alternatives will be hampered by market volatility and uncertainty—worried about going bust in the next half-cycle.

Global recognition that failing oil supply is the problem and that we are at the start of an inexorable oil decline may result in loss of confidence in long-term investment gain, so that many withdraw from the market—fleeing to gold or cash or other escapes deemed safe against year-over-year declines. Foreign investors could pull out of U.S. holdings, lacking confidence in our ability to grow against a backdrop of oil decline. The dollar could be abandoned as the standard currency for oil exchanges. A long-term global crisis of confidence could dramatically change the rules of the game.

About ninety percent of the oil in this world is controlled by national oil companies: not multi-nationals like ExxonMobil, etc. If even one major oil-exporting country decides to reduce exports, recognizing that they should preserve a valuable and waning resource for their own future, the decline gets that much worse—sending prices higher and tempting more countries to do the same. If export prices double, a nation figures, it can sell half as much and still keep its economy on an even keel. Nations that do not regard oil as a fundamentally special commodity—a one-time physical endowment not easily replaced with money—may elect to cash in on the bonanza, keeping their export level at maximum capacity (where virtually all operate today). But I doubt that this short-sighted reaction will be universal.

The potential exists, therefore, for major disruption to our accustomed ways of life. We will become viscerally aware of how fundamentally important oil is to all that we do. Even though energy may represent something like 10% of GDP, it’s what makes the other 90% possible. It’s not just another commodity like sneakers or widgets. Curtail transportation and watch the grocery store shelves struggle to stay full. See food prices escalate and cause immediate hardships around the world. Find out how far-flung about the globe the material resources are that comprise a cell phone.

I am not claiming any crystal ball clarity in imagining these scenarios, but I do believe they represent distinct possibilities. Only by acknowledging the potential for such developments would we intentionally safeguard ourselves against them, to the degree possible.

Plenty of Hydrocarbons

A decline in conventional oil production represents a liquid fuels problem. Crash programs in solar, wind, or nuclear infrastructure—besides suffering from the Energy Trap phenomenon—do not address the fundamental problem. Replacing a fleet of vehicles with electric cars or plug-in hybrids will take decades to accomplish, amidst decline and hardship. Biofuels that can scale to meet the demand gap and that do not compete directly with food supply have not been demonstrated. But wait! There are loads more hydrocarbons in the ground besides conventional oil.

Cost of various fuels

This graphic, adapted from Brandt & Farrell, shows the estimated resources of all hydrocarbons relevant to liquid fuels, together with their production cost. Proven reserves are the dark bands to the left of each block, and increasingly uncertain potential resources stretch off to the right for each component. The graphic conveys that in order of increasing cost, enhanced oil recovery, tar sands and heavy oil, gas-to-liquids, coal-to-liquids, and oil shale add substantial stocks at production costs that are only 2–10 times that of conventional oil. Those who are primarily interested in climate change are not too happy with the implications, but this situation could alleviate concerns over oil decline.

I should point out that the production costs of the various hydrocarbons in the plot above are based on 2007 energy prices. Using the escalated energy prices brought on by a conventional oil decline pushes everything higher on the scale. So don’t take either axis of the graph literally.

I will admit that personally, this is the strongest evidence I have seen for why I should not worry about peak oil. I will completely understand if we part company here, and you conclude that post-peak conventional oil decline does not pose a significant threat to our way of life. At least I know that you are aware of the potential dangers, and that if things do go off the rails, peak oil will be in your vocabulary. I’m not interested in being right as much as I am interested in awareness so we can anticipate troubles and get busy with earnest mitigation/prevention. I just don’t want to get caught with our collective (size 40,000 km) pants down, and have to listen to “no one could have seen this coming” excuses like we did with the crash of the sub-prime housing bubble.

So how can I look at the total hydrocarbons figure and still have concerns? Most simply, peak oil is about rates, not amounts. It’s also about economics, the speed with which we could scale, energy returned on energy invested (EROEI), carbon caps, and other practical matters. The fact that oil prices recently rose by a factor of three while no relief arrived from other hydrocarbons can be taken as empirical evidence that the vast amount of hydrocarbons in the ground is not immediately useful in a pinch. The market did not cradle us and take care of business, as the perennial promise goes.

A 2005 report commissioned by the U.S. Department of Energy (called the Hirsch report: summary and full text) performed a detailed analysis of which technologies and strategies are in a ready-to-go state for scaling up crash programs to mitigate conventional oil decline. The conclusion can practically be read right off the graph above. Besides increased vehicular efficiency, the mitigation schemes involved enhanced oil recovery, tar sands, gas-to-liquids, and coal-to-liquids. Note the fossil fuel theme: we’re hooked!

The bottom line was that initiating such crash programs 20 years ahead of the peak (or more to the point, 20 years before the start of decline) may be sufficient to avoid major hardships. Waiting until 10 years before the decline would result in major disruptions as the efforts struggled to establish a large enough foothold in time for the decline. Initiating the crash program at the moment the decline starts was characterized as having catastrophic repercussions. Not treated was the more politically realistic scenario of waiting until 5 years after the start of decline while we bicker about the fundamental cause of our woes and strategies for mitigation.

Why am I prone to heed the conclusions of this report? In large part, it is because of the scale of the problem. A 3% per year decline of conventional oil (considered mild in many models/scenarios), requires that we replace 2.5 Mbpd of capacity each year. Canadian tar sands, for instance, were at 1.2 Mbpd in 2008, and are projected to reach 3–4 Mbpd by 2020. This represents an impressive growth rate of 10% per year. But a 3% decline beginning in 2015 will need five times the marginal oil represented by the gain in this expanding front-runner. Other methods are less ready to scale than tar sands. In the U.S. alone, a 3% decline represents about 42 GW of yearly power loss, requiring the equivalent of about one nuclear plant per week in gas-to-liquid plants, coal-to-liquid plants, and other major infrastructure investment. Not to mention that coal mining and gas production must scale up for the challenge (can they?). When have you heard of workers moving to coal country for employment?

Because we will more likely wait until the pain of decline has made itself clear, we may find ourselves handicapped by recession and debt, hampering our ability to act boldly.

Quick Wrap-Up

This post has swelled to larger dimensions than is ideal. I have covered the main points, and may circle back for another pass at a later date. For now, I will end with a by-now-familiar plea that we not wave off potentially debilitating threats to the stability of our civilization. The risk is asymmetric: starting a crash program toward replacement of finite fossil fuels too early has great up-sides and marginal downsides (opportunity cost); but failure to act has enormous downside for marginal upside.

We tend to have self-confidence in our ability to solve any problem. But we have no historical analog to the peak of fossil fuels, without a clear (and superior) replacement on the horizon. As a result of our fossil fuel binge, we have unprecedented problems in population, water, agriculture, fisheries, pollution, climate change, and so on. Our moment in history is rather special. It is dangerous to assume that we’ll gracefully handle problems at this scale, because such assumptions amount to dismissals and concomitant inaction. Unacceptable.

It bothers me that we don’t have a plan. It scares me that we (collectively) don’t think we even need a plan. Faith in the market to solve the problem represents a high-stakes gamble. We can and should do better.

The frustrating thing for me is that I believe it is possible to beat this problem, but only if we aggressively alter our practices. We would never adopt the necessary radical changes without first agreeing on the potential for disaster otherwise. Yet even if I’m wrong about the problem, the shift I imagine may result in a better, more fulfilling life anyway. I’ll have to describe this vision of a possible future at a later date.

By. Tom Murphy

Tom is an associate professor of physics at the University of California, San Diego. This post originally appeared on Tom's blog Do the Math.

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  • Anonymous on November 05 2011 said:
    Absolutely excellent and valuable article, although I will NEVER believe that shale oil is something to count on. Of course I believed it once, and said so at a conference in Vienna, and later that night a US business executive called me a fool for my troubles.
  • Anonymous on November 05 2011 said:
    EROEI is where the horror story is.3/1 energy return on a planet of 7+ billion looking to live the American Dream will not end well and I believe we're in the final chapter of this sad story. Also, you didn't even mention Export Land Model...
  • Anonymous on November 06 2011 said:
    Excellent article addressing the key issues..........we will need very strong leaders to avoid/resist a global conflict as a way for one or a few winners take all! Obviously, I have no confidence in our political will to plan ahead for this and related Peak Agriculture, Peak Productivity, etc.

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