Talking about “peak oil” can feel very last decade. In fact, the question is still current. Petroleum markets are so glutted and prices are so low that most industry commenters think any worry about future oil supplies is pointless. The glut and price dip, however, are hardly indications of a healthy industry; instead, they are symptoms of an increasing inability to match production cost, supply, and demand in a way that’s profitable for producers but affordable for society. Is this what peak oil looks like?
Back in the early years of the current millennium, I was among a handful of authors warning that world petroleum production rates would soon hit a maximum level and start to decline, and that the eventual result would be economic mayhem. But it’s now the latter half of 2016 and, according to the United States Energy Information Administration, world production of crude oil hit a new high in 2014 of almost 78 million barrels per day, while 2015’s average number was almost certainly higher still.
Yet something strange and ominous is indeed happening in the oil industry. And I’d argue that only those versed in peak-oil discourse are prepared to understand what that is, and what the likely emerging trends will be.
Aside from issuing forecasts regarding the timing of the inevitable moment when petroleum production would max out (yes, many of those forecasts proved premature), we peak-oil writers more importantly tended to agree on three key insights, all of them as valid now as ever:
1. Oil is essential to the modern world. Energy is what enables us to do anything and everything, and oil is currently the world’s primary energy source. But oil’s role in society is even more crucial than that sentence might suggest. Nearly 95 percent of global transport is oil-powered, and if trucks, trains, and ships were to stop running, the global economy would grind to a halt almost instantly. Even electricity (which is the other main energy pillar of commerce and daily life) depends on oil: coal mining, transport, and processing depend on oil; much the same is true for natural gas, uranium, and the components of solar panels and wind turbines.
2. Oil is hard to substitute. A colleague, the energy analyst David Fridley, and I recently finished a year-long inquiry into details of the necessary and inevitable transition from fossil fuels to renewable sources of energy. While lots of sunshine and wind are available, not all the ways we use energy will be easy to adapt to renewable electricity. Some of the biggest challenges we identified are in the transport sector. Electric cars are certainly feasible (more are on the road every year), but batteries alone can’t power heavy trucks, container ships, and large airplanes.
There are other possibilities (including biofuels and hydrogen-based fuels made using electricity), but these are likely to be much more expensive and will require large energy inputs for their ongoing production. Moreover, transitioning to them will take major investment and infrastructure build-out occurring over two or more decades.
3. Depletion of oil (and of other non-renewable resources) tends to follow the low-hanging fruit principle. Humanity has been extracting oil on an industrial scale for 150 years now. At first, all it took was identifying places where petroleum was seeping to the ground surface, then digging a shallow well. Today, globally, millions of old conventional oil wells lie depleted and abandoned. The primary remaining prospects for production include heavy oil (which requires expensive processing); bitumen (which must be mined or steam-extracted); tight oil (produced from low-permeability source rocks, which requires hydrofracturing and horizontal drilling, with typical wells showing a rapid decline in output); deepwater oil (which entails high drilling and infrastructure costs); or arctic oil (which has so far mostly proven cost-prohibitive). All of these options entail rapidly growing environmental costs and risks.
It’s that third point that helps explain the disturbing recent evolution of the petroleum world. Most industry analysts focus on oil prices, and it’s clear on this score that the market has gone seriously weird in recent years. In 2001, petroleum sold for about $20 a barrel, a price that sat well within a fairly narrow band of highs and lows that had bounded price for roughly 20 years following the politically generated oil shocks of the 1970s. But, by the summer of 2008, the price had ascended to the unprecedented, dizzying altitude of $147; then (following the cratering of the global economy) it plummeted to $37. Following that, prices gradually recovered to around $100, where they remained for nearly three years before sliding again, starting in mid-2014, to the high $20s, from which they have partially rebounded to today’s approximately $40.
