Did peak oil go away? No
For there is a dark side to this otherwise salutary turn of events. Rather then rendering moot the question of peak oil, the falling prices of petroleum actually exacerbate it. This is because, while the current economic free fall will continue to lower demand for petroleum and drive down prices, these lower prices have also fallen below the cost of bringing new oil into production.
As the International Energy Agency (IEA) has repeatedly warned for over a year, excessively low prices will discourage investment in production, especially with the steadily rising costs of extracting and processing oil from increasingly difficult places. This lack of sufficient investment has serious implications for the future supply, once the global economy recovers from its current descent, particularly when we wrap our minds around the $26 trillion that the IEA says it will now cost over the next 20 years to keep energy flowing at its current pace.
In a Nov. 12 interview with The Times of London, Dr. Fatih Birol, the IEA's chief economist, said that fresh sources of oil equivalent to the output of four Saudi Arabias will have to be found to provide not only the 45 million daily barrels needed to simply stand still, but the additional 20 million to keep pace with the surging demand. Noting that much of the increase would have to come from costly unconventional and environmentally dangerous sources (such as the tar sands of Alberta, Canada), Birol emphasized that the twin challenges of meeting surging energy demand, while dealing with the threat of catastrophic climate change, would require "a global energy revolution."
The IEA's fears are echoed throughout the oil industry and financial world. The Financial Times reported earlier this month that more than four out of five refinery construction projects face cancellation. The Wall Street Journal reported last month that "big oil companies are already finding it harder to maintain, let alone increase, production."
Jad Mouawad recently wrote in The New York Times, "Some analysts predict oil could fall to $30 to 40 a barrel as the world economy worsens." He goes on to cite the conservative Cambridge Energy Research Associates that estimate that "As much as 4 million barrels of future oil could be jeopardized if prices remain below $60 a barrel."
Quoting several energy executives, The Financial Times reported last month that "delays in developing projects in Russia, Angola, Nigeria, Australia and elsewhere mean there will not be enough oil available once the world economy is ready to get back on its feet."
What lends special significance to this development, however, is that it is part of a larger trend of underinvestment in the industry that predates the current drop in prices. Western oil companies have been decapitalizing in recent years, buying stock back and otherwise returning cash to shareholders, rather than exploring for large new fields that just aren't there.
Petroleum is a capital-intensive industry, where massive amounts are required just to offset depletion and to maintain production. Drilling and platform equipment has aged and is unavailable. The cost of drilling rigs has doubled in recent years. There is an alarming dearth of skilled personnel. What is the oil industry telling us with this retrenching, while it continues to reap unprecedented profits at the same time?
The fact is that the systemic conditions that drove prices to record levels have not disappeared. Oil production has "plateaued" (to use the term favored by the industry) at about 85 million barrels per day since 2005, and this at a time when prices were rising. Production is in decline in 33 or the world's 48 oil-producing countries.
In its 2008 edition of its "World Energy Outlook," the IEA took the unprecedented step of including a comprehensive study of depletion rates in the world's largest oil fields, demonstrating annual depletion rates of 10-11 percent in non-OPEC countries, and 2-3 percent in OPEC members. The fact that the discovery of new fields peaked in the 1960s, and that we consume three barrels of oil for every new barrel discovered means that these smaller, new fields can't compensate for the decline in production in older fields.
As Lawrence Eagles, an energy analyst at JP Morgan, recently observed in typical business understatement, "the fact is that supply side problems in oil have not completely gone away."
When you combine the "plateauing" in production over the last three years, peak oil author Richard Heinberg has opined, with the ongoing depletion and rising decline rates in the oil fields, we may have already reached the all-time peak this past July. If this is true, then the country is going to have to adjust quickly to steadily decreasing amounts of oil.
Given that we are totally, utterly, completely dependent on fossil fuels for our being, this fundamental change will necessitate a massive overhaul of the U.S. economy including transportation, lifestyles, jobs, agriculture, and industrial production. Think Apollo Project, squared.
While enjoying this respite from high oil prices, we should also seize it as an opportunity to address what needs to be done, as rapidly as possible, so we can reasonably transition into the post-petroleum age we have irrevocably entered.
Tim Stevenson is a community organizer with Post Oil Solutions
TALK TO US
If you'd like to leave a comment (or a tip or a question) about this story with the editors, please email us. We also welcome letters to the editor for publication; you can do that by filling out our letters form and submitting it to the newsroom.