Peak oil: Is the oil running out?

October 6, 2006

"Dear reader, civilisation as we know it is coming to an end soon." This is how the Peak Oil: Life After the Oil Crash website introduces itself. Peak oil is the theory that the world's oil supplies will soon reach their highest output, their peak, after which there will be a rapid decline in output. The website argues that "the consequences (if true) would be unimaginable. Permanent fuel shortages would tip the world into a generations-long economic depression. Millions would lose their jobs as industry implodes. Farm tractors would be idled for lack of fuel, triggering massive famines. Energy wars would flare."

In his article "Iraq and the problem of peak oil" (first published in the January 2004 edition of the Zurich-based monthly Current Concerns), US economist William Engdahl explains the concept; "Much like a bell curve, oilfields rise to a maximum output or peak. The peak is the point when half the oil has been extracted... The oil production may hold at the peak output for a number of years... Once the peak is past however, the decline can become very rapid. Past the peak, there is still oil, but each barrel becomes more difficult to exploit, and more costly, as internal well pressures decline... After a certain point it becomes uneconomical."

This theory was first advanced by US geophysicist Marion King Hubbert, who created a model of known oil reserves, and proposed, in a paper he presented to the American Petroleum Institute in 1956 that production of oil from conventional sources would peak in the 48 mainland US states between 1965 and 1970, and worldwide within "about half a century" from publication.

With regard to the mainland US, Hubbert's prediction has been proven to be accurate. According to a September 18 Bloomberg.com article, mainland US oil production peaked in 1970, about a century after large-scale oil production began in the US, at 11.3 million barrels per day (mb/d), and has been declining ever since. In June-July this year, the US produced 7.4 mb/d.

If Hubbert's other prediction about world oil supplies proves correct, it's possible that the world is now experiencing the peak in crude oil output or will be in a few years. One of the most prominent peak oil watchers, Colin Campbell, a retired petroleum geologist who helped found the Association for the Study of Peak Oil and Gas, believes the peak will occur next year.

@subh = Oil optimists

On the other hand, oil "optimists" avoid the question of when the supply of petroleum will run out and talk up all the possible oilfields that have not yet been discovered and the potential for new technology to recover more from the known oilfields.

In an address to a September 11 Asia Pacific Oil and Gas Conference in Adelaide, Mark Nolan, chairperson of ExxonMobil's Australian unit, claimed that "the world has an abundance of oil". He cited an estimate by the US Geological Survey that shows Earth has more than 3 trillion barrels of conventional recoverable oil resources and "so far we have produced 1 trillion of that".

Nolan, and other optimists, assume that there will be further major oil discoveries. The announcement by Chevron on September 6 of the discovery of a big new oilfield — containing an estimated 3-15 billion barrels of oil — 426 kilometres off the coast of New Orleans has given the optimists reason to celebrate, claiming that it ends speculation that the days of discovery of new big oil finds are over.

The new oilfield, named the Jack Field, was discovered by drilling the deepest to date in the Gulf of Mexico — to a depth of 8.6km into lower tertiary rock formations, and may add 0.7 mb/d to US oil output. However, as CNN observed in its report on the discovery, the "first drop of oil from the lower tertiary isn't expected to hit the market until at least 2010, and at best it will only slow the decline in annual US production...

"Some analysts urged caution in inferring too much, too soon. 'One well doesn't tell you a lot of information', said Matthew Simmons, a Houston investment banker and author of Twilight in the Desert: the Coming Saudi Oil Shock and the Global Economy."

While new discoveries will continue to be made, the general trend for the last two decades is that the new oilfields that are discovered are getting smaller and smaller.

In his 2002 research paper "The World's Giant Oilfields" (which are defined in the paper those producing at least 100,000 b/d), Simmons pointed out that "over the last two decades most oil and gas discoveries have been quite small fields". Only four oilfields with production of 1 mb/d or more have been discovered since 1959, with the last one being Mexico's Cantarell field in 1976.

