Peak Oil

The Peak Oil question is beginning to become a central part of the daily debate on energy matters. On one side is an increasing number of independent scientists and oil engineers who note that world oil production is barely rising. Existing fields are running down and new reserves are found rarely. On the other side of the debate are the major institutions of the global oil industry. The International Energy Agency sees world oil supply rising from about 88 million barrels a day now to about 116 million barrels in 2030.

This last week saw another analysis (from Germany’s Energy Watch Group) suggesting that world oil production actually peaked in 2006. From now on, the group says, we can expect rapid declines. Many people worried about climate change see Peak Oil as a good thing. They believe that a shortage of oil and natural gas will slow down the rise in energy consumption and therefore help reduce greenhouse gas emissions.

The argument is actually more complex – it may well be that Peak Oil will tend to increase CO2. We will not be saved from ourselves by running out of oil.


The Peak Oil debate First, some facts that nobody disagrees with:

  • A large part, perhaps a majority, of the recoverable oil in the Earth’s crust has already been extracted. The CTO of Chevron, a company not known for its pessimistic utterances, particularly about oil supply and climate change, recently said that we have used 1.1 trillion gallons and only a further 1 trillion could be extracted with current technologies.
  • Most large oil deposits have already been found. We probably will never see a new field the size of the main Saudi Arabian field. Today’s discoveries are smaller, usually very much smaller. It is taking more and more exploration effort to find fewer and fewer fields.
  • The world oil industry is finding it more and more difficult to maintain this growing exploration drive. Oil drilling equipment is in short supply (and one drilling rig is typically likely to find far fewer barrels a year than it did twenty years ago). Oil engineers have an average age of 51 and few people are being trained to replace them.
  • The growth in the expenditure on oil exploration is largely ‘illusory’ (source: IEA). More money is being spent, but it is being consumed by rapid cost inflation and the need to work in ever more arduous environments.
  • We are consuming more than we are discovering.
  • Any future production increases will have to be concentrated in the OPEC countries or Russia. No other oil provinces are likely to produce substantial amounts of new oil. Everybody agrees that non-OPEC oil provinces are already in decline.
  • The oil companies have been able to maintain an apparent stability in the volume of unused world reserves by upgrading their estimate of extractable oil each year, not from new discoveries.

The key differences between the Peak Oil proponents and the sober institutions of the world energy industry are few but stark:

  • Peak Oil people say that Saudi Arabia is pumping almost as much as it can. Optimists like the IEA say it can continue to grow its output for several decades. Of the 28m extra barrels of oil a day that IEA projects for 2030, over 8m comes from the Kingdom.
  • Both sides make similar remarks about Iran, Venezuela, Iraq and Russia. The pessimists say that these countries aren’t discovering oil and their main fields are near decline. The mainstream forecasters say that they can grow.
  • Around the world there are huge resources of low-grade oil in the form of shale or sands. The most important may be in Canada. Peak Oil people say that these resources are extremely costly to exploit and require unprecedented amounts of water to extract the oil. In the case of the Alberta oil sands, there simply isn’t enough water anywhere near the oilfields to process more than a very small fraction of the oil every year. The conventional view in the oil industry is that the oil sands are within our reach.

The oil market – now pushing at unprecedented price levels of more than $80 a barrel – is giving a clear signal. Clearly, short-term traders see no relief in sight to the extremely tight world oil market.

Where is the climate change angle? The International Energy Agency sees total world energy demand growing by over 50% by 2030, with greenhouse gas output rising by a slightly larger figure. A new forecast is due in the next few days and the rumour mill is suggesting that the IEA will increase its projections for 2030, throwing climate change worriers into deeper gloom.

The IEA sees oil output rising slightly less fast than energy use as a whole. Oil use is expected to rise by about 35% by 2030. Of course, if the Peak Oil people are right, emissions from the burning of oil are likely to stabilise or fall. This looks like good news for the atmosphere. It is actually more complex than might appear:

  • If the Peak Oil hypothesis is right, we can expect further huge increases in the price of oil. True, this will add to the incentive to extract every last barrel from depleted fields. But it will not alter the fact that no large fields remain. So the high price of oil will not be followed by a surge in new supply.
  • High oil prices haven’t yet restrained consumption of oil by any significant amount. US oil purchases have continued to rise even as the price spikes. The rest of the industrial world, partly protected by the fall in the dollar, has seen growth rates not dissimilar to GNP growth rates. All the evidence is that the demand for liquid fuels is extremely price inelastic. After all, there is no easy substitute for petrol or diesel.
  • So the price may stay high. Many countries subsidise fuel prices, or hold them down through regulation. The recent Burmese riots were driven partly by increases in the price of fuels. Higher fuel prices threaten social stability, even in oil-producing countries. In Iraq, for example, higher oil prices aren’t getting transferred to the urban poor in the form of higher incomes. But they are feeling the impact at the petrol pump. High oil prices mostly benefit the elites. Eventually the poor will revolt, possibly threatening the supply of oil to the outside world. If Iran were to collapse because of uprisings from the urban masses, world oil prices would go yet higher.
  • Paradoxically, perhaps, this isn’t good news for climate change. Increasing transport fuel prices increase the incentive to convert other fossil fuels into liquids. Coal can be turned into a motor spirit. It is only economic at high oil prices, but it is perfectly technically feasible. The Nazis and the boycotted South Africans did it. It is extremely greenhouse gas intensive – probably doubling the climate change cost of a litre of fuel.
  • Second, high petrol prices will encourage states to develop crash programmes for biofuels. Temperate biofuels save only a small amount of fossil fuel, since so much energy needs to go into fertilisers and processing the biomass. So the emphasis is likely to be on tropical biofuels. We can expect to see faster and faster rates of deforestation as land is cleared for grains and oil plants. The net effect of this deforestation is disastrous for CO2 emissions as the felled trees give up their sequestered carbon to the atmosphere.
  • The third major impact of very high oil prices is on the viability of extracting oil from unconventional sources. The world’s shales and oil sands hold large volumes of oil – perhaps as much as remains in conventional fields. In Alberta, development may be held back by a shortage of water, but any processing of oil sands uses large amounts of energy (largely to produce hydrogen for a chemical reaction to upgrade the oil and make it usable). Extracting oil from sands makes the carbon cost of the oil at least as bad as coal and significantly worse than conventional oil.

The net effect of the continued high oil prices expected by the Peak Oil gang is difficult to predict. The impact may be to hold down world growth, and thus restrain emissions. But it is at least possible that the dominant implication of high oil costs is huge CO2 outputs from processes that turn other fossil fuels into usable liquids. Am I being too pessimistic? Possibly. But the Princeton academics (Socolow and Pacala) who popularised the idea of ‘wedges’ of increased carbon emissions have recently included the conversion of coal to liquid fuels to their list of forces tending to increase global emissions. According to Socolow and Pacala, the large South African synthetic fuel plant is the largest single point of CO2 emissions in the world. The game they have invented for schools envisages 180 similar plants over the next decades. This leads one to the conclusion that these highly respected academics do not think that Peak Oil will be good for climate change.

(Those interested in reading more on the Peak Oil issue should read David Strahan’s superb 2007 book The Last Oil Shock.)