Peak Oil News: Over a Barrel

Tuesday, November 09, 2004

Over a Barrel

It's eight o'clock on a fresh summer morning in Denver, and I'm at a podium before a hundred executives from regional energy companies. Having spent the last few years closely observing trends in the oil industry, I'm often asked to speak about the decline of global energy supplies, the way oil has corrupted U.S. foreign policy, and why the worldwide energy economy needs a radical transformation if we want to avoid catastrophic climate change. Yet while these themes play well to liberal audiences in Boulder and Berkeley, I worry my reception here will be much cooler. Most of these weather-beaten men (and a few women) spend their days squeezing hydrocarbons from the sand and stone beneath the Rockies; if my past observations of the energy industry are any guide, they voted for Bush, support the Iraq war, think climate change is a leftist hoax, and believe the main cause of America's energy crisis is that overzealous regulation keeps drillers like themselves from tapping the most promising reserves of oil and natural gas.

But as I finish my spiel and take questions, my initial assumptions vanish. When I suggest that the Iraq war might not have been motivated entirely by America's thirst for oil, many in the room openly smirk, as if I've just suggested that the world is flat. Likewise, few here seem to share the White House's Panglossian view that the United States is sitting atop some massive, but politically off-limits, reserve of natural gas. In fact, as much as these executives would love to sink their drills anywhere they want -- and as much as they detest environmentalists for stopping them -- no one here believes the volume of natural gas yet to be discovered in the Rockies, or anywhere else in America, would reverse the nation's decline of gas production or let the United States move to a cleaner, more secure "gas" economy. As one executive tells me, "even if all the off-limits land were opened for drilling, all the new gas we could bring on-line wouldn't be enough to replace all the production we're losing from older fields. We'd barely keep production flat."

For those who wonder where the world will be getting its energy a decade from now, confessions like these only confirm what many have feared for some time: namely, that the cheap, "easy" oil and natural gas that powered industrial growth for a century no longer exist in such easy abundance; and that we may have a lot less time than we thought to replace that system with something cleaner, more sustainable, and far less vulnerable to political upheaval.

The evidence is certainly piling up. Pollution levels from cars and power plants are on the rise. Climate change, another energy-related disaster, has begun impacting crop yields and water supplies and may soon provoke political strife. In fact, according to a Pentagon report last October, global warming could make key resources so scarce, and nations so desperate, that "disruption and conflict will be endemic" and "warfare would define human life."

Yet the most alarming symptoms of an energy system on the verge of collapse are found in the oil markets. Today, even as global demand for oil, led by the economic boom in Asia, is rising far faster than anticipated, our ability to pump more oil is falling. Despite assurances from oil's two biggest players -- the House of Bush and the House of Saud -- that supplies are plentiful (and, as George W. Bush famously put it, that getting the oil is just a matter of "jawboning" "our friends in OPEC to open the spigots"), it's now clear that even the Saudis lack the physical capacity to bring enough oil to desperate consumers. As a result, oil markets are now so tight that even a minor disturbance -- accelerated fighting in Iraq, another bomb in Riyadh, more unrest in Venezuela or Nigeria -- could send prices soaring and crash the global economy into a recession. "The world really has run out of production capacity," a veteran oil analyst warned me in late August. "Iraq is producing less than a third of the oil that had been forecast, the Saudis are maxed out, and there is no place else to go. And America is still relying on an energy policy that hasn't changed significantly in 20 years."

Nor is it any longer a matter of simply drilling new wells or laying new pipe. Oil is finite, and eventually, global production must peak, much as happened to domestic supplies in the early 1970s. When it does, oil prices will leap, perhaps as high as $100 per barrel -- a disaster if we don't have a cost-effective alternative fuel or technology in place. When the peak is coming is impossible to predict with precision. Estimates range from the ultra-optimistic, which foresee a peak no sooner than 2035, to the pessimistic, which hold that the peak may have already occurred. In any case, the signs are clear that the easy oil is harder to find and what remains is increasingly difficult and expensive to extract. Already, Western oil companies are struggling to discover new supplies fast enough to replace the oil they are selling. (Royal/Dutch Shell was so concerned about how declining discovery rates would devastate its stock price that it inflated its reserves figures by 20 percent.)

