Peak Oil News: Peak Oil and the Big Picture

Tuesday, November 30, 2004

Peak Oil and the Big Picture

Speech by Michael Ruppert at the Commonwealth Club in San Francisco on August 31, 2004.

Oil and natural gas are indispensable to our way of life. The world consumes ten calories of hydro-carbon energy for every calorie of food that is eaten. All commercial fertilizers are made from natural gas. All pesticides are made from petroleum. All irrigation, plowing, harvesting and transport is accomplished by either oil-powered machinery or oil- or natural-gas-generated electricity.

There are between 600 and 700 million internal-combustion-powered vehicles on the planet and the demand for them is exploding exponentially, especially in China where GM’s sales rose 300% in one year alone. According to the National Geographic this last June, there are seven gallons of oil in every tire. Want to suddenly build 600 million new vehicles that run on something else, hydrogen perhaps? How much oil will be required to do that? To mine and melt the ore? To transport it to factories that don’t exist, using electricity that isn’t there? To make the paints, solvents and all of the plastic needed? All plastic is made from oil.

Hydrogen is a cruel joke that creates false hope. A recent study from EV Magazine reported that the average life expectancy of a very expensive fuel cell engine was just 200 hours. Commercial hydrogen is now made from natural gas. We’re nearly out of that too.

China’s economic growth has seen that country replace Japan as the world’s second largest importer of oil, and China is now coming into direct economic and political competition with the US for what oil remains.

I have attended two international conferences on the subject of peak oil and its implications for civilization, one in Paris in 2003 and one in Berlin this year. For almost the entire year between the Paris and Berlin conferences, the icons of the mainstream press — the ones known and employed to mold public and business perception — have been acknowledging peak oil’s reality [see resources], sometimes reluctantly, sometimes less than directly, but also sometimes very boldly. CNN, the BBC, the New York Times, The Economist; dozens of media giants had begun to respond, like a giant ship turning slowly in the water. The subject of peak oil is one which requires a little study to get your brain around. It does not, however, require much science except for basic arithmetic. Discoveries of large oil deposits have been in steep decline since 1962. Demand, on the other hand, has been soaring.

To quote my energy editor Dale Allen Pfeiffer, a geologist: it appears that the year 2007 will be important. A new study published in Petroleum Review suggests that production might not be able to keep up with demand by 2007. The study is a survey of mega projects (those with reserves of over 500 million barrels and the potential to produce over 100,000 barrels per day of oil). Mega projects are important not only because they provide the bulk of world oil production, but also because they have a better net energy profile than smaller projects, and they provide a more substantial profit than smaller projects.

Bear in mind that the planet consumes a billion barrels of oil (or two mega fields) every 11-1/2days.

The discovery rate for mega projects has dwindled to almost nothing. This can be seen in the data for the last few years. In 2000, there were 16 discoveries; in 2001 there were 8, and in 2002, only 3. From discovery to first production generally takes about 6 years. If a new project can make use of existing infrastructure, then the start-up time might be cut to 4 years.

In 2003, seven new mega projects started producing. 2004 expects to see another 11. 2005 will be the peak year for bringing new projects on stream, with 18 new projects expected. In 2006, the pace drops back to 1l. But in 2007 there are only 3 new projects scheduled to begin production, followed by 3 more in 2008. There are no new projects on track for 2009 or 2010. And any new mega project sanctioned now could not possibly come on stream any sooner than 2008.

The study points out that currently about a third of the world’s oil comes from declining fields, with a likely overall decline rate of about 4%. As a result, global production capacity is contracting by over 1 million barrels per day every year. New production is the only thing offsetting this decline.

Of course, recent events have clearly demonstrated the fragility of a global production system that is operating at full tilt. Sabotage an Iraqi pipeline, and in one day the price goes up. Announce that Vladimir Putin is easing up on Russian oil giant Yukos, and the price drops. Announce that Putin is moving to sell off its assets and confiscate its cash, the price soars. Worry that Hugo Chavez of Venezuela might be ousted in a violent coup, and the price jumps. Watch Chavez — who is despised by the Bush administration — win his seventh election in as many years, and the price drops.

In spite of repeated assurances from the Saudi government that they can and are increasing production, the evidence is growing that they cannot. My organization, From the Wilderness, was the first to report, a year before the New York Times did, that Saudi Arabia may have actually peaked. New studies are reporting that Saudi wells in the mother of all oil fields, Ghawar, are showing 55% water cut. That means that 55% of what is pumped out every day is the same seawater that was pumped in to push the oil up. Experience has shown that when the water cut gets to between 70 and 80%, the field collapses.

