National Commentary

The Peak Oil Crisis: The Crunch

Another study warning governments of the imminence and danger of peak oil was released last week. This one was an updated version of a similar report produced by a group of British industrialists 14 months ago.

The intended audience of the report is the new British government that will take office after an election later this year. The authors hope that a new government will take a more serious view of the dangers to Britain (and everywhere else for that matter) of impending high oil prices and shortages which previous British governments were unwilling to confront or prepare for.

The English-speaking world has always been entranced with noble titles – Duke, Earl, Count, even Sir. When you combine “Sir” with the words multi-billionaire and virgin you have a sure winner. Even if the topic is as mundane as peak oil, much of the world press pays attention. When the spokesman for the recent report turned out to be none other than billionaire and Virgin Group founder Sir Richard Branson, many British publications and even a few American, including Forbes, the Wall Street Journal, and the Christian Science Monitor, felt impelled to write serious stories about what Branson had to say.

The new report, produced by the UK’s Industry Taskforce for Peak Oil and Energy Security, is of interest because it updates the estimates of when the oil “crunch” (when demand exceeds production) will occur to account for the global economic slowdown. In addition, the amount of unbiased attention that has been given to the report including that of the British government shows that a wider understanding of the problem is starting to take hold.

For most, the key concern is not whether there will be much higher gasoline prices ahead, but when. To answer this question, we have to take into account trends in the three major variables that determine oil prices and also be aware that there are numerous geopolitical factors affecting the situation, such as the Iranian nuclear standoff; stability of the Iraqi government after the US pullout; the drought in Venezuela; and the Nigerian insurgency.

The first two issues encompass the balance of new oil supplies and declining production from existing oil fields. Here the report suggests a fairly specific time frame when significant additions of new production to the world’s oil supply is likely to end. The report says time is around the end of the current year. From 2011 on, the relentless drop in production of just over 4 million b/d from the fields that are currently producing about 85 million barrels a day will be just barely balanced with production from new projects through 2014. After that world production will go into decline.

In other words, the world’s ability to keep increasing its oil production will come to an end this year after 150 years of more or less steady growth. While new production from projects such as those in the deep waters off Brazil and the Gulf of Mexico will continue, these projects are five to ten years away from significantly adding to global production and likely will be overbalanced by the 4 million b/d annual drop in production from existing fields. New production will, of course, slow the pace of global oil depletion, but will not be enough to allow for global economic growth.

The key concern is not whether there will be much higher gasoline prices ahead, but when.

High oil prices may or may not come in the next year or so because of recent drops in demand for oil in 2008 and early 2009. Currently world oil production is running about 85 million b/d; however, there is said be another 6 or so million b/d of unused productive capacity that could start producing oil in a few months. Although some are skeptical about the size and quality of this “reserve capacity” about 4 million barrels a day (b/d) of which is in Saudi Arabia, in theory it could keep the lid on prices for a while. In fact world oil production could increase to 91-92 million b/d if demand increases soon.

The third major variable determining the timing of the crunch, and one that is much harder to predict, will be the growth or decline in global demand for oil. At the moment, demand from the US and the other OECD nations appears to be falling slowly and all eyes are on China, India and other developing countries where demand grew rapidly in 2009 and despite accumulating problems shows every indication of continuing to increase in 2010 and beyond.

So there you have it. What is likely the best current thinking on the peak oil situation concludes that world oil production will stop growing at the end of this year; will just balance annual global depletion of 4 million b/d for the next four years or so; and then enter into irreversible decline. In the meantime, there may be enough spare capacity that has built up since 2008 to keep prices from spiking for awhile. If the growing demand from Asia and within the oil producing countries themselves continues, however, it is likely to consume much of the reserve production capacity over the next few years. Geopolitical disruptions of oil supplies could, of course, trigger off price spikes at any time.

Although they do not seem likely at the minute, governmental restrictions on carbon emissions could reduce the demand for oil and delay the task force’s crunch beyond 2015.

An interesting sidelight to the new report’s official launch was that Chris Barton, the government official responsible for Britain’s energy security, showed up and answered questions about the government’s position. In what can be best characterized as backing down the flag pole, Barton acknowledged that the government really does not know when peak oil will occur but acknowledged the risks could be serious. For a government that until recently had been in complete denial that is more evidence that the message and dangers of peak oil are sinking in.

Tom Whipple is a retired government analyst and has been following the peak oil issue for several years.