Energy International Quarterly

Energy International Quarterly

july/august 2011 vol. 3, issue 13

THE END OF OIL? EIQ investigates peak oil, p.32

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CanWEA spurs the growth of Canada’s wind industry, p.38

THE END O Some experts claim that worldwide oil production is already in decline. Others predict that peak oil is fast approaching, and that it will bring disastrous consequences.

EIQ investigates. by carolyn dorant 32

OF OIL? energyinternationalquarterly.com | july/august 2011

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The end of oil?

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audi Arabia will be unable to meet production goals,” declares a leaked cable from the US Embassy in Riyadh. The dramatic message, written in November 2007, was published in the United Kingdom’s Guardian in February 2011. The cable summarized a conversation between US State Department officials and Dr. Sadad al-Husseini, the former executive vice president for exploration and production at Saudi Aramco.

“While stating that he does not subscribe to the theory of peak oil, the former Aramco board member does believe that a global output plateau will be reached in the next 5-10 years, and will last some 15 years, until world oil production begins to decline,” the cable reads.

Though al-Husseini claims not to subscribe to the theory of peak oil, his forecast describes exactly what peak-oil activists have been predicting for years: the current rate of oil production is unsustainable. There has not been enough oil discovered in the world to meet production goals, and it’s possible that there never will be again.

THE CONSEQUENCES OF PEAK OIL

This issue reaches beyond the oil industry: the average consumer will also feel the consequences of peak oil. First, already-expensive gasoline will continue to get more expensive. As supply begins to level, should demand remain the same or increase (and currently, it is scheduled to increase from 85 million barrels a day in 2009 to 105 million barrels a day in 2030, as reported by the International Energy Agency), it will be impossible for gas prices to remain the same or 34

to lower. As a result, many predict that cars with better fuel economy and gas mileage will become more popular. The US Department of Energy released data in December 2009 that indicated an increase of more than one million flex-fuel cars per year between 2005 and 2009. At the time the data was published, there were 8.3 million E85, or flex-fuel, cars on American roads. In 2008, US car manufacturers Chrysler, General Motors, and Ford pledged to have 50 percent of their vehicles available as flex-fuel models by 2012.

With the high-profile releases of Nissan’s Leaf—one of the first widely available electric cars—and Ford’s Focus Electric, it seems that the automobile industry is anticipating a future with less oil—or no oil at all. City governments, too, seem to be looking to a future that’s less dependent on oil. In February of 2011, the City of Chicago awarded almost $2 million dollars to 350Green, a San Diego-based firm that develops wide-scale electric vehicle charging networks.

These stations were previously only seen in California and abroad, and the adoption of these technologies in a city like Chicago signals that the green movement may have readied people for fuel alternatives.

energyinternationalquarterly.com | july/august 2011

Dr. Colin J. Campbell, a retired geologist, coined the term “peak oil” and, in 2000, founded the Association for the Study of Peak Oil and Gas, a self-described, “network of scientists, [interested] in determining the date and impact of the peak and decline of the world’s production of oil and gas.” The organization, founded in Germany, is headquartered in Sweden.

Dr. Campbell argues that while people are embracing more advanced green technologies, their advances will not be enough to stop oil production from peaking. “There is a finite supply of crude oil on this planet,” he says, and cites the previous availability and low cost of oil as proof that no alternative source of energy will ever be able to take the place of oil in regards to affordability and abundance. “People will be forced to return to more local lifestyles,” Campbell predicts, “because long commutes will no longer be possible.” He adds that people may be forced to learn to grow their own produce, because imports may become increasingly difficult. “That doesn’t sound so bad,” he quips.

Not all experts agree with his analysis of the global oil situation. On one hand, Joseph R. Dancy, an adjunct professor of energy and environmental law at Southern Methodist University, agrees that oil is a special energy source—and that if it is in decline, a similar boon is unlikely to come again. “Crude oil is unique as a transportation fuel,” he says. “It is difficult to find substitutes. It has a very high energy density, is easy to store, is stable (nonexplosive), retains energy content in storage,

The end of oil?

Research by the Smith School of Enterprise and Environment at Oxford University suggests demand has started to outstrip supply. It also recommends that the current oil reserve estimates should be downgraded from between 1,150 and 1,350 billion barrels to between 850 and 900 billion barrels.

is easy to distribute, and can be made widely available at a reasonable distribution cost.”

But while Dancy acknowledges that oil production may be reaching its peak, he doesn’t think humans will face a dramatic lifestyle change. “[The biggest misconception people have about peak oil is that] mankind will go back to a stone-age lifestyle,” he says. “Alternative fuels will aid in non-transportation sectors as oil gets much more expensive. Natural gas and coal will play a big role…[and] oil production will not fall off a cliff, it will plateau for some time, allowing for a transition.”

While many people fear that peak oil will have catastrophic consequences—some predict it will lead to food shortages, riots, disease, and more—others, like Dancy, predict the impact will be gradual and less dramatic. In any case, it seems that the decline in the availability of crude oil presents an opportunity for energy innovation. The energy industry will doubtlessly be faced with multiple challenges in the coming years, but a decreased oil supply is one that could define a generation. “Fossil fuels, coal, natural gas, and crude oil will still provide a majority of energy to the globe in 2030,” Dancy predicts, but, “wind, solar, ocean, geothermal, and other sources will [grow], but remain a minority of the energy mix.”

The trick, it seems, is to supply the gap between the amount of oil available and the amount needed to keep prices reasonable. “I think the industry is doing all it can to develop unique technology to extract additional oil from old fields and to find new fields.” he says. Many

are also considering obtaining oil via alternative extraction methods—like steamflooding, the process of heating an oil well in order to make it lighter and easier to move around. Shale oil, which is usually extracted above ground via ex situ processing, has also experienced a surge in popularity as a source of fuel.

