What Happened to Peak Oil?

by: Edward Harrison August 31, 2008 | about stocks: OIH / OIL / PBD / PBW / USO / XLE    

Edward Harrison

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Up until Tuesday, oil was crashing down toward $110 a barrel as demand growth estimates have been clipped. So what happened to peak oil? Nothing happened; peak oil should still be a concern.

For a larger context on peak oil, see my June post 'Peak oil: are we there yet?' From where I sit, I see oil as having played a major role in creating the downturn we are now experiencing. Basically, oil prices rose to the point where we cried uncle, reduced our consumption accordingly, and the economy suffered as a result. Before 1973, the world had never see an oil shock. But, this is the 4th such oil shock since the end of Bretton Woods in 1971 when Nixon ended the U.S. dollar peg to gold and ushered in an era of floating currencies. Methinks I see a connection.

Now, the real point of peak oil here is not that oil supplies are running out, the sky is falling and the world is coming to an end. Rather, it is an understanding that there will come a time when the ever-increasing global demand for oil will permanently outstrip the supply. What does that mean? Well for starters, it means that oil shocks will not be the result of supplies being artificially constrained by some monopoly like the Seven Sisters, the Texas Railroad Commission or OPEC. Peak oil means that oil producers will simply not be able to cost-effectively pump enough oil out of the ground rapidly enough to meet the rising oil demand.

And oil demand is price inelastic. Translation: we need the stuff -- we need the stuff a lot. We use it to heat our homes, drive our cars, make plastic containers, pave the roads -- oil is ubiquitous. It just won't do to have it in short supply. The result is that, with peak oil, oil prices must rise exponentially before the necessary demand destruction is created to bring supply and demand into balance. That's what has just happened.

So, what happens when demand destruction sets in? Economics would tell you that the price collapses again but to a new higher equilibrium level. And then the whole pattern reasserts itself again. That means higher lows and higher highs for the price of oil as we go through each business cycle. Obviously, this is a recipe for global economic instability and that leads to war, famine, revolution and some other pretty nasty stuff.

There are two things that can stop this train wreck:

  1. Finding additional sources of oil that can be tapped at prices high enough that oil producers actually make money to drill for oil in these previous no-go areas. As far as the US election goes, this is the McCain strategy, if you will: drill for more oil in order to increase supply to meet demand. However, this strategy is short-sighted for a number of reasons - demand will eventually outstrip supply again anyway, the potential recoverable oil is not that large, and in the short term, this does nothing for consumers.
  2. Looking for wind, solar, nuclear, geothermal and other alternative energy sources. This is the Al Gore strategy. The benefit of this strategy is that there are unlimited supplies of alternatives to oil, so it will secure our future. The downside to this strategy? Cost. Our whole infrastructure is built around oil and that is not going to change anytime soon.

Like it or not, we have limited alternatives for a solution to this problem. However, we do have solutions. Now is the time to act on them.

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This article has 39 comments:

  •  
    Aug 31 08:03 AM
    Now that both running mates have been chosen and the presidential election heats up American's are left to sort out which candidates will better address the ever burdening issue of the energy crisis in America. The energy crisis is directly linked to our economy. Foreclosures are on the rise as well as unemployment. With all the technology available it is incredible to believe we have not come together as a nation to devise a plan. We have become so dependant on foreign oil that we have neglected to fully utilize such natural sources of energy such wind power & solar power. Along with modern technology such as plug in cars, hybrid cars, v2g technology ,and regenerative braking, technology we still seem to be floundering as a nation as to devising the best plan utilize all that is available to us and lift ourselves out of this mess we are in.

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  •  
    Aug 31 08:14 AM
    we must not send any more money to those crazy foreign countrys. our standard of living is going down and theirs is going up. (or their leaders are getting richer)
    we must drill everywhere, use solar, wind, fuel cells, waves, nuclear,etc.
    we need more refineries. coal to gas.

