RIP peak oil?

It’s been a great year for the oil industry, particularly in the US. After years of decline, US oil production has jumped in the last 18 months as a new rush of shale oil comes online. With new sources of unconventional oil being tapped, and a record amount of new investment in 2011, production hit a new peak. Cue much hype, including hopes for a new golden age of oil, and fantasy predictions of the US being energy independent.

That has prompted a host of articles and reports declaring the end of peak oil, or at least its postponement to somewhere over the distant horizon. Even those who have campaigned on the issue have had a rethink. This week, George Monbiot dedicated his weekly column to the boom in oil production. “We were wrong about peak oil” he writes. “The facts have changed, now we must change too.”

Is George Monbiot right? He’s right on some things. He’s certainly right that the more alarmist end of the peak oil movement has been discredited, and those predicting an imminent collapse are going to have to revise their comments. He’s right that any hope that peak oil might save the climate have now come to nothing, which is the focus of his article. But on peak oil itself, I think it’s a more complicated picture.

The idea of conventional oil production peaking and then declining is not a theory. It’s geology, observable in any oil well in the world. That’s how oil wells behave, with production ramping up, hitting an all-time high and then declining. All oil wells behave this way, as do oil fields, and the total oil reserves of any oil producing country. This is all observable, and plenty of countries have hit their national peaks. Taken together, it’s a logical conclusion that there must be a peak of production for the planet as a whole – it’s a matter of when, not it.

However, it’s important to note that the production bell curve associated with peak oil is a description of conventional oil wells. The production graphs of shale or tar sands projects look very different. Shale oil is a much sharper spike, with production from an individual well dropping dramatically in the second and third year of production. Maintaining production in shale oil depends on constantly drilling new wells. Tar sands are different again. Because it’s a mining operation rather than drilling, it operates more on a plateau, with steps up or down as capacity is added or removed. Because of these differences, the industry definition of oil has not included tar sands or shale until very recently. It is only in recent years that it has been added to official stated reserves.

Conventional oil is well into the peaking phase of that bell curve. The International Energy Agency, normally very conservative on these matters, called it in 2006. Unconventional oil doesn’t follow that production pattern, so the peak in conventional oil does not mean that total oil production has necessarily gone into a decline phase.

The second thing to bear in mind is the response speed of the oil industry. Because we’re talking about hugely expensive projects and massive infrastructure, the oil world moves very slowly. “Investment cycles for exploration and development of oil and natural gas deposits are very long, averaging between eight and twelve years” says Leonardo Maugeri in the report that appears to have changed George Monbiot’s mind.

So here is what appears to have happened: In the late 90s and early 00s, the oil price was low and supply was more or less taken for granted. Infrastructure was allowed to decline and there was no market incentive to innovate. Production leveled off or declined in some places, and discoveries were relatively small. Inevitably, supply lines began to tighten, and as production dipped for the first time in decades, there were fears that it may not be able to keep up with demand. Rumours circulated that some countries were lying about their reserves. Peak oil made a resurgence.

With production reaching a plateau, prices began to rise. The trouble in the financial markets encouraged traders to move into commodities, pushing the prices higher still.

Since the oil market responds slowly, those market signals have taken a long time to filter through. But they have, aided by the rumours of peak oil and the price spike of 2008. The oil companies scored record profits as the price shot up, and the door opened on marginal oil projects that were economically unviable before. Investment poured in to tar sands and shale oil. Companies pushed through projects that had been on the back burner and upped their game on exploration. Deepwater and Arctic oil became economical. Governments hastily set up new subsidies for biofuels.

Half a decade on from the initial slowdown in oil production, the oil sector’s response is now coming through. The result is a new boom in oil production.

So let’s reframe the question. Has an unconventional oil revolution just buried the peak oil theory? Or has a peak in conventional oil triggered an oil revolution?

I’m not an expert here. I’m just an educated observer and I’m trying to make sense of it. So here’s what I do know:

  • Oil isn’t running out. If you think peak oil is about that, you need to do some homework.
  • Disruption to oil supplies are more at risk from economics than geology.
  • Energy returns on energy invested will go through the floor as the oil sector moves towards unconventional sources. Sweet crude gets 70 to 1, while shale oil can be as low as 6 to 1. This matters.
  • Regardless of what prices at the pump do, the era of cheap oil is over – those unconventional oil sources need higher prices to remain viable.
  • Oil is now far more tied to the state of the economy. If the global economy stalls, oil demand drops and thus the price drops too – and once again tar sands and shale don’t break even. People are still going to make a lot of money in oil, but others are going to lose a lot of money too.
  • Global oil supply is very vulnerable, and the oil price will be volatile for the foreseeable future.
  • Climate change hasn’t gone anywhere, and we really ought to leave the oil in the ground regardless.
  • Resilience to oil shocks is just as important as it was. Transition Towns and other resilience-building strategies are no less relevant.

