Helping America Navigate a New Energy Reality

About Peak Oil

What is peak oil?

Very simply, peak oil means the maximum rate of oil production. It does not mean we’re “running out of oil.”

Oil production generally follows a rough bell curve shape, beginning at a low rate, then ramping up to a maximum rate, and finally declining to a low rate as the reservoir is depleted.

This observation has been made in thousands of oil fields (and oil producing nations) worldwide, and is named “Hubbert’s Peak” in honor of the geologist who first described it, Dr. M. King Hubbert.

Global oil discovery peaked in the late 1960s, and has been in a declining trend ever since. Of the 42 largest oil producing countries in the world, representing roughly 98% of all oil production, 30 have either plateaued or passed their peaks.

The peak typically occurs when about half of a given oil endowment has been produced, but it’s the rate that really matters, not the absolute size of the oil reserves. In other words, “It’s not the size of the tank which matters, but the size of the tap.” We won’t “run out of oil” for another 100 years or more, but it will be produced at ever-declining rates.

We believe that the world reached the peak of regular conventional oil in 2005, and will reach the peak of “all liquids” by 2015.

Learn More: Peak Oil DataPeak Oil Theory

What are the implications of peak oil?

When oil production peaks and begins to decline, the world’s economies will be forced to live within a shrinking, not expanding, energy budget. The economic impact of peaking oil production is what concerns us, not the amount of oil yet to produce, because all economies depend on continuous growth.

If our expectations are correct, the world’s industrialized economies, which are utterly dependent on a growing liquid fuels supply, will likely face unprecedented turmoil. According to the Hirsch report, oil supply shortfalls will occur unless crash mitigation efforts are undertaken now. Unconventional liquids such as tar sands and biofuels will only thicken the tail of global liquids production. The only way to narrow the gap between growing demand and flat-to-falling supply is greater efficiency and other measures that reduce oil consumption.

Many of the adaptation strategies we are counting on, like increasing the share of renewable energy and replacing the vehicle fleet with more efficient vehicles, will require decades and enormous investment to make much difference.

Unfortunately the world no longer has decades to make the necessary changes. Not only are we “close enough” to the peak, we’re far too close to it.

Does peak oil affect oil prices?

Demand grew faster than supply between 2005 and July of 2008, and the world’s spare production capacity (the potential excess supply over demand) fell to marginal levels. This was the primary reason why oil prices tripled over the same period. When spare capacity fell to roughly 1%, it created a tradeable opportunity for speculators, who were probably responsible for the last $20-30 of the push to the $147 a barrel top in July 2008. During the second half of 2008, high oil prices plus financial turmoil and the economic slump reduced demand for oil, and prices crashed.

Prices have crept back up since then, led by still-increasing demand from Asia. As long as the world population continues to grow, and developing countries in Asia, South America, Russia, and the Middle East continue to have rapid economic growth, world supply will again outstrip demand…in spite of falling demand from OECD (developed) nations.

The reason is simply that oil is a globally traded commodity. Since the U.S. imports two-thirds of the oil it consumes, the price of domestic oil will always maintain parity with global prices. Therefore, no matter how much we drill up the remaining resources, it will not significantly change the price of fuel.

Once we take into account the decades it will take to bring new domestic resources online, any additional production in the U.S. will only slightly nudge the decline curve in global oil production, and only slightly depress domestic prices for gasoline, for a short while.

Can the U.S. drill its way out of trouble?

The U.S. uses about 20 million barrels per day (mbpd) of petroleum and other liquid fuels. It now produces just 5.5 mbpd of crude, and imports two-thirds of its supply. (One barrel = 42 gallons.)

U.S. oil production has been in decline for 40 years, despite major technological advances and the most thorough exploration and drilling program in the world. This was not the result of politics. It is simply the nature of petroleum extraction. Indeed, the largest oil field ever found in the U.S., the Prudhoe Bay field in Alaska with 13 billion barrels of recoverable oil, was unable to push U.S. production back its 1970 peak level after production began from the field in 1977.

Learn more: U.S. oil production

Can improved technology change the picture?

No. Improved technology cannot move the peak.

The potential of enhanced oil recovery (EOR) techniques is well known, after over four decades of experience in the field. That experience has shown that (with a few minor exceptions) improved technology cannot move the peak. What it does is increase, over time, the overall amount of oil that can be produced. On the bell curve, it thickens and lengthens the tail. But it does not change the time at which production peaked.

Some oil analysts, such as Peter Jackson and Daniel Yergin of CERA, have routinely overstated the potential of improved technology as a way of denying the reality of peak oil. ASPO-USA’s direct challenge to their estimates remains unanswered. (See also: “On the Likelihood of Peak Oil.”)

What about ANWR and offshore drilling?

In total, we believe that if all limits on domestic drilling were removed, it could only increase U.S. oil production by a maximum of 2-3 mbpd. Once it came online bit by bit, given the loss in global oil production by that time, the additional oil from ANWR and all other undeveloped federal lands would only slightly dampen the downward trend of depletion.

The U.S. Department of Energy estimates that drilling in ANWR would only reduce the price of gasoline by less than four pennies per gallon-20 years from now!

Although every barrel we can produce domestically will be welcome and would slightly reduce our dependency on imports, there is no chance that we can drill our way to independence from imported oil. At the rate that the U.S. currently uses oil, the chance of producing all of our own needs domestically is zero. The only way we can truly become energy independent is by severely curtailing our oil demand, and in time, switching loads over to renewables.

Learn more: ANWR and Offshore Drilling

Then why do the IEA and EIA still expect supply growth?

Peak oil deniers often point to the forecasts of the International Energy Agency (IEA) in Paris, and the Energy Information Administration (EIA) within the U.S. Department of Energy, which have always shown increasing supply well into the future. This is because both agencies base their forecasts primarily on demand, and simply assume that supply will be sufficient to meet it.

In fact, the forecasts of both agencies have  been continually shrinking for the last several years, when it became clear that net oil supply had stopped growing. Reality is setting in.

Learn More: Critiques of EIA and IEA forecasts

What about the vast reserves of unconventional liquids?

All sources of unconventional liquids have serious drawbacks, and are difficult (if not impossible) to scale. All are far more expensive and energy-intensive to produce than conventional oil.

Having examined these unconventional liquids in detail, we believe they will not scale quickly or cheaply enough. Indeed, they will not even overcome simple oil depletion, which removes 3-4 mbpd from world supply every year.

Learn More: Unconventional Liquids

What can be done about peak oil?

We have offered a list of policies and actions that will help address the peak oil problem.

Learn more: Mitigation Strategies