Forget everything you thought you knew
Did you think there was a practically endless supply of crude oil in the world and that we would be knee deep in cheap gasoline for generations to come?
Experts now say that regardless of how
much crude remains in the ground, what really matters the most is when
oil production passes its peak. That could happen soon worldwide. The
marketplace could then treat oil as a scarcity driving prices skyward.
From that point on, it will be the end of oil, as we know it
HOLES BECOME RAT HOLES
You're probably thinking, despite recent headlines, that there is really plenty of cheap gas to go around. Why worry? But the mother of all oil shocks could be just 5 or 6 years away! Gas prices have been reaching record highs nearly every day this year and newly emerging studies suggest the recent run-up in gasoline prices may just be a shot across the bow.
Let's hope not, because our current lifestyles are dependent on oil for everything from manufacturing, to transportation, to agriculture. Despite this and even in the face of the recurrent oil shocks of the last decades, very little has been done worldwide to lessen our addiction to the "black gold" from within.
And consider this. Regardless of how much petroleum resides in the bowels of the earth, when the production of a given amount of fuel requires the industry to first consume the equivalent amount to discover, extract, refine, and deliver it, its all over. You might as well be out of gas. But guess what? Despite advances in technology, that day may be much closer than you think. What's more, when the amount of energy produced per barrel of oil is just equal to the amount used to obtain it, nothing will be left to run the engines of commerce or agriculture either.
How could that be? Suppose you wanted to drive to the nearby filling station to buy some gas and you only had a gallon in your tank. What if you suddenly remembered that you would have to use all your gas to get there though and that you had been told that the station would only allow you to buy just one gallon. You would have enough gas then to get from the station back to where you started from but no more. If you have to use all your fuel just to get an equivalent amount there would be no point leaving home in the first place.
The issue is known as "net energy" and it may be more important to understanding our future than worrying about all the tea in China or for that matter, all the oil available for future extraction from our planet. Here's why.
"The Best Kept Secret in Washington"
Speaking of net energy, oil industry watcher Jay Hanson states, citing the laws of thermodynamics, http://www.dieoff.com/page175.htm#_edn5
"By definition, energy 'sources' must generate more energy than they consume; otherwise, they are 'sinks'."
But net-energy analysis first reached public attention in 1974. At that time, Business Week reported that oil scientist Howard Odum had developed a "New Math for Figuring Energy Costs." To the surprise of many, Odum's new math indicated that stripper oil well operations were energy sinks and not energy sources.
According to this analysis, these operations could be profitable only when "subsidized" by cheap, regulated oil, which was used to produce deregulated oil. Because the industry is subsidized in this way in terms of net energy and also from direct taxpayer "allowances", the industry can continue to produce oil at a monetary profit, at least for a while. Hanson observes,
"Even without direct and indirect subsidies of $650 billion a year it's conceivable that energy companies could make money – but lose energy – by burning one $10-barrel of oil today in order to pump one-half of a $50-barrel tomorrow."
But how much longer can they keep this up? Hanson says,
"Based on the best information we have at hand today, sometime during the coming century [the 21st] the global economy will 'run out of gas', as fossil energy sources become sinks. One can argue about the exact date this will occur, but the end of fossil energy – and the dependent global economy – is inevitable."
Of course major oil companies may have private reserves of fuel which can be used to underwrite the energy costs of future production. However, if the energy produced for distribution to society is not sufficient to also pay back the overhead, the reserves themselves will eventually evaporate.
And those in denial might think that oil supplies will last forever. In reality though of course, the oil supply is finite. Jim Bell, author of "Achieving Economic Survival on Spaceship Earth", compares oil exploration with picking apples from a tree,
"We tend to pick the ones that have fallen from the tree and those that are closest to the ground first. Later though we may need a ladder as we expend more effort to find the ones that are harder to reach. The oil companies have to try harder and harder each year to find extractable oil. They have already harvested the easiest pickings."
Jim Bell points out,
"We are always told that there is plenty of ultimately recoverable oil left in the ground and so we naturally assume the supply will last forever, certainly through our lifetimes. What really matters though is not the amount of petroleum that lies within our planet, but the price we pay for it, in terms of our wallets and the consequences for our planet. And higher fuel prices will raise the price of everything else. As the production of petroleum begins to decline, market forces will push the price of hydrocarbon based products, if you can find them at all, higher and higher."
So then in the pursuit of profit, as the oil companies expend more and more energy to extract and refine petroleum, they eventually reach the point of diminishing returns, as proven reserves are depleted. Although there may be more ultimately recoverable crude in the ground, the new sources tend most often to be smaller, require more energy expenditure, or are technologically unexploitable. At that point, production "peaks", then declines rapidly.
