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A Peek at Peak Oil

April 5, 2007

Peak oil is a thunderhead hovering on the energy horizon. The cloud has put some snap into the air, but no one today can say for sure whether it will deliver a drizzle or a catastrophic deluge.

In any event, according to a new report from the Government Accountability Office, the federal government isn’t doing much to prepare the nation in case it’s a deluge. “There is no coordinated federal strategy for reducing uncertainty about the peak’s timing or mitigating its consequences,” the report said dryly.

In essence, peak oil means that oil production generally follows a bell-shaped curve. After a field enters production, output rises, then hits a peak. Following the peak, production falls.

Nationwide, the U.S. hit peak in the early 1970s. Domestic oil production has never returned to its high point. The Energy Department projects that enhanced oil recovery technology and deepwater production may increase U.S. oil output a bit between now and 2030, but there is no prospect that conventional oil production will defy the bell curve and return output to the glory days of the early post-World War II era.

The question of the hour is whether global production has hit peak or will in the near future. Post-peak, if demand exceeds supply, the predictable result would be higher prices. If the production drop-off is steep, the economic dislocation could be severe.

The issue has long roiled petroleum geology and energy economics circles, but it has entered the broader public conversation only recently, thanks partly to a series of sound-the-alarm speeches given on the House floor by Congressman Roscoe Bartlett, R-MD, who co-chairs the congressional Peak Oil Caucus.

The GAO report said that most studies project the arrival of peak oil between now and 2040. Pinning that arrival date down a bit more definitely has proved vexing, however.

There are several reasons for this. The 15 members of the Organization of Petroleum Exporting Countries (OPEC) control some 80 percent of the world’s stated oil reserves, but their reserves estimates, unlike those of commercial oil companies, have never been subject to independent scrutiny. There is reason to believe that OPEC nations have exaggerated the size of their reserves because the cartel’s production quotas are linked to stated reserves size. Unless the cartel members are willing to open their books to outside auditors, a highly unlikely prospect, there is no way to tell for certain whether they are blowing smoke or not.

In any event, no one can say how much of the world’s remaining oil could be taken out of the ground. Political instability afflicts many of the producing areas. GAO pointed out that Global Insight, a Massachusetts risk consulting firm, estimated that one-third of proven oil reserves are in zones of high political instability, vulnerable to strikes, violence, and other disruptions that add a risk premium to prices.

There may be large pools of oil in frontier polar or marine regions, but such fields are costly and difficult to produce. For example, the hullabaloo last year about the discovery of a potential super-giant oilfield beneath miles-deep water off the Louisiana coast overlooked the fact that ultra-deepwater production is a pricey undertaking. Operating costs for deepwater rigs are 3 to 4.5 times higher than shallow water rigs, the GAO report said. Such fields will not be produced unless it is profitable for companies to produce them.

Aside from costs, estimating how much oil remains in the ground is not an exact science. A good way to start a barroom argument in Houston would be to comment on the reliability, or lack thereof, of any one of several estimates that energy agencies and peak oil factions have published.

Fossil fuel boosters point to seemingly vast quantities of unconventional resources: tar sands, oil shale and extra heavy oil. Such resources are unconventional for a reason, however. Producing them is costly because of the extra processing and energy that are required.

Here’s a new acronym to ponder -- EROEI, which stands for “energy return on energy invested.” Back in the gusher days of the huge East Texas oil field, investing one unit of energy yielded a handsome return of 100 units of energy produced. That’s an EROEI ratio of 1 to 100. For the sticky, gunky, unconventional resources, EROEI ratios are a paltry 1 to 2 or 1 to 3. Anything lower than that and producers would be wasting their time.

On the demand side, most projections see rising oil consumption in the years ahead, but precisely how much will be consumed cannot be known with precision. Alternative technologies that could take a big bite out of fuel demand will need time to ramp up. If the global peak has arrived or is just around the corner, the alternatives aren’t quite ready to ameliorate the pinched oil supplies, price run-ups, and deep recession that could follow.

As the world’s largest oil consumer, the U.S. has the most at stake in getting peak oil questions answered. All the more reason, the GAO says, for the federal government to pay more attention to the issue by trying to reduce uncertainties about peak oil’s timing and identifying oil replacement technologies that could be speeded towards widespread commercial adoption.

Better to act now, while the peak oil thunderhead is on the horizon, than waiting until a downpour begins.