Peak Oil – A Turning Point For Mankind

The World is not about to run out of oil, but what it does face is the end of the First Half of the Age of Oil. That opened 150 years ago when wells were drilled for oil on the shores of the Caspian and in Pennsylvania. The cheap, convenient and abundant energy, it supplied, led to the growth of industry, transport, trade and agriculture, which in turn allowed the population to expand six-fold exactly in parallel with oil. Lastly, it allowed the creation of huge amounts of financial capital, as banks lent more than they had on deposit, confident that Tomorrow’s Expansion was collateral for Today’s Debt. This in turn led to the subject of Economics by which to understand and manage money, investment and finance, and came to control the very fabric of the modern world, its business and indirectly its politics.

Oil is a finite resource formed in the geological past. In fact, the great bulk of current production comes from just two brief epochs of global warming, 90 and 150 million years ago. Algae proliferated in the warm sunlit waters to provide the organic material that fell to the depths of stagnant rifts which formed as the continents moved apart. Gas was formed in a similar way, save that it was derived from vegetal remains as found in the deltas of tropical rivers. Ordinary oil also broke down into gas if over-heated by excessive burial. Once formed, the oil and gas moved generally upwards through the rocks to collect in structural traps containing porous reservoirs. In short, a great deal is now known about the occurrence of oil in Nature.

As every beer-drinker knows, the glass starts full and ends empty. The quicker he drinks it, the sooner the glass will be empty, and every bar has a closing time. So, how far along the oil depletion curve are we? The first step in answering this question is to ask how much has been found so far and when it was found, because production has to mirror discovery after a time-lapse. Extrapolating the discovery trend gives a good indication of what is left to find. These sound like simple questions, being just a matter looking up the data, but as we dig into the issue, we find a minefield of confusion, obfuscation and disinformation.

Firstly, there is confusion over what to measure. There are many different categories of oil, each with its own costs, characteristics and, above all, depletion profile. Producing oil from a free-flowing Middle East well is not the same as digging up a tar sand in Canada with a shovel, albeit a big one. Some types are cheap, easy and fast to produce, whereas others are the precise opposite.

The reporting of reserves is the second major area of confusion. Reserves are financial assets, subject to strict stock-exchange rules, which were designed to prevent fraudulent exaggeration, while smiling on under-reporting as laudable commercial prudence. In practice, the oil companies reported just as much as they needed to report in order to deliver satisfactory financial results, building up for themselves a useful stock of unreported reserves to tide them over lean discovery years and cover any temporary setback. As a result, reserves have been progressively revised upwards, giving a comforting but very misleading impression of steady growth, commonly attributed to technology, when in fact it was mainly an artefact of reporting practice. Clearly, the revisions have to be backdated to the original discovery to obtain a valid discovery trend. The stock of unreported reserves has however now been substantially drawn down, prompting the major oil companies to merge in their efforts to deliver satisfactory financial results.

OPEC for its part announced enormous over-night reserve increases in the 1980s, when its members were competing for production quota, based on reported reserves. For example, Kuwait announced an increase from 64 to 90 Gb (billion barrels) in 1985 although nothing particular had changed in the oilfields : the new number being close to the total found, not the remaining reserves. Some of the other countries were forced to match Kuwait to various degrees This explains why the official numbers have barely changed since then despite substantial production and limited new discovery.

Unravelling all of these confusions so far as is possible indicates that World discovery has been in decline since 1964. It has been declining despite a worldwide search always aimed at the biggest and best prospects; despite all the many technological advances; and despite a favourable economic regime whereby most of the cost of exploration has been offset against taxable income. It means that there is no good reason to expect the downward trend to change direction. Extrapolating the downward trend gives a good indication of what is left to find..

The World started using more than it found in 1981, and in 2005 it found about one barrel of so-called Regular Conventional Oil for every five consumed. This term describes the cheap and easy oil that has provided most to-date and will dominate all supply far into the future. It excludes oil derived from coal and shale, bitumen and heavy oil, deepwater and polar oil, as well as the liquids that are extracted from gasfields in specialised plants.

The production of oil in any country normally begins to decline when half the total available in Nature has been extracted, due ultimately to the immutable physics of the reservoir. This graph shows the approximate status of depletion for all the different categories of oil and gas.

In short, the Second Half of the Age of Oil now dawns. The high oil prices of the past year mark the onset of this new epoch when there is neither material spare capacity nor hope of securing any. Many claims are made that technology will come to the rescue, but in fact the oil industry already uses very advanced methods achieving optimal recovery. Only certain reservoirs and oil types are susceptible to special treatment. In fact the main impact of technological developments has been to produce at higher rates, thereby accelerating depletion. So, at best, more technological progress and the entry of more oil from non-conventional sources can ameliorate the rate of decline having a negligible impact on peak itself.

Natural Gas is less depleted than oil but has a very different depletion profile simply because it is a gas not a liquid. In an open market, the end of production tends to come abruptly and without warning price signals, as several countries have discovered to their cost.

The transition to decline will likely be a time of great international tension as the countries of the world, led by China and the United States, vie with each other for access to supply, most of which lies in just five countries bordering the Persian Gulf. If production were to be stepped up in this region by massive investment and superhuman effort, it would simply make the peak higher and the subsequent decline steeper, making a bad situation worse. There is an irony about depleting a finite resource : the better you are at doing the job, the sooner it ends.

The Second Half of the Age of Oil will be characterised by a decline in the supply of oil and all that depends upon it, which includes eventually financial capital. That may herald the End of Economics as presently understood, being accompanied by deep recession. It is impossible to predict the course of events because the transition to decline is an unprecedented discontinuity of historic proportions, as never before has a resource, as critical as oil, become scarce without sight of a better substitute. All countries and all communities face the consequences of this serious new situation.

There is no solution in the sense of finding enough oil and gas to prolong the past epoch, but there certainly are responses by which countries could plan and prepare. It is not difficult to formulate some useful steps:

• 1) Establish an objective entity to properly evaluate the real situation so as to avoid being misled by erroneous forecasts promulgated by vested interests and political pressures.
• 2) Undertake a massive programme of public education, so that everyone may become more energy conscious and find ways to be less wasteful.
• 3) Encourage the rapid development of renewable energies from tide, wave, solar, wind and other sources, including the growing of energy crops, and re-evaluate the nuclear option, despite its low net energy yield and other drawbacks.
• 4) Execute a Protocol to cut imports to match World depletion rate, currently running at only 2 – 3% a year. It would moderate world price by putting demand in balance with supply, which would allow the poor countries of the world to afford minimal needs and prevent excessive financial flows to the Middle East, that are likely to destabilise the world financial system. It would also force the consumers to better face the reality imposed by Nature

This is not necessarily a doomsday scenario. Indeed, the decline of oil and gas may have a beneficial impact on adverse Climate Change, brought about by oil-based emissions. There is great scope for positive individual response by local communities, towns, regions and individual countries which could achieve competitive advantage by being better prepared than those that continue to live in the past. Indeed there are already many signs of a positive awakening, which is encouraging.

The new age, that dawns, conjures up an almost romantic image of smiling people living in harmony with themselves, each other and their environment. But the transition threatens to be a time of great tension.