And when oil production peaks worldwide, most experts agree it will be a whole new ballgame. That day of reckoning is inevitable. But when? It is a known fact that oil production peaked in this country in the 1970s and impressive evidence suggests that oil production worldwide will peak during the next twenty five years or sooner, some say as early as 2010. Hanson states that "the petroleum industry itself has announced that global oil production will 'peak' in less than ten years!"
You wouldn't know that from the official reports however. According to petroleum industry own spokespersons, there is at least another 93 years of known petroleum reserves worldwide to keep us in gas, at the current rate of consumption. The U.S. government has been even more optimistic. Past government studies cite advances in technology and the promise of synthetic fuels and methodologies as being cause to expect the continued availability of petroleum based fuels for generations to come. More recent reports though by the United States Geological Survey offer cautions about the coming end of the "buyer's market" for petroleum in a world of growing demand.
However, when the peak comes, whenever it does, all bets are off. And, it could be preceded by serious production shortages, which could occur even sooner. But Hanson warns the peak will come sooner and not later. When it does, Hanson states,
"The price of oil is expected to rise sharply – and permanently."
And he has good reason to say so. In another paper, "The Best Kept Secret in Washington", Hanson discusses a private study that was conducted by worldwide industry expert, "Petroconsultants" (now known as IHS Group). The study suggests that when the peak comes, the markets will treat petroleum as a scarcity and that the days of "cheap" petroleum will then be gone forever. The study is available for sale and can be purchased directly from the IHS Group (the world's leading provider of data and analysis for oil exploration and production). Its cost- $32,000 a copy. He adds,
"In 1995, Petroconsultants published a report for oil industry insiders titled WORLD OIL SUPPLY 1930-2050 which concluded that world oil production could peak as soon as the year 2000 and decline to half that level by 2025. Large and permanent increases in oil prices were predicted after the year 2000."
And they are not the only experts sounding the alarm.
In a recently published report from The New Republic,
"Campbell bases his thinking on something called the Hubbert Curve, perfected by M. King Hubbert, patron saint of petroleum geologists. Hubbert found that production tends to peak almost exactly when a petroleum reservoir hits its halfway point--meaning that once a well's output begins to decline, the amount left in the ground is roughly equal to what has been pumped out. In 1956, when oil optimism was universal, Hubbert used his curve to forecast that U.S. petroleum production would peak in 1969. The actual peak came in 1970; this dead-on prediction has given Hubbert legendary status."
Easterbrook goes on to say,
"The evidence is legion. In the United States, which contains 75 percent of the world's oil wells, petroleum production has been in decline since the 1970 peak. Prudhoe Bay, the last "elephant" oil find in the United States, peaked in 1988. Production in the former Soviet states also peaked that year."
Some experts say in fact that there are nearly 500,000 wells sites in the U.S. that produce less than a single barrel of oil per day. An added exclamation comes from Campbell's own work with Laherrer, http://dieoff.org/page140.htm,
"By 2002 or so the world will rely on Middle East nations, particularly five near the Persian Gulf (Iran, Iraq, Kuwait, Saudi Arabia and the United Arab Emirates), to fill in the gap between dwindling supply and growing demand. But once approximately 900 gbo (900 thousand billion barrels of oil) have been consumed, production must soon begin to fall. Barring a global recession, it seems most likely that world production of conventional oil will peak during the first decade of the 21st century."
And after the peak? Campbell says,
"From an economic perspective, when the world runs completely out of oil is thus not directly relevant: what matters is when production begins to taper off. Beyond that point, prices will rise unless demand declines commensurately."
A non renewable resource, the end of cheap oil is inevitable, although some may choose to argue the timeline. Debate aside, the next great oil shock however, may have nothing to do with money or supply and everything to do with that other problem, the one no one wants to talk about, net energy. Hanson notes,
"The key to understanding energy issues is to look at the 'energy price' of energy. Energy resources that consume more energy than they produce are worthless as sources of energy. This thermodynamic law applies no matter how high the 'money price' of energy goes. For example, if it takes more energy to search for and mine a barrel of oil than the energy recovered, then it makes no energy sense to look for that barrel—no matter how high the money price of oil goes."
Consider this illustration from University of Wisconsin at Stevens Point professor Thomas Detwyler http://www.uwsp.edu/acaddept/geog/courses/geog100/Petrol-ShrinkNetE.htm?
