Another Wolf at the Door

Global oil production will probably reach a peak
sometime during this decade. After the peak, the world's production of crude oil
will fall, never to rise again. The world will not run out of energy, but
developing alternative energy sources on a large scale will take at least 10
years. In the meantime, there will be chaos in the oil industry, in governments,
and in national economies. What will happen to the rest of us? In a sense, the
oil crises of the 1970s and 1980s were a laboratory test. We were the lab rats.
You might remember it. Most Americans' real standard of living dropped
progressively lower for several years. And those crises were far less severe than
what's coming this time.

Do you think I'm crying wolf? Admittedly, for the first half of the twentieth
century oil forecasters did a lot of that. People who divided the then-known U.S.
oil reserves by the annual rate of production would periodically start screaming
that the nation's petroleum industry was going to die in 10 years. During each
ensuing decade, more oil reserves would be added and the industry actually would
grow instead of drying up. But in 1956, M. King Hubbert, a world-renowned
geologist at the Shell Oil research lab in Houston, pioneered a different method
of analysis and predicted that U.S. oil production would peak in the early 1970s.
Hubbert's analysis divided those who follow these things into two warring camps.
The controversy raged right up until 1970, when the U.S. production of crude oil
started to fall. Hubbert was right.

Around 1995 several analysts began applying Hubbert's method to worldwide oil
production. Most of them estimate that the peak year for world oil will be
between 2004 and 2008. These analyses were reported in some of the most widely
circulated sources of scientific news: Nature, Science, and Scientific
American.
Yet none of our political leaders has yet paid any attention.

Hubbert realized that, over time, the graph of annual oil production will
follow a bell curve. For his first analysis, he found the curve that best fit the
facts of past oil production and some well-educated guesses about the total
output that will eventually be produced from conventional wells. Later, he
discovered he could eliminate much of the guesswork. The production curve, he
found, lags consistently behind the bell curve of cumulative oil discoveries (all
the oil produced up to a given year plus the reported reserves for that year). In
other words, the discovery curve is a predictor of eventual production. It was
this trick that allowed Hubbert to see into the future.

But reliable estimates of oil reserves are a vital ingredient in a Hubbert
analysis, and this leads to the chief difficulty in using the method to predict
the peak of world oil production: In the late 1980s, several OPEC nations
reported huge, abrupt increases in their oil reserves. OPEC had recently changed
its rules, assigning each member nation a share of the oil market based not just
on the country's annual production capacity but also on its oil reserves. Most
OPEC countries promptly hiked their reserve estimates.

These increases were not necessarily fraudulent. "Reserves" exist in the eye
of the beholder. Oil reserves are defined as future production, using existing
technology, from wells that have already been drilled. (They should not be
confused with the U.S. "strategic petroleum reserve," which is a storage facility
for oil that has already been produced.) Typically, young petroleum engineers
unconsciously tend to underestimate reserves. It's a lot more fun to go into the
boss's office next year and announce that there is actually a little more oil
than last year's estimate predicted. The abrupt increase in announced OPEC
reserves in the late 1980s was likely a mixture of updating old underestimates
and wishful thinking.

The result is probably an overly optimistic view of future oil production.
I've made corrections for OPEC optimism in my own Hubbert predictions; others
have used different estimates. But our predictions are all in the same ballpark.
It's a good guess that the best numbers were available to a firm in Geneva,
Switzerland, called Petroconsultants, which until recently maintained a huge
private database, to which the rest of us had no access. One long-standing rumor
has it that the U.S. Central Intelligence Agency was Petroconsultants' largest
client. This much is known: The loudest warnings about the predicted peak of
world oil production came from Petroconsultants.

So who is listening? probably the OPEC oil ministers. Prices of
crude oil have doubled in the past year. I suspect that the OPEC countries know
that a global shortage may be only a few years away; and if they can trickle out
just enough oil to keep the world economies functioning until that glorious day,
they can market their remaining crude at mind-boggling prices.

