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The fundamentals in the oil market are that we are in the beginning stages of peak oil. Supply can no longer keep up with demand, which keeps soaring even in the face of record. The U.S. Energy Information Administration has the surprising statistics:
Preliminary data indicates that global consumption rose by roughly 500,000 barrels per day (bbl/d) during the first half of 2008 compared with year-earlier levels, as a 1.3-million bbl/d rise in consumption outside of the Organization for Economic Cooperation and Development (OECD) was partially countered by an 800,000 bbl/d drop in U.S. consumption compared with year-earlier levels.... Total world oil consumption is expected to grow by a little over 1 million bbl/d during the second half of 2008 and by almost 1 million bbl/d in 2009 compared with year-earlier levels.
That's right, even after "the largest half-year consumption decline in volume terms in the last 26 years," demand continues to grow. Why?
Over the next year and a half, lower OECD consumption is expected to be more than offset by continued non-OECD consumption growth, led by China, the Middle East, Latin America, and India.
Yes, speculation overextends every move in market price -- but why shouldn't people speculate that oil prices will be much higher in the future? That seems like a very solid bet. And yes, a rising dollar can temporarily help lower prices -- but we are headed for a $10 trillion cumulative trade deficit just in oil between now and 2020. So which way do you think the dollar is headed long-term?
Ultimately only much, much greater demand destruction can stop the inexorable rise of oil prices. And that obviously requires much higher prices than what we've seen in the first half of this year!
Global consumption is now about 85 million barrels a day. Until the last few years, the United States was the major contributor to rising oil demand. From 1995 to 2004, China's annual imports grew by 2.8 million barrels a day. Ours grew 3.9 million. Since then, growth has come mostly from China, India, the Middle East countries themselves, and other developing countries that subsidize their fuel.
The world just can't deal with oil demand rising one million barrels a day or more year after year. In January, Jeroen van der Veer, chief executive officer of Royal Dutch/Shell, e-mailed his staff that the world will peak in conventional oil and gas within the decade. He wrote: "Shell estimates that after 2015 supplies of easy-to-access oil and gas will no longer keep up with demand." It used to be unheard of for oil executives to talk about limits to oil production. Now it happens all the time.
John Hess, chairman of Hess Corp., a global oil and mineral exploration company, said recently, "An oil crisis is coming in the next 10 years. It's not a matter of demand. It's not a matter of supplies. It's both." In October, Christophe de Margerie, CEO of French oil company Total S.A., said that production of even 100 million barrels a day by 2030 will be "difficult." In November, James Mulva, CEO of ConocoPhillips, the third biggest U.S. oil company, told a Wall Street conference: "I don't think we are going to see the supply going over 100 million barrels a day ... Where is all that going to come from?"
In the short-term, I suppose it is possible that we can go back to $3 gasoline, although that would probably require a deep global recession, and prices would only stay low for the extent of the downturn.
But the far more important point is that it is now simply too late to adopt policies that can prevent much higher oil prices, as high as $300 a barrel in 10 years, if you believe oilman T. Boone Pickens. Why?
Replacing oil in the transportation sector requires strong government action two decades before a peak because of the time needed to replace vehicles and fuel infrastructure. That was the conclusion of a major study funded by the Department of Energy in 2005 -- yes, the Bush DOE -- on Peaking of World Oil Production. The report notes:
The world has never faced a problem like this. Without massive mitigation more than a decade before the fact, the problem will be pervasive and will not be temporary. Previous energy transitions (wood to coal and coal to oil) were gradual and evolutionary; oil peaking will be abrupt and revolutionary.
If we start an aggressive move soon to end our addiction to oil, to shift to highly fuel-efficient vehicles and plug-in hybrids as discussed here, we can perhaps spare our children from the worst impacts of peak oil (and, of course, global warming). But that require a far more progressive President than we have had for the last eight years.
Comments
One of the biggest challenges in my opinion, is convincing the generation of older Americans that lived through the geopolitical oil crises that this one is real. People already wail against the oil industry for record profits when their profits margins and ROI aren't out of line, and even if they were a little heavy, it's pretty arbitrary to say 8% is too high, and cutting it to %5 would mean little to the price at the pump.
