Waking up to the threat of ‘peak oil’

Drilling in the North Sea: The Ekofisk oil and gas field development complex is 200 miles from Norway, the British Isles and Germany.
REUTERS
Drilling in the North Sea: The Ekofisk oil and gas field development complex is 200 miles from Norway, the British Isles and Germany.

The recent dip in the world oil market has given consumers relief from surging pump prices, and has investors and commentators waxing with hope that the dip will become a trend. 
 
But don’t bet on it, says energy expert Matthew Simmons. Along with the likes of oilman T. Boone Pickens whose celebrated national campaign calls for a radical shift away from oil dependence, Simmons says that all fundamentals remain in place for energy prices to resume their skyward climb to levels quite beyond records of a month ago.   
 
In fact, in 2005 Simmons personally wagered $5,000 that the worldwide price per barrel would top $200 by 2010 (it was at a record $147 on July 11, and closed Friday at $113.77 on the New York Mercantile Exchange). 
 
Simmons fully expects to win the bet.

He has a growing band of believers, including state Rep. Bill Hilty, DFL-Finlayson, who chairs the House Energy Policy and Finance Division and is openly concerned about the future picture of energy and its implications for Minnesota.   
 
“We have a global economy that’s based on cheap oil,” said Hilty, adding that sharply rising energy costs would be economically damaging and could, if not checked, become dangerous.     
 
A key witness at St. Paul hearing
Simmons, of Houston, Texas, was a key witness at a St. Paul hearing last spring chaired by Hilty. Listening intently and nodding agreement in the packed hearing room were Eagan energy investor Jim Johnson and a retired IBM scientist, Norm Erickson of Rochester, Minn.   
 
Simmons explains that the supply-demand fundamentals that drive oil prices “have actually gotten worse”: 
 
• Worldwide oil demand continues to grow rapidly in populated China and India, while economic growth in oil-rich Russia, Mexico and even Iran has those nations keeping more of their production to themselves. Economic growth means more oil-gulping industry and many more cars; later this year Tata Motors’ will bring its low-cost “Nano” to market, and millions who now ride bikes or small scooters will be driving cars that require lots of oil to make and still more oil to move. 
 
• Despite a rash of media reports that Americans are driving less and in smaller cars, oil demand in the world’s highest energy-consuming nation has dipped only slightly. The United States still consumes 21 million barrels of oil daily (with 5 percent of world population the U.S. consumes a quarter of world oil, while China, with 21 percent of the population, consumes just 8 percent). 
 
• Producing oil is increasingly difficult, time-consuming and costly — Canada, for example, has turned to extracting oil from “tar sands” with a complex heat process that burns so much natural gas that exports are curtailed, helping crimp supply that’s driving gas prices in places like Minnesota much higher.  World oil production of 85 million barrels a day is seen by some analysts as unsustainable (54 of the 65 major oil fields — including the North Sea and Mexico — already are in decline) economic projections would require daily production to increase to a staggering 130 million barrels by 2030. 
 
Warnings of a ‘tipping point’
It’s the last point that most worries Simmons and Hilty, and a growing band of others.  Simmons warns that the world is near a “tipping point” where demand could overwhelm supply, sending energy prices soaring and causing economic disruption if not collapse. In a volatile energy market, massive overnight price spikes could be triggered by threatening speeches by a Middle East leader or a catastrophic shipwreck in places like the narrow Strait of Hormuz at the mouth of the Persian Gulf, through which a third of the world’s oil supply passes on vulnerable vessels longer that three football fields. 
 
Worse, Simmons says, a severe supply and demand imbalance could result in resource wars that a European group has warned may be closer than most would care to believe. 
 
More recently, a diverse group of luminaries — including Colin Powell, Henry Kissinger and James Woolsey — sent an open letter to President Bush and presidential candidates Sen. Barak Obama and Sen. John McCain warning that the United states “is facing a long-term energy crisis that could become one of the most significant economic and national security challenges of the 21st Century.” 
 
Simmons, for 40 years an energy investment banker, is among adherents to the theory of “peak oil” — a point where oil production hits its maximum, after which supply goes into permanent decline. 
 
Little dispute that oil is finite
There is disagreement on how much oil remains, owing to notoriously inaccurate data on reserves. But among energy experts there is little dispute that oil is a finite resource with all signs favoring the “peak oil” view: Oil supply is of lower quality, which requires more refining; there are more and more dry drill holes (Simmons said there have been 220 nonproducing holes in the Arctic, a place that the U.S. Geological Survey says is oil-rich) and oil will be much more costly to extract from things like oil shale or from much deeper wells, some of which are under lots of water.
 
When Brazil giddily announced it had found an offshore oil field that could make the country the world’s largest producer, analysts noted that the oil is 32,000 feet deep and technology to draw it out hasn’t even been invented.   
 