The rush to produce more oil is hastening the destruction of fields that could last longer otherwise.

Ghawar, the super giant of all fields was discovered more than 60 years ago. It had estimated reserves of almost 100 billion barrels. Professor Michael Klare has told us that, in order to keep pace with accelerating oil demand, the world will have to discover three new Ghawars in the next 10 to 15 years. There was only one Ghawar. There hasn’t been another since.

So when we look at the paltry and rapidly diminishing rate of discovery for the so-called mega fields, the prospects become a bit more chilling. In the year 2003, for the first time since the 1920s, according to a leading petroleum consulting firm, not a single so-called mega field — 500 million barrels or more — was discovered.

By 2007, production capacity will have declined by 3-4m b/d. Yet this decline will be offset by 8m b/d of new capacity drawn from the many new projects expected to come on stream over the next few years. This leaves a surplus of 4m b/d in spare capacity. Yet global demand is growing by over 1m b/d each year. So 3 years of demand growth will reduce our spare capacity to 1m b/d by the start of 2007. As very little new capacity is set to come on stream in 2007, that remaining 1m b/d spare capacity will likely disappear before 2008.

The oil supply appears sustainable, barring major wars or destruction of infrastructure, until 2007. With so much new production coming on stream, there may even be periods of price weakness. However, it is likely that we will begin suffering oil shortages after 2007, especially if anything happens to disrupt a portion of the production. If new projects are not found and online by 2008, then by the end of that year we are certain to see severe shortages without any cause other than rising demand.

But there is another factor to this oil calculus. We hear complaints that a major part of the problem with current oil prices has to do with a lack of refineries. Why are no more refineries being built? The answer is simple and an irrefutable confirmation of peak oil. The refineries are not being built and massive expensive exploration projects are not being undertaken because the oil companies understand that there is very little oil left to find.

Finding 10 new North Sea fields somewhere By 2015, global oil demand is expected to increase by over two-thirds, that is, 60m b/d beyond current global consumption of between 75 and 80m b/d. To meet that demand we will have to find the equivalent of 10 new North Sea oil fields within a decade. In the meantime, Britain’s North Sea, just like Alaska’s North Slope did a decade ago, is running dry. Rigs are shutting down and employees being laid off. Yet we are hard pressed now to discover even another mega-sized field. To quote former British environmental minister Michael Meacher, we are facing "the sharpest and perhaps the most violent dislocation (of society) in recent history."

There are many out there who refuse to believe that oil and natural gas are running out. There are those who insist that alternative energies can be snapped into place. But aside from looking at the events since 9/11 and seeing that they match a world of diminishing energy, let’s take a look at some recent developments around the world and see what they tell us.

Britain’s largest electricity provider has announced that prices will soar as much as 40% next year. Wholesale energy prices have doubled in the last year as Bloomberg has announced that the decline in North Sea production is creating a trade gap which is now threatening to cause widespread unemployment.

In March, Reuters reported that Argentina, facing its worst energy crisis in 15 years, is becoming unstable to the point of threatening the security of the entire region. It has cut its natural gas exports to Chile by 15%, which is threatening Chilean power generation. Argentina is now moving into the world oil market in search of oil for power generation and transportation as its own domestic supplies have dwindled.

The BBC reported recently that high oil prices are threatening many Asian economies.

Just two weeks ago, the Australian government ordered an emergency fuel review in anticipation of future crises. In June it conducted a test to see how the government and country would respond to a "disruption" in oil supplies.

On August 25, it was reported that Brazil was opening negotiations with Ecuador to replace diminishing oil supplies.

China, in the midst of rapidly diminishing harvests, is fearing a major food crisis. This, even as Hong Kong, Hangzhou, and Shanghai are facing mandatory blackouts which are disrupting manufacturing, trade and retail activity. Chinese oil imports have increased by 15% in just the first quarter of 2004 alone. In anticipation of pending military conflict in the region, China has decided to build a pipeline through Burma to the Indian Ocean so that tankers supplying China’s growing thirst will not have to travel through a region that is becoming increasingly dangerous.

Germany has moved to institute home energy passports and undertaken serious and well-planned efforts to reduce energy consumption. Chancellor Schroeder, in the wake of recent revelations that Shell revised its reserve estimates four times in one year, called upon the G8 nations to mandate total and verifiable transparency in all oil reserve figures.

