Oil Peak Threatens Economic Recovery

By David L. Brown

Well, it’s finally official. We’ve been saying it for years here — that the world was passing Peak Oil and economic disaster would surely follow — but the wall of denial stood strong. Until now.

According to an article today on the website of the British paper The Independent, a noted energy economist says that “[t]he world is heading for a catastrophic energy crunch that could cripple a global economic recovery because most of the major oil fields in the world have passed their peak production.”

We’ve heard this before, so what is the significance of this particular iteration of a warning that has been issued by others? Well, Dr. Faith Birol is the chief economist for the International Energy Agency (IEA). And what is that? It is an intragovernmental organization established after the first oil shock in 1972 as an arm of the Organization for Economic Cooperation and Development (OECD), a collaboration of 30 developed nations. Its mission was to evaluate and report on energy resources.

The trouble is that until recently the IEA was glossing over the emerging fact that the Oil Peak had arrived. As I wrote on November 4, 2007 in an essay titled “The View From Over the Mountain” (read it here), according to an independent energy agency “The message by the IEA, namely that business as usual will also be possible in future, sends a false signal to politicians, industry and consumers — not to forget the media.”

What a difference 20 months (and an economic collapse) can make. Now, according to the Independent article, Dr. Birol reports that

…the first detailed assessment of more than 800 oil fields in the world, covering three quarters of global reserves, has found that most of the biggest fields have already peaked and that the rate of decline in oil production is now running at nearly twice the pace as calculated just two years ago. On top of this, there is a problem of chronic under-investment by oil-producing countries, a feature that is set to result in an “oil crunch” within the next five years which will jeopardise any hope of a recovery from the present global economic recession, he said.

As Oliver Hardy used to say to Stan Laurel, “Well, that’s another fine mess you’ve gotten me into.” And there isn’t any excuse for the world economy to be blindsided by this. As we have discussed here for more than three years (and privately for decades), the situation we now face was clearly predicted a half century ago by economist M. King Hubbert. He accurately foresaw the peak of American domestic oil production with his famous (or perhaps infamous if  you work for ExxonMobil or are the Oil Minister of Saudi Arabia) Hubbert Curve.

Here, reproduced from my essay of nearly two years ago is an updated version of that curve, as developed by the German-based Energy Watch Group (EWG), a self-described watchdog organization.


The graph shows petroleum production by source, and the red line indicates projected future demand for the precious substance. It is apparent that the demand is not very realistic, since it  is going one way while supply is going the other way. Note that according to this graph, demand began to exceed supply in about 2006 or 2007. That fits well with the oil price spike last year, followed by the economic turmoil that has continued ever since. The growing gap between supply and demand must be closed in some way if the world economy is to continue on its course.

What are the options? Assuming that this graph correctly projects the true supply situation, there is nothing that can be done on the supply side. That means that either demand must come down, or some other adjustments be made to make up the difference. That’s why all the belated fuss about alternative energy — using wind, nuclear, geothermal, biofuels or whatever else can be set into motion.

But it’s too late, you see. Look at the graph. It takes upwards of 20 years to plan, approve and build a nuclear power plant. For wind power we would need to erect literally millions of generators and rebuild our power grid, a huge investment that cannot be accomplished overnight. Biofuels have already had an adverse effect on food prices and availability worldwide, and cannot be pushed far and fast without further disastrous effects.

We should have started 20 or 30 years ago — but we didn’t. Instead we kept importing more and more oil from unfriendly and potentially unstable nations. We kept on building gas guzzling SUVs and pickups used mostly to take kids to school or run to the store. We squandered energy as if it would always be plentiful and cheap. In other words, we ignored common sense and prudence as exemplified in the story of the grasshopper and the ant. And like the grasshopper, we (and I am referring here to the entire human race) are facing the cold winds of a fast-approaching winter with no practical plan to fill the petroleum supply-demand gap.

So, we don’t have time but what about money? If enough could be spent, surely we can build a new alternative energy infrastructure quickly? After all, during World War II the Alaska Highway was built in about eight months. Well, there is a problem with that, and it is that the world is essentially broke. Here in America we’re already spending money like drunken monkeys in a banana factory, and cranking up the presses to print more dollars. At the same time, tax revenues are plummeting just as the government is ramping up to provide elaborate social programs that we cannot afford. Our leaders are proposing a massive investment to limit global warming, and admittedly some of that will result in development of alternative energy. However, too much of the program would be aimed at longer-term proposals such as nuclear power, or to give-aways to energy companies in the form of carbon credits. That won’t solve the problem we face right now, and almost certainly will create new ones that cannot even be foreseen.

What are the other options? Well, necessity may be the mother of invention, but it is also the cruel arbiter of natural forces. If the gap cannot be filled from below, it must be closed by reduced demand. That can be achieved by a number of steps, including first and foremost strict conservation. It is not inconceivable that we will soon see gasoline rationing, something that will not go down well with consumers in America. Our way of life is bound for dramatic change, and there is no way to avoid it.

Emerging economies such as China and India will be caught in the no man’s land of attempted transition from peasant economies to industrialized states. It is clear, to me at least, that in a post-Oil Peak world those drives to mimic the Industrial Revolution of the West will be stillborn unless drastic changes are made in the direction of development.

Finally, let me return to the statements by the IEA economist who, it seems, is still reluctant to reveal the true seriousness of the problem. Despite the dismal statements quoted above, he pulled his punch by telling The Independent that “global [oil] production is likely to peak in about 10 years – at least a decade earlier than most governments had estimated.”

Um, he’s saying that Peak Oil won’t arrive until about 2019. That flies in the face of many other opinions, such as the data used to compile the graph above. How can one reconcile the opinion that Peak Oil is still a decade away with this statement from the Independent interview with Dr. Birol himself:

“In its first-ever assessment of the world’s major oil fields, the IEA concluded that the global energy system was at a crossroads and that consumption of oil was ‘patently unsustainable’, with expected demand far outstripping supply.”

Well, you can’t reconcile it, because there is zero basis to expect that oil production will continue to rise for another decade. According to many best estimates, including that of the EWG from several years ago as pictured in the graph above, the Oil Peak is here, or has already passed. We don’t have 10 years. We have already crossed over the mountain and are staring into the abyss. We can see plain evidence in the fact that the world economy is crashing around us. The two events — Peak Oil and shattered economies — are merely two aspects of the same thing, for those economies were unwisely built and sustained for far too long on a foundation of cheap and abundant oil, something that no longer exists and will never come again.

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