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  •  
    Aug 31 08:27 AM
    Converting urban transportation to PRT (Personal Rapid Transit), with vehicle of 200-400 mpg, will make a significant difference.
    seekingalpha.com/artic...
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  •  
    Aug 31 09:16 AM
    It is likely a generation will pass, at least in the US, before a significant amount of renewable energy is available to be harnessed, to offset enough of our oil based consumption to avert "peak oil."
    There are just too many people who, as one presidential candidate uses the phrase, "just don't get it" that by virtue of their personal oil consumption habits stand in the way of any near term measurable success. I define "near term" as 20-30 years for the purposes of this discussion.
    On the other hand, it seems that an entire generation of young people who are at the age to become politically active "do get it" and are enlightened enough about the potential environmental and economic concerns, to promote the changes necessary to deal with this demon we have named "peak oil."
    For those of us caught in the middle of this conflict, our work is to encourage and to offer support and guidance to that younger generation's effort where are abilities and finances provide us an opportunity to do so.
    Once we "know what we know" that knowledge brings with it a moral imperative to act.
    We need to help the issues of the day move forward and address the present as well as potential future deterioration of our economy and the environment.
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  •  
    Aug 31 09:17 AM
    Edward, great article and summary. However, I would add a 3rd point to the two you have listed above. Before we can start on either of the two paths you have itemized, we need a LEADER, or at least some leadership. I see no such leader or leadership, although there are some who show promise.

    As you point out, the Drill, Drill, Drill approach will help, but not significantly in the near term, as it will take too long, and in that time the problem will grow much, much worse. (Your point #1 above.) The Republicans are essentially advocating this approach, IMHO.

    Your point #2 is the more towards the Dems posistion, and as such, it fails to understand the complexity, or seriousness of the problem. Simiply beating up on the oil companies and blaming them for the high price of gasoline, makes no progress towards a solution, IMHO. That is much like blaming our farmers for the high price of grains.

    If neither of the above approaches is coming close to offering a solution, and if no leadership emerges to begin to align all our efforts towards a solution, then it looks to me like we are back to square one, and more of the same of what got us to the crisis we are in. T. Boone Pickens is trying to get the political scene aware of the coming crisis, and while there is some awareness now of the seriousness, we still as a nation, just don't get it. That to me means higher lows, and higher highs, until there is more recognition of the problem. IMHO
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  •  
    Aug 31 09:30 AM
    Drilling and conservation is about it.Any "alternative"... that uses oil is not an alternative.Ethanol,so... list goes on and on.
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  •  
    Aug 31 10:29 AM
    "Floundering"... The market (national and global) has numerous (as in many many many) enterprises persuing significant alternatives. However, these alternatives will still be marginal contributors for some time. We still need to use fosil fuels while full speed ahead on green and some no so green solutions. This is not an either or situation, that is, outside the political nonesense, anyway.
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  •  
    Aug 31 11:34 AM
    Timothy -- I don't disagree whith your recognition of the intransigence of the bulk of the population, but I do think that they will come around, dragged kicking and screaming, to conservation, as the ever-increasing price of oil will do for them what it has done for the rest of us. And this will happen a LONG time before 20-30 years from now.

    Perhaps as soon as within the next 5 years, as we inevitably drill everywhere, and after 5 years, the price of gas is running in the $6-7/gal range, and no oil has begun to flow from any of the bazillions of new wells and pipelines that will soon be under construction.

    That will create the profit incentive to fuel a green economy, initially built on conservation (look for very high-efficiency consumer products over the next year or two, with prices held down by the consumers' inability to pay, or else supported by government incentives (regardless of which party is in power).
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  •  
    Aug 31 12:01 PM
    Plus, don't underestimate how rapidly a conversion to green power can take place, when one's attention is focussed on the matter (as sky-high oil prices and the attendant inflation are wont to do). Despite being gang-raped by the neocons over the past 8 years, there is still a lot of potential in the American economy.

    Just take a look at the growth rates of installed wind power and photovoltaic solar (thermal solar, despite being more cost effective and easier to put in place in significant amounts, has not got its momentum up yet). Windmills and PV MW production are growing at nearly vertical rates. Down the road, there is the recent spotlighting of better geothermal technologies, which should begin to make an impact before the next 10 years are past.