And here are some things I don’t know:

  • It’s too early to tell if the uptick in oil production in 2011 signals a new age of oil. (US shale is certainly more fragile than it seems – Maugeri thinks it’s headed for a glut – but that’s a whole other post.)
  • Because some of the biggest oil producing countries still lie about their oil reserves, nobody actually know how much oil they have. That includes Saudi Arabia, the world’s biggest producer, who keep their official reserves a state secret.
  • I don’t know how much of the slowdown in production in the early 00s was a result of underinvestment, and how much of it was down to declining reserves.
  • Consequently, I couldn’t tell you if conventional oil production could still be increased.
  • I don’t know when total global oil production, including biofuels and unconventional sources, will peak.

So what to make of the rumours? Has the shale boom killed peak oil? Hardly. It’s almost the opposite. The plateau in conventional oil production has driven a new wave of investment in unconventional oil. If supplies weren’t tightening, we wouldn’t bother with shale or tar sands in the first place. We wouldn’t be arguing over who owns the Arctic. We wouldn’t be drilling in deep water, or venturing into unstable countries like Sudan.

The world consumed 32 billion barrels of oil in 2011. The challenges of bringing that amount of oil to the global marketplace every year are mind-boggling. To suggest that we can carry on consuming 32 billion barrels of a finite resource definitely, well, that’s just illogical. The boom in alternative oil sources may delay the day of reckoning, but it would be highly complacent to think that we can push oil to the back of our minds and drive on.

9 Comments on “RIP peak oil?”

  1. Paul G July 5, 2012 at 6:27 am #

    Seems to me that the oil industry and its supporters are getting more desperate. Shale oil, tar sands, more and more wars, taking over more of the media, investing in gas from fracking, attempts to get into more national parks and the Arctic,…. Likely signs that the easy oil is gone or close to it.

    • Jeremy July 5, 2012 at 9:08 am #

      Exactly, and that’s just the market response that intelligent peak oilers predicted. In fact, I might go back and list some of those predictions.

  2. Stefan Thiesen July 5, 2012 at 9:01 am #

    Thank you Jeremy for this analysis, which strikes me as better than anything that I read in even the more enlightened “mainstream media”. I am not sure if the “peak oil movement” was discredited, though – like many such informal movements it is too diverse to generalize. Many comments papers and predictions form that context did predict shale oil and tar sand production increases and pointed out that ultimately it is not about “peak oil” but about the energy harvest factor. And when the latter goes through the floor, as you described it, the economic costs go up – and so do the externalized ecological costs we all have to bear. All the additional “energy invested” means additional CO2 and carbo-hydrates adding to atmospheric radiative forcing. The dramatic dystopian scenarios of people like Jay Hanson et al remain intact: energy starvation, increasing fuel prices, increased profitability of agriculturally grown plant fuels (to avoid the oft misleading term “bio-fuel”), hence ever increasing competition of fuel and food, mass starvation around the globe and accelerating forest destruction, ever increasing production risks and resulting accidents and disasters, large scale directly production related pollution and environmental destruction (increased CO2 and CXHX outputs, massive landscape and groundwater destruction and pollution), very likely accelerating climate change with the known effects and phenomena. Secondary effects will be resource wars over energy, water, land and minerals and ores (I see no reason to believe that human behavior patterns are likely to change under pressure – they will be as they always were throughout history).

    Richard Heinberg called what we are facing “peak everything”, which surely is a pre-programmed long term issue. What we are certainly facing in the near future – and even now in many parts of the world – is energy starvation. Shale oil and gas and tar sand oil production are the energy equivalents to eating the seeds during a famine. Japan shows how desperate governments get when the energy situation gets tight: last year a coastal nuclear power plant in an earth quake zone was hit by a tsunami and blew up. And now a coastal nuclear power plant in a tsunami and earth quake zone was brought online again. The argument: Japan cannot hold its standard of living without nuclear power. Well. In Japan it is standard to keep a bathing tub with continuously heated water. Aircons are everywhere. And electric toilets. It is a society where ultimately pretty pointless electric toys are pervading every aspect of daily life. And that is the standard of living. The nuclear risk is taken to keep bathtubs with constantly heated water. Millions of them. It is a cultural thing, I hear. And: “The American culture is a blessed one.” A man named George once said.

    • Jeremy July 5, 2012 at 9:10 am #

      Yes, it’s only the simplistic or alarmist elements of the movement that are on the back foot. Most intelligent peak-oilers predicted exactly what we’re seeing now. I might go back and correct that.

  3. jeremy July 5, 2012 at 9:12 pm #

    Thank you for an insightful, concise and informative overview. I have recently arrived at the peak oil discussion and the Transition movement, and you have addressed many of the questions and emotions swirling within me after reading Monbiot’s article. Rob Hopkins has a thoughtful response as well.

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