What happens if oil output 'peaks'?
By John W. Schoen
With oil prices breaking $60 a barrel, our story last week on a new book questioning OPEC’s ability to keep the world supplied with crude drew a heavy response from Answer Desk readers. Many, like Ray in Los Angeles, fear that coming oil shortages could bring “the end of life as we know it.” We agree. But that doesn’t have to be a bad thing.
'DAY OF RECKONING'?
If, in fact, world oil production has peaked and there are (at best) twenty years worth of oil and gas reserves remaining we are facing cataclysmic change. We're not talking about the "inconvenience" of higher gasoline prices or the need to curtail emissions to arrest global climate change. We're talking about the end of life as we know it. There is no single aspect of our economy, our very lives that is not dependent on products and processes derived from oil and gas …
While "alternative" energy sources are available, they, too, are dependent on fossil fuels: photovoltaic cells and hydrogen fuel cell membranes are derived from petroleum based plastics. The sooner we acknowledge that our fossil fuel sources are finite and the day of reckoning is not that far away, the better our chances that some semblance of what we call human civilization will exist fifty years from now.
-- Ray S., Los Angeles
The relentless rise in oil prices is certainly worth worrying about. But before you stock up on canned goods and head for the hills, consider an alternative to the dire predictions of the coming collapse of a world civilization starved for oil.
There's no doubt that the global economy runs on petroleum. If the gauge ever did suddenly hit “empty,” the world -– or more precisely, those countries like the U.S. that are heavy oil consumers –- would be in for a nasty shock. There are plenty of Web sites out there that offer up all manner of predictions about what such a world would look like.
But while there’s plenty of cause for concern, and the need for major changes in U.S energy policy, we don’t believe that the “gloom and doom” scenarios are inevitable. It’s easy to see what could go wrong; it’s more important to focus on what can go right. Replacing oil as an energy source very well could create "the end of life as we know it." But that post-oil life could end up being a much better one.
The fact is that no one knows just how much oil and gas is still underground waiting to be produced. The oil industry measures reserves based on various probabilities: industry inventories of so-called “P90” reserves, the most conservative measure, assert there’s a 90 percent probability that a given amount of oil will eventually be pulled out of a given oilfield. Until it’s been produced, no one knows for sure.
Here’s what we do know. As we wrote last year, a number of respected academic and industry oil experts are warning -– with, to our mind, fairly compelling arguments -- that global oil production may soon “peak” while demand continues to grow. While well-reasoned, these arguments are ultimately speculation. And, in response, some strong arguments are now being offered that refute the “peak” forecasts.
The problem is that the debate is a lot like the one over global warming and climate change: If accurate, by the time these forecasts are confirmed by events, it could well be too late to head off potentially disastrous consequences.
Keep in mind that the “peak” of oil production is a lot different than “running out” of oil. When production peaks –- whether next year or decades from now -- there will still be billions of barrels of oil underground waiting to be produced. But if daily demand exceeds daily production, the economists tell us, prices will continue to rise. (One big reason for the 1970s-era gasoline lines in the U.S. was government-imposed price controls; since everyone could still afford to fill up, gasoline retailers ran out or had to ration what they had.)
So unless the government brings back price caps, you’ll most likely be able to fill up your tank for many years to come. But you could be paying $5 a gallon -– or more. European drivers already pay more than double what U.S. motorists pay at the gas pumps. But life there seems to be proceeding, more or less, as usual. In Canada, one of the largest suppliers of oil to the U.S., the average price of a gallon of regular unleaded has was $3.47 a gallon (Canadian dollars). And life there goes on. (Note: We got our Candian gasoline price quote from MJ Ervin & Associates weekly price survey. And earlier edition incorrectly converted this to U.S. dollars.)
Higher oil prices will also spur production of alternative energy sources that may not be economically viable when oil is cheap. But most of the major renewable alternatives out there now: solar, wind, nuclear, etc. –- are used to make electricity. Oil is used primarily as a transportation fuel, for which there are no readily available alternatives. Ethanol and other “bio” fuels can help. But even if Congress continues to lavish ethanol subsidies on the agriculture industry, farmers could plant every inch of the U.S. with corn and still wouldn’t come close to replacing the gasoline consumed by American drivers. And even if every SUV owner in the U.S. decided to trade in for a gas-electric hybrid tomorrow, there wouldn't be enough to go around. Of the 17 million or so cars and trucks sold this year, production of hybrids can be measured in the tens of thousands.
Economists will also tell you that when the price of a commodity goes up, demand should slow down because fewer people can afford to buy it. So far, that doesn’t seem to be happening with oil. One reason may be that, adjusted for inflation, oil is still cheaper than it was in the 1970s (when it sold for around $80 a barrel in today’s dollars.) Another reason may be that the U.S. -- like most developed nations -– is using oil much more efficiently. For each dollar of Gross Domestic Product, the U.S. economy today requires about half as much oil as it did 30 years ago.
Improvements in efficiency have been relatively meager since then, which means there are lots of new opportunities to conserve. New technologies that aren’t being used today could generate big savings over a fairly short period of time. In the end, every barrel of oil that’s saved is just as good as a new barrel of oil discovered and produced. And as oil prices rise, cutting demand becomes an ever cheaper alternative. After the oil shortages of the 1970s, oil consumption actually fell in the early 1980s –- and prices soon followed. One way or the other, conservation will ultimately provide a major solution to the current problem of tightening oil supplies. The question is whether that means getting by with less or getting more out of the oil we consume.
Unfortunately, our elected representatives in Congress have done little to encourage conservation -– in large part because it’s not a politically popular thing to do. Every politician alive today remembers watching one-term President Jimmy Carter addressing the nation in a sweater telling Americans to turn down their thermostats. In a world of sprawling McMansions compete with central air, home entertainment suites and multiple SUVs in the garage, telling voters to consume less isn’t a great way to get elected.
“Conservation,” in fact, has become a dirty word on Capitol Hill because it denotes sacrifice; these days “increased efficiency” is the preferred way to talk about cutting demand. As a result, after four years of debate and two failed attempts, Congress is still promoting a comprehensive energy bill that (at this writing) makes little, if any, serious provision for encouraging conservation and cutting demand. Requiring government workers to turn the lights out when they go home just isn’t going to get the job done.
If oil prices continue to rise (as we believe they will), all that could change. But American consumer/voters first need to stop blaming “greedy” oil companies, OPEC, environmentalists, China, gasoline retailers, fanciful conspiracy theories about suppressed oil production, etc. (Our email Inbox is full of these.) If you really want to fix the problem, find out who is running for Congress in your district, Google their Web site, find out where they stand on energy policy. Write or email them and let them know what you think.
If the era of “cheap oil” is indeed over, we all have a lot of work to do. But here at the Answer Desk, we don’t believe that the game is over. There are a lot of very smart people out there working on solutions. As oil consumers, we all created this problem. The good news is that that means we all have the power to solve it.