Crash Course: Chapter 17a - Peak Oil by Chris Martenson
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Chapter 17a: Peak Oil
Okay, we’re up to the chapter on Peak Oil, and this one is a doozy. If you think
all the way back to Chapter 3, I said I was going to connect the Three “Es,â€
and we are now about to connect the Economy to Energy. This is one of the most important
chapters, this is a big subject, and I wish to acknowledge that much of this chapter stands
on the shoulders of the hundreds of dedicated people who have gathered the data, made the
points, and tirelessly worked to advance our understanding of the role of energy in our
lives. I tip my hat to these sources and many others.
 Energy is the lifeblood of any economy. But
when an economy is based on an exponential debt-based money system, and that is based
on exponentially increasing energy supplies, the supply of that energy therefore deserves
our very highest attention. Â
And when we look at US energy use, we see in this chart from the Department of Energy
that oil represents over 50% of our total yearly energy use, while oil and natural gas
together represent over 75%. Â
We’re going to examine oil in detail, although pretty much everything I am about
to say about oil applies equally to natural gas.
 In order to understand what “Peak Oilâ€
means, we need to share a common understanding about how oil fields work and how oil is extracted.
A common misperception is that an oil rig is plunked down over an oil field, a pipe
is inserted, and then oil gushes from a big, underground lake or cavern that eventually
gets sucked dry. Â
It turns out that it is pretty much just solid rock down there, and oil is only found in
porous rocks, like sandstone, that permit the oil to flow through the rocks crevices
and pores. No vast caverns or lakes of oil exist down there. Oil has to be carefully
extracted from what turns out to be a very solid rock matrix.
 It’s better to think of an oil field
like a margarita, where the oil is the tequila mix and the rock is the crushed ice. When
an oil field is tapped, we find that the amount of oil that comes out if it follows a very
prescribed pattern over time that ends up resembling a bell curve. At first, shortly
after the drink is discovered, there’s just one straw in our margarita, but then
with excitement more and more straws are stuck in and more and more drink flows out of the
glass. But then that dreaded slurping sound begins, and now, no matter how many new straws
we insert, the amount of margarita coming out of the glass declines, until it is all
gone and we are only left with ice. That’s pretty much exactly how an oil field works.
 Every oil field exploited to date has exhibited
this same basic extraction profile. And what is true for one is equally true when we measure
across many oil fields and then sum the result. Because individual fields peak, so to do collections
of fields. Peak Oil, then, is NOT an abstract theory so much as it is a physical description
of an extremely well characterized physical phenomenon.
 How much remains to be discovered is a theory,
but the process by which oil fields become depleted is rather well-understood. Peak Oil
is simply a fact. Also, Peak Oil is NOT synonymous with “running out of oil.†At the
moment of peak, somewhere around half the oil still remains.
 But something interesting happens at the halfway
mark. Where oil gushed out under pressure at first, the back half usually has to get
laboriously pumped out of the ground at higher cost, obviously. Where every barrel of oil
was cheaper to extract on the way up, the reverse is true on the way down. Each barrel
becomes more costly in terms of time, money, and energy to extract. Eventually, it costs
more to extract a barrel of oil than it is worth, and that’s when an oil field
is abandoned. Â
Here’s our experience with oil in United States. From the first well drilled in 1859
until 1970, more and more oil was progressively pumped from the ground. But after that point,
less and less came out of the ground. It is said, then, that the US hit a peak of oil
production in 1970 at just under 10 million barrels a day, and today produces just a little
over 5 million barrels a day. Those are the facts.
 Counting only our crude oil consumption here,
the remaining balance of our 15 million barrel a day crude oil habit is met by imports. That
is, we import two-thirds of our daily needs. Â
Now, in order to produce oil, you have to first find the oil, right? It’s pretty
hard to pump something you haven’t found. US oil discoveries peaked in 1930,
which yields a gap between a peak in discovery and a peak in production of 40 years. Remember
that number. Â
Here’s an interesting aside. Suppose we wanted to become “independent from
imported oil†and decided to replace those 10 million imported barrels with some other
form of energy. Those 10 million barrels represent the same power equivalent as 750 nuclear power
plants. Considering the issues we have with the 104 we have operating right now, I think
it’s safe to say nuclear power is not a realistic candidate for reducing oil imports.
Well then, how much would we have to increase our solar wind and biomass energy production?
There, we’d have to increase our currently installed base by a factor of 2,000. Not 2000%.
