Monday, August 10, 2009

Peak Oil for Dummies

Peak Oil for Dummies is a new post on Seeking Alpha by Lionel Badal. A short overview:


Over the past decade, a fierce debate has emerged amongst energy experts about whether global oil production was about to reach a peak, followed by an irreversible decline.

This event, commonly known as “Peak Oil” far outreaches the sole discipline of geology. From transportation to modern agriculture, petrochemicals and even the pharmaceutical industry all of them rely on one commodity: cheap and abundant oil. In order to sustain the needs of an ever globalized world, oil demand should double by 2050.

Nonetheless, geological limitations will disrupt this improbable scenario. In fact, a growing proportion of energy experts argue that Peak Oil is impending and warn about the extraordinary scale of the crisis.

42 Years of Oil Left?

According to the 2009 BP Statistical Review, the world has precisely 42 years of oil left. Those numbers come from a very simple formula, the R/P ratio, which consists of dividing the official number of global oil reserves by the level of today’s production.

Nevertheless, this methodology is dangerously defective on several key points as it ignores geological realities. Oil production does not consist of a plan level of production that brutally ends one day; it follows a bell-shaped curve.

Indeed, the important day occurs when production starts to decline, not when it ends. As it is a non-flexible commodity, even a small deficit in oil production can lead to a major price surge.

Finally, the R/P ratio does not acknowledge that production costs increase over the time; the first oil fields to be developed were logically the easy ones and so the most profitable. It is well recognized that remaining oil fields consist of whether poor quality oil or remotely located fields which need high technologies and expensive investments.

Therefore, relying on the R/P ratio gives a false impression of security while the actual situation is critical.

Global Oil Reserves: Lies and Manipulations

Oil is a strategic resource; therefore having oil is a key political and economical advantage for a state. This is why politics interfere in the evaluation of oil reserves, especially in countries with poor accountability records; that is, the majority of OPEC countries.

At this point, we should not forget that oil reserves reported by these countries are not audited by independent experts. In 2006, the notorious Petroleum Intelligence Weekly said it had access to confidential Kuwaiti reports which stated that reserves were half the official numbers.

The question of oil reserves is most relevant. As oil exporting countries have less oil in their ground, Peak Oil will arrive faster. Oil optimists who argue Peak Oil is still decades away rely on these same erroneous data.

In addition, if importing countries assume oil reserves are abundant as they do, the crisis will be unexpected, unprepared and misunderstood; in one word: overwhelming. Similarly, once oil shortages occur, oil importing countries may assume that exporting countries are deliberately reducing their oil exports to harm their national interests.

Such a flawed assumption from oil importing countries is likely to have serious repercussions, and eventually lead to new oil wars.

The Imminent Decline of Global Oil Production

By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD… The implications for future conflict are ominous...

At this pace, global oil production could decline by 50% from its current level, as soon as 2030.

A Contested Reality: By Whom and Why?

For many years, Peak Oil was ignored by officials from oil companies and governmental agencies such as the IEA. They negligently repeated that production was not at risk.

Any Viable Alternative Energy?

There is no easy, present, solution to the crisis. Alternatives to oil are still far from being a feasible replacement; hydrogen for example would require 30 to 50 years to replace oil economies.

Meanwhile, the automobile industry is now planning to develop electric cars in the near future. While the first electric cars are expected to come on line in 2010-12, in order to replace 50% of the car fleet, the world would need between 10 to 20 years.

Besides, as manufacturing a single car requires at least 20 barrels of oil, once oil production starts to decline, in 2011-2013, it will increasingly become difficult to develop the electric car on a massive scale.

In fact, the closer we get to Peak Oil, the more difficult a massive and costly emergency plan to develop alternative energies will become.

The Industrial Civilisation at a Turning Point

A former director at the IEA, who used to be the superior of Dr. Fatih Birol, told me during a discussion that,

The current (economic) crisis was caused by the insufficiency of (oil) supply from 2007 onwards, an avatar of Peak Oil.

This extract from the Energy Watch Group study on oil production provides useful additional information:

The world is at the beginning of a structural change of its economic system. This change will be triggered by declining fossil fuel supplies and will influence almost all aspects of our daily life... The now beginning transition period probably has its own rules which are valid only during this phase. Things might happen which we never experienced before and which we may never experience again once this transition period has ended.

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