Tuesday, November 4, 2008

Peaked Oil

The International Energy Agency expects to release its World Energy Outlook study of annual oil production and depletion on November 12, but the Financial Times leaked the results last week, and the principal summary finding, if borne out, represents a tipping point in the world's energy economy:

Without extra investment to raise production, the natural annual rate of
output decline [of the 400 largest oil fields in the world] is 9.1 per cent.
The IEA in a statement, cautioned that the 9.1% figure:
...appeared to be based on an early version of a draft from several months
ago that was subsequently revised and updated. The numbers in the article can be
misleading and should not be quoted or considered to be official IEA

Were the figure to hold up it would mean that, just in order to maintain crude oil output at current levels, 6.825 million barrels a day of new production capacity must be developed every year. By way of comparison, the total annual crude oil output of Saudi Arabia, the world's largest producer, is just over 10 million barrels a day.

Says the IEA:
The future rate of decline in output from producing oilfields as they mature is
the single most important determinant of the amount of new capacity that will
need to be built globally to meet demand. [There must be a] significant
increase in future investments just to maintain the current level of

The global economic recession will (and is already) depressing demand, which somewhat obscures the impacts. OPEC and other oil-producing countries can (and do) adjust their actual output based on myriad factors: demand, spot price, political pressures, etc. The IEA report addresses not how much they pump, but the maximum amount they could pump. With slackening demand in the short term, the effects may be imperceptible.

The longer term picture is more disturbing. Replacing depleted production will require investment in a climate where investment capital is expensive or unavailable. Falling oil prices will continue to delay additional investment. When the global economic climate improves and demand increases the combination of declining output of existing fields and the lack of new additional sources will result in sharply higher prices and a panicky global grasp for energy security suddenly unattainable with oil. The kind of investment needed to replace 9.1% of lost production could be so large as to be economically infeasible unless the price of oil is exponentially higher than it is today. Put another way, if we fail to move beyond our terminal reliance on oil for our energy needs, the amount of investment required to ensure supply will guarantee a radical upshift in the price of oil, and hence of everything else in the economy dependent on it (i.e., just about everything.) Finally, there is no assurance that, even with the scale of these investments, any resultant project will produce a sufficient flow of new production.

Comments the Post Carbon Institute:
...the IEA has disavowed the Financial Times story. But if nine percent is even close to being the final figure, then it's absolutely clear: July 2008 was the all-time peak in world oil production. Don't expect anyone at the IEA to officially admit that fact until 2025 or so. But among those who pay attention to the evidence and the terms of the debate, further ink need not be spilled in speculation.

Peak oil is history.
More oil is not the answer to our energy future. Maintaining existing oil supply levels is becoming rapidly harder to do. Changing to other forms of energy will take time and money, probably lots of money. Not changing will be equally if not more costly. This is just economics--climate change outcomes also demand change. The sooner we aggressively transition to other energy sources the better off we will all be.
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