The challenges of peak oi
We may not be doomed, but we also may not be ready for all of its effects
By Steve Yetiv
Americans are feeling serious pain at the gasoline pump, and scratching their heads as to why. Part of the answer may be that we are approaching peak oil sooner than many people would have guessed.
Peak oil refers to a key turning point when global oil production peaks, signaling a future of slowly decreasing world oil production. No one can say when peak oil will arrive, but one fact at least suggests that it may come sooner rather than later: Until recently, the Organization for Petroleum Exporting Countries barely tried to stem the rise of oil prices from $50 dollars per barrel in February 2007 to more than $130 per barrel today.
In the past, OPEC, and especially Saudi Arabia, have often increased oil production to try to prevent prices from rising high enough to trigger alternative energy exploration; a Western political backlash; and the ire of the gendarme of the Persian Gulf — the United States. In fact, when I visited OPEC headquarters in May 2003, OPEC researchers underscored how OPEC was keeping the price of the OPEC oil basket at around $22-28 per barrel (roughly $25-31 on the New York Mercantile Exchange). And, OPEC did succeed in doing so more than 80 percent of the days from June 2001 to June 2003.
Recently, the Saudis announced that they will boost daily oil production by 200,000 barrels per day by the end of July, though most of this oil will probably not be sweet crude, which the world most needs. Moreover, Saudi Arabia reiterated that it has a $50 billion plan to increase production by another 30 percent in the coming years. But, even so, how can we explain the lack of any action until now, as prices have spiked dramatically?
The answer is multipronged, but peak oil may be a factor. OPEC behavior may be a signal that OPEC cannot easily meet long-run global oil demand, on demand. Even if the Saudis reach 12.5 million barrels per day, that would still be well short of meeting such demand, unless they can boost production further.
For its part, the International Energy Agency recently underscored its concern that future global oil demand will outstrip oil supply. And the U.S. Energy Information Administration significantly scaled back how many barrels of oil it expected the Saudis to produce in 2010.
In 2000, its forecast for Saudi production in 2010 was 14.7 million barrels per day. But last year, it dropped that figure to just 11.4 million barrels per day. That is no small change. A growing number of oil industry executives, including the CEOs of ConocoPhillips and TOTAL, believe peak global oil production will hit at 100 million barrels per day. We're at 85 million barrels per day already.
If peak oil is creeping up slowly, does this mean we're doomed? Well, no. But, depending on when oil does peak, it may produce some effects for which we are not prepared. Oil prices could spike possibly to more than $200 per barrel, triggering economic dislocation. Such prices will increasingly spur work on affordable alternatives to oil, as we are already seeing today in nascent form, but it will take a long time for such alternatives to penetrate the market. Our infrastructure is designed for oil. We can't switch overnight.
In addition, Middle East oil will become even more important. The region now accounts for about one-third of global oil production, but holds two-thirds of the world's oil reserves. These will be the last left as the rest of the world's production declines, from Africa to Russia and the United States. Threats to the free flow of Persian Gulf oil have been largely exaggerated by oil markets in the past decade (there have been few serious disruptions, despite all the angst) but disruptions can occur at any time, and will certainly have far more serious consequences as Middle East oil production becomes even more vital.
Fears about peak oil could also exacerbate tensions among great powers. For example, note China's obsessive concern about energy and Washington's growing concern about China's rising power. Imagine how tense Sino-American relations could become against the backdrop of dwindling oil supplies or even the rising perception of such dwindling supplies. Or consider that Russia is already using energy to coerce countries such as Ukraine. What will the future hold?
The upshot is that we need to hedge better against the effects of the oil era, including the peak oil issue. The United States clearly needs a far more serious energy plan, coordinated with the other major global powers. And such a plan must target transportation, where much global oil is used, while not wrecking the U.S. and global economy.
Yetiv is author of "Crude Awakenings" (Cornell, 2004) and the Pulitzer Prize-nominated book, "The Absence of Grand Strategy," (Johns Hopkins, 2008). He is a professor of political science at Old Dominion University in Virginia. He can be e-mailed at email@example.com.