National Commentary

The Peak Oil Crisis: Forests & Trees

The old rubric about not being able to see the forest for the trees is becoming more relevant as the world drifts towards numerous catastrophes. While our media talks endlessly about the symptoms of our many problems — Trump, Syria, floods, droughts, interest rates, and whatever – but these are not our fundamental troubles. The real problem is that the global forest in which we all live is coming unglued. There are too many of us. We are growing too fast for the resources left on the planet. The earth is melting at the top, frying in the middle, and melting still more at the bottom. Soon there will not be enough water to drink, food and fish to eat, or clean air to breathe. The global economy is winding down before our eyes.

To top it all off, people are starting to migrate across the earth in large numbers searching for economic opportunity, safety from hostilities, or even enough food and water. If the climate scientists are right, soon the tens of thousands on the move will become millions as life in many parts of the world will become unsustainable before the century is out.

Change in many forms is coming too fast for our planet’s diverse cultures. A few of us are barely out of the stone age. Others are stuck in the Middle Ages, while still others cling to the beliefs and practices of their fathers in the 20th, 19th, or even earlier centuries while trying to cope with the technology, communications and social customs of the 21st.

How does peak oil which is the underlying topic of this column fit into all this?  For the last six or seven years, nobody has paid much attention to the possibility that in the near future oil might come into short supply and prices start climbing to unaffordable levels – there simply has been too much oil from new sources coming out of the ground to be concerned about shortages. In the last seven years horizontal drilling and fracking has produced a lot of new oil, but the process has some unusual characteristics in contrast with your grandfather’s oil wells. First it is very expensive to produce compared to other land-based sources of oil. Fracking has been around for a while, but it just was not economical until oil prices got to $70 or above per barrel; then the industry went to town and production soared.

Fracked oil is not only expensive to produce, but fracked wells run out very quickly requiring continuous drilling to keep production from falling. Extracting shale oil only works in a limited number of geological formations of which there are only a few in the U.S. These formations are clearly of finite size so that even if there were not cost constraints on production, independent geologists say that production will be in decline by the end of the decade no matter what the selling price.

The U.S. is unique in allowing private ownership of mineral rights and having an extensive transportation system for newly produced oil already in place. This has allowed oil companies quick and easy access with minimal environmental opposition to shale oil deposits in Texas and North Dakota. In other countries which lack these prerequisites, horizontal fracking of shale oil deposits has been slow to develop.

In recent months, U.S. shale oil production has been dropping, despite the best efforts of drillers to cut costs and confine new drilling to the best of the “sweet spots.” Unless oil prices rebound to levels where shale oil production is profitable, it seems likely that US oil production will continue to fall. How long this fall will last, and how low production will go is the matter of much discussion.

In the last 10 months, global oil consumption has been rising simply because oil products are now much cheaper than in recent years. This has given rise to the optimistic view that soon there will be so much new demand for oil that prices will rise making shale or production sort of profitable again. For those of you who missed it, very few drillers have made any money from shale oil. Their well-paid employees and contractors have, but most investors have only lost money.

The other view of the next few years holds that oil prices will not rise to the level that leads to significant increases in production. Arctic, deepwater, and tar sands oil costs even more than fracked shale oil. New production projects targeting these sources have nearly come to a halt and given the lead time required to exploit these sources, it will take several years of high oil prices before significant increases in new oil sources can be achieved. In the meantime, depletion will take its toll on existing oilfields and global production will fall.

Does this mean that we have reached peak oil? The short answer is that it is too early to tell. As we know, industries have numerous embedded feedbacks which self correct perturbations. Lower oil prices lead to lower production, but also to more demand as consumer prices are cheaper. The lower production leads to shortages and higher prices and which in turn leads to more production – but only if more production is available at going prices. How these cycles will play out over the rest of the decade and into the 2020s is nearly impossible to predict.

There are many outside factors in the equation such as the current contraction of the global economy led by China. The Middle East is clearly coming unstuck in many ways. Oil is no longer freely flowing from a number of countries in the region; Iran is about to ramp up its production, if it can sell it; Iraq certainly seems on the way to fracturing into smaller countries; and the forces that want to overthrow the Gulf oil producing monarchies are growing in strength all the time. The rest of the decade is going to be an interesting time.

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