The mother of all energy crises

POWER readers today face severe problems in the electricity supply business. But a much bigger problem will soon burst on the scene: the peaking of world oil production. Experts have forecast peaking since shortly after the first U.S. well began production in 1859, and many subsequent forecasts of peaking have proven incorrect.

Oil reserves dip

But oil is a finite and rapidly depleting resource. There is no question that world oil production will peak at some time. In 2005, the Royal Swedish Academy of Sciences noted that 54 of the world’s 65 most important oil-producing countries were past peak production and in decline. The academy also observed that the rate of adding new reserves worldwide was less than a third of the rate of world consumption. Others believe in a much higher ratio.

The timing of maximum world oil production is uncertain, largely because of poor and biased data, so forecasts have varied widely. Recently, a number of highly qualified professionals have concluded that the world seems to be on an oil production plateau, with declines waiting in the near future. Included in this group are industry stalwarts such as Henry Groppe, T. Boone Pickens, and Matt Simmons. Ken Deffeyes, retired Princeton geologist, believes that peaking began at the end of 2005. The competent and outspoken Sadad al Husseni, retired executive vice president of Saudi Aramco, recently had the courage to make the same point. His knowledge base may be better than that of any other oilman.

Why is the issue flying below the public radar? Partly it’s because many economists believe that as the price of a commodity increases, more supply will come to the market. That theory has worked for minerals. But oil geology is fundamentally different. Furthermore, the experience of the past five years belies economic doctrine.

Industry silence

Influential optimists, including ExxonMobil, Cambridge Energy Research Associates, and the DOE’s Energy Information Administration, have assured us that there is no cause for immediate concern. A major oil company has very serious problems in speaking up about peak oil, because it would simultaneously have to outline a new business plan in order to avoid a stock market drubbing. Nevertheless, in a guarded manner, the oil majors warned of serious trouble brewing in a recent National Petroleum Council study.

For decades, world oil production has grown in step with world GDP growth. Oil is the lifeblood of modern societies; oil products fuel almost everything that moves. Think of the difficulties of building new electric power infrastructure without the ready availability of liquid fuels, let alone at prices many times higher than today’s.

My recent analysis of the problem—“Mitigation of Maximum World Oil Production: Shortage Scenarios” (to be published in Energy Policy, Elsevier)—considered a worldwide crash program in liquid fuel efficiency and substitute liquids from coal, oil sands, shale, and natural gas. It concluded that, after 20 years of effort, some 25 to 35 million barrels of savings and substitute liquids might accrue. But if world oil production decline rates were a modest 2% per year, the world would still be short tens of millions of barrels of oil per day. If, as some believe, a 5% decline rate were to occur, even more severe economic havoc is likely. And what if oil exporters decide to withhold development of their oil supplies in their own national interest?

As peaking is approached, liquid fuel prices and price volatility clearly will increase dramatically. That’s happening now. However, because there can be other explanations for the current circumstances, current circumstances alone are not a dependable indicator. We will likely only recognize peaking in the rearview mirror.

Addressing inevitable change

Dealing with a peak in world oil production will be extremely complex, involve trillions of dollars, and require decades of intense effort under the best of conditions.

A framework for planning the mitigation of oil shortages was recently developed and presented in the Hirsch report. To estimate potential economic impacts, the potential relationship between percentage decline in world oil supply and percentage decline in world GDP was estimated to be roughly 1:1, meaning that a 1% decline in world oil supply would create a 1% reduction in world GDP. Even recognizing the fact that precision is impossible in such matters, it is sobering to contemplate the impact of world oil shortages growing 2% to 5% per year over a long period.

Technologies are ready to mitigate peak oil, such as coal liquefaction, enhanced oil recovery, and gas-to-liquids, to name a few. They will be necessary because the fleets of liquid-fueled vehicles and machinery worldwide have lifetimes measured in decades, and they cannot be quickly replaced under the best of conditions. First, the public will have to become more aware of the problem; second, we will have to replace our current, cumbersome method of decision-making—worldwide; and third, major commitments will have to be made and followed through on. The tasks ahead will be daunting; there will also be remarkable opportunities to contribute and profit.

—Robert L. Hirsch, PhD is a senior energy advisor for Management Information Services Inc. Hirsch has run the U.S. Department of Energy’s fusion program, headed the Washington office of the Electric Power Research Institute, and was chairman of the National Academies’ board on energy and environmental systems.