A blog by Mel Riser about LifeBoat Permaculture and Solar Villages

Monday, July 10, 2006

Long Term Issues

The Fading of the Oil Economy

Transition of the industrialised countries of the temperate zone into a post-fossil-fuel world

"The first half of the oil age now closes...It lasted 150 years and saw the rapid expansion of industry, transport, trade, agriculture and financial capital, allowing the population to expand six-fold. The second half now dawns, and will be marked by the decline of oil and all that depends on it, including financial capital."
- Colin Campbell, co-founder of the Oil Depletion Analysis Centre
The Human Animal has burnt most of the black sunlight from long ago
For the last 2,000,000 years or so we were literally wild animals, gathering and hunting food, living in rock or vegetation shelters. Daily life was our work. The sun and fire were our only energy sources.

150 or so years ago, we transitioned into the petrol and diesel age.

Using internal combustion engines, we in the industrialised countries have unleashed huge 'horsepower' to create our oil based economy. Today, we burn over 700 000 barrels of oil every 10 minutes. We burn about four times more oil than is being discovered to replace it. We haven't run out because of the truly enormous reserves in the Middle East. Within 5 to 10 years from now, we will have used over half those reserves. Oil will become permanently expensive as supply diminishes and demand continues to grow.

Eventually it will become prohibitively expensive for all but the most essential purposes.

The actual timeframe of just when this inevitability will cut in is fuzzy, as the data is not very good. Estimates may be out by a few years in either direction, but these errors are trivially small. The huge facts are true. We have used up close to half the existing oil reserves, demand is huge and will exceed supply very soon, and only relatively small oil deposits are left to find. The only option then left is to look for energy sources and human practises that are sustainable - that can continue over time without depending on a resource that will be used up. The options are limited and cannot re-create our existing lifestyle.

Tropical countries are less affected
Tropical countries are generally far less developed, and are much closer to a peasant land-based economy. When oil-based industries become uneconomic, it is much easier for significant numbers of people to return to village life. Tropical countries do not have to consume huge numbers of calories in burning fuels to stay warm in sub zero temperatures. No expensive insulation is needed for housing. Tropical countries can take two crops - or more - a year from the land, where temperate countries can only take one. Intensive agriculture using human labour and thousands of years of knowledge has made village scale tropical rice agriculture the most truly efficient and sustainable agriculture on earth. So long as land is protected from erosion, and nutrients are returned from the cities and re-cycled, it is a self-sustaining system.

Some tropical countries are overpopulated due to a high birthrate. This is a seperate issue, as no amount of cheap oil can solve the issues that arise from of overpopulation.

Industrialised temperate zone countries are most affected
The increases in population of the industrialised countries of the temperate and warm temperate zones have been underpinned by cheap food from cheap energy. Cheap energy has enabled vast crops of grain from the plains of USA, Canada, and Australia. Unlike many tropical countries, small scale, labour intensive production is simply not an option. The entire industrial-manufacturing base and all its support services is predicated on cheap oil. Heating, electricity, car ownership, travel, holidays, comfortable housing - almost all our experiences of daily living that we take for granted - are due to cheap oil.

We are unprepared for the shock of adjustment to 'doing without'. The dissonance between what we thought was normal and would go on forever, and a different, upsetting, reality will be much greater if we don't think about it now. The idea that we are going to experience dramatic and painful changes to our familiar and comfortable conditions of life seems utterly absurd, an alarmist fantasy. The data is hard to refute. Examining the data, a reasonable person cannot but conclude "I certainly don't like it, but it looks like we're stuck with it". The next thing to do is to try to deal with it as effectively as we can.

And that is why this site exists.

Short outline of the unfolding situation
Oil prices have risen recently, and some people have complained bitterly about oil company 'price gouging'. The prices seem to have been pushed up by futures traders. Traders only push a price upward if they reasonably expect prices to continue to rise. Why should they believe that?

