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Energy Solutions

Thoughts on the Future of Petroleum

What ever happened to "peak oil"?

Significant price fluctuation has been the rule with gasoline and other petroleum products for the past several years. As the economy picks up, many experts predict higher oil prices during 2011. Graph: Wall Street Cheat Sheet.
Image Credit: Wall Street Cheat Sheet

It’s fitting that this first blog of 2011 takes a look into the crystal ball — at the energy source that pretty-much defines our culture.

That we consume oil prodigiously is an understatement. The world guzzles this highly concentrated fossil fuel at a rate of nearly one thousand barrels per second (29.2 billion barrels in 2009, according to the BP Statistical Review of World Energy 2010). The U.S., with 4.5% of the world’s population, consumes 22.2% of its petroleum. A lot of that (71%) is for transportation; 97% of our vehicles are powered by petroleum fuels.

A few years ago, to get a sense of how quickly the world is consuming oil, I spent several days digging into historical oil production statistics. I wanted to know how much of the world’s cumulative oil production had occurred since I was born (in 1955). Each year I’ve updated the spreadsheet I created with new oil production data, and here’s where we stand:

Of all of the oil extracted since the dawn of the petroleum age (going back to 1859 — see last week’s blog), 92% of that oil has been extracted since 1955. A remarkable 51% of the world’s cumulative oil extraction has occurred just since my older daughter was born in 1986. Put another way, over half of the oil extracted from the earth and consumed by humans has happened in just the past 25 years — a mere heartbeat in geologic time — and all that stored carbon has been converted into the greenhouse gas carbon dioxide.

So what’s ahead for petroleum? Are we running out? Has “peak oil” been reached, marking the point at which petroleum production reaches a maximum and begins an inexorable decline? Will we soon be paying $5 or even $10 per gallon for gasoline at the pump? Where are we heading and how should we plan for it?

Unfortunately, no one really knows the answers to these questions — though the blogosphere is full of opinion on it. I too have opinions, which I’ll share here.

Are we running out of oil?

The short answer is “no.” There is still a great deal of oil that can be extracted, and mammoth new discoveries deep under the Gulf of Mexico and off the coast of Brazil are adding to known reserves. However, we may be running out of “cheap oil.” The really easy-to-extract, inexpensive oil is in short supply. It is this cheap oil that fueled the petroleum age and our car-dependent development patterns.

Oil supply, demand, and pricing are driven by a complex interplay of different forces. As easy-to-extract oil reserves are depleted, we have to turn to deeper wells that are more expensive to operate (and carry greater environmental risk). But oil can only be profitably extracted from these sources when the price of oil is high enough to justify the cost of production. Oil prices are determined, to a significant extent, by demand. When demand is high, relative to available supply, the price goes up. But as the price goes up, consumers figure out ways to use less: we drive fewer miles; we trade in our SUVs for hybrid cars; we turn down our thermostats; and we insulate our houses. Those conservation measures, in turn, drive down demand, which reduces cost.

As if all that isn’t complicated enough, there are various layers of subsidies and taxes that also affect the economics of oil production and regulate demand. In smart countries, governments have levied significant taxes on petroleum products to artificially reduce consumption and spur energy conservation and the development of alternatives; this is why vehicles and buildings tend to be far more energy-efficient in Europe than in the U.S.

There is also the troubling issue that much of the world’s most accessible oil is in places that are either politically unstable or where the well-being of Americans isn’t a top priority. Unanticipated political changes could significantly affect the oil price equation.

So we’re not running out of oil, but we are probably in for several decades of fairly wild price gyrations: rapid price increases followed by price collapses. Emerging economies, such as China and India, will have a tremendous influence on these gyrations. If those economies continue to expand, even if the U.S. remains in an economic slump, expect oil prices to rise significantly. If the U.S. economy recovers while China and India are booming, oil price increases could be dramatic — with crude oil even hitting $200 per barrel within the next five years (though such price increases would likely slow the economic recovery).