India, whose oil imports jumped 23% in one month, has moved to create a strategic petroleum reserve.

Indonesia, a member of OPEC, has announced that its oil production will drop significantly by 2008.

Japan, ignoring stiff opposition from Washington, has signed a major oil contract with Iran, at the same time that it is feuding with China, Vietnam and the Philippines over relatively small oil and gas deposits in the Spratly Islands of the South China Sea. Three bills have been introduced in the Japanese parliament that would suspend its nonviolent constitution and permit a full-scale rearmament.

Russia, having recently admitted that its oil reserves are finite and that production might start to decline sharply within the next five years, has announced it will build a pipeline from its Siberian fields to the Pacific ports of Vladivostok and Sakhalin, thus agreeing to sell its oil to Japan, Korea and the Philippines. Russia’s other choice was to have the pipeline terminate in central China.

"This Week in Petroleum," an industry journal, has reported that non-OECD countries have begun to hoard petroleum and are buying all they can even at what some analysts call "inflated" prices.

In Thailand, mandatory curfews have been imposed two nights a week, requiring all businesses to shut down in order to conserve energy.

On August 24, Britain’s Oil Depletion Analysis Center confirmed, citing data from "Petroleum Review," that daily oil depletion is now exceeding 1m b/d. In other words, every day, the world is producing 1.14 million barrels per day less than it did the day before. By analyzing data from the 18 largest oil producing nations, "Petroleum Review" calculated that production from these countries peaked in 1997 at 24.7 m b/d and that by 2003 it had fallen to 22.1 m b/d.

On August 21, the Houston Chronicle posed a great question. If oil prices are soaring and there’s insatiable demand, why isn’t there a boom in hiring and corporate expansion? The Chronicle, paying due heed to the financial markets, offered the dubious explanation that the oil companies just didn’t want to overdo things and look greedy. In fact, all over the world, oil companies are downsizing, selling off assets, laying off employees and merging. Just last week it was announced that French giant Total was considering a tender offer to purchase Royal Dutch Shell.

And here in the United States, rising oil prices have forced major airlines like United to consider raiding corporate pension funds in order to offset rising oil costs as an alternative to bankruptcy.

This, ladies and gentlemen, is just the beginning. And neither presidential candidate has even remotely addressed the real issues or dared to tell the American people the worst. The one overriding concern I have seen expressed everywhere is "Oh, no. We can’t do that. It will crash the markets."

Is that the sum total of human expression and achievement? The markets?

To close this presentation tonight, I would like to offer you a quote from John Kenneth Galbraith, from a 2002 article, "The Unbearable Costs of Empire":

"It is a straightforward fact that if global oil production starts to decline but U.S. consumption does not, everyone else will be required to cut purchases of oil. But how can oil prices be held stable for Americans yet be made to rise for everyone else? Only by a policy of continuing depreciation in everyone else’s currency. Such a policy of dollar hegemony amid worldwide financial instability, of crushing debt burdens and deflation throughout the developing world, is perverse. It will make our trading partners’ exports cheap, render their imports dear and keep their real wages low. It will price American goods out of world markets and lead to unsustainable dependence on foreign capital. This is the policy that Bush and Cheney are actually imposing on the rest of the world. But they cannot make it last. It will make lives miserable elsewhere, generating ever more resistance, terrorism and military engagement. Meanwhile, we will not experience even gradual exposure to the changing energy balance; we will therefore never make the investments required to adjust, even eventually, to a world of scarce and expensive oil. In the end, therefore, that world will arrive much more abruptly than it otherwise would, shaking the fragile edifice of our oil economy to its foundations. And we will someday face a double explosion: of anger against our arrogance and of actual shortage and collapsing living standards, when the confidence of investors in the dollar finally gives way.

Compared with this future, a new commitment to collective security, to a new world financial structure, to a rational energy and transportation policy, and to spending to meet our actual domestic needs would be a bargain. At the end of the Constitutional Convention, Benjamin Franklin was asked what type of government the framers had given our new country. He famously replied, "A republic, if you can keep it."

In 49 BC, Julius Caesar, fresh from a battlefield victory in central Italy ordered his legions to cross a small creek called the Rubicon. Under the laws of the Roman Republic, the army was not allowed to enter the capital city.

As Julius Caesar crossed the Rubicon, the Roman Republic died and the Roman Empire was born.

Our task, if we and much of human civilization are to survive, is not to keep our republic, but to take it back.

Thank you.


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