Worse, according to a new study in the respected Petroleum Review, in the United Kingdom, Indonesia, Gabon, and 15 other oil-rich nations that now supply 30 percent of the world's daily crude, oil production -- that is, the number of barrels that are pumped each day -- is declining by 5 percent a year. That's double the rate of decline of even a year ago, and it has forced other oil producers to pump extra simply to keep global supplies steady. "Those producers still with expansion potential are having to work harder and harder just to make up for the accelerating losses of the large number that have clearly peaked and are now in continuous decline," writes Chris Skrebowski, editor of Petroleum Review and a former analyst with BP and the Saudi national oil company. "Though largely unrecognized, [depletion] may be contributing to the rise in oil prices."

If there is one positive sign, it's that the high prices seem to have finally broken through America's wall of energy denial. In fact, while energy experts like Skrebowski have been fretting about oil dependency and depleting reserves since the 1970s, today's energy anxiety is no longer coming simply from academia or the political margins. In recent months, energy problems have come under intense focus by the mainstream media, filling radio and TV talk shows and newsmagazines. Whereas official U.S. policy still blames OPEC for our oil woes, even right-of-center, pro-business outlets like Business Week, The Economist, and Fortune have acceded that the biggest risk for U.S. energy security isn't "foreign" producers or even environmentalists, but rather a decades-old domestic energy policy that remains focused almost entirely on finding new supplies while doing nothing to curb demand. "Much as we might like to, we can't blame it on OPEC," noted Fortune in August. "After all, Americans have been on a two-decade oil pig-out, gorging like oversized vacationers at a Vegas buffet."

What's more, while a powerful, ideologically driven minority -- led, sadly, by the Bush administration -- continues to insist that energy security is simply a question of drilling in the Arctic National Wildlife Refuge (ANWR) or browbeating OPEC, outside the White House, and certainly outside the Beltway, there's a growing push to build a fundamentally new energy system. Thus, while the Bush administration dithered on climate change and the future of energy, individual states, like California and New York, enacted their own alternative energy policies and even sued utilities over carbon dioxide emissions. The corporate world, once a stalwart opponent of any policy reform, has become startlingly progressive. Toyota and Honda are busily rolling out hybrid cars. Agriculture and insurance firms warn of the future costs of oil-price swings and climate change. And energy companies like BP and Shell, eager to profit in the new energy order, are developing new fuels and technologies to help reduce oil use and emissions.

And if most U.S. consumers still share the administration's energy obliviousness (U.S. gasoline consumption continues to rise, despite high oil prices), some in Congress have become downright activist. Last year in the Senate, Republican John McCain and Democrat Joseph Lieberman came close to passing a climate policy far beyond anything the White House has countenanced. In fact, even some traditional oil-and-gas politicians appear to see the writing on the wall. For example, U.S. Senator Lisa Murkowski, a Republican from Alaska and still an ardent supporter of drilling for oil in ANWR, nonetheless concedes "this nation needs to do a far better job of energy conservation and needs to develop alternative energy technologies to wean us from fossil fuels."

Unfortunately, as encouraging as all this new energy awareness is, actually weaning the United States from fossil fuels is far easier said than done. To begin with, our current energy infrastructure -- the pipelines and refineries, the power plants and grids, the gasoline stations, and, of course, the cars, trucks, planes, and ships -- is a massive, sprawling asset that took more than a century to build and is worth some $1 trillion. Replacing that hydrocarbon monster with "clean" technologies and fuels before our current energy problems escalate into catastrophes will likely be the most complex and expensive challenge this country has ever faced.


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