We won’t run out of oil, but if the price climbs significantly higher, it will become impractical to use it for low-grade needs like home heating — where energy conservation, passive-solar energy, natural gas, cordwood, and wood pellets can provide cheaper alternatives. Increasingly, I expect to see electricity used for home heating (via heat pumps) and transportation (via plug-in hybrids) — which opens up the question of how we will be producing that electricity. But that’s the subject of another column.

In addition to this Energy Solutions blog, Alex contributes to the weekly blog BuildingGreen’s Product of the Week, which profiles an interesting new green building product each week. You can sign up to receive notices of these blogs by e-mail — enter your e-mail address in the upper right corner of any blog page.

Alex is founder of BuildingGreen, Inc. and executive editor of Environmental Building News. To keep up with his latest articles and musings, you can sign up for his Twitter feed.

11 Comments

  1. 5C8rvfuWev | | #1

    Thanks Alex
    A great and unusually objective summary of where "we" are -- unusual because any mention of the topic usually generates fantasy and passion galore.

    You didn't happen to plot population growth along with the oil usage, did you? I think -- no useful stats to back it up -- that much of the increasing oil usage can be directly tracked by a growth in population. Yes, lifestyle is important, mostly because it is something we can control. Population growth may be even more important going forward ... and the big players in futuristics are concerned about it ... and it's not something 'green building' can address. Can it?

    Best for your New Year.
    Joe W

  2. Lucas Durand - 7A | | #2

    Yes, thank you.
    Alex, I would also like to thank you for tackling such a sticky subject. It is a contentious issue precisely because, as you said, oil is:

    ...the energy source that pretty-much defines our culture.

    But not only that - oil is a requisite resource for our culture. The implications of a diminishing supply can be difficult and indeed frightening to contemplate. If a person doesn’t find the implications of peak oil at least disconcerting, then that person is either made of stone or doesn’t understand the issue.

    Alex, you said:

    the blogosphere is full of opinion...

    Which is true, and opinion ranges from "peak oil has already past us" to "peak oil will happen in the 2020-2030 timeframe" - though there tend to be fewer and fewer in the latter camp. What is no longer disputed or a matter of opinion (at least not in scientific and engineering circles) is that the concept of peak oil is a real thing that will have to be dealt with sometime.
    Current best guesses put the lead-time on a seamless transition to a "post-carbon economy" at about 20 years. So even if you are in that latter camp who believes that the worst effects of peak oil can be put off until 2020 or 2030, we are already behind the curve on a seamless transition.
    There is a strong case to be made that peak oil has already passed us, and that the recent global "economic crisis" is the first shockwave of that peak in conventional crude production. If this is the case we are way behind the curve on the necessary transition.

    It is well past time for this to be a mainstream issue.
    I am not being dramatic by saying that our way of life must be almost entirely revolutionized starting now.

    A tall order, I know.

  3. Lucas Durand - 7A | | #3

    Energy is the economy

    If the U.S. economy recovers while China and India are booming, oil price increases could be dramatic — with crude oil even hitting $200 per barrel within the next five years (though such price increases would likely slow the economic recovery).

  4. Aj Builder, Upstate NY Zone 6a | | #4

    Energy costs are hooked to the economy
    We will not have ever higher energy costs than we are able to pay for. Simple economics. And when charts gyrate wildly, smart people step in and take advantage of the extreme nature of such for quick easy profits. Once this is done, the gyrations fade away due to the feedback nature of the beast.

    Look back at lots of charts... wild times lead to bland times. The DOW has had some epic periods of going nowhere since it's creation along with some wild times too.

    Just my take on what "is" being able to predict what "isn't" yet.

  5. Aj Builder, Upstate NY Zone 6a | | #5

    Wrong spike to be concerned with.
    OK.. above I stated worry not about energy bouncing as eratically as it did just recently. It won't now is my prediction.

    But... what else? Population is now at a big spike up. Not good. What goes up that fast will not continue. What does that mean? The only way short term for this to correct besides China's one child policy is for lots and lots to die that as of today are not dieing. Something or somethings will come to be for this such a large increase in the death rate which the the population spike definitely is predicting.

