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By Robert Rapier on Mar 30, 2007 with no responses

My Thoughts on the GAO Report on Peak Oil

As I mentioned yesterday, the Government Accountability Office (GAO) has released a report addressing future energy supplies in the U.S.:

Uncertainty about Future Oil Supply Makes It Important to Develop a Strategy for Addressing a Peak and Decline in Oil Production (1.1 meg PDF warning)

The report is getting a good deal of mainstream media coverage. I believe that there is something of value in the report for everyone, and there are a number of lessons we need to take away from it. Let’s start with Results in Brief:

Most studies estimate that oil production will peak sometime between now and 2040, although many of these projections cover a wide range of time, including two studies for which the range extends into the next century.

That is obviously a very wide range. If you don’t believe that oil production will peak until the latter part of that range, then you may not be at all concerned about the issue. (More in a bit on why you should be anyway). After all, 2040 is over 30 years in the future, and technology could come up with a lot of neat tricks in that amount of time. After all, some believe we will have transcended biologyby then. Perhaps very cheap solar energy will satisfy the bulk of our power needs. Those who tend toward the optimistic viewpoint that science will solve the problem will probably take great comfort in a 2040 estimate.

On the other end of the scale are some of the hysterical reactions that I read yesterday. Some believe that not only is peak NOT 30+ years away, but they believe that it has already happened. After reading some reactions following the release of the report, I had to look outside to make sure there wasn’t rioting in the streets and missiles flying overhead. That was literally the tenor of some of the more hysterical reactions. (For the record, I believe there is a 90% chance of a production peak by 2015, and maybe a 10% chance that production has already peaked).

While I certainly don’t tend toward the apocalyptic viewpoint, I do consider this a very serious challenge and something that needs to be addressed immediately. If oil production peaks in the next few years, and is followed by a 4-8% annual production decline, things could get very bad indeed. The U.S. is simply not prepared to have its oil supply disrupted. As the report notes:

While the consequences of a peak would be felt globally, the United States, as the largest consumer of oil and one of the nations most heavily dependent on oil for transportation, may be particularly vulnerable.

Now, here is why you should care about this situation, even if you tend toward the viewpoint that oil production won’t peak for 30 years:

Other important sources of uncertainty about future oil production are potentially unfavorable political and investment conditions in countries where oil is located. For example, more than 60 percent of world oil reserves, on the basis of Oil and Gas Journal estimates, are in countries where relatively unstable political conditions could constrain oil exploration and production.

Most of the remaining oil happens to be in places like Iran – not on the friendliest terms with the U.S., Nigeria – where the promise of oil wealth has led to much violence (ala Blood Diamond), and Saudi Arabia – generally on “friendly” terms with the U.S., but in a historically unstable part of the world. This is where the oil dollars are flowing. If you think ExxonMobil is making big profits, you would probably be stunned at the amount of money Saudi Aramco is pulling in – with a significant portion resulting from U.S. demand. Some of that money ends up in the pockets of people like Osama bin Laden, who then uses it to fund attacks against the U.S.

So, is that situation desirable for the next 30 years (for those with a 2040 peak view)? I doubt too many people will say yes. Yet the same mitigation efforts for peak oil will also mitigate our dependence on foreign oil. Why don’t we address this? Politics. There is no free lunch. Mitigation will cost money. How many people would be willing to get off of foreign oil if the end result is gasoline prices of $7.00 a gallon? I guarantee you that there is a price point that would enable us to get off of foreign oil. But what percentage would accept such a solution? 5%?

The problem is that people are being promised pie-in-the-sky solutions. They want to get off of foreign oil, but they don’t want their gasoline prices to increase. So, to fulfill the unrealistic expectations we get “solutions” like corn ethanol. I have been warning about the implications of this for a long time. We saw a lot of unrealistic assumptions early on that have now led to a situation in which ethanol has done little to reduce our foreign oil demand, while driving up our food prices. Yet despite the current production of 5 billion gallons of ethanol a year, gasoline prices are once again in record territory. And I believe the worst is still in front of us. (Yes, I know the farmers are getting rich, and their land values are skyrocketing. Maybe we should hit them with a windfall profits tax?)

Biofuels certainly have a part to play if we are serious about getting off of foreign oil. But we have got to be realistic here. The U.S. uses too much energy, because energy has been cheap there for a long time. People are ready to riot because gasoline hits $3.00 a gallon, yet people in Europe have dealt with that situation – and quite well – for many years. But in the U.S., conservation is really being discussed as an afterthought. Cellulosic ethanol, algal biodiesel, and hydrogen cars are not going to save the day. Conservation is the only thing that can save the day, with various energy sources providing the energy we do need.

This is why, even if I knew oil production wasn’t going to peak for 30 years, I would still be concerned. We are very vulnerable. Supply and demand will remain tight. Look at Chris Skrebowski’s latest Megaproject update. As Chris noted:

It is only possible to draw two conclusions from this latest megaprojects analysis. First, data on production, project performance and depletion rates is wholly unsatisfactory, particularly for the Opec producers. Second, the large volumes of new capacity being added between 2007 and 2012 may not translate into the sort of increased production flows the world economy needs to underpin economic growth.

Supply can’t open up a gap on demand, so oil prices are going to remain high. As long as the U.S. maintains the status quo, riches will continue to flow into countries like Iran and Venezeula, imminent peak or not.

There is a section of the report devoted to various mitigation possibilities. That is a pretty realistic assessment in my opinion, and probably worth another post in the near term. The report concludes:

The consequences would be most dire if a peak occurred soon, without warning, and were followed by a sharp decline in oil production because alternative energy sources, particularly for transportation, are not yet available in large quantities. Such a peak would require sharp reductions in oil consumption, and the competition for increasingly scarce energy would drive up prices, possibly to unprecedented levels, causing severe economic damage. While these consequences would be felt globally, the United States, as the largest consumer of oil and one of the nations most heavily dependent on oil for transportation, may be especially vulnerable among the industrialized nations of the world.

That is not an acceptable situation. Policy makers must wake up and find the courage to address the vulnerability.