Friday, March 16, 2012

Toward Energy Literacy: Our "Peak Oil" Reality

Friday, March 16, 2012

A recent MSNBC show allowed a guest to state, without challenge, that U.S. oil production is now at an all-time high. No one, including the host and three other guests, objected to this statement. Many articles in various media outlets are now trumpeting the new “oil boom” in the U.S.

The fact is that U.S. oil production is a bit more than half of what it was at its peak in the early 1970s. It is not even close to an all-time high. This is not a small discrepancy in facts — every pundit should know this information when discussing our current and future energy needs.

The U.S. peaked in oil production long ago, and the globe seems to be at a peak now. The idea of “peak oil” — that a maximum production level is reached for any and all oil fields, followed by a steady bell-curve decline — was made famous when M. King Hubbert, a Shell geologist, accurately predicted in 1956 that the U.S. would hit its peak in oil production in 1970.

Even the major Alaskan North Slope oil fields didn’t do much to slow the U.S. decline. It’s generally been a steady downward slope since our peak — until the last couple of years, as the chart above shows. 

The big news recently is, however, that the national decline in oil production has been halted, and we’ve seen a recent uptick in production. The recent bump in oil production is being hailed by breathless pundits and policitians as a prelude to complete energy independence. This is pure hyperbole, as the first two figures show graphically. 

We produce less than six million barrels of oil per day and we consume about nineteen, a difference of about thirteen million barrels per day. Even when we add liquid fuels from domestic natural gas production and biofuels, we still import about 40 percent of our petroleum.

The increase in U.S. production in the last few years has been due largely to an increase in onshore production in the lower 48, which is itself due largely to an increase in drilling rigs. Rigs are up 60 percent in 2011 when compared to 2010, the highest since 1987. We are, by increasing drilling, generally taking oil out of the ground faster, but not actually increasing the amount of oil we’ll ultimately produce from existing fields. The resource is finite and the pump rate doesn’t change this fact.

Looking to the future, the U.S. Energy Information Administration (EIA) projects increased domestic oil production primarily from increases in “tight oil,” but not much from increased offshore oil. Tight oil is oil from shale, tracking the increase in natural gas production from shale gas, known as “fracking.” Fracking is opening up some new resources, with serious environmental consequences. But even with increased production from tight oil fracking, EIA projects that the U.S. will be pumping 6.1 million barrels per day by 2035, about the same as we’re pumping today. Clearly, fracking is not going to make us energy independent, though it may significantly extend the declining tail of domestic production.  

The increase in domestic oil and gas production is good for the economy in many ways, if not the environment. But the problem, even from a purely economic point of view, is that these new sources of oil are facing serious headwinds in the form of declining oil production from traditional fields, which still comprise the lion’s share of oil production. 

The global picture: running faster to stay in the same place 

The International Energy Agency (IEA) is the West’s energy watchdog, formed after the oil shocks of the 1970s. Its mission is to try and prevent similar oil shocks from happening again. It’s the international equivalent of the EIA. As such, it is considered the authority on international energy statistics and policy recommendations. Its annual World Energy Outlook is eagerly awaited each year. 

IEA finally started listening to the peak-oil crowd in 2008 and completed a supply-side analysis of the world’s 800 biggest oil fields. In previous analyses, IEA had projected oil and other fossil fuel demand based on economic modeling and had simply assumed (literally) that supplies would meet this projected demand. The 2008 analysis used a slightly different approach. Rather than simply assuming supplies would meet demand, IEA looked at the 800 largest oil fields and calculated their rate of decline. They found that these fields were declining far faster than previously assumed, about 7 percent per year rather than the previous estimate of 3.5 percent per year.

This may not sound like a large difference but when we project into the future we see that many millions of barrels of new oil production are required to offset the declines in existing fields. In fact, IEA projected that 64 million barrels per daywould have to come online by 2030 in order to make up for the decline in production from existing fields and to meet increased demand. This is equivalent to the entire production from nine and a half Saudi Arabias. The enormity of this task should be readily apparent.

EIA and IEA projection of future oil supply and demand (2008). 

Gas prices and politics

Given the global oil supply picture, it is no surprise to many people that gas prices are back at record highs, even exceeding the seasonal highs of the last super price spike in 2007 and 2008 when gas and oil prices hit their all-time highs. Many observers fear that a similar, or even higher, price spike will occur this summer. Current price increases are due to a number of factors, including tensions over Iran and Syria. But current highs are due primarily to an ongoing tightness between supply and demand on a global scale.

Discussions about U.S. energy policy are perhaps the most caricatured discussions of any policy area. Politicians, those in office and those running for office, know full well that no short-term policy is going to have any impact on current gas prices. New Gingrich’s pledge to bring prices back to $2.50 a gallon (down from about $4 now nation-wide) is blatant pandering. 

Gingrich knows that oil is traded on a global market, so prices for West Texas Intermediate (WTI), the primary U.S. type of oil, are determined by the consumption of oil in many countries, far more than by the amount of US drilling. I already mentioned that U.S. oil supplies are half of their historic peak back in the 1970s, so any suggestion that U.S. oil production will be able to return back to where it was at its peak, or even to reach a level that would have a significant impact on gas prices, is a pipe dream.

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