Oil Crisis of Epic Proportion on Horizon

On December 26, 2004 the water off the coasts of Indonesia, Sri Lanka, India, and Thailand began receding. Some people recognized the receding sea as a warning and headed toward higher ground. Many others oblivious to the imminent danger ventured out on to the coast to investigate the rare sight. What followed was a deadly tsunami that swept up and killed close to a quarter million people. The warning signs were there, but few too many people understood what was about to happen.

There are presently visible warning signs that an economic tsunami is on the horizon pending the peak and decline of global oil production. We experienced significant economic recessions in the 1970s resulting from disruptions in oil supplies. The difference now is that we are not facing the 1970s’ correctable man-made production disruptions, but rather disruptions of a natural sort that are not easily mitigated.

Global demand for oil is climbing at the same time production is peaking and verging on decline. According to the International Energy Agency (IEA), global production for the first five months of 2008 averaged 86.82 million barrels per day. IEA forecasts 2008 daily global oil demand at 86.85 mb/d. And of the 48 largest oil-producing countries, 33 are experiencing irreversible declines in production (Bentley, Mannan, & Wheeler, 2007). This means supply and demand is extremely tight with no evidence of loosening. We find ourselves ignoring a very serious matter for which few are knowledgeable enough to recognize or fully appreciate.

Any serious authority on this subject would agree that peak oil is real, and when it occurs will be economically catastrophic if nothing is in place to offset production declines. Yet few are willing to come to terms with the prospect of peak oil arriving anytime soon. It’s as if the water is receding but no one seems sufficiently concerned about the imminent danger.

Flat-Earthers v. Natural Scientists

The peak oil debate stems from confusion between and reliance on two different data sets that fuel two conflicting viewpoints. One viewpoint is characterized as the Economic or Flat-Earth approach while the other is referred to as the Geological or Natural Science approach (Aleklett & Campbell, 2003; Bentley, Mannan, & Wheeler, 2007).

The Flat-Earthers typically rely on proved reserves (1P) data published by organizations like the IEA to calculate remaining discovered oil (Bentley, Mannan, & Wheeler, 2007). However, there are serious problems with 1P data due to producers significantly not reporting, underreporting, and over-reporting their reserves (2007). Widespread reliance on 1P data is the primary reason debate over peak oil continues (2007).

In addition to using deficient 1P data, Flat-Earthers also believe irrespective of oil’s finiteness that technology, price, and investment drive supply (Bentley, Mannan, & Wheeler, 2007). The problem is the facts and fundamentals of oil production don’t neatly fit within this economic model. Nevertheless, for the past 20 years the economic viewpoint has been the dominant perspective on the subject among oil companies and throughout the world’s halls of power (2007). Soon we will find that with no evidence of future decline in demand, the primary driver of supply is simply availability.

The Natural Scientists understand the significant flaws inherent in 1P data and instead rely on proved plus probable (2P) data to make calculations for projecting future production capacities. 2P data is considered among experts to be a scientifically achieved best estimate of a given oilfield’s size. A key distinction of 2P data aside from 1P’s under, over, and non-reporting of reserves, is its reporting methods used for calculating discovery trends.

Over time it is inevitable that discovered reserves’ size are revised either up or down depending on the initial size estimate and its production capacity through the years. 2P data record reserve revisions by backdating them to the original wildcat who discovered the field so that a more accurate discovery trend may be plotted (Aleklett & Campbell, 2003). 1P data on the other hand, record reserve revisions by attributing the revision to the day they are announced. This practice gives the impression that a new discovery was made when in fact it was merely a revision of a past discovery estimate. As a result, 1P data would leave one to believe substantial amounts of oil continues being discovered when it’s clearly not the case. Presently, no significant discoveries have been made since the 1970s (Meng & Bentley, 2008).

According to 2P data based discovery trends, and past and present demand forecasts, global peak oil is anticipated to occur around 2010 (Meng & Bentley, 2008). The only people clinging to the unfounded belief peak oil either will not occur or will occur twenty or more years from now are those with a vested interest in the status quo . For example, OPEC goes so far as to deny the existence of peak oil even in theory. The problem for peak oil deniers, however, is that the science simply is not on their side. Some of the most notable in the geological field forecast peak oil to have already occurred, is occurring, or will occur by 2012.

Now What?

Now that we have a scientifically based understanding that global peak oil is occurring or will occur very soon, we must quickly devise ways to mitigate its economic impact. Some of the proposals involve producing unconventional oil, offshore drilling, renewable energy, and conservation.

Unconventional oil production includes use of special technologies for oil/tar sands, converting natural gas to liquid fuel, shale oil from oil shale, coal liquefaction, and heavy oil refinement (Duncan & Youngquist, 1999). Despite the tremendous quantities of available unconventional reserves, they will have little impact on peak oil due to the economic and environmental cost associated with their being mainstreamed. For example, processing oil/tar sands for use costs approximately $32 a barrel. The greatest cost however, is not tied to production but the environmental impact from production. When compared to conventional extraction, oil/tar sands processing emit up to triple the amount more carbon dioxide per barrel produced. Such economic and environmental costs are consistent with all the other unconventional oil production methods listed.

Offshore drilling continues to be bandied about by Republicans as the solution to reducing high oil prices. Yet anyone who truly knows anything about our current state of affairs, and is serious about crafting real solutions knows offshore drilling is not the answer, and to claim otherwise is bunk. People in the know claim oil from offshore drilling would not begin flowing onto the market for about a decade, and even after it does there will not be enough production to significantly lower oil prices. Offshore drilling is not the solution it’s touted to be. Instead, it’s little more then a Republican sideshow that will make some oil producers money.

The solution to an unhealthy oil addiction is not to sit around talking about producing more oil that’s not there to produce. We are not going to drill our way out of this seemingly bottomless pit we find ourselves. The way out is to get innovative about climbing our way to the top of producing renewable technologies, and increasing conservation through greater efficiency. This crisis offers us the opportunity to do what we do best, be innovative. We can’t afford to run toward the receding water.

References

Aleklett, K., & Campbell, C. J. (2003). The peak and decline of world oil and gas

production. Minerals & Energy. 18, 5-20.

Bentley, R. W., Mannan, S. A., & Wheeler, S. J. (2007). Assessing the date of the global
oil peak: The need to use 2P reserves. Energy Policy. 35, 6364-6382.

Duncan, R. C., & Youngquist, W. (1999). Encircling the peak of world oil production.
Natural Resource Research. 8, 219-232.

Meng, Q. Y., & Bentley, R. W. (2008). Global oil peaking: Responding to the case for
‘abundant supplies of oil’. Energy. 33, 1179-1184.