The price of gas will up and up. Supply is at it's greatest. My Dad doesn't believe me, even though I've worked for oil and my job was to find it as a geoscientist, that we can't just find and produce more. It's true, there is plenty of oil. But there is not plenty of oil that is easily accessible at a low cost. The maximum supply is here or will be in the next few years, at which point it will diminish while demand continues to grow.
"We can drill more." No, that doesn't matter. We know how much we can drill. It's not enough to satisfy demand at the rate we could produce it. Even though we know where plenty of oil is, we won't be able to produce it and sustain current levels of available supply. So many people do not understand this. They just think the oil companies are greedy -- and they are not without criticism -- but the problem really is an unsustainable supply on which our economy is built.
The question is: how can we educate people of this without sounding like anti-capitalist doomsdayers?
Posted by: Jonsi | August 21, 2008 2:29 PM
I think a big part of the problem is that no one is pushing the 'peak oil' concept the way Al Gore is with climate change. Even today, many are skeptical of climate change even though we've had literally decades of data telling us what is happening. Gore is still trying to convince people. I admit that back in the early 90s I was a skeptic of global warming, but the last 15 years of data has changed my mind. I've come around quickly to understand the peak oil concept, but i only learned about that concept within the past year.
A few months ago Nat. Geo Magazine had a whole issue devoted to oil, including an article on peak oil which I thought was good, and there have been some mentions on main stream media. It may be that people understand and believe in peak oil a lot faster than they do in climate change. Perhaps the climate crisis will be mitigated by people using less oil even though they don't necessarily believe there actually is a climate crisis. We can hope.
Posted by: darth | August 21, 2008 3:27 PM
There is still a lot of disinformation out there. Whether it is because people genuinely believe they can talk down the price, by claiming there is no problem, or more cynically, trying to promote business as usual by poo-pooing the problem. Then we have the wingnutters trying to give the impression that oil-shale or Bakken formation means we can have all the oil we would ever want, just elect our sort of fellows. So it is a really tough message to get out.
Whatever you may think of T. Boone Pickens, at least having someone with a lot of money trying to spread the message should help. But, we have clearly dawdled for far too long to avoid serious consequences.
Posted by: bigTom | August 21, 2008 5:57 PM
I'm not sure that you can - people have come to conflate capitalism (rightly or wrongly - I don't want to get into the argument) with endless consumption growth. Pointing out that there are physical limits of any kind makes you an anti-capitalist doom-sayer. Sorry.
It's coal that's the big problem in terms of climate change, not oil. If anything, peak oil is likely to result in a shift from burning oil to burning coal or coal derivatives, making the problem worse.
Posted by: Dunc | August 22, 2008 5:19 AM
Good point Dunc about coal use. The only way to limit coal use will be emissions taxes and tax-incentives for non-polluting alternatives. For public perception, I think we need to get away from the term "alternative energy" and use "sustainable energy" or "clean energy". Anytime you use the word "alternative" it scares the conservatives who think it means everywhere will be like San Francisco.
I remember reading somewhere (maybe this blog?) that if you factor in the land area used for coal mining the total area for the solar equivalent is actually less. This fact (assuming it is correct) needs to be pushed out there.
Posted by: darth | August 22, 2008 9:09 AM
The institutionalized pushback against taking peak-oil seriously comes mostly from the 'free market uberalis' crowd. A few years ago I went to a talk by Goodstein (Caltech physics prof) on peak oil at UCLA. He pretty much proved his point IMO, but one business school economics prof in audience just kept saying "but the futures market would be booming if this were true... so you have to be wrong".
This is the ideology which runs almost every company and has been in control of the US government since Reagan (yeah, Clinton bought it too). They won't see it until it is too late, because until they see it the markets won't move.
The fact that the markets are moving means we are all pretty screwed. Move that "we are here" arrow over to the right a ways.
