The world’s most respected journal of economics has now officially acknowledged the advent of peak oil, validating (finally!) what we’ve been saying for years.
In a July 19 article, the venerable Economist cut straight to the point:
“The world is consuming more oil than it is producing.”–The Economist, July 14-20 print edition.
Now there would appear to be a certain degree of confusion over exactly what is meant by “Peak Oil.”
According to Wikipedia.com:
“In the context of models of the depletion of resources, notably Hubbert peak theory, peak oil is the date when the peak of the world’s petroleum (crude oil) production rate is reached. After this date the rate of production will by definition enter terminal decline. According to the Hubbert model, production will follow a roughly symmetrical bell-shaped curve.”
Some observers such as Kenneth S. Deffeyes, Matthew Simmons, and James Howard Kunstler believe that because of the high dependence of most modern industrial transport, agricultural and industrial systems on inexpensive oil, the post-peak production decline and possible resulting severe price increases will have negative implications for the global economy.
Talk about understatement!
Predictions as to what exactly these negative effects will be vary greatly.
More optimistic outlooks, delaying the peak of production to the 2020s or 2030s and assuming that major investments in alternatives occur before the crisis, show the price at first escalating and then retreating as other types of fuel sources are used as transport fuels and fuel substitution in general occurs.
More dire predictions that operate on the thesis that the peak will occur shortly or has already occurred predict a global depression and even the collapse of industrial global civilization as the various feedback mechanisms of the global market cause a disastrous chain reaction.
The shortfall will cause demand destruction, which may be mitigated with planned conservation measures and using alternatives.
So its not that we’re running out of oil. The bottom line is this: We’ve reached the point where we can’t produce as much oil in a single day as is consumed in a single day.
The other consideration is cost. There are literally billions of barrels of oil left in “alternative” structures such as oil sands or technically challenging reservoirs such as those in the North Sea.
Total production from the North Sea so far is roughly 34 billion barrels. It is estimated that there are still at least 20 billion left. But the last big field to be discovered, the Buzzard, was found in June of 2001, and only started producing in June of last year.
The many remaining reservoirs are either very small, very deep, extremely hot, or under incredible pressure.
British Petroleum’s Rhum oilfield was discovered in 1977. But because of high temperatures and incredibly high pressure (12,700 pounds per square inch), it was not technically feasible to produce until 2005, when the requisite technologies were finally available cheaply enough to make producing the field profitable.
BP’s Director for North Sea operations, Dave Blackwood, said Rhum represents a new type of development for BP in the North Sea:
“Rhum has presented a unique set of challenges for us in dealing with high reservoir pressures and temperatures, combined with the length of subsea tie-back, and the modifications required on the Bruce platform. The project team has demonstrated how with dedication and innovation, these challenges can be overcome in order to increase recovery from the UKCS, maximize our investment in the existing infrastructure, and help secure future gas supply for the UK.”
The seas west of the Shetland Islands are thought to hold billions of barrels of hydrocarbons, mostly natural gas. But the lack of infrastructure in such a remote area would make it difficult to bring production to shore. And although oil prices are high, natural gas prices have slumped following the opening earlier in the year of a big import pipeline from Norway.
In northern Canada, the very existence of production from the vast oil sands (which used to be called “tar” sands, until the industry launched a campaign to deflect what it thought was perceived by investors as a negative term) is only possible because of the high price of oil.
Conventional crude oil is easily extracted from the ground by drilling wells into the geological formations into which light or medium density oil flows under natural reservoir pressures. But oil sand deposits must be strip mined or made to flow into producing wells by in situ techniques which reduce the oil’s viscosity using steam or solvents. These processes use a great deal of water and require large amounts of energy.
The heavy crude oil or crude bitumen extracted from these deposits is a viscous, solid or semisolid form of oil that does not easily flow at normal ambient temperatures and pressures, making it difficult and expensive to process into gasoline, diesel fuel and other products. Despite the difficulty and cost, oil sands are now being mined on a vast scale to extract the oil, which is then converted into synthetic oil by oil upgraders or refined directly into petroleum products by specialized refineries.
All very pricey.
With the development of new in-situ production techniques such as steam assisted gravity drainage, and with the oil price increases of 2004–2006, there were several dozen companies planning nearly 100 oil sands mines and in-situ projects in Canada, totaling nearly $100 billion in capital investment.
With 2007 crude oil prices significantly in excess of the current average cost of production for oil sands of $28 per barrel, all of these projects appear likely to be profitable.
However, oil sands production costs are rising rapidly, with production cost increases of 55% since 2005, due to shortages of labor and materials.
Price manipulation is also a factor with producing regions that clearly benefit from a high price squeeze.
Last summer Saudi Arabia began cutting back its production with the increase in inventory. These cuts were formalized, and extended, at subsequent summits of the Organisation of the Petroleum Exporting Countries (OPEC).
As a result, OPEC’s members are now producing roughly one million fewer barrels per day (bpd) than they were this time last year.
Meanwhile, global demand has risen by over one million bpd, to over 84 million.
The inevitable result is falling inventory at a time when it would normally be rising.
Since 1999, inventories of oil have grown by 840,000 bpd on average in the second quarter, according to Leo Drollas of the Centre for Global Energy Studies. This year, though, they fell by 140,000 bpd.
Goldman Sachs goes so far as to predict that oil could reach $95 a barrel this year if OPEC doesn’t increase production.
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