National Commentary

The Peak Oil Crisis: A Summer Review

It has been an interesting summer. In the midst of a deluge of “peak oil is dead” stories, crude prices surged upwards taking gasoline with them. Most “end of peak oil” stories talk mainly about the rapid growth in U.S. oil production in the last few years that has come from hydraulic fracturing of tight oil formations in North Dakota and Texas, without any context. Many assume open-ended growth that will soon spread around the world as more “shale” formations are discovered and attacked with the latest technology. A few acknowledge that even these wonderful formations will eventually run dry, but that is generally portrayed as so far down the road that we will have abundant oil for the foreseeable future.

While most of these stories stem from the financial press or those beholden to the fossil fuel industry in one way or another, the notion of energy plenty is starting to creep into the publications of the OECD’s International Energy Agency and the U.S.’s Energy Information Administration. The financial press of course starts from the unstated premise that any limitation on availability of natural resources, be it fossil fuels or the capacity of the atmosphere to absorb any more emissions without triggering off devastating consequences, could be bad for economic growth and stock prices.

For the next few years, all the optimism to which we have been subjected lately will probably play out and U.S. domestic oil production from tight (“shale”) formations will probably increase, provided oil prices stay high enough to support this expensive way of extracting oil. Some knowledgeable observers, however, believe that the rapid increases in production will come to an end in three or four years and that U.S. domestic oil production will once again enter a decline – perhaps for the last time. This assessment is based on the speed with which production from fracked oil wells declines and the lack of places to drill productive wells in North Dakota and Texas.

For the immediate future, the prospects for production of major amounts of oil and gas from other areas do not look good. Russia seems to have plenty of conventional gas that can be produced much more cheaply than by fracking tight formations. China may run into water and transportation problems in areas where they may have gas-bearing shale formations. Many other places, such as California and Europe, are so well developed that drilling and fracking operations are running into much local opposition. France, for example, has banned fracking for as long as the current government is in power.

From a peak oil perspective, there are several problems with optimistic forecasts that run beyond the next few years. Optimists almost never mention the increasing rates of depletion taking place in conventional oil fields as an ever-increasing share of global production shifts from land to deepwater. The cost of producing unconventional oil is almost never mentioned amidst discussion of how much will be technically recoverable with advancing technology. Cost must be measured both in terms of how much energy is required to produce more energy, and the price of oil in relation to an economy’s ability to pay the price.

Rarely is it mentioned that so far more progress towards “energy independence” for America has come from a drop in demand by people and organizations no longer able to pay the price than from fracked oil. This in turn depends on the future of the OECD and Chinese economies, which at the minute do not look too good. While oil demand is stagnant in Europe, Japan and the U.S., it is still growing in China, but this might not always be the case. There is considerable discussion in energy optimist circles these days about how “peak demand” might occur, thereby slowing oil production to some kind of false peak. This of course is always tied to the increased efficiency with which we use oil and not to economic hard times during which fewer will be able to afford the increasingly expensive stuff. No one ever mentions the circa 70 million people that are being added to the world’s population each year who might like a little energy in their lives.

We finally get to the 800-pound gorilla in the world oil situation which is the future of the Middle East. It is hard to paint too gloomy a picture in looking at the future of the region which produces much of the world’s exportable oil. So far disruption of exports for one reason or another has been confined to Iran, Syria, Yemen, and Sudan. Political instability in Algeria, Libya, and Iraq is already slowing exports and there is little to prevent the situation from getting worse in these countries.

Egypt is on course for years of political upheavals that could close or restrict use of the Suez Canal or slow its oil production. A civil war there could easily spread refugees and troubles across the region. For now only the Saudis and their handful of Gulf States seem immune to upheavals, but this could change. A frequently overlooked issue is the ever increasing share of oil production by Middle Eastern countries that is consumed domestically. Increasing summer temperatures are requiring governments across the region to burn increasing amounts of oil to keep their populaces cool and quiescent.

Looked at broadly, there is likely to be much more to the peak oil story over the next five to ten years than drilling and fracking of several thousand marginal oil wells in North Dakota and Texas. Ignoring emissions into the atmosphere from the combustion of fossil fuels, while still tolerable for some, will become increasingly perilous for us all. In the end the optimists will be wrong simply because we live on a finite earth.