Probably because they have followed the analysis of the depletion of finite oil reserves in an industrial world whose demand for increased output has gone up year on year.

Easiest to find and most profitable giant fields and large fields have all been found, pump pressure is falling as they deplete
The essence of the analysis is based on the prediction made many years ago by a geophysicist from Shell oil that the amount of oil that was physically able to be pumped out of the US oilfields would rise as new wells came on stream, but as the oldest fields were the biggest (oil geologists go for the largest basins first as this brings most profit quickest), and as all major oil reservoirs had been found, then when the large fields passed the mid point of production (the peak of production) total production must decline in spite of new mid sized and smaller fields being drilled.

Compounding it, as older reservoirs go past the 'half-drained' point, they start to lose pressure in the reservoir and yeild progressively less - no matter how large a quantity is still in the reserve waiting to be sucked out. There is no longer enough pressure. The rate of production of the remaining half then tails off. Once substantially drained, the residual oil in the field may even be too expensive to extract. He described this bell-shaped production curve in 1956, and calculated the US national oil resource would peak sometime between 1965 and 1972.

As Hubberts theory predicted, US oil production peaked in 1970. And as predicted, in spite of best efforts, the US oil fields have produced progressively less since that time, so that they can now yeild only half the amount produced in 1970, at the top of the bell curve for US oil production. This curve could be extended out a little if there were major new oil deposits found in USA. The US is one of the most oil-explored countries on earth. There are no significant or economically extractable significant reserves in USA. A reasonable sized field exists in an Arctic national park, and this will almost certainly eventually be produced. But it only adds half a million barrels a day to the US (declining) production of 5 million barrels a day.

The fields with the vast reservoirs and high pressure to pump huge volumes are losing pressure. New fields are too small to pump at high volume for long.
The situation in the USA is simply an illustration of a universal principle. The same early drilling of major and even 'giant' fields happened all over the world. Most of the large fields in Venezuela, Canada, North Sea, Russia, China and Indonesia have either reached their peak point, or are about to peak within the next few years. Some giant fields in Saudi Arabia and Iran have peaked, but others will not peak for many years yet. Even so, most of todays oil is 'old' oil.

Most world production is supplied by 'old' fields. 70% of oil put on the market every day of the week comes from fields that have been producing for 30 years or even longer. Around 20% of world supply comes from truly massive 'giant' fields mostly discovered in the 1950's (the Saudi Ghawar field alone provides 5% of world oil consumption). By definition, the remaining 80% of fields are not 'massive', although a few are large. These relatively smaller fields will reach their halfway point (peak of production) sooner than the giant fields. The more demand for oil, the sooner these medium and small fields will peak. This means that giant fields with giant pumping capacity are of crucial importance in meeting world demand.

There are no giant fields left to find. Oil companies have spent billions recently, and with superior technology, trying to find them. They appear now to be unwilling to throw good money after bad, and the number of exploration rigs has fallen dramatically. While more fields will come on stream, some quite big, the best seismic technology has found what would be expected in a well prospected world - relatively small fields.

World oil consumption has increased to levels which in theory will empty all reserves within 40 years
The world consumed 25 billion barrels of oil in the year 2000. By 2004 the figure had risen to about 30 billion barrels consumed. At this rate of consumption, all existing global oil reserves will be gone in less than 40 years.

Oil is added to reserves as new medium and small fields are found, but the rate of draw off of existing fields is such that for every barrel of oil added to the reserve pool, 3 barrels are withdrawn from the pool.

The real crisis is a pumping crisis
Obviously, freeflowing oil in abundance will cease long before the pool is emptied down to equal the tiny refill rate. The primary determinant of a happy world market is a situation where the world demand is met by the pumping capacity. Demand is far less than the amount under the ground that is in theory available to be pumped. But as demand increases, so pumping capacity must increase. But it physically can't. Some mega fields are only still pumping at historic pumping levels because they are being pressurised with millions of gallons of salt water every day. There are physical limits to this process. Oil can only be drawn from reservoirs at a rate that the unique physical characteristic of each reservoir allows. Initial pumping is of pooled 'easy' oil. Trying to accelerate pumping can leave oil 'stranded' in the formation as it doesn't have time to trickle into reservoirs from sponge-like rock, resulting in the well ultimately producing much less than it would otherwise if it were pumped at a safe rate.

