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The Peak Oil Crisis: Edging Towards Reality




Last week the International Energy Agency (IEA) in Paris released their annual report on the state of the world’s energy resources — World Energy Review 2008.

As the world’s energy situation becomes more and more confused, with prices gyrating wildly, and with more voices warning of unprecedented problems just ahead, this 569-page report stands as the most authoritative description of what will happen to the world’s energy supply. The energy policies of the 28 countries that are members of the IEA in theory hinge on the report’s findings – and that is where the trouble comes in.

Until recently, the IEA’s forecasts have been based on the premise that there was plenty of oil or equivalent hydrocarbons left to extract. Forecasting future production was simply a function of extrapolating demand. However much oil the world needed and was ready to pay for, the oil industry would provide. This premise of course undercuts the notion of world oil production peaking anytime soon. As long as there is plenty of oil to extract in the foreseeable future, world production should not peak. It was this premise and associated judgments that serve as the basis for most of the world’s governments denying or at least avoiding discussing very loudly the idea that world oil production will soon be going into decline.

In recent years however, as world oil production stagnated, and as more attention was focused on rates of oil depletion vs. the likelihood of offsetting new production, the IEA’s basic premise became more and more untenable. This year the Agency succumbed to reality and addressed the issue of stagnating oil production head-on with detailed discussions of oil depletion around the world.

It must be kept in mind that the World Energy Review is not an academic search for truth, but a political document that forms the basis for energy policy in many countries and guides the expenditure of billions of dollars. The current travails of General Motors is a case in point. Given the importance of the document, it is naïve to expect a sharp reversal of its key judgments that the world’s oil supply will continue to grow for the next 20 years nor that oil prices will not become too burdensome. In this respect the new release does not disappoint, for the Agency continues to forecast in what is called a “reference case” that world oil production will increase by another 20 million barrels a day (b/d) over the next 20 years.

With the “all will be well” formalities out of the way, the Agency, however, breaks much new ground in providing data on world oil depletion and warning that supply problems are just ahead. As it has done for over a year now, the IEA bases its concerns for the future not on geology, but on the lack of sufficient investment to keep up with the steadily rising costs of extracting and processing oil from increasingly difficult places. If you want a mind boggling number, the Agency now says that it will cost $26 trillion (with a “T”) over the next 20 or so years to keep energy flowing at its current pace and to provide for some economic growth. If we don’t spend this much, then it is our own fault if supplies of oil, coal, natural gas, and electricity run short.

Perhaps the most interesting phenomenon surrounding the release of this year’s report is the veritable swarm of critics that descended on release day to dissect all 569 pages, word by word, graph by graph and chart by chart. Dozens if not hundreds are involved in this effort and are already bombarding the report’s authors with demands for explanations of the dozens of inconsistencies that have already turned up. While obviously stressful to those involved in producing the report, it is a healthy process for it serves to remind the Agency that its judgments are having a significant impact and that many knowledgeable people are watching and parsing the Agency’s every utterance.

For most commentators, the major flaw in the report is the judgment that world oil production will continue to increase steadily for the next 22 years despite increasing rates of oil depletion, as well as growing environmental and fiscal problems. The Agency forecasts that production from currently producing fields will decline to about 50 percent of current production. This decline, they say, will be more than made up for by: developing new already discovered oil fields; finding new fields, using enhanced recovery techniques to get more oil out of existing fields; getting more oil from the Alberta tar sands; doubling natural gas production and extracting the liquids from the gas; and finally increasing the extraction liquids from coal. When, and if, all this happens, the world will be perking along nicely with 106 million b/d of oil vs. the current 86 million b/d.

As one cynic put it, the IEA was given the job of forecasting enough energy production to allow the world’s economy to continue to grow for the next 20 years, and then set about constructing a scenario, however implausible, of how this might happen.

After deriding the optimistic forecast, most of the commentary thus far has focused on the new data about rates of oil depletion and what they portend. Rates of oil depletion is a complicated, (for there are hundreds of major oil fields) yet important area of study as it is key to what is going to happen over the next few decades. The new information provided by the IEA, and more importantly the debate over this information, is likely to occupy the time until the next report comes out.

The best feature of this report is that the IEA seems to be responding to its critics and seems willing to engage in a genuine debate over the future of the world’s energy supply. It is asking too much of agency that answers to 28 governments to embrace peak oil with the release of one publication. However, if one reads between the lines and uses the data to draw one’s own conclusion, the new report simply screams that peak oil and all that it implies is just about here.

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