    If you recall that old fable about the peasant who, when asked by his ruler what reward he would like, asked for a chessboard of wheat, with a single grain on the first square, and doubling that on each subsequent square. The total bankrupted the ruler in that fable.

    The growth rates of installed capacity in wind and solar are rising at very fast rates, although perhaps not at a 100% per year increase. If we assume a 50% per year increase (which I'm fairly confident is lower than what is actually occurring), we see a 1% market share grow in the following manner:
    yr mkt shr
    1 1%
    5 8%
    7 17%
    10 58%
    11 87%

    Additionally, we will see the size of the national energy pie either held constant, or shrink, due to conservation, both consciously, and forced by policy and prices.

    And I repeat, it seems to me that we are growing our installed base of green energy production at annual rates higher than 50% per year. It's just that the compounding takes a while to build up a head of steam.

    We'll get there, with the longest recession/depression in our history pulling the goal-posts closer.

    There is a light at the end of the tunnel, and to the disappointment of those wishing for economic collapse (the libertarian rapture), it is neither a muzzle flash nor a train.
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  •  
    Aug 31 12:02 PM
    I'm actually very pessimistic on this issue. The leadership we have has been stuck on a which-hunt over oil prices rather than actually facing up to the problem of peak oil. Now that the oil price has temporarily subsided, the failed speculator scapegoat has disappeared from headlines. The misnamed "Big Oil" companies are still a target for the misguided "windfall profit taxes." The oil fields they do control account for only about 7 percent of the world's known oil reserves. The rest are in the hands of government-run companies in oil-producing countries such as Saudi Aramco in Saudi Arabia or the National Iranian Oil Co. in Iran. Countries such as Russia and Venezuela have seized their assets and kicked them out. "Big Oil" is not so big anymore.
    "Consumers stung by high oil prices today will suffer even more as state monopolies cement their control over the world's remaining oil resources in coming years, analysts say."
    www.washingtontimes.co.../
    "The scope of the supply problem became more clear in the latest quarter when the five biggest publicly traded oil companies, including Exxon Mobil, said their oil output had declined by a total of 614,000 barrels a day, even as they posted $44 billion in profits. It was the steepest of five consecutive quarters of declines."
    www.nytimes.com/2008/0...
    The other crazy thing Congress wants to do is sue OPEC over oil prices. This is laughable for three reasons:
    1.) Foolish - the assumption that Saudi Arabia has a lot of idle spare capacity available that would enable them to "open the spigots"
    2.) Arrogance - the idea that the U.S. is entitled to other countries national resources at the price that we want to pay.
    3.) Cold Reality - we are a debtor nation and we are using borrowed money to buy oil from them. There are lots of ways they can retaliate such as pricing oil in a different currency.
    So looking at the increased resource nationalism that is going on throughout the world, the combination of geopolitical peak oil and geological peak oil are bringing about overall peak oil much faster. We are facing a problem we've been putting off for 3 or 4 decades. Further spikes in the oil price are inevitable.
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  •  
    Aug 31 12:15 PM
    David Lentz,
    With all your green talk, you don't directly address the real problem - the highly concentrated "liquid" energy source of oil for which there is no viable alternative on the scale that we use it. To many factors are converging at once for us to solve this problem smoothly. Wind, solar, and geothermal are all nice for electric generation but don't directly answer the transportation sector's problem which is that it is 98% dependent on oil. And then there's the huge problem of oil use in our food production sector.
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  •  
    Aug 31 12:48 PM
    With all due respect to author and others the problem is actually quite simple . Oil is still the cheapest energy we have (besides coal ) ,which means that alternative sources of energy won't enter the main stream until the price of oil becomes much higher making it economical to use alternatives . However even though oil is cheap on a relative basis , we should still build out alternatives such as nuclear in preperation for the day when oil does reach 200 dollars which is not far off if we continue on the current course . The biggest problem is there are too many people who think that there is limitless oil and that the price of oil will return to 30 dollars a barrell . This thinking is incompatible with developing alternative fuel sources as it would not be economical .Therefore I predict not much will be done until we are past crisis stage ,which of course is too late .
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  •  
    Aug 31 01:10 PM
    ALL OF YOU ARE RIGHT.