Posted by: travc | August 25, 2008 5:54 AM
Well, economists only care about liquid hydrocarbons, not conventional gas and oil. In reality, we will have an undulating plateau for a decade or so, and then production of heavier oil, shales, and other processes where the extraction costs (both $, energy, and water) are more costly. There will be a liquid hydrocarbon peak a couple decades later.
Again, that is a short term "solution" to a major problem. Doomsday pessimism is not necessary but T. Boone Pickens is on to something, at least in terms of leadership, in establishing wind and then shifting to CNG for trucks/fleet vehicles while other technologies catch up.
We can buy some time, but ultimately, there is only a few decades of liquid transportation fuel.
Posted by: Jonsi | August 25, 2008 5:05 PM
I see no reason to suspect that we will be on an "undulating" plateau for a decade. This sounds much like CERA-speak, along with their confidence in the possibilities of unconventional oil. I suppose you can make a case for it, but it's very weak, stretching credulity.
Posted by: Eric the Leaf | August 25, 2008 8:36 PM
There seems to be a better case for a rough plateau then for the sudden drop that is displayed in the image at the top of this post. While oil production in the United States and many other places has followed a curve something similar to the top of this page, the world is unlikely to see a similar drop because when the United States peaked there was still cheap oil coming in from other countries which discouraged people from conserving and switching to alternatives. As we are unlikely to import oil from the moon or other planets, there the world has no outside source of oil to keep prices down. This means that any production decrease will cause a large price increase which will result in a wave of economy and substitution and more effort put into extracting the large but expensive to get quantities of oil that remain. Hopefully it won't be too long before we reach a point where the production of oil drops, not because we can't extract it, but because the alternatives are simply better and cheaper than using oil. (The cost of using oil also includes its environmental effects.)
This does not mean that economies that are dependant on cheap oil won't suffer pain as the United States is doing now. However, we are unlikely to see a sudden crash in oil production, unless of course we are dilligent enough to work hard at changing our economy to render most oil production obsolete.
Posted by: Ronald Brak | August 26, 2008 8:10 PM
Eric the Leaf -
If we had had completely unconstrained oil production from the start, then we would have seen a peak circa 1995 at perhaps 120-130mb/day. Instead we've had constraints imposed by OPEC, FSU breakdown, Iraq, etc.. which is why we've never hit even 100mb/day (never will), but also why we probably won't see drastic declines; for example, as Iraq stabilizes, we could see another 4-5 mb/day of production come onstream, mitigating perhaps 2-3 years of other declines.
The other problem is that Hubbert modelling does require a consistent target - i.e. Production of conventional crude from a given geographical area. Once you add in other stuff (NGL, non-conventional, biofuels, et. al), the picture does become less clear.
Posted by: Andrew Dodds | August 27, 2008 6:09 AM
Andrew,
You seem to have a fair handle on the situation. However, I wonder about the 4-5 mbd coming from Iraq, even under the most favorable conditions. I'm not disputing those figures, I'd just be interested to know their origin. Yes, there was an FSU breakdown, but they are now on the downside of their second peak.
Hubbert modeling is not the basis for every forecast. There are a number of "bottom-up" analyses that take into consideration various combinations of conventional oil with or without NGPL and so on. These are posted regularly on TheOilDrum. I would say that it is unclear whether non-conventional resources or biofuels, etc., will make of for any shortfalls in conventional oil, whose depletion rates may accelerate. Further, net exports appear to be declining as demand within oil exporting nations increases, and may continue to do so at a rate greater than production declines.
Thus, for anyone to say that they know "what is going to happen" would appear foolish, and I agree that the picture is not clear. Blind faith in the potential of unconventional hydrocarbons or the possibility that alternatives will make up for shortfalls is--well--simply blind faith. The situation, in my opinion, is precarious.
Ronald,
That oil dependent nations may "suffer pain" reminds me of General Buck Turgidson who stated famously to the president that a nuclear exchange with the Ruskies wouldn't mean that "we wouldn't get our hair mussed."
Posted by: Eric the Leaf | August 27, 2008 9:07 PM