Tuesday, November 08, 2005

Peak Oil: An Austere Future
by Steve McKinlay

This article was published by the NZ Futures Trust in their e-Future Times Journal, Volume 15, September 2005.

I recently noted the dead link - NZ Futures Trust have reorganised their web site. I have republished the article below.

Peak Oil: Ramifications for NZ in the 21st Century
By Steve McKinlay
June 2005

Increasingly commanding world attention is the phenomenon of Peak Oil. Peak oil is the point at which the maximum production of oil is attained after which a gradual irrecoverable decline follows. Peak oil has enormous implications for modern industrial society, both economically and socially. The following article examines our society; it’s dependence on oil and the forthcoming peak.

The Age of Reason
The fundamental promise at the dawn of the 20th century was the democratisation of modernity. The ideology of modernity prescribes rational thought as the ultimate liberator informing us to the truth about the world and ourselves. The road to progress therefore would be one built upon true knowledge, knowledge informed by science and logic, free from superstition, dogma and ignorance. And lets face it science mostly delivered, not only did it put men on the moon but it laid the foundation for our modern all-mod-cons way of life. The last century, upon the foundations of science and logic was one characterised by great technological advancement. We have become accustomed to the belief consequently that there are technological solutions to all our problems, we like to call this human ingenuity.

However the 21st century dawns under the spectre of an ever-increasing pluralism. Science and rationalism is in decline in favour of baneful individualism.
The sciences popularly perceived as irrelevant by students and laymen are retreating into their respective labs and philosophy departments, in favour of a kind of pop-cultural post-modern relativism. In the wake of this retreat we are left with all manner of popular worldviews that by and large freely evolve within the democratized slurry of our suburban malls, determined by our SUV driven, recreational shopping lifestyles, mostly devoid of any rationality, selected for consumption by a corporatist media intent and dependant upon perpetuating a myth.

The myth itself is one of the most fundamental views to transpire within modern consumerist society. Supported by the mantras of neo-classic and supply-side economic theory and in conjunction with our newfound technological hubris emerges the unquestionable assumptions of perpetual growth and “endless substitution”. Essentially the myth embodies the faith that the “market” will always provide. New products and resources are always superseded by something cheaper, more efficient and much better than the previous. To economists natural resources are no exception to the rule. The market of course dictates, as productivity increases, prices drop, production increases, more exchange occurs and living standards rise for all involved. And on and on and on it goes, forever.

Neo-classic economic theory is the supposed perpetual motion machine of the globalised mass consumer fantasy, predicated by endless economic growth compounding at 3% or so a year, creating wealth via fractional reserve banking and fiat currency. Tomorrow’s expansion is the put-up collateral for today’s debt. According to modern economics there are no limits to this growth. Forget the sciences, unquestionable faith in technological progress will allow us to use fewer and fewer resources for greater and greater returns. The reductio ad absurdum of this bizarre form of reasoning is that technology will eventually enable us to use zero resources for infinite returns.

Both science and reason inform us otherwise. We only need consult the laws of thermodynamics in order to inform ourselves that any kind of perpetual motion machine is impossible. Energy is the capacity to do work. No energy equals no work. Thus our entire global economy much to the chagrin of voodoo economists is 100% dependant upon energy. In order to grow economically we must also grow our energy consumption.

It may be offensive to futurists, technologists and economists but the laws of thermodynamics inculcate that neither capital, labour nor technology can create energy. We cannot convert our supposed intelligence, our ability to find novel technological solutions into energy. Instead available energy must be expended in order to transform matter (e.g., oil, natural gas etc.) or to divert an existing energy flow (e.g., water, wind etc.) into more available energy. Furthermore energy resources must produce more energy than they consume. It would never be economic to expend more than one barrel of oil to extract one barrel of oil.

No other energy source comes anywhere near the level of convenience or economic value of oil. For this reason alone oil has become the most important form of energy we use. About 40% of all energy use on the planet comes from oil, it has been estimated that 95% of all transportation is powered by oil. The substance oozes all over modern civilisation. Not only is it responsible for plastics and petrol, but oil (and its close cousin natural gas) is critical to our food supply in the form of fertilisers, pesticides and irrigation. Mass agriculture is wholly dependant upon oil and natural gas. Take it away and we are faced an immediate return to small-scale organic gardening. Sounds like a romantic ideal but the infrastructure is not yet in place to implement in such a way that we could all feed ourselves. A change over will take time and while oil is cheap mass agriculture wins hands down on economies of scale.

All respected geologists and scientists agree that oil is a non-renewable resource the global demand for which is growing at a rate much faster than new supplies are being found. It is understood that the total world discovery of oil in 2004 was about 7Gb (billion barrels), approximately 2Gb of which were deepwater finds. However in 2004 we consumed about 30Gb thus we are burning between 4 and 5 barrels of oil for every one found. What is more interesting is that the cost of exploration in 2004 exceeded the net present value of the discoveries in absolute terms,[1] clear evidence for the claim that the cheap oil is already gone.