The pumping capacity limitation is the real crisis. Virtually all global oilfields are pumping at safe full capacity right now. But taken as a whole, the oil fields of the world are able to pump 3%-5% less volume every year. Every percentage increase in world demand can only come out of unused existing pumping capacity.

Fortunately, in 2004, world demand was 100 million barrels less than current pumping capacity. No problem.

Growth in world oil demand will almost certainly be greater than the100 million barrel buffer that existed in 2004. Worse, the maturing fields lose ability to pump relative to their peak production. They lose from 2% to 3% of their pumping ability ever year after peak. Indications are that most non - OPEC fields large fields have either peaked, or will peak soon.

World demand will therefore exceed ability to supply. The oil will be there, in the ground, but 'unproducible' at the rate the world wants. Big problem.

When will demand exceed supply?
Big question. It depends on the accuracy of figures on pumping rates. It depends on the accuracy of figures on expected reserves for fields due to come on stream over the next few years.It depends on the accuracy of claims about the pumping capacity of the mega fields. It depends on whether world demand continues to rise, or goes flat - in other worlds, if there is a global 'economic slowdown'. Usually, when uncertainties are co-influential, the confidence in the prediction becomes weaker than might be thought. We can be almost certain it will occur within 20 years. If all information to hand is fairly true, and if consumption continues at the present rate, there are sound arguments to estimate it a supply/demand mismatch somewhere around the end of 2005, or early in 2006.

Put it this way - at the end of 2004, oil demand (which equals consumption) was 83 million barrels per day. On present demand projections, 86 million barrels a day may be required by the end of 2005. The maximum physically possible global oil pumping rate is said to be in the region of 89 million barrels a day. 3 million barrels a day of that rate is an unused pumping capacity claimed by Saudi Arabia. They have not demonstrated that this 'spare pumping capacity' really exists. If it doesn't, supply and demand about match by the end of 2005.

This is only the beginning of the story, not the end. How governments do - or don't - respond to a situation that will cause both immediate and imperative societal failures will starkly mark out their respective abilities to analyse, strategise, prioritise and lead.

Later, absolute supply will be the crisis
As oil can't be produced as fast as the world wants it, there will be a shortfall. The laws of supply and demand say this will increase the price. Recession inevitably follows. Demand drops. Price per barrel falls again. Demand increases. Slowly falling pumping capacity at some point once more means demand - even lower demand - can no longer be met. Prices rise again. And so the cycle continues. But at each point, there is less and less oil to in the reservoirs. While prices of oil rise dramatically and then fall, they will not fall right back. Every price fall is to a higher plateau than previously. Eventually, oil will be available to anyone who wants it. But relatively few will be able to afford it. Oil will never run out. But the ability of most people in the world to pay its ever-increasing scarcity value will certainly run out.

There are still people who say that if oil prices rose too much (whatever that may mean) oil would price itself out of the market; but it is perfectly obvious that there is no ready substitute for oil to take its place on a quantitatively significant scale, so that oil, in fact, cannot price itself out of the market.
-E.W.Schumacher, author of 'Small is Beautiful', 1973.

No other source of energy can substitute for cheap, energy-dense oil
We reflexively think "some other" power source can be used. Maybe electricity from nuclear power, hydro electricity, or coal or gas fired power stations can be used to split water into hydrogen gas, which can then be used to power our cars the same way compressed natural gaas is right now. Sadly, much of the Wests' electricity creation is itself dependant on burning diminishing supplies of suitable coal and gas. It will have it's own supply crisis in years to come. There is absolutely no 'spare capacity' left over to make huge amounts of hydrogen gas to run vehicles.


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