The Challenge of Peak Oil

The supply of extractable oil is subject to geological limits. At some point those limits will overcome our ability to produce oil at the ever-expanding rates that growing economies demand. The global peak is likely to occur well before societies adapt painlessly to a different energy regime. And that likely time lag contradicts the way orthodox economists imagine that rising prices solve supply shocks by steering economies to develop and use substitutes.

Oil is different from most commodities, because, as President Bush so memorably declared, we are addicted to it, and because substitute energy sources cannot be developed and deployed overnight. And as long as oil remains available and profitable, the existing energy regime also resists the development and substitution of alternatives.

During the early 20th century, America was the world's foremost producer and exporter of oil. In 1970, the rate of U.S. oil extraction reached its all-time maximum and has generally declined since, even with later discoveries in Alaska and the Gulf of Mexico. Today the United States imports almost two-thirds of the oil it uses.

Altogether, according to ChevronTexaco, out of 48 significant oil-producing nations worldwide, 33 are already experiencing declining production. Few doubt that the rate of oil production for the world in total will peak at some point. That point is known as peak oil. If the peak were to occur within the next five years, national economies could not adjust quickly enough without major dislocations, while a peak 20 years hence would present easier adaptation, assuming we begin adapting now.

Further evidence for a near-term peak includes the fact that global rates of oil discovery have been falling since the early 1960s -- a fact confirmed by no less than ExxonMobil. Currently, only about one barrel of oil is being discovered for every five extracted.

On their face, current world petroleum reserves numbers look reassuring. U.S. government agencies estimate proven reserves at more than 1.1 trillion barrels. Some sources claim even more. However, oil optimists include costly and hard-to-extract sources such as Canadian tar sands. And some of the largest producing nations may have inflated their reserves figures for political reasons. An important study released in January concluded that Kuwait's official reserves figures are double the amount that can actually be produced.

Matthew Simmons, founder of Simmons & Company International energy investment bank and author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, concludes, from his study of technical papers from the Society of Petroleum Engineers, that Saudi Arabian oil production could be close to its maximum, and that world oil production is also therefore close to peak.

Another important 2005 study, “Peaking of World Oil Production: Impacts, Mitigation and Risk Management,” prepared by Science Applications International Corporation for the U.S. Department of Energy, makes clear the risks. The project leader was Robert L. Hirsch, who has had a distinguished career in formulating energy policy. The Executive Summary begins:

The peaking of world oil production presents the United States and the world with an unprecedented risk management problem. As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented. Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking.

The Hirsch report effectively undermines the standard free-market argument that as oil becomes scarcer, higher prices will necessarily stimulate more exploration, development of alternative fuels, and the more efficient use of remaining quantities. The transitional problem is timing.

An obvious example is the failure of today's higher prices to induce more purchases of fuel-efficient cars. Our fleet fuel efficiency for cars is currently quite low, averaging about 22 miles per gallon. Technology exists (including electric/ice hybrid engines, diesel hybrids, and plug-in hybrids) that could easily achieve between 60 and 100 mpg. But even with a price-spike high enough to induce this shift, auto manufacturers would require at least five years for retooling, and more than double that will be needed for the substantial majority of existing vehicles to be replaced by energy-efficient models.

Thus the response to peak oil will take considerable time and investment capital. Market forces alone will not solve the problem. The solutions will require both the government and the private sector, as well as citizen efforts on a scale not seen since World War II.

Richard Heinberg is the author of The Party's Over and Powerdown, and is a Core Faculty member of New College of California in Santa Rosa. This article is adapted from The Oil Depletion Protocol: A Plan to Avert Oil Wars, Terrorism, and Economic Collapse (New Society Publishers, June 2006).