Energy think-tanks point to the diversity of countries that produce oil (almost 80 countries) as a sign of strength but, as Simmons pointed out. this is a false sense of security because the world is still heavily dependent upon a few countries to provide most of its oil supply.

Half of the world's oil output comes from 120 oilfields. The top 14 fields, which provide 20% of global supply, were developed nearly 50 years ago.

@subh = Technological breakthroughs

Oil optimists, such as Nolan, also point to current and future technological advancements as enabling access to difficult oil reserves and as enabling the extraction of more oil out of existing fields.

In his September 11 Adelaide speech, Nolan claimed that technological advances in recent years have enabled the recovery of twice as much oil from an oilfield or well than was possible when the oil deposit was first discovered. He argued that a further 10% recoverability will "deliver 800 billion barrels of oil to our recoverable total". However, this is based on an assumption of achieving the extra 10% recoverability as well as an estimate of current world reserves that is three times greater than OPEC's global estimate of 1.2 trillion barrels.

Technological advances have also made possible the accessing and recovery of oil in extremely difficult places. For example, oil companies now regularly explore for and access oil below deep seas. This is where the majority of new oilfields are being found. The Jack Field, for example, lies 6km below the sea bed, some 2km underwater. Its discovery required, according to Chevron's media release, "half a dozen world records for test equipment pressure, depth and duration in deepwater".

The July 4 Wall Street Journal reported that drilling companies "are currently building 91 major offshore rigs, up from fewer than 10 in 2003... To build a jack-up rig costs [US]$160 million to $190 million, and deep-water rigs can cost as much as $600 million...

"To compete with international markets, Gulf of Mexico producers will have to pay higher rates to lease rigs. In February, BP PLC agreed to pay Transocean Inc. $520,000 a day to keep a massive drill ship in the Gulf; the three-year contract starts at the end of 2007. BP leased the same ship in 2004 for $184,500 a day. The ship is nearly as long as three football fields and can drill in waters that are 10,000 feet deep."

These huge costs — which are a fraction of those for extraction of oil from land-based fields — will then be passed onto the consumer. There are few voices willing to assert that there will ever be cheap petrol again.

@subh = Geopolitics of oil

Engdahl argues that peak oil is the driving force behind Washington's invasion and occupation of Iraq. He recounts a speech that US Vice-President Dick Cheney gave to the International Petroleum Institute in London in 1999 when Cheney was CEO of Halliburton, the world's largest oil services company. Cheney said: "There will be an average of 2% annual growth in global oil demand over the years ahead, along with conservatively a 3% decline in production from existing reserves... That means by 2010 we will need on the order of an additional 50 million barrels a day."

The drive by the big US and British oil corporations — ExxonMobil, Royal Dutch Shell, Chevron and BP — to secure control over reserves of cheap-to-produce crude oil played a key role in Washington's and London's decision to replace the nationalist Baathist government in Iraq with a puppet government willing to privatise Iraq's nationalised oil industry. As Engdahl observed in his 2004 article, "the Iraq war is but the first in a major battle over global energy resources, a battle which will be more intense than any oil war to date".

Iraq's proven oil reserves stand at about 115 billion barrels — the world's fourth-largest after Saudi Arabia's 264 billion, Canada's 179 billion and Iran's 133 billion. The US energy department, however, estimates that Iraq's actual oil reserves may be three times as great as its currently proven reserves.

While the US imports half its oil supply, only about 17% of this comes from the Middle East (mostly from Saudi Arabia). However, Iraq's oil is the world's cheapest to produce, at a cost of only about $1 per barrel (compared with $10 per barrel of oil from deep-water rigs in the Gulf of Mexico).

In his 2003 article "Oil Companies in Iraq: A Century of Rivalry and War", James Paul, executive director of the Global Policy Forum, noted: "Assuming 50 years of production and 40% royalties, Iraq could yield annual profits of $80-90 billion per year — more than the total annual profits of the top five [oil] companies, even in the banner year of 2003."

The US rulers are driving toward an Iraq-style "regime change" war against neighbouring Iran, whose oil and gas industry was nationalised in the early 1980s in the wake of the 1979 anti-monarchy revolution.