    IMHO, But Ifear that while we get it, our "leadership" does not. If the Recession/Depression takes hold, the rate of switching to alternatives will stall in the private sector. The Onus will be on Government to provide the stimulus. I do not see this occurring under either Party.

    Obama wants to redistribute the Wealth at a time when the Wealthy, like TBoone, are gambling on alternatives. Meanwhile, all that the other side has is Palin with the "drill, drill, drill" mantra.

    Of the 2, at least drill,drill,drill will create jobs. Recession/Depression will require jobs. Sure, redistribution of wealth will help the poor but only temporarily and at what cost to the rest of the nation. Karl Marx is must reading and Russia is a prime example of Marxist Doctrine enforced.
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  •  
    Aug 31 02:10 PM
    A very good article. I suggest that solution one will buy time until we can implement solution two. IN THE MEANTIME, LET'S ELCT SARA PALIN PRESIDENT.
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  •  
    Aug 31 02:16 PM
    David Lentz, a couple comments. I am all behind solar/wind/geothermal. As much and as fast as we can muster- even if we have to steamroll over environmental groups who are attempting to halt grid transmission projects that would link Mojave Solar to urban demand. But even so, the projections you detail for their collective contribution to our electric supply will fall far short of replacing the escalating oil shortfall which will be upon us within 2-3 years, big time. Despite assuming good intentions, I dont think either party is ready to confront the massive shortfall we are about to experience. for example- McCain has called for a gas tax holiday in the summer, and has voted against extension of the solar/wind electricity production tax credit. And Obama has promised to due everything for everyone. What he would need to say is that the government is calling on every citizen to make huge sacrifices for the sake of energy security. I'm not hoding my breathe that the government will get out in front on this problem, and yes, as you said- we are in for huge financial challenges, and those will prevent us from coming up with the funds we will nedd to implement the technologies needed to crank out domestic and clean energy.
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  •  
    Aug 31 03:05 PM
    Ed - great confession; you just said our whole infrastructure is built around oil. That is like saying we have just placed our bet on the next buggy whip.

    CONSIDER::


    Aug 31 02:38 PM

    Obama wants to be elected. (So does McCain.) I want to solve the problem.

    Considering much of the flux flow between free enterprise, unfree enterprise, natural and contrived disaster, who's on the take, corporate greed and personal greed, I am convinced that we need to create our own crisis to get off oil and coal and the natural resources we BURN before we find ourselves in another crisis without a paddle - not unlike the '73 embargo and the '78-79 gas crunch (we know who caused eash so we know who the enemy is - an as you know we, the American consumer and American Business, are not exempt).

    So let's do the unthinkable - the action and the results are not new - other nations have done it - it's time we did it. Put a $5 BURN TAX on each gallon of gasoline and diesel, equivalnet mcf of NG, ton of coal, lb or gal of propane etc., - A BURN TAX - where ever; from wherever: import or domestic. That tax (God help us because it goes to DC) is to be used only for installing infrastructure like electric railroads, electrified inter/intrastate hiway ferries, electric grid improvements and expansion (beefing up) to handle 20 Quads/yr, INCLUDING SOLAR AND WIND HOOKUPS.

    In addition, the electrified railroads, electrified hiways and power grid will have an attached lesser TOLL TAX for prime-movers (the railroads, the ferries, the utilities) and a CREDIT REBATE (reduced fee) for baseline users (John Q Public and businesses).

    Doing this:

    1) the Govt provides the means for the common good which is it's role,

    2) making the profiting entrapanuers pay to play (ie., the capitalistic risktakers placing their bets), and

    3) forcing thru taxation (punishment) and relief (rewards) the behavior change desired where,

    4) additional capitalistic risktakers will develop the additional means to make it all happen (the R&D, investment, and providing of solar, wind, electric vehicles, hybrids, etc., etc, whatever the need).

