Crash Course: Chapter 17a - Peak Oil by Chris Martenson

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,†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.   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%.   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 Oil†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.   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.   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.   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.   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.   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.   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.   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?   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.   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,†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.   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.   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.   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.   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.   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..   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.   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.   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.   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.   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.