It is not clear, though, whether the major oil companies are facing up to
the problem. Most of them display a business-as-usual facade. My limited attempts
at spying turned up nothing useful. A company taking the 2004-2008 hypothesis
seriously would be willing to pay top dollar for existing oil fields. There does
not seem to be an orgy of reserve acquisitions in progress.

But you have to understand, internally the oil industry has an unusual
psychology. Exploring for oil is an inherently discouraging activity. Nine out of
10 exploration wells are dry holes. Only one in a hundred exploration wells
discovers an important oil field. Darwinian selection is involved: Only the
incurable optimists stay. They tell each other stories about a Texas county that
started with 30 dry holes yet had a major discovery with its next well.

Are they right? Is there some way the crisis could be averted?

  • Drill Better?
  • One of the responses to the far less
    devastating oil crisis in the 1980s was to ask for a double helping of new
    technology. It's not going to work this time, and here's why: Before 1995 (when
    the dot-com era began), the oil industry's rate of return on invested capital was
    higher than any other industry's. When the oil companies discovered that
    everything else they tried to diversify into was less profitable, they came home
    and poured billions of investment dollars into the development of petroleum
    technology. Much of the work was successful. That makes it difficult to ask today
    for new technology. Most of those wheels have already been invented.

  • Drill Deeper?
  • Unfortunately, the "oil window" goes only from
    about 7,000 feet to about 15,000 feet underground. Temperatures closer to the
    earth's surface are not hot enough to "crack" organic-rich sediments into oil
    molecules, while beyond 15,000 feet the rocks are so hot that the oil molecules
    are further cracked into natural gas. Drilling rigs capable of penetrating to the
    bottom of the "oil window" have been available since 1938.

  • Drill Someplace New?
  • Geologists have gone to the ends of the
    earth in their search for oil. The only rock outcrops in the jungle are in the
    banks of rivers and streams; geologists have waded up those streams picking
    leeches off their legs. As early as 1923, they knew that the Arctic Slope of
    Alaska would be a major oil producer. Today, about the only promising petroleum
    province that remains unexplored is part of the South China Sea, where
    exploration has been delayed because six different countries claim the drilling
    rights. Although the South China Sea is an attractive prospect, there is little
    likelihood that it is another Middle East.

    In any case, it takes a minimum of 10 years to go from a cold start on
    a new province to delivery of the first oil. One of the legendary oil finders,
    Hollis Hedberg, explained it in terms of "the story": When you start out in a new
    area, you want to know whether the oil is trapped in folds, in reefs, in
    sandstone lenses, or along faults. You want to know which are the good reservoir
    rocks and which are the good caprocks. The answers to those questions are the
    story. After you spend a few years in exploration work and drilling holes, you
    figure out the story. For instance, the oil is in fossil patch reefs. Then pow,
    pow, pow--you bring in discovery after discovery in patch reefs. Even then, there
    are development wells to drill and pipelines to install. It works--but it takes
    10 years.

    Rising prices and the supposed magic of the free market won't change that. In
    fact, history shows the price of oil to be mostly irrelevant to finding oil. More
    oil was discovered in the United States in the 1930s than in any decade before or
    since. That was during the Depression--when the price of oil was $1 a barrel and
    the price was that high only because of production rationing.

    Nothing we initiate now can substantially postpone the world production peak:
    No Caspian Sea exploration, no drilling in the South China Sea, no SUV
    replacement, no renewable energy projects can bring results quickly enough to
    avoid a bidding war for the remaining oil. And we can only hope that the war is
    waged with cash instead of far worse weapons.

    So what should we do? The Hubbert analysis definitely has its
    weaknesses. In the book from which this article is adapted, I offer readers some
    expertise in evaluating the problem. If the experts' scenario for the years
    2004-2008 reads like the opening of a horror movie, readers can make up their own
    minds about whether to accept the scary account. But ignoring the problem is the
    equivalent to wagering that world oil production will continue to increase
    forever.