    5) AND THE GOVERNMENT HAS TO DO WHAT IT HAS ALWAYS DONE, PUT A TAX ON IT'S PEOPLE AND NEVER REMOVE IT.

    AS THE BEHAVIOR CHANGES THE PUNISHING TAX NATRUALLY EVAPORATES (NO MORE BURN; NO MORE TAX).

    AND THE NEW ECONOMY IS ESTABLISHED FOR THE NEW DESIRED BEHAVIOR WITH BURDEN AND REWARD IN PLACE, BOTH PAYING FOR USE; AND NOT KNOWING IT, AND SATISFIED.
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  •  
    Aug 31 03:15 PM
    Realsit - it may be a typo, but your term "which-hunt" is a brilliant play on words. If it really is a typo, deny that and take a big bow.

    Edward Harrison - I like your article. I don't want to repeat comments made recently to other articles. If anyone is interested you can click on the id link at the left.

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  •  
    Aug 31 03:17 PM
    Actually, I should have said "AND KNOWING IT, SATISFIED".
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  •  
    Aug 31 03:25 PM
    First Katrina and now Gustav, what more evidence do you need that drilling outside the Gulf is a necessity no matter how much the wealthy squeal about preserving the caribou. Who but the wealthy can afford to visit ANWR?
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  •  
    Aug 31 03:30 PM
    This article is moving in the right direction. But here is a summary of the problem:

    According to energy investment banker Matthew Simmons and most independent analysts, global oil production is now declining, from 74 million barrels per day to 60 million barrels per day by 2015. During the same time demand will increase 14%.

    This is equivalent to a 33% drop in 7 years. No one can reverse this trend, nor can we conserve our way out of this catastrophe. Because the demand for oil is so high, it will always be higher than production; thus the depletion rate will continue until all recoverable oil is extracted.

    Alternatives will not even begin to fill the gap. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment.

    Surviving Peak Oil: We are facing the collapse of the highways that depend on diesel trucks for maintenance of bridges, cleaning culverts to avoid road washouts, snow plowing, roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, transformers, steel for pylons, and high tension cables, all from far away. With the highways out, there will be no food coming in from "outside," and without the power grid virtually nothing works, including home heating, pumping of gasoline and diesel, airports, communications, and automated systems.

    This is documented in a free 48 page report that can be downloaded, website posted, distributed, and emailed: www.peakoilassociates....

    I used to live in NH-USA, but moved to a sustainable place. Anyone interested in relocating to a nice, pretty, sustainable area with a good climate and good soil? Email: clifford dot wirth at yahoo dot com or give me a phone call which operates here as my old USA-NH number 603-668-4207. survivingpeakoil.blogs.../
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  •  
    Aug 31 03:35 PM
    No Polititian will be brave enough to do the right thing suggested above by nakedjaybird. Imagine a majority of Congress and a President who will sign a bill into law that will actually solve our foreign energy dependence problem-until hell freezes over or the second coming of Christ. What about social security reform and Medicare reform? The current lists of elected officials can't even install adequate oversight over those big social programs which saps the energy out of our GDP.

    The oil problem has a simple cure and doesn't need solution by any governmental intervention. The driving public actually can and has reigned in demand by simply stop driving gas sucking and energy inefficient trucks and SUV's. I look forward to the days where by force of high price of oil leads to forced energy conservation in our nation of selfish wasteful consumerism and foolish fads with trucks and SUV's.
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  •  
    Aug 31 03:40 PM
    OIL SPECULATION FOR DUMMIES

    GO TO:

    www.stopoilspeculation.../

    And stop BSing around. Sign the petition...and maybe google Michael Greenberger ( for YOU DUMMIES, Professor Greenberger is the fellow at the University of Maryland who knows how the Federal Commodities Trading Commission has been costing us money.)