"The useful energy to be obtained from nonrenewable resources, such as fossil fuels (mainly crude oil, coal and natural gas) and uranium, is subject to diminishing returns through time. It takes energy to get energy. And because we exploit the easiest-to-get energy resources first, each subsequent unit of gross energy (e.g., oil in the ground) requires greater energy subsidy to obtain than did the previous unit, thus leaving less net energy:"
No doubt. Energy costs in the oil industry are on the rise and are reflected in the increasing depth of wells: 300 feet in 1870, 1,000 feet in 1900, 3,000 feet in the 1920s and more than 6,000 feet by 1980. Campbell notes,
"The cost of drilling oil and gas wells (which is largely a function of energy subsidy) rises exponentially with increasing depth. By the mid-1970s, about half the petroleum produced in Texas was also consumed there as production-related subsidies, so that at best net energy was only half of gross energy ".
It is for this reason perhaps that net energy returns have been falling consistently despite improved technology. Campbell adds,
"The dynamic of shrinking net energy means that the usefulness of gross energy reserves may be vastly overrated. In fact, a large portion of any given gross reserve will be energetically unexploitable, though perhaps technically extractable. The following diagram illustrates this consequence. Beyond the resource cutoff line, the system is an energy sink requiring more energy as subsidy than is returned as net energy."
Just how bad is it? Citing work by analyst John Gever from "Beyond Oil", http://www.dieoff.com/page175.htm, Hanson states that in the '50s the industry could produce 50 barrels of energy for every barrel consumed producing finished products for the market. By the nineties, the ration had fallen to 5 barrels to 1. By the year 2005, the industry will just break even-it will be necessary to use as much energy to produce any given quantity.
"Under that latter scenario, even if the price of oil reaches $500 a barrel, it wouldn't be logical to look for new oil in the US because it would consume more energy than it would recover."
Good Money After Bad
It takes energy to make energy. As supplies shrink and prices rise, market forces may drive us towards other fuel sources. But we will need to have an infrastructure in place capable of assuring an uninterruptible supply. Professor Robert Costanza of the University of Maryland (1984) cautioned though that there is an "embodied cost" of energy, whereby manufactured goods, like machinery, power cable, relays, switchboxes, or any finished goods, exist only after a given amount of energy was consumed by industry in their manufacture.
And Jim Bell explains,
"When the amount of net energy available in society begins to shrink it is harder to harness the resources necessary to manufacture the solar panels, the wind mills, and the other equipment needed when we begin the inevitable task of creating a large scale alternative infrastructure."
In reality, because there is in only a dwindling supply of energy that can be sucked from the well, absent an alternative, we will be living in an "energy limited economy". Hanson offers this definition, http://dieoff.com/page185.htm
"An 'energy-limited economy' is one where more energy cannot be had at any price. The global economy will become 'energy-limited' once global oil production peaks in less than ten years (perhaps much less)."
That could mean more trouble than just lining up at the filling station. Consider the problem facing agriculture. Hanson points out, http://dieoff.org/page185.htm
"Food grains produced with modern, high-yield methods (including packaging and delivery) now contain between four and ten calories of fossil fuel for every calorie of solar energy." Hanson adds,
"It has been estimated that about four percent of the nation's energy budget is used to grow food, while about 10 to 13 percent is needed to put it on our plates. In other words, a staggering total of 17 percent of America's energy budget is consumed by agriculture!" Again citing other sources, Hanson states,
"By 2040, we would need to triple the global food supply in order to meet the basic food needs of the eleven billion people who are expected to be alive. But doing so would require a 1,000 percent increase in the total energy expended in food production."
Following the peak of oil production, absent an alternative, Hanson notes,
"It will be physically impossible -- thus economically impossible -- to provide enough net energy to agriculture: "
Hanson adds grimly, "Obviously the death sentence for billions of people has already been issued".
So what can be done? Conservation, building a better light bulb or even just a more fuel efficient SUV, though a good idea, won't be enough. Observers, like Bell and others suggest that unless industry recognizes the need to shift now from a mind set that views energy resources in terms only of dollars instead of in terms of diminishing returns in real energy units, they will be planting the seeds of their own destruction, simply throwing good money after bad. Hanson notes,
"To have more energy in the future means that energy must be diverted now from non-energy sectors of the economy into future energy generation."
But what about the so called "unconventional oil" the oil found in shale deposits and sand tars? Sinks all. In just a few short years then, the net energy value of oil could be zero and its fate as the world's dominant energy source will be sealed. Light's out! When civilization can only produce the amount of energy needed to cover the energy expended to produce itself, nothing is left to power your car, run your business, or even grow you food. At that point, the size of the worlds crude reserves would be irrelevant. Oil would then become of greater interest to historians than to consumers as the Age of Petroleum joins the Bronze Age and the Stone Age as footnotes in the chronicling of civilizations.