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By Robert Rapier on May 14, 2007 with no responses

Peak Oil: End of the World?

I will have a new post up in a day or so (working with Vinod Khosla on something, and then I will finish that bio-butanol post), but until I get that finished, I will recycle this one (from 5/4/06) that details my views on Peak Oil.

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Perhaps like many of you, I spend a lot of time trying to predict what the future holds with respect to Peak Oil. I want to know what the effects will be to the U.S., the world, the economy, my employer, but first and foremost I want to know how it will affect my immediate family and me.

I am not a “doomer”, but I do think we are facing a very serious challenge. I think the affects of Peak Oil will be unprecedented, but I don’t think it is going to throw us back into a pre-industrial existence. If the peak happened suddenly and with little warning, followed by a rapid oil depletion rate, then the scenario would be disastrous.

One of the things that I believe is going to “save us”, so to speak, is the supply/demand imbalance that is currently opening up ahead of Peak Oil. China and India are both increasing their consumption of oil, and it is providing steady upward pressure on the price of oil and gas. This is causing gasoline to become quite expensive, and over time should cause people to start making the necessary adjustments. If you are a “doomer”, you should embrace higher gasoline prices as something that will give us more time to prepare for the aftermath of the peak.

I view the aftermath of Hurricane Katrina as a preview of things to come. Around 25% of the refining capacity in the U.S. was knocked offline. Prices immediately reacted to this to prevent consumers from draining gasoline inventories. Gasoline became very expensive, and suddenly people started to cut back on unnecessary travel. I personally cut out unnecessary driving, as I am sure did most people. Demand for gasoline dropped, and is still down somewhat from historical levels.

Over a longer time frame, if gasoline remains expensive, people will start buying automobiles with higher fuel efficiency. People will begin to base their housing decisions on proximity to work. People who have never considered car pooling or public transportation will do so. Granted, changes in auto and housing markets will take time before the cumulative effects make a dent. But a prolonged period of very expensive gasoline prior to the peak, which is the scenario I expect, will help spur these changes.

Now, that is what I think will happen. But I have to consider the possibility that price will not stem demand as much as is necessary. I am making the implicit assumption that we can merely raise gasoline prices until supply and demand are balanced. But that is probably not a realistic option. Why? Because who will benefit from those higher prices? Oil companies. If you think the public is outraged now, wait until gas is $10 a gallon, people are suffering as a result, the economy is tanking, and ExxonMobil posts the first ever $100 billion annual profit. I will probably have to wade through protesters to get to work in the morning.

The vast majority of the country will blame Big Oil for their woes, and they will resent that Big Oil is profiting from it. How will the public react? How will the government react? No doubt there will be legislation designed to combat the problem, but of what form? Will the government institute rationing? Will they attempt to nationalize the oil companies? If they did, would it mitigate the problem in any way? Should I buy farmland so I can grow my own food if necessary? Should I store a few thousand MREs in my garage?

When Will We Peak?

I know a lot of people believe the peak is on top of us. Some are suggesting that it occurred in the 4th quarter of last year. At one time I had compiled a dozen different peak predictions based on rigorous studies. Nine of the twelve predicted a peak between now and 2016. Another (Shell, I believe) predicted a peak around 2025. The Energy Information Administration (EIA) predicted a peak around 2037, and one study essentially predicted we will never peak.

I monitor oil inventories and production pretty closely. I know that some of the curves look as if oil production is topping out. However, consider that we still have 300,000 barrels per day shut-in in the Gulf of Mexico as a result of last year’s hurricanes. Nigeria has taken more than 500,000 barrels per day off the market due to the unrest there. The war in Iraq has taken over a million of barrels off the market. Those are the factors driving the current flattening of the oil production curve. As one very knowledgeable insider recently told me “I believe that the peak oil theorists have been mistaking resource access and geopolitical issues for peak oil”.

I believe this person was largely correct. The oil is there for us to continue ramping up production for several years, provided the access issues can be negotiated. I see a decent probability that we will peak by 2016, as was predicted by 75% of the studies I had collected. I just don’t see it happening this year or next year. I see near zero probability that the peak will happen as late as 2037, as the EIA suggests.

A peak in the next year or so would be disastrous. A peak in 10 years will give us a fighting chance, provided gasoline costs stay high until it is clear that a peak has occurred. I view fear of a peak in the next year or two as largely a good thing, because it should mobilize some people to take the steps needed well in advance of the peak.

A significant challenge right now is education. I was in Walmart yesterday, and as I am apt to do I watched the faces of the people shopping. I wondered how many of them are aware of the problem facing us. How many of them know that their lives will be profoundly impacted by their ability (or inability) to acquire energy in the near future? Sadly, most of them were probably blissfully unaware, attributing high gasoline prices to the current political climate and just waiting for the relief they are sure is coming. These people are unaware that a storm is coming. Ten years of storm warnings may give some of them time to make the necessary changes to their lifestyles. If the peak hits in the next year or so, they may very well be like Galveston residents in 1900 who were unaware of the severity of the hurricane that was coming until it was on top of them. And if the vast majority of the population is unprepared, it really won’t matter that some of us saw this coming. We will all be in trouble together.