According to a Bloomberg report, tapping the potential reserve will require equipment that can withstand 18,000 pounds per square inch of pressure (enough to crush a truck), pipes that can carry oil at temperatures above 500 degrees Fahrenheit, and drill bits that can penetrate layers of salt more than a mile thick.  Also, the water is so deep that massive drilling platforms cannot be anchored (as in the Gulf of Mexico) but must float on a windy, swelling ocean and rely on complex positioning technology to maintain proximity to the drill hole. 
 
Compare that to the derrick that Edwin Drake erected to tap Pennsylvania crude in 1859 that was a mere 70 feet under solid ground.
 
‘Easy stuff’ is gone
What it comes down to is that the “easy stuff” has already been pumped out, and much of what’s left will be very expensive to produce. Vast oil shale deposits in Colorado, Utah and Wyoming, for prime example, would require the removal of millions of tons of rock and an energy-intensive extraction process (nearly 1,000 degrees of heat is needed to free the oil) so expensive that no one has yet figured out how to make it work.
 
Hilty puts it this way: To extract Pennsylvania crude, it took only one unit of energy input for each 100 units of energy extracted, or 100 to 1; most oil fields today have an energy input/output ratio of about 30 to 1, and Canadian tar sands is down around 3 to 1. Once technology is developed to extract oil from the Brazilian reserve or oil shale, the energy ratio would be even less. 
 
By way of comparison, most analysts say the energy ratio of corn ethanol is about 1 to 1 (Simmons says it’s less, so much so that “it simply doesn’t make any sense”). 
 
Along with others, Simmons has been warning about peak oil for two decades, but he’s not the first. M. King Hubbert, a geophysicist with Shell Oil, accurately predicted in 1956 that U.S. oil would peak by 1970. That’s when the United States went from being a producing nation to being one that today imports 70 percent of the oil it consumes. 
 
Unlike climate change theorists, who rely on data and modeling, “peak oil” advocates rely on known production data that in every case shows a bell-curve history of discovery to increasing production to decreasing production to exhaustion. Taken together, the data from all oil production sites, along with such other information as the ratio of dry-hole to successful-hole drilling and economic growth rates, have helped geoscientists develop “peak” scenarios that are broadly accepted.  
 
National campaign to reduce oil dependence
Among them is lifelong oilman T. Boone Pickens, who recently launched a national campaign to reduce America’s dependence on imported oil by radically increasing wind-power production and using natural gas in vehicles. 
 
Another adherent is Jim Johnson of Eagan, who spent over a decade in the oil business and is now an energy investment adviser. 
 
Johnson said that energy-industry insiders quietly acknowledge “peak oil” and the dire economic and social consequences that are implied by doing nothing about it. 
 
“Energy prices will go through the roof,” Johnson said, “and people don’t see it coming. Worst, we deny that the cause is us and our profligate style of consumption.” 
 
When asked about the prospect of resource wars, Johnson says flatly that it already has started. The war in Iraq, he says, is all about oil because of the reserves that lie beneath the entire region. Indeed, some analysts have suggested that the current military conflict between Russia and Georgia has much to do with controlling oil and natural gas supply.
 
Concern about dwindling natural gas
Norm Erickson, a retired IBM educator from Rochester, Minn., believes that natural gas supply, like oil, is dwindling. As evidence he points to an announcement from Alberta that gas exports (Minnesota gets over half of its gas from Canada) are being cut sharply and then reduced by 8 percent annually. 
 
Erickson believes that oil soon will become in such short supply and so expensive that he has planted hazelnut trees on some property he owns near Lake City, Minn., so that when they’re mature in about six years he can press out the high oil content and burn it in his VW diesel car. 
 
Hilty said the issue of peak oil won’t go away, and he aims to do what he can with his Minnesota House Energy Committee and the newly formed Legislative Energy Commission to develop workable solutions. He said a problem is that the range of solutions to the problem will take two decades to achieve. 
 
Hilty and Sen. Jim Carlson, DFL-Eagan, tried to move the state ahead with solutions by winning bipartisan support for a legislative resolution recognizing the threat of peak oil and calling on Gov. Tim Pawlenty to assemble a study that could lead to development of a comprehensive approach of solutions. Pawlenty said he recognized the problem of peak oil, but he vetoed the resolution. (PDF) However, Sen. Carlson said he was told by Pawlenty’s former energy point person, Edward Garvey, that peak oil “is a door I don’t want to go behind.” Garvey left his job on Aug. 5. 
 
So, what are the solutions? 
 
Short term, it’s a radical rush to conserve energy and to develop alternative sources, an approach that’s supported by a broad spectrum of folks like T. Boone Pickens and fellow conservative Sen. James Inhofe, R-Okla., and the Sierra Club’s Carl Pope.
 
Longer term, Simmons said, people must learn to “live in villages”: in small, energy-efficient homes near where they work and shop, grow their own food, and bike or walk instead of using the car. 
 
But first, he said, people “must wake up and understand what’s going on here.”