This trend is not new. Oil discovery across the globe peaked during 1965.
Since then discovery, on average has declined every year. Several groups of scientists, including oil exploration geologists and some brave financial analysts are now predicting a world-wide oil production peak between now and the end of the decade. “Peak Oil” as it is termed is used to describe the point at which half of all the oil in a particular region has been extracted after which a period of irrecoverable decline sets in until it is no longer possible to extract oil efficiently.

The term peak oil is derived from the graphed curve that can be observed when tracking all oil production. In 1956 Shell Oil geologist M. King Hubbert hypothesised that oil production roughly followed a bell shaped curve. He used this to successfully predict the peak in US oil in 1971.
Recent work by Dr Colin Campbell[2] suggests global peak oil this decade based on the Hubbert curve model (see fig1) the most probable year according to Campbell is expected to be 2007. These claims are not based upon any conspiracy theory, nor on popular belief, culture or economic dogma but on hard empirical evidence. Peak oil is a geological phenomenon immune to evolving relativistic views of politics and economics. The only point speculative in regard to peak oil is not if peak oil will occur but when. Regional peaks and subsequent decline in oil production particular in the non-OPEC states serve to support the peak oil model.
For example peak production modelling was used to accurately predict the US, North Sea, Norway and, Denmark amongst many others. It follows that the global peak can be predicted with some accuracy using the Hubbert/Campbell model.

Economic Growth / Supply and Demand
Western democracies have enjoyed unprecedented economic growth and the subsequent rise in living standards since the end of the Second World War. Suburban life, a 4WD in the driveway, mobile phones, holiday homes, web-surfing, LCD screen TV’s, DVDs, Playstations, iPods, and recreational shopping during the weekend are the reality if not the desire of many of us. As China, India and other transitioning economies race to industrialise their desire turns into economic demand. They want what we have. The growth rate for motor vehicle sales alone in China is around 50%. On the industrial front China needs to build in the vicinity of 60 power plants a year, each the equivalent of the Clutha dam to keep up with exploding electricity demand. If you want to grow a developing economy you need to grow your electricity sector.

According to International Energy Agency analysis the world currently consumes about 84 Million Barrels of oil per day (Mbd). Andrew McKillop[3] and Colin Campbell amongst others suggest absolute maximum oil production for the planet could not exceed around 90Mbd give or take a couple of million barrels. We have mentioned already that many of the non-OPEC nations are already in decline and as oil production follows a kind of bell shaped curve we are losing to depletion production from many of these wells.

Interestingly world demand in 2001 was around 76Mbd thus we have seen a growth rate of 8Mbd within 3 years. If we extrapolate the current growth trend factoring in some growth in demand we end up with a plausible consumption figure of around 94Mbd by 2008. It is exceedingly unlikely that this production capacity exists. Saudi Arabia the owner of the largest oil fields on the planet has admitted in numerous articles lately that they are pushing the limits of production. OPEC’s president Purnomo Yusgiantoro is on record as saying last year “there is no more supply.” OPEC is pumping at near capacity. It is entirely within the realms of reason that we will see structural supply deficits within a year or two.

If indeed the kind of oil required to meet exploding demand beyond a year or two is to materialise we first need to find oil in quantities larger than we are currently consuming, develop it and bring it into production. Even if we ignore current security concerns around the Middle East region this will be no mean feat, it can take several years to bring discovered oil into production. The amount of oil we are talking about, 8Mbd (required by 2008) is about the same as the entire production of Saudi Arabia. The vast bulk of Saudi oil was discovered during the 1940s and 50s. Before Iraq was liberated it produced about 2.2Mbd. Today a large oil field find is one that proves reserves of about 500 million barrels – about a weeks supply on the global market. Short of a miracle, a discovery of another Saudi Arabia, global oil supply will comfortably meet demand for a year or two at most. Beyond 2008 the picture grows even bleaker.

The Global Picture

Bush and Blair have been making plans for the day when oil production peaks, by seeking to secure the reserves of other nations.
George Monbiot, “Bottom of the Barrel”, The Guardian, Dec 2, 2003

Let's look at it simply. The most important difference between North Korea and Iraq is that economically, we just had no choice in Iraq. The country swims on a sea of oil.
US deputy defence secretary, Paul Wolfowitz, June 1, 2003

The remainder of the world’s oil is coalescing around the OPEC nations of the Middle East. Previously the swing producer able to control the global price at levels around US$20bbl OPEC controls almost 40 percent of the world’s oil contrastingly the majority of the non-OPEC nations are now in decline. The United States is the largest consumer of oil on the planet but its reserves have been in decline since 1971. Increasingly the US is reliant upon imported oil, it imports over half of what it uses. Given that the entire global economy the US notwithstanding, is reliant upon oil to ensure future economic growth oil is an extremely strategic commodity.

The Bush-Cheney argument that the American way of life is not negotiable predicates the US’s presence in the Middle East. America’s willingness to use military force to control oil supplies goes back to the 1970’s when it threatened to seize Saudis and Kuwaiti oil fields during the Arab oil embargo. The Carter doctrine of the 1979 clearly indicated that the US would use the military to ensure access to Middle East oil[4].

