Posted by & filed under Economics, Global Warming/Climate Change, Peak Oil.

by Dr Samuel Alexander, co-director of the Simplicity Institute and a lecturer with the Office for Environmental Programs, University of Melbourne. Originally published on theconversation.com.


There’s plenty of oil, but at what price?
(Source: arbyreed/Flickr)

You might have heard that peak oil — the theory that one day crude oil production will stop increasing, even as demand grows — is dead. Shale oil production is surging in the US. The premiere peak oil website, The Oil Drum, is shutting up shop. Even notoriously left-leaning columnist George Monbiot has announced: “We were wrong about peak oil”.

But he’s wrong about being wrong.

Peak oil is very much alive, and squeezing its hands ever more tightly around the throats of oil-dependent economies. The new economics of oil also have alarming implications for climate change, as Monbiot acknowledged, suggesting this is a subject we dismiss at our own peril.

Peak oil, of course, doesn’t mean that the world is running out of oil any time soon. There is a vast amount of oil left. Over the last 150 years, however, we’ve picked the low hanging fruit, so to speak, meaning that the remaining oil is harder to find and more expensive to extract. This is making it more difficult to increase the “flow” of oil out of the ground.

When the rate of crude oil production cannot be increased, that represents peak oil. This is considered by many to signify a defining turning point in history, because oil demand is expected to increase as the world continues to industrialise. The theory goes that, as the supply of oil stagnates and the demand increases, the cost per barrel will rise, making the consumption of oil an increasingly expensive and debilitating addiction.

So is this theory alive or dead? Well, it’s not a theory, it’s a fact. Around 2005 the production of crude or “conventional” oil stopped growing significantly and has been on a corrugated plateau ever since. This plateau has been acknowledged even by mainstream institutions like the International Energy Agency, a position it recently reiterated through its chief economist, Fatih Birol. Global demand for oil, however, has continued to grow significantly, which has put upward pressure on the price of oil.

This upward pressure on price has changed the economics of several sources of unconventional oil, making them financially viable to produce when once they were not. Shale oil was not produced previously because the costs of getting it out of the ground and refining it were significantly more than the market price for oil, historically around US$25 per barrel.

But now that oil is above US$105 per barrel, producers can make money producing shale oil and other unconventional oils, even though their energy and economic returns on investment are considerably lower than conventional oil.

The fact that unconventional oil is much more carbon-intensive than crude oil — exacerbating an already intractable climate problem — doesn’t seem to trouble oil producers or most politicians.

Driven by high prices, this new production has meant total oil production (conventional plus unconventional oil) has been able to meet increasing global demand, even though conventional oil has shown almost no growth in recent years. Because total oil production has increased to meet demand, many commentators have declared that “peak oil” is dead. These declarations, however, are based on a misunderstanding.

The main reason unconventional oils are economically viable is because crude oil production has essentially stopped growing, causing the price of oil to jump. Geopolitical instability in oil rich regions of the world also keeps prices high, with the current situation in Syria being the latest manifestation of this dynamic. Our industrial economies, however, are addicted to oil — the world consumes 90 million barrels of oil every day — and when oil gets expensive, our economies suffer.

At US$25 per barrel — the historic average — 90 million barrels would be US$2.25 billion every day on oil expenditure. At US$105 per barrel, that amounts to US$9.45 billion per day. This is a difference of US$7.2 billion every day, an extra cost to the global economy which is primarily a result of crude oil having peaked. It lacks credibility to pronounce the death of something costing the global economy US$7.2 billion every day — or US$2.6 trillion every year.

The economic costs of peak oil are especially significant for oil importing nations. Due to the price of oil rising in recent years, the US is now spending an extra US$600 million every day on its net oil imports of 7.412 million barrels, which is money leaving the US economy. Had crude oil not peaked and prices remained low, every day the US would have that US$600 million to spend on things other than expensive, foreign oil. This is hardly a phenomenon to dismiss.

When oil gets expensive, everything dependent on oil gets more expensive: transport, mechanised labour, industrial food production, plastics, etc. This pricing dynamic sucks discretionary expenditure and investment away from the rest of the economy, causing debt defaults, economic stagnation, recessions, or even longer-term depressions. That seems to be what we are seeing around the world today, with the risk of worse things to come.

This should provide us all with further motivation to rapidly decarbonise the economy, not only because oil has become painfully expensive, but also because the oil we are burning is environmentally unaffordable.

If people had listened to the warnings of the peak oil school, we could have broken our addiction to oil and had this money to spend on other things. I, for one, can think of better things on which to spend US$2.6 trillion dollars per year — such as renewable energy, bike lanes, better public transport, and local food production.

We have entered a new era of energy and economics, one in which expensive oil is going to make it increasingly difficult for oil dependent economies to grow their economies. This is alarming because almost no attention is being given to this issue at the macro-economic and political levels. Economists and politicians are still crafting their policies based on flawed, growth-based thinking, but the growth model, which assumes cheap energy inputs, is now dangerously out-dated. The climatic implications of exploiting unconventional oils make the math more worrying still.

Granted, we’re not running out of oil any time soon, but we have already run out of the oil that is economically and environmentally affordable.

3 Responses to “Peak Oil Is Alive and Well, and Costing the Earth”

  1. Rosie

    Yes, thanks for stating that so clearly. I think people should be worried about eating. Almost every aspect of raising and moving food from the farm to the table involves oil-driven transport. From the tractor to sow the seed to driving to the supermarket to buy the dinner involves using oil and rising price of oil means rising cost of food.

    It worries me anyway.

    Reply
  2. Scott Reimers

    The author just described the sad parts about best case peak oil “soft landing”, but this IS a much better scenario than most peak oil people expected. The price keeps going up, people are little by little squeezed into greater efficiency or alternatives. As prices rise further the economic viability of alternative energy sources keep increasing.

    Any government that chooses to shift subsidies for oil and/or invest in alternative energies is planning for the future, but this must be done carefully. Cheap subsidized oil is the world standard and if a country shifts too far from that they will ensure that their countries products have no chance of being competitive and hurt their economy in the process.

    China is probably the most far seeing government in the world right now. China is using cheap subsidized oil to create cheap subsidized solar panels and wind turbines to position themselves as the premier manufacturer of these energy sources of the future. By investing in cheap energy both now and in the future they will give their society a leg up on cheap manufacturing and services long into the future.

    Reply

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