The recent highs (above $100) are incomprehensible, until we recognize that the oil industry’s costs of production have skyrocketed in the past decade. Throughout the first decade-and-a-half of the new century, demand for oil was growing rapidly in Asia. Normally, the industry would have simply ramped up its supplies of conventional crude to satisfy the needs of new car buyers in China and India. But output of conventional oil topped out in 2005; all the new supply growth since then has been from hard-to-reach or low-grade resources. Producers didn’t resort to these until demand outstripped supply, raising prices and justifying the far higher rates of investment that are required per unit of new production. But that meant that, henceforth, high prices would have to continue if producers were to turn a profit.
When oil was selling for $100 per barrel, many tight-oil projects in the U.S. were nevertheless only marginally profitable or were actually money losers; still, with interest rates at historic lows and plenty of investment capital sloshing around the financial industry, drillers had no trouble finding operating capital (David Hughes of Post Carbon Institute was one of the few analysts who questioned the durability of the “shale gale,” on the basis of meticulous well-by-well analysis). The result of cascading investment was a ferocious spate of drilling and fracking that drove levels of U.S. oil production sharply upward, overwhelming global markets. The amount of oil in storage ballooned. That’s the main reason prices collapsed in mid-2014 — along with Saudi Arabia’s insistence on continuing to pump crude at maximum rates in order to help drive the upstart American shale-oil producers out of business. The Saudi gambit mostly succeeded: Small- to medium-sized U.S. producers are now gasping for air, and, as their massive debts come due over the next few months, a wave of bankruptcies and buyouts seems fairly inevitable. Meanwhile, in the continental U.S., oil production has dropped by 800,000 barrels a day.
Indeed, the entire petroleum business is currently in deep trouble. Countries that rely on crude oil export revenues are facing enormous budget deficits, and in some cases are having trouble maintaining basic services to their people.
The worst instance is Venezuela, where hunger is rampant. But hard times have also fallen on Nigeria, the Middle Eastern monarchies, Russia, and even Canada to some degree. The oil majors (Exxon, Shell, Chevron, etc.) are still somewhat profitable because a significant portion of their output still comes from older, giant oilfields; but a large and increasing segment of their remaining profits now goes toward debt servicing. And their existing oil reserves are not being replaced with new discoveries.
Any way you look at it, the industry faces a grim future. Even if prices go up, there is no guarantee of recovery: Investors may be shy to rush back to oil since they have no assurance that a price rout won’t recur in months or years. After all, when prices are high enough to generate profits (which is very high indeed these days), they are also high enough to destroy demand — which is also vulnerable to recessions, the growth of the electric vehicle market, and meaningful climate policy. It’s simply unclear whether the global economy can consistently support an oil price that’s sufficiently robust to pay the industry to extract and refine the kinds of resources that remain.
Again, most oil commentators look at all of this through a purely economic lens. But it may be helpful to think more in terms of thermodynamics. Oil, after all, is primarily useful as a source of energy. And it takes energy to get energy (it takes energy to drill an oil well, for example). Energy profits from oil extraction activities were once enormous, and those energy profits got spread throughout society, wherever oil was used. Now, petroleum’s energy profitability is falling fast.
The peak-oil discussion was an effort to warn society ahead of time: Once the dynamic of declining energy profitability really gets rolling, adaptation becomes much more difficult.
While conventional oil wells 50 years ago often had a hundred-to-one energy payback, for example, today’s bitumen production in Canada shows an energy-return-on-energy-invested (EROEI) ratio of between 3:1 and 5:1. This declining energy profitability is why it’s now so hard to produce oil at a financial profit, and also why — even when oil supplies are still expanding — they don’t fuel as much economic growth throughout the economy.
Since oil is the key energy source of modern civilization, the effective EROEI of society as a whole can be said to be declining. It might not be far from the mark to suggest that we are witnessing the early stages of the thermodynamic failure of global industrial society. An earlier phase of the process manifested in the financial crash of 2008; when that occurred, governments and central banks responded by deploying easy money (massive debt, low interest rates) to prop up the system, and this temporarily masked society’s dwindling EROEI. Debt can accomplish this over the short run: Money is effectively a marker for energy, and we can borrow and spend money now on costly energy with the promise that we will pay for it later (hence the massive build-up of debt in the oil industry). But if cheaper-to-produce energy and higher prices don’t emerge soon, those debts will eventually become transparently un-repayable. Hence what is inherently an energy crisis can appear to most observers to be a debt crisis.