Although it would be naive to argue that the Iraq invasion was solely about securing Iraqi oil there are certainly a variety of extant factors together, which make Iraq an obvious target of the US. The perceived or real threat (it doesn’t really matter, the American people were convinced) of terrorist activity within the area (although not previously in Iraq) is relevant in the sense that the war on terror at it’s heart is really a war about resources. The possibility of future resource induced conflicts and or destabilisation within the area as energy becomes scarcer made it desirable for the US to act first. These factors put the US in a relatively comfortable position having established a presence in this area.

Competition for resources will intensify as peak oil becomes self-evident. There is increased likelihood that conflict could appear within Venezuela, Iran, and African nations for example. Richard Heinberg argues that the 21st century has ushered in the final geopolitical struggle of the industrial age - the struggle for control of Eurasia and its energy sources[5]. If he is correct the Bush-Cheney claim that we won’t see the end of the war on “terrorism” in our lifetimes are sure to have secondary effects starting with economic hardship. Very recently George W. Bush announced massive domestic funding cuts from law enforcement to transit budgets, wastewater treatment, education, social programs, housing and medicare as national wealth is increasingly diverted into military budgets.

The Rickshaw Economy?
Whether the year of peak oil is 2007 or a few years later, or indeed if as some suggest that we are already past peak the point to be taken is that we are entering the second half of the oil age. This will be characterised by the gradual decline of oil and gas at around 3% per annum. Thus by 2020 production of all liquid hydro-carbons will have fallen to the levels of 1990[6]. Although this sounds rather benign it will have catastrophic consequences for our financial system that depends upon perpetual economic growth. Given that our present economy relies upon oil driven mobility provided by petrol and diesel combustion engines for which there appears no immediate alternative it would be foolish to rely upon the unscientific perpetual growth axiom for which there is no empirical evidence. As we continue depleting the supply of relatively cheap conventional oil at an astounding rate of 80 odd million barrels per day the world continues to economic and technological reliance upon oil. As long as the supply continues to meet the demand, for the next year or two, the world economy will continue to increase the dependence and no incentive to develop alternatives will emerge. Until the supply falters, at which point we will be technologically unprepared for the decline. Once the peak does occur the price for a commodity for which demand now supplants supply will result inevitably in lower or negative growth in demand. It follows by implication that lower or negative growth in the world economy will occur. Ironically the requirement for investment in alternatives will only occur at the time when economic recessions are already beginning to bite.

In 1976 M. King Hubbert (1903-1989) concluded his paper Exponential Growth
as a Transient Phenomenon in Human History with the following observations:

It appears therefore that one of the foremost problems confronting humanity today is how to make the transition from the precarious state that we are now in to this optimum future state by a least catastrophic progression. Our principal impediments at present are neither lack of energy or material resources nor of essential physical and biological knowledge. Our principal constraints are cultural. During the last two centuries we have known nothing but exponential growth and in parallel we have evolved what amounts to an exponential-growth culture, a culture so heavily dependent upon the continuance of exponential growth for its stability that it is incapable of reckoning with problems of nongrowth. Since the problems confronting us are not intrinsically insoluble, it behooves us, while there is yet time, to begin a serious examination of the nature of our cultural constraints and of the cultural adjustments necessary to permit us to deal effectively with the problems rapidly arising. Provided this can be done before unmanageable crises arise, there is promise that we could be on the threshold of achieving one of the greatest intellectual and cultural advances in human history.

It is clear that our window of opportunity is being rapidly drawn closed. Peak oil detractors are often heard quoting the following, “the stone age didn’t end because we ran out of stones, likewise the oil age won’t end because we will run out of oil”. It might be timely to remind such critics that the transition from tools such as axes and arrowheads made of stone to more effective weapons made from iron and bronze occurred over several centuries. We are looking to transition a planet of 8 billion people, a global economy based on cheap abundant oil technologies, inherently committed to continued economic growth for stability to one that is dependant on some other yet to be developed (or even identified) technology. All this must occur within a few short decades.

To the vast majority of us conditioned by an extended period of prosperity this is not welcome news. Peak oil will vastly change our current political, social and cultural landscapes and there seems to be no path forward that doesn't involve immeasurable stress. Changes need to begin immediately, however before any change can take place widespread acknowledgement of the looming crisis is required, presently this is the problem we seem to be grappling with.

[1] ASPO Newsletter 50 Feb 2005.
[2] Colin Campbell is the founder of the Association for the Study of Peak Oil and Gas, http://www.peakoil.net/
[3] Andrew McKillop is an energy economist and consultant who recently edited a book for Pluto Books, ISBN 0745320929, title 'The Final Energy Crisis' including articles by Colin Campbell and Edward R D Goldsmith. He has held posts in national, international and supranational (Euro Commission) energy, and energy policy divisions and agencies.
[4] Heinberg. R., (2004), Powerdown: Options and Actions for a Post Carbon World.
[5] http://www.museletter.com/archive/132.html
[6] Colin Campbell., ASPO Newsletter 50, Feb 2005

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