Comments (10)

  1. Submitted by Tom Poe on 08/19/2008 - 03:59 pm.

    It has come to my attention that former president Jimmy Carter spoke to Americans about the need to consider changing our lifestyles, move to alternative fuels, avoid dependence on oil, and promptly lost the election. Folks don’t like the idea of changing their lifestyles. In 1977, we were given a choice based on facts. The facts have accumulated, and we are now facing the same choice. This time, however, we’re able to see the results of not listening and acting with Mr. Carter. Will we make a different choice this time? With effort, my yard is becoming edible. The grass is being replaced by garden. Will yours do the same?

  2. Submitted by myles spicer on 08/18/2008 - 11:47 am.

    For those who urge us to start drilling off shore RIGHT AWAY, they may want to check the reality of such a plan. Transocean — the world’s largest off shore drilling company is currently backlogged $33 Billion for the next 8 years!!!!! Yes, Billion with a “B”. So, claims of getting new oil fast, are a myth and irresponsible.

  3. Submitted by Norm Erickson on 08/18/2008 - 02:50 pm.

    Correction and addition: The US imports about 56% of Canadian gas production, about 15% of US consumption. Most of it is delivered to our north central region via three pipelines. Some new gas is coming on-line, but it may not even replace losses due to depletion. Gas wells poof out about half their production in 6 months. We are now drilling over 25,000 wells a year to try to stay even. We are in trouble. Foreign gas brought in as liquified natural gas will cost two to three times as much as domestic gas. We are in troule!

    Hazelnuts contain ~60% high quality edible oil, three times that of soybeans, and, hazelnuts are perennial so they do not have to be replanted every year at considerable energy cost. Hazelnuts will become a third crop on farms, for energy to operate the farm, for food production, windbreaks, landscaping, wildlife, etc. Go to http://www.ruraladvantage.org for hazelnut field day information.

  4. Submitted by Don Gulseth on 08/18/2008 - 07:41 pm.

    http://tonto.eia.doe.gov/oog/info/twip/twip_gasoline.html
    http://tonto.eia.doe.gov/oog/info/twip/twip_distillate.html

    Ron, the above web sites have easy to read graphs and charts from the: Energy Information Administration (EIA) Logo – Need Help? 202-586-8800

    This site is for domestic inventories, purchases and use for day,week,month and years.
    You can see purchases, inventories, are “demand” oriented. Generally it is 90 day period to pump crude to the retail pump. IT may allow people to understand the volatility of pricing of fuels.

  5. Submitted by Ron Gotzman on 08/18/2008 - 10:35 am.

    I guess it takes a village with properly inflated car tires.

  6. Submitted by Clifford Wirth on 08/18/2008 - 09:15 am.

    According to energy investment banker Matthew Simmons, 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.

    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: http://www.peakoilassociates.com/POAnalysis.html

    I used to live in NH, 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.

  7. Submitted by Robert Moffitt on 08/18/2008 - 10:54 am.

    Individuals concerned about peak oil need not plant their own personal hazelnut orchard, as Norm Erickson has done.

    Biodiesel can be made from a variety of natural oils and fats, currently the biodiesel used in Minnesota is made from soy oil. The metro buses (including the diesel-electric hybids) are already running on a 20% blend now, the coming NorthStar commuter rail will use biodiesel, next summer virtually ALL diesel sold in Minnesota will contain 5% biodisel.

    Minnesota has offset more than 10% its overal petroluem fuel consumption by using biofuels, that percentage will grow in years to come. Even as gasoline consumption drops, use of cleaner-burning fuels such as E85 has risen 13% statewide this year.

    We need to work on other alternatives (second-generation biofuels, more efficient vehicles, more mass transit options) if we are going to face the challenges of “peak oil,” but at least Minnesota has started moving in that direction.

  8. Anonymous Submitted by Anonymous on 08/18/2008 - 09:18 pm.

    This is a great article! It notifies folks that a great many experts believe in the peak oil study and are concerned about the future. The author mistakenly used the word “exhaustion” with respect to oil. The peak oil study only has to do with “production rates”. It has nothing to do with the amount of oil that remains in the ground and therfore the word “exhaustion” is inappropriate. The conservatives who can’t be convinced that “peak oil” is real are very critical of talk about “running out of oil”. The truth is the world will never run out of oil because as the production rate declines the cost will skyrocket to the point that no one will be interested in buying any.

  9. Submitted by Daniel J. Lavigne on 09/03/2008 - 11:59 pm.

    It is truly unfortunate that President Carter’s timely warning, via his fireside chat, was ignored.

    Worse, President Reagan’s first order as President, to remove the solar panels President Carter had installed on the White House roof, led America to ignore the facts about its dependence on lo-cost oil; and to the subsequent careless / indiscriminate use of all fossil fuel sources.

    If such is not soon addressed by a meaaningful political decision to fully communicate and confront the reality of the energy crisis, near future lack of fuel sufficient to drive food production and delivery processes could well lead America to suffer another civil war.

    Pray that common sense prevail.

    To a safer, saner and more caring world.

    To Duty.

    Daniel J. Lavigne, Founder
    International Humanity House

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