    That I do see happening. I have never seen a Y spike on a XY graph that is (X continuous in time) ...not reverse it's Y direction. OK... except the universe is forever expanding theory?

    It's pretty basic math to me.

  6. Daniel Ernst | | #6

    Oil / Gasoline Prices
    Alex,

    I enjoy reading your weekly articles. Thanks for the informative discussions!

    I know it was probably beyond the scope of your article, but there was one large and missing variable in the price discussion of oil and gasoline. That "complex interplay" you mentioned is further complicated by this fact: the United States Dollar (USD) is the currency used for international oil trade. That, combined with the USD's reserve currency status, gives us an even greater "downside" exposure on oil and gas prices.

    The USD Index is near an all time low. See a good chart here:

    http://research.stlouisfed.org/fred2/series/DTWEXM

    As the USD goes lower on the index, the price of oil goes higher. Our large federal government deficits, the Federal Reserve's near zero percent interest rate policy, and their Quantitative Easing program---these variables only increase the probability that oil and gas prices will go higher---and that the gyrations will continue.

  7. Aj Builder, Upstate NY Zone 6a | | #7

    Daniel
    Too much of the world economy interplays with the US. If your prediction came true it makes the world economy come to a stand still. Not going to happen Daniel.

    There is abundance on the planet right now. There is supply. There is demand.

    And that's truly what strong healthy sustaining economy is. Abundant supply and abundant demand.

    IMO The sky will not fall.

  8. Riversong | | #8

    The Life and Death of a Prophet
    Matt Simmons, the Pied Piper of Peak Oil, died in his Maine hot tub this past summer.

    Simmons & Company is the oldest independent investment bank specializing in the entire spectrum of the energy industry. Simmons promoted the idea that world oil reserves are peaking, and he explored the implications in a 2005 book called “Twilight in the Desert.”

    “Petroleum is industrial oxygen,” Matt Simmons liked to say. The more he looked, the more convinced he was that much of our energy system was being red-lined, run on the ragged edge of disaster. And look he did – more than 50 hours a week by his own description. “Some people play golf,” Matt said. His hobby was looking at energy data.

    Matt was arguably the most influential individual on this side of the Atlantic to warn about the coming peak-and-decline of world oil production, beginning in 2001 when he published his ground-breaking white paper on the world’s giant oil fields. He co-chaired the energy task force of presidential candidate George W. Bush in October 2000, and helped bring peak oil to the boardroom and to Wall Street.

    Demand for energy has become a “runaway train that cannot be easily slowed or reversed,” Simmons said. “We are in early stages of a global train wreck when demand outstrips supply and shortages begin.”

    Matt Simmons has long been a prophet of peak oil. "So ultimately our only option," says Simmons, "is to beat a fast retreat from over consumption, start working from home, grow our own food, and rethink our entire system."

  9. Lucas Durand - 7A | | #9

    The bet...
    Some readers may know that Matt Simmons recently lost a bet (despite his having already passed away) to John Tierney of the New York Times regarding the price of oil at the close of 2010.
    John Tierney has trumpeted his victory as evidence that the "cornucopian" (optimist) view has it more correctly than the "Malthusian" (pessimist) view.
    Here is an article from "The Oil Drum" that puts John Tierney's victory into what I think is a more realistic perspective:
    http://www.theoildrum.com/node/7343

  10. Peter | | #10

    Cellulosic ethanol
    Alex, there is a very interesting article on cellulosic ethanol production. Thought you might like to see this.
    http://green.blogs.nytimes.com/2011/01/13/a-step-toward-car-fuel-from-wood-waste/?partner=rss&emc=rss

  11. gary | | #11

    the plot thickens...
    Great stuff, Alex. As always, well-researched and presented. I particularly appreciate the re-direction of the issue from one of supply and peak oil to one of cost and access to oil. I'm not sure, though, if it is safe to separate the supply issue from the mischief we create as we explore for oil, drill wells or scrape the surface sands (I'm in Canada), create and transport assorted petroleum products, spill them, ingest them, burn them and/or dispose of them. GHGs are just one by-product in a chain of negative impacts from oil. It's time to wean ourselves off oil. You first though!

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