The problem of eroding energy profitability is hard to deal with partly because the decline is happening so fast. If we had a couple of decades to prepare for falling thermodynamic efficiency, there are things we could do to soften the blow. That’s what the peak oil discussion was all about: It was an effort to warn society ahead of time. Once the dynamic of declining energy profitability really gets rolling, adaptation becomes much more difficult. Oil no longer provides as much of a stimulus to the economy, which just can’t grow as it did before, and this in turn sets in motion a self-reinforcing feedback loop of stagnating or falling labor productivity, falling wages, falling consumption, reduced ability to re-pay debt, failure to invest in future energy productivity, falling energy supplies, falling tax revenues, and so on. How long can debt continue to substitute for energy before the next traumatic phase of this feedback process begins in earnest? That’s anybody’s guess, but our window for action is likely months or years, not decades.
What could world leaders do about declining societal EROEI if they took the crisis seriously? Clearly, part of their strategy would entail building an alternative energy supply infrastructure — which must be low-carbon, since we also face the existential threat of climate change. Indeed, some environmentalists say peak oil is a non-issue because whatever we do to tackle climate change will simultaneously solve our oil dilemma. I’m not so sure about that. Most proposed climate mitigation strategies start with transitioning the electricity sector to solar and wind power, and then proceed with a gradual electrification of other energy usage (electric cars, electric air-source heat pumps to heat buildings, etc.). But, as noted, much of the transport sector is hard to electrify. It’s nice to see more Nissan Leafs, Teslas, and Chevy Volts on the road, but those carry people; our real challenge is moving all the stuff we need (food, raw materials, and manufactured goods of all kinds), and that stuff outweighs passengers by an order of magnitude and currently travels mostly by ship and truck.
We need to build a bridge to the energy future, even while the highway we’re on is crumbling beneath us.
Efforts now underway to power trucking and shipping renewably are woefully insufficient. Peak oil demands that we focus on transport now, not later: We should supply substitute renewable fuels where absolutely needed, but we must also quickly and substantially reduce our reliance on long-distance transport through economic re-localization.
As much as I hate to think so, thermodynamic decline and economic contraction could seriously impair our chances for a robust renewable energy transition in response to the threat of climate change. Building enough solar panels and wind turbines, and adapting the ways we use energy (in building heating, in industrial processes, in transportation, in food systems, and on and on), will take time and many trillions of dollars of investment. It will also require stable international markets and supply chains, and those could be thrown into turmoil by the declining thermodynamic profitability of our society’s current primary energy source — unless we can somehow build a bridge to the future while the highway we’re on is crumbling beneath us.
A few of us never stopped studying the nexus of problems subsumed under the rubric of peak oil, and we now have a more sophisticated understanding of oil production and prices, and links with the larger economy. Still, outside a relatively small, well-informed audience, nobody’s listening — because the subject of peak oil has been discredited following a short-term oil supply glut and low oil prices. Even many environmentalists have filed peak oil under “Things Not to Worry About.” (One high-level climate campaigner of my acquaintance has said that peak oil is a lousy issue to organize around — as though we can afford to ignore a gargantuan problem if it offers insufficient fundraising potential). Thankfully, that small, resourceful audience has taken action anyway, in the form of community resilience-building efforts that often fly under the banner of Transition Initiatives and similar networks.
It may be counterproductive even to use the phrase “peak oil” today, though I’ve done so in this essay. After all, we don’t know if the actual maximum in world oil output occurred last year, or will happen this year, next year, or several years from now. This lack of definitive predictive power is the Achilles’ heel of an otherwise useful term. What instead should we