Through the drive to use their huge war machine to ensure the world's remaining large oil reserves are brought under US corporate control, the US capitalist rulers are attempting to ensure that China's rapidly expanding capitalist economy is dependent upon oil imports from sources that are under their thumbs, as Japan's and Western Europe's are.

China is now the world's second-largest oil importer. According to the July 29 Chicago Tribune, Chinese oil imports are expected to double to 14 mb/d over the next 20 years fueling speculation of a "new 'energy cold war' as the US and China square off over the planet's last reserves".

The coming crash in cheap oil supplies will push crude oil and petrol prices much higher than they are even today and further enrich the billionaire families that own the big oil companies. This year's spike in world oil prices has already led to record profit margins for the big oil companies, with ExxonMobil declaring a US$10.71 billion profit for the 2006 fourth quarter, the highest profit per quarter ever recorded, with the second highest being Exxon's 2005 third quarter profit of $9.92 billion.

Meanwhile, as the warnings of oil pessimists continue to be ignored, the world teeters on the edge of an unprecedented global disaster. On the one hand, a sharp drop in cheap oil supplies will have a catastrophic impact on world food production, which is highly dependent upon oil-fuelled farm machinery and oil-derived fertilisers and pesticides.

In his 2003 article "Eating Fossil Fuels", US geologist Dale Allen Pfeiffer points out that approximately 10 calories of fossil fuels are required to produce every calorie of food eaten in the US. This ratio is only set to increase as modern capitalist farming methods deplete the soil, requiring more and more use of artificial fertilisers.

Without an adequate plan to counter peak oil, more of the world's people will face food shortages.

On the other hand, the world's 78 million barrel a day oil addiction is a major contributor to global warming, described as "the greatest crisis humanity has ever faced" by former US vice-president Al Gore. His documentary film An Inconvenient Truth outlines the catastrophic effects of global warming — from rising sea levels that will inundate major cities (threatening to create 100 hundred million refugees) to increasingly destructive weather events.

@subh = An oil-free future

The world urgently needs to address the problem of reliance on oil (as well as other polluting fossil fuels such as coal). One country that has already overcome its own "peak oil" crisis in relation to food production is socialist Cuba.

When the Soviet Union collapsed in 1991, Cuba lost about 70% of its oil imports overnight. Cuba also lost a large proportion of its food imports, which it was heavily reliant upon, as well as a large percentage of its oil-intensive fertilisers and pesticides. Cuba faced a food shortage with the potential for famine among its people.

Cuba was able to overcome this impending crisis by converting to organic, low-energy-input agriculture. Oxen replaced petrol-driven tractors, bio-pesticides replaced synthetic pesticides and manure and other organic fertilisers replaced oil-derived artificial fertilisers.

While the process of conversion took several years, by 2003 Cuban agriculture had made gains in yields for 16 out of 18 major crops; food availability was at a level recommended by the UN Food and Agriculture Organisation; 14,000 hectares of urban gardens produced 3.4 million tonnes of food (supplying 90% of Havana's fresh produce) and more than 200,000 Cubans were working in the urban agriculture sector.

The Cuban agriculture ministry was also using less than 50% of the diesel fuel, less than 10% of the chemical fertilisers and less than 7% of the synthetic insecticides that it used in 1989. Cuba is also a world leader in the development of bio-pesticide techniques, also a large source of employment for Cubans.

Cuba was able to achieve such progress because its economy and political system is not run by and for capitalist-owned businesses seeking to maximise corporate profits, but is largely run by publicly owned businesses directed to a nationally decided-upon plan that aims to maximise the wellbeing of working people.

Through the country's system of participatory democracy, or People's Power, each Cuban citizen had a say in the development of the solutions to the crisis of the post-Soviet "special period" and understood the role that they needed to play in this — for example, riding a bicycle to work or setting up an urban garden.

Cuba's example shows that the major change the world needs to make in the face of the coming peak oil crisis is possible — but only if the world's working people are actively involved in creating and implementing the solutions, rather than relying on the profit-driven capitalist corporations for answers.

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