Two-thousand times as much. Â
When we look at worldwide oil discoveries, we find that those increased in every decade
up to the 1960’s and then have decreased in every decade since then, with future projections
looking even more grim. The exact peak of discovery? That was in 1964, 44 years ago,
and that is another cold, hard, indisputable fact.
 Remember, in order to produce oil you have
to find it first. Â
And here is the third and final fact about production I want to present. This is a chart
of global conventional crude oil production only – it leaves out biofuels and other
liquids that amount to roughly 10 million barrels a day, collectively. Conventional
crude is the easy, high-energy-yield stuff and it is what the world’s past 100
years of growth has been built upon. We can see here that, since mid-2004, for some reason,
oil production has been flat. Whatever the reason for this is, it isn’t price,
because oil has climbed from $50 a barrel to $120 a barrel as of today.
 If ever there was a strong incentive to get
oil out of the ground and off to market, this would be one.
 Is it possible, then, that this chart is telling
us that conventional crude oil production is at a peak? The twin signals of rapidly
rising price and flat production certainly make a compelling argument that this is the
case. Interestingly, the global peak in discoveries was exactly 40 years prior to the leveling
off of this production graph, possibly echoing the US gap between the discovery and production
peaks. I’m softpedaling this to an enormous degree. Let me be blunt: If we are
already at peak, as these data suggest is possible, then we are in trouble.
 However, the most urgent issue before us does
not lie with identifying the precise moment of Peak Oil. That is, truthfully, an academic
distraction, because the economic dislocations will begin as soon as there’s a gap
between supply and demand. Â
Here’s a very simple and clever way to think about the supply and demand problem,
which was developed by Dallas geologist Jeffrey Brown, which he calls the Export Land Model.
Suppose that we have a hypothetical country that produces 2 million barrels of crude a
day, but which is declining at 5% a year. We’d note that they’d be able
to export 2 million barrels, and that after ten years that would decline to one and a
quarter million barrels a day. This seems manageable. But now suppose that this country
uses oil themselves, as they all do, and they are consuming 1 million barrels a day, and
this internal demand is increasing at 2.5% a year. This is also reasonable.
 What happens to exports under this model?
They go to zero in ten years. This is the miracle of compounding, but in reverse, where
exports are eaten into from both ends. It turns out that this is a very realistic scenario,
because we can already observe that production is declining even as demand is increasing
in a number of countries. In the case of Mexico, currently the number THREE supplier of oil
exports to the US, production declines and supply growth will entirely eliminate their
exports by the year 2011 or 2012. Now, where in the world is the US going to find a new
#3 oil supplier in the next 3-4 years? Â
When world production will peak is a matter of some dispute, with estimates ranging from
right now to some 30 years away. But as I said before, the precise moment of the peak
is really just an academic concern. What we need to be most concerned with is the day
that world demand outstrips available supply. It is at that moment that the oil markets
will change forever and probably quite suddenly. First we’ll see massive price hikes,
that’s a given. But do you remember the food ‘shortages’ that seemingly
erupted overnight back in February of 2008? Those were triggered by the perception of
demand exceeding supply, which led to an immediate export ban on food shipments by many countries.
This same dynamic of national hoarding will certainly be a feature of the global oil market
once the perception of shortage takes hold. When that happens, our concerns about price
will be trumped by our fears of shortages. Â
In order to understand why oil is so important to our economy and our daily lives, we have
to understand something about what it does for us. We value any source of energy because
we can harness it to do work for us. For example, every time you turn on a 100-watt light bulb,
it is the same as if you had a fit human being in the basement, pedaling as hard as they
could to keep that bulb lit. That is how much energy a single light bulb uses. In the background,
while you run water, take hot showers, and vacuum the floor, it is as if your house is
employing the services of 50 such extremely fit bike riders. This “slave count,â€
if you will, exceeds that of kings in times past. It can truly be said that we are all
living like kings. Although we may not appreciate that, because it all seems so ordinary that
we take it for granted. Â
And how much ‘work’ is embodied in a gallon of gasoline, our most favorite
substance of them all? Well, if you put a single gallon in a car, drove it until it
ran out, and then turned around and pushed the car home, you’d find out. It turns
out that a gallon of gas has the equivalent energy of 500 hours of hard human labor, or
12-1/2 forty-hour work weeks. Â
So how much is a gallon of gas worth? $4? $10? If you wanted to pay this poor man $15
an hour to push your car home, then we might value a gallon of gas at $7,500.
 Here’s another example. It has been
calculated that the amount of food that average North America citizen consumes in year requires
the equivalent of 400 gallons of petroleum to produce and ship.
