Peak Oil: Who Cares?

Lately there has been a lot of talk about peak oil. This is the idea that we have or will soon reach the point where we are pumping the most oil we can (currently the world uses around 80 million barrels of oil a day). It is not that we will run out of oil in the ground, but rather we won't be able to pump enough of it to keep up with demand.

The concern is that modern economies are based on oil and that when we can no longer get enough of it, great economic strife will occur. Or as Life After the Oil Crash puts it:

Civilization as we know it is coming to an end soon. This is not the wacky proclamation of a doomsday cult, apocalypse bible prophecy sect, or conspiracy theory society. Rather, it is the scientific conclusion of the best paid, most widely-respected geologists, physicists, and investment bankers in the world. These are rational, professional, conservative individuals who are absolutely terrified by a phenomenon known as global "Peak Oil."

You can read more about it at peakoil.com, which is not to be confused with peakoil.net, which should also not be confused with peakoil.org.

I think all this talk of imminent collapse of the economy is crazy, and that peak oil by itself is not what we should worry about.

The Economist had a nice write up on this. This sums up what I think:

Despite today's obsession with the idea of “peak oil”, what really matters to the world economy is not when conventional oil production peaks, but whether we have enough affordable and convenient fuel from any source to power our current fleet of cars, buses and aeroplanes.

Even if we hit peak oil, if there are alternatives out there to fuel our vehicles the economy will not be affected. While peak $20 oil is probably passed, peak $70 oil is still to come (I wouldn't be surprised if you see oil prices back down to $40-$50 in a year or two).

$70 oil doesn't appear to have any catastrophic effects on the economy. In fact, miraculously oil prices have more than tripled in the last 4 years and yet the world economy hasn't missed a beat. Supposedly every $10 raise in oil prices leads to .5% less in net economic growth. But if that happened I must have missed it. Anyone who was predicting that $40, $50, $60 or $70 a barrel oil prices would lead to a world recession were way off base. I have to admit, even I am surprised at how little of an effect it has appeared to have.

And the higher oil prices haven't slowed down US demand at all. In fact it actually increased:

Although the press is filled with anecdotal stories of people curtailing automobile travel, official reporting by the US Department of Energy says US consumption of petroleum products during the last month is running 1.3 percent ahead of last year.

At $70, there is more oil that is economically feasible to pump. This really surprised me the first time I read it:

Globally, the oil industry recovers only about one-third of the oil that is known to exist in any given reservoir.

Wow! When an oil reservoir is "tapped out" it still holds almost 2/3 of its oil! I bet technology and higher oil prices will be able to get at a lot more of that oil.

As the graphic shows, there are lots of alternatives to fuel our cars and planes when oil is at $70 a barrel.

Coal can be turned into oil. Scientific American had a writeup that put the price at $54 a barrel for synthetic fuel from coal. Green Car Congress had an article today about the National Coal Council and their plans for coal to liquids:

A massive expansion of Coal-to-Liquids Processing to produce 2.6 million barrels of coal liquids (fuels and chemicals) per day. Production at that level would meet approximately 10% of US petroleum demand and consume an additional 475 million tons of coal per year.

You can also turn natural gas into liquid fuel, or create ethanol (see previous post) or heavy oils, or tar sands. Wired had a nice writeup that I blogged about a while back. The Economist lays out some of the options:

Several big GTL projects are under way in Qatar, where the North gas field is perhaps twice the size of even Ghawar when measured in terms of the energy it contains. Nigeria and others are also pursuing GTL. Since the world has far more natural gas left than oil—much of it outside the Middle East—making fuel in this way would greatly increase the world's remaining supplies of oil.

So, too, would blending petrol or diesel with ethanol and biodiesel made from agricultural crops, or with fuel made from Canada's “tar sands” or America's shale oil. Using technology invented in Nazi Germany and perfected by South Africa's Sasol when those countries were under oil embargoes, companies are now also investing furiously to convert not only natural gas but also coal into a liquid fuel. Daniel Yergin of CERA says “the very definition of oil is changing, since non-conventional oil becomes conventional over time.”

The good news is that this is not unique. China also has deposits of heavy oil that would benefit from such an advanced approach. America, Canada and Venezuela have deposits of heavy hydrocarbons that surpass even the Saudi oil reserves in size. The Saudis have invited Chevron to apply its steam-injection techniques to recover heavy oil in the neutral zone that the country shares with Kuwait. Mr Naimi, the oil minister, recently estimated that this new technology would lift the share of the reserve that could be recovered as useful oil from a pitiful 6% to above 40%.

As these articles point out, there are many alternatives to fuel our vehicles at $70 a barrel oil. Given the fact that $70 a barrel oil has not had a big effect on the world economy, and that this price will allow for more oil development as well as alternative sources, I think that any talk of imminent economic ruin due to peak oil is pretty crazy. Instead of worrying about peak oil, we should worry about having reasonably priced fuel to run our cars and planes. I think $5 a gallon is reasonable (though I am sure some would object, but not the Europeans and Japanese who are already paying that) and with all the possible alternatives out there, we will be there for many decades. This will give us the time to develop the alternative sustainable energy sources. Of course, I would like to see the world get off of oil sooner, but for environmental and social reasons (see this post for the social reasons to do so).

And there are definitely those that will disagree with The Economist and my take on this. The Oil Drum thinks this article is way off base. Check back in 5-10 years and see who was right.