WHEN WILL OIL SUPPLY PEAK? Experts are mixed about the exact point in time at which peak oil will occur, and what its impact will be. Campbell, who developed his theory in the 1970s while working for an oil firm in South America, believes it occurred in 2005. Dancy, however, says we may not be at peak, but we are very close to it. The truth (if there is one) is that it’s impossible to know. In the Federal Reserve Bank of Atlanta’s Economic Review, published in November 2009, Laurel Graefe writes: “[One] factor that obscures the outlook for oil supply is that individual countries take differ-

ent approaches to sharing their reserve data.

For instance, while the United States policy is to publically share its reserve estimates, Saudi Arabia, the country thought to have the largest petroleum holdings on earth, maintains a high level of secrecy about its reserves.”

Due to the recent Wikileaks, which caused hundreds of classified Department of State cables to be published, we now know that even Saudi Arabia is struggling to meet production goals. Some argue that the absence of knowledge of the world’s oil reserves makes peak oil impossible to predict. In the December 2010 issue of The Geographical Journal, Michael J. Bradshaw’s “Global Energy Dilemmas: A Global Perspective,” addresses this issue. “The notion of ‘peak oil’ is highly contested because…knowledge of the extent of reserves is limited and the level of production is contingent upon so many ‘above the ground factors,’” Bradshaw writes.

“That said, it is recognized by all that the end of

Oil demand was 85 million barrels a day in 2009, and is scheduled to increase to 105 million barrels a day in 2030. source: international energy agency energyinternationalquarterly.com | july/august 2011

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The end of oil?

the oil age will come long before the world physically runs out of oil.” Bradshaw estimates that production will peak between 2009 and 2031, adding, “…there is a significant risk of a peak before 2020.” Despite the uncertainty about the time at which oil production will peak, most experts concede that this natural resource is not bottomless.

In February 2005, the US Department of Energy published a report, Peaking of World Oil Production: Impacts, Mitigation, and Risk Management, which is commonly referred to among peak oil experts as the Hirsch Report, because it was written by Robert Hirsch, a respected energy advisor. In the report, 13 different sources discuss when they believe oil production will (or would) peak—including Campbell, who, at the time, declared it would be in 2010. Dates ranged from 2006 (as predicted by Dr. Ali Morteza Samsam Bakhtiarti, an Iranian who worked for the National Iranian Oil Company) to never (this optimistic prediction was declared by Organization of the Petroleum Exporting Countries). Shell predicted the second most optimistic result: 2025 or later.

Because different countries, organizations, and corporations have access to different sets

ITPOES (Industry Taskforce on Peak Oil & Energy Security) predicts peak oil will occur within the next decade, potentially by 2015. of data, it is unlikely that all nations and organizations will come to a consensus about when production has or will peak. “What matters is not so much the date but the vision of the long decline,” Campbell says.

HOW THE INDUSTRY IS PREPARING

Oil companies are already affected by the predicted decline in supply. Some firms, like Chevron, for example, are making moves to prepare for a large-scale shift in the energy landscape.

On its website, the company writes: “worldwide energy consumption is projected to rise

by about 33 percent in 2030. … At Chevron, we recognize the world needs all the energy we can develop.” And so, in 2010, the firm invested $21.6 billion to develop a diverse portfolio of energy resources,which includes celluloid biofuels and geothermal energy. The firm has also invested billions in oil exploration and production, and into the development of alternative oil-collection technologies, such as harvesting oil from sand.

Some smaller firms, though, stand to benefit from the onset of peak oil—at least temporarily. One such company is Osyka Corporation, a

Global Oil Production Thousand barrels per day barrels per person per year Source: carrentals.co.uk

United States 18,686 21.9

Brazil 2,405 4.56

Canada Mexico 2,195 23.4

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1,945 6.3

energyinternationalquarterly.com | july/august 2011

Germany 2,422 10.1

Iran

Russia

1,741 8.5

2,695 6.9

United Kingdom Saudi Arabia India 1,611 9.4

2,614 35.1

3,183 0.9

China 8,625 2.3

Japan 4,396 12.5

Houston-based independent oil-and-gas production firm. Though CEO Michael Harness admits that the firm’s production is currently low (it now produces roughly 135 barrels per day, but in 2008, produced about 2,500 barrels each day), he hopes a strategic growth strategy will get production back up to 2,000 barrels per day in 2011.

Peak oil, he says, could bring a short-term boon to Osyka. “We can benefit from the change in supply,” he says. “We buy assets that were once owned by major oil-and-gas companies, and try to further exploit them and to identify opportunities for more drilling or well repair that allows us to increase production. Those opportunities will continue to exist.” The firm uses waterflooding to pump oil out of wells that others have deemed as dry. As oil supply gets increasingly low, Osyka may also begin to use a recovery method that involves injecting CO2 into a reservoir, to push additional oil to the surface.

Like Dancy, Harness doesn’t believe that peak oil will send our society back to the Stone Age. He does believe it will act as an impetus to usher in more green technologies. As it relates to transportation, for example, he predicts “we will find ways to use electric cars, or propane or butane cars that run off natural gas.” If you haven’t bought an electric car yet, though, don’t panic: “For this switch to occur in a more dramatic worldwide fashion,” he says, “it’ll probably be another 20 years.” EIQ

“While the United States policy is to publically share its reserve estimates, Saudi Arabia, the country thought to have the largest petroleum holdings on earth, maintains a high level of secrecy about its reserves.” from the federal reserve bank of atlanta’s economic review energyinternationalquarterly.com | july/august 2011

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