 At $4/gallon, that works out to $1600 of your
yearly food bill spent on fuel, which doesn’t sound too extreme. However, when we consider
that those 400 gallons represent the energy equivalent of 100 humans working year round
at 40 hours a week, then it takes on an entirely different meaning. This puts your diet well
out of the reach of most kings of times past. Just to put this in context, as it is currently
configured, food production and distribution use fully two-thirds of our domestic oil production.
This is one reason why a cessation of imports would be, shall we say, disruptive.
 Besides the way that oil works tirelessly
in the background to make our lives easy beyond historical measure, oil is a miracle in other
ways. In this picture, a typical American family was asked to cart out onto their front
lawn everything in their house that was derived from oil. That’s quite a sight.
 How easily could we replace the role of oil
in our style of consumer-led, growth based economy? Not very. We currently use oil mainly
for transportation, sitting at right around 70% of all oil consumption. The next biggest
block is for industrial purposes, followed by residential, which means heating oil. This
last, tiny little sliver? That’s oil used to generate electricity. With the exception
of biofuels, which I’ll get to later, all renewable energy resources either provide
heat or electricity, meaning that even if we entirely replaced ALL of the electricity
and heat currently provided by oil with renewables, we’d only be addressing these tiny
slices here. Â
And in the industrial processes, oil is the primary input feedstock to innumerable necessities
of life, such as fertilizer, plastics, paint, synthetic fibers, innumerable chemical processes,
and flying around. When we consider other potential fuel sources, we find that they
are mostly incapable of fulfilling these needs. Â
Biofuels and coal could potentially fill some of these functions, but certainly not without
a massive reinvestment program and not anytime soon.
 Let’s review a few Key Facts. You have
to find oil before you can produce it, and Key Fact #1 is that world oil discoveries
peaked in 1964. US discoveries peaked in 1930, and 40 years later production peaked. We are
now 44 years after the global discovery peak. Â
Key Fact #2 is that world production of conventional crude has been flat for the past four years,
even as prices have increased by 140%. Taken together, Key Facts #1 and #2 suggest the
possibility that Peak Oil is already upon us. If true, then we are going to wish with
all our hearts that we had begun preparing for this moment a decade or more ago.
 Key Fact #3 is that the US oil imports are
the energy equivalent of more than 750 nuclear power plants, which is seven times as many
nuclear plants as currently exist here, and nearly twice the total number of nuclear plants
in the entire world.. Â
Key Concept #9 of the Crash Course is that Peak Oil is a well defined process that is
nothing more than a physical description of how oil fields age. We have literally thousands
of studied examples under our belts and this is not open to debate. Only when the peak
might arrive is up for discussion. Â
Mostly hidden from us in plain sight is Key Concept #10: The amount of work that oil performs
for you is equivalent to having hundreds of slaves. It is this work that makes our lives
what they are - staggeringly comfortable by historical standards. The average middle class
life in western society would be the envy of kings in times past.
 Key Concept #11 is that Oil is a magical substance
of finite supply but of unlimited importance. This cannot be overstated.
 Transitioning from one fuel source to another
is a devilishly expensive proposition, posing enormous challenges with respect to cost,
scale, and time. Our species transitioned over many years from wood to coal because
coal was a better fuel source. And we transitioned over several decades from coal to oil for
the same reason. Nobody has been able to advance any candidates as our next source of energy.
Technology is not a source of energy – it may well help us to exploit our energy
more efficiently – but it is a big mistake to confuse technology with energy
sources. Â
And finally, what we need to keep a careful eye out for is the supply of oil being exceeded
by demand, and this raises Key Concept # 12: Oil exports are being hit two ways -
by rising demand and declining production. This raises the prospect that the moment when
the world’s nations finally realize that there is not enough oil to supply everybody
may come much sooner than most suspect. Exponential functions are hard for most humans to grasp,
and oil exports are being doubly squeezed, subjecting them to a surprisingly high rate
of decline. Â
This completes an immensely brief tour through Peak Oil. If you have not already done so,
you owe it to yourself to become knowledgeable on this subject due to its unequaled importance.
I have links aplenty on the Essential Books, Essential Articles, and Resources pages on
my site. Â
In the next section we will discuss the intersection between Energy and the Economy, and I will
make the point that it was no accident that our exponential, debt-based money system grew
up at precisely the same moment that a new source of high quality energy was discovered
that proved capable of increasing exponentially right alongside it.
 Please join me as I explore the importance
of energy to our particular economic and monetary systems in Chapter 17b – Energy Economics.
 Thank you for your attention.