    My own opinion is that the peak in world oil production may even occur
    before 2004, and while I would be delighted to be proved wrong, the truth is, it
    would take a lot of unexpectedly good news to postpone the peak even to 2010. In
    either case, by the time my granddaughter reaches retirement age, world
    production of oil will be down to a fifth of its present size.

    My recommendation: Bet that the experts' prediction is roughly correct, make
    good use of the few years before the crisis actually hits, and start planning now
    for increased energy conservation and alternative energy sources. In 1980 the oil
    crisis was a problem in distribution; the oil was there, but it wasn't getting to
    the corner gas station. In 2008 the oil won't be there. Psychologically, the
    realization that the change is permanent may be as devastating as the shortage
    itself. Still, if we take the experiences of past oil crises as guides, we can
    benefit from what we have learned.

    First, beware of any salesman peddling just one brand of snake oil. Many
    hucksters will claim to have found the new elixir that will solve the energy
    problem. Some of them will truly believe they have. We should know better.
    Prudence dictates that we make good use of each innovation where it fits best and
    find others to use elsewhere. Use geothermal energy where it is most effective;
    don't try to find a geothermal solution for the entire range of U.S. energy needs.

    Second, beware of the salesman peddling an enormous variety of snake oils. The
    message: "There are so many possibilities, some of them are bound to come
    through in time to save us." The long list of innovations--including gas
    hydrates, subsalt seismic reflections, coal-bed methane, and deepwater drilling,
    to name just a few of the usual promises--will give the impression that doomsday
    won't arrive in our lifetime. We'll muddle through. Unfortunately, every item on
    that list was already identified 20 years ago. Most are still not deliverable.
    Muddling is going to be painful.

    Third, beware of narrow focuses. In earlier oil shortages, we became fixated on
    improving automobile efficiencies in miles per gallon. Unfortunately, some of
    those improvements came at the cost of higher energy consumption in the refinery.
    We need to look at the whole system--from the refinery to the driver in
    traffic--when we make "improvements."

    Finally, we need to approach energy use the way a butcher approaches a side of
    beef. He could convert all the meaty part to hamburger, with high efficiency, but
    butchers (and economists) know to slice off some high-priced steak and a roast or
    two, then grind up the rest for hamburger. Electricity is steak; space heating is
    hamburger.

    When I switched my house from home heating oil to natural gas, I paid extra
    for a high-efficiency furnace. The efficiency is listed at 94 percent. Sounds
    fabulous. Here's the problem: Just downstream from my gas-air flame, the
    temperature is over 1,000 degrees--very high-grade energy. My "efficient" furnace
    ignores it, dilutes heat by design, and delivers 70-degree air to my heating
    ducts. A smarter idea is co-generation: Use the high-temperature gases to produce
    electricity and then use the lower-temperature air to heat the house. (Today, the
    smallest co-generation units operate on the scale of an apartment block.)

    I also think we need to get over our nuclear phobia. We certainly need better
    engineering and better operators. A nuclear plant operator ought to receive the
    level of training and the salary of a commercial airline pilot. Maybe it will
    happen when the economic squeeze gets everyone's attention.

    The point is, crude oil is much too valuable to be used for fuel.
    Eventually we'll figure that out, and it will be used only in manufacturing needed
    organic chemicals--plastics, fertilizers, that sort of thing. "You burned it?"
    our grandchildren will ask someday. "All those lovely organic molecules--and you
    just burned it?" Sorry, we burned it.

    In contrast to the hundreds of millions of years it took for the world's oil
    endowment to accumulate, most of the oil is being extracted and refined in about
    100 years. (The short bump of oil exploitation on the geologic time line has
    become known as "Hubbert's peak.") In a sense, fossil fuels are a onetime gift
    that lifted us up from subsistence agriculture and eventually should lead us to a
    future based on renewable resources.

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