    The FCTC has not been doing there job to stop speculation.
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  •  
    Aug 31 05:45 PM
    Jlounsbury59, yes "which" way do way do we go from here with our blame game? Speculators? OPEC? "Big Oil"? GOP? With the politician's index finger pointing at this, that, or the other thing, there's 3 other fingers pointing back at themselves.
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  •  
    Aug 31 08:16 PM
    There is a lot of pessimism about energy--too much. We are already beginning to address the problem of renewable energy. Right noiw large tracts of land are being bought up in the desert southwest where huge solar power facilities will be built and large quantities of electricity generated. We have enormous reserves of natural gas, a two hundred fifty year supply of coal which can be burned or converted to oil, enormous deposits of oil shale in the Rocky Mountain states, vast areas suitable for wind turbines, and nuclear power which will inevitably come back into vogue. And new technologies will be developed because the profit incentive will cause the free market to ramp up research and development. The earth is awash in energy--we just have to find the ways to exploit these sources.
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  •  
    Aug 31 09:29 PM
    JJason,
    You have no clue about why we have energy problems. Speculation is not the core issue, not even close. Quit wasting our time with your repetitive know-nothing posts.
    I have an idea, why don't you do some research on other sites about the peak oil problem?
    You won't find much about speculation being the problem. Even if the US government did "something" about it, guess what, there are other commodity exchanges to trade on other than Nymex.
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  •  
    Aug 31 11:28 PM
    This is a totally inaccurate description of Peak Oil theory.
    Peak Oil referrs to extraction rates only. There will be a point in time when maximum extraction rate is reached and becasue the remaining sources are of slower flow, lower pressure and increasingly so, production rates will embark on a long term trend down.

    Deman can, for instance in a deflationary scenario drop AND supply drop as well. This could then mean that you have passed Peak Oil production even iof demand doesn't outstrip supply.

    Secondly, as this is often confused, PO has nothing to do with reserve sizes as huge reserves doesn't guarantee fast extraction rate. For example shale, tar sand etc.

    What is most concerning is however not if PO is reached but what the IMPACT of PO will be.
    For instance if there were good alternatives, hitting PO wouldn't matter.
    But as long as we keep our dependence oil oil/hydro carbon products for transportation, generation of electricity and for manufactuing of a large portion of all goods, the impact will be huge.

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  •  
    Sep 01 12:43 AM
    Edward;
    Good article till you mention Al Gorem . I forgive you though .

    What the problem in America is , is sort of like the 26 comments . Basically none agree on anything.

    We are strangling ourselves just as the terrorist planned and knew we would . All they had to do was furnish the fuse , they knew we would furnish the lighter and explosive. Government is the lighter and citizens the explosive.
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  •  
    Sep 01 02:30 AM
    Johnnie Long: "The earth is awash in energy--we just have to find the ways to exploit these sources."
    As soon as mankind figures out how to create cold fusion successfully, then this statement will be true. You mention wind turbines, solar, and nuclear - none are liquid fuel and only count for electricity generation and are no substitute for oil. Oil shale is considered an unconventional oil source produced from a highly carbon and water-intensive extraction and treatment procedures and will never be able to be generated in the volumes that conventional oil is. The returns on extracting oil from tar sands and oil shale is in the same ball park: roughly 3 barrels of oil for every 2 consumed. This is an EROEI of about 1.5, very poor. Though their EROEI can vary depending on the process used, separating the oil from the oil sands is much easier because the oil is ‘‘suspended’’ in a water/sand layer and not directly stuck on or in the sand as is the case for oil shale. Coal-to-liquid fuel also has a very poor EROEI and will not be cheap or clean. The energy required to convert coal to liquid fuel doubles the amount of carbon dioxide released compared to fuels refined from oil. Mountain top removal and toxic ground water are what you see if you take a visit to W. Virginia. The peak for natural gas is only about 10 years behind that of oil.
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  •  
    Sep 01 02:48 AM
    Gashog - now stay focused. Fix energy. That's only been a 40 year problem. Tax us into alternatives. The only problem I have with government getting all the money to electrify everything is that THEY CAN'T EVEN BUILD A FREKIN' FENCE.
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