Are we about to hit Peak Oil?
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Associate Editor
David Stevenson Aug 07, 2009
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Fears that the world is running out of crude oil have just resurfaced after a new International Energy Agency warning, says David Stevenson. So how worried should we be?
What are the latest jitters about?
Crude oil is what makes our modern lifestyles possible. As well as providing the world's main transport fuel, it's also the key raw material for the chemical, plastics and drug industries, while food production depends on it for fertilisers.
The trouble is, many credible people believe it's running out. Dr Fatih Birol is chief economist at the International Energy Agency (IEA), whose job it is to assess future energy supplies by OECD countries. He believes that "both the public and also many governments appear oblivious to the fact that the oil on which modern civilisation depends is running out far faster than previously predicted", reported The Independent's Steve Connor this week.
In other words, "Peak Oil" may hit earlier than expected.
What is "Peak Oil" theory?
Peak Oil isn't the point at which oil runs out altogether. It's the point at which the maximum feasible rate of global oil extraction is hit, due to technical and geological constraints. Production then falls. In other words, Peak Oil is the point at which we're getting as much oil out of the ground per day as we'll ever achieve.
"The real godfather of the movement," says Reuter's John Kemp, was Shell geophysicist M King Hubbert, who correctly forecast in 1956 that US oil production would peak in 1970.
Some Peak Oil pundits reckon it's already happened globally, and certainly, extraction has peaked in major producers such as Britain and Indonesia. But mainstream authorities had believed Peak Oil won't occur until at least 2030, says Connor. Until now.
What's the IEA's latest thinking?
The IEA reckons global oil production is likely to top out in ten years' time, rather than the 20 or more it had earlier thought. That's the most pessimistic assessment seen yet from a mainstream, respected source.
The change of heart came after the IEA's first-ever detailed assessment of more than 800 of the world's major oil fields, covering 75% of global reserves. It found that "most of the biggest fields have already peaked", while production rates at existing fields are falling at 6.7% a year, nearly twice the 3.7% it estimated in 2007.
And the recent oil price drop means that producers aren't spending enough on finding new supplies.
What could this mean?
We could see an "oil crunch" within the next five years, says the IEA. That will hit economic recovery hopes. This would increase the power of the countries with substantial reserves – mostly in the Middle East.
"If we see a tightness of the markets, people in the street will see much higher prices than now," Dr Birol tells The Independent.
With the global economy still fragile, any recovery risks being strangled by higher crude costs. The upshot is that "we have to prepare ourselves and leave oil before oil leaves us. The earlier we start, the better, because all our economic and social system is based on oil".
Should we be panicking?
Not necessarily. IEA oil supply alarmism isn't new, says John Kemp at Reuters. "It's paid to be the 'conscience' of the oil-consuming countries." Although the word 'reserves' implies high certainty, all reserve estimates are uncertain and depend on sound geologic and engineering data.
Reserves fall under one of four criteria: discovered, recoverable, commercially viable or remaining in the ground – and can either be proved or unproved. Unproved reserves are either 'probable', with a greater than 50% likelihood of extraction, or 'possible', with a less than 50% chance.
But oil recoverability isn't just about geology. It depends on oil prices, forecast demand and potential extraction costs. Further, different experts make varying assumptions. At fields past their peak, varying production rate declines affect calculations. Then politics can creep in. Some countries regard the size of their oilfields as a national security issue and don't provide accurate data.
What's the long-term answer?
On a simplistic basis, says Kemp, Peak Oil "must be true". Like all good things, "oil is something they don't make any more".Even if demand remains steady, the world would need the equivalent of four Saudi Arabias to maintain production, and six Saudis to keep up with demand increases between now and 2030, reckons Dr Birol.
But, says Kemp, there's no reason we won't be able to find that. As prices rise and technology improves, there's lots of crude to be found in hard-to-reach areas such as the ocean floor, while technology exists to turn other sources (such as bitumen) into oil.
The real question is not, "when will we run out?"; but "how much will these alternative hydrocarbons cost and what happens to the environment if we combust them all?" If we don't take steps to cut our use now, we could face a very expensive future.
Is oil the only thing that's running out?
Far from it. The recession may have bought us some time as global growth slows. However, says Jeremy Grantham of US fund manager GMO, beyond our debt problems "lurks another longer-term and more important factor affecting future growth – the increasing limitations on resources. We're simply running out of everything at a dangerous rate".
The planet's metal supply is fast depleting, and the quality of what's left is lower: "where 30 tons of copper ore once produced a ton of copper, it now takes 500 tons". Even water's running out.
As the planet's population soars, says Grantham, "we must prepare ourselves for waves of higher resource prices and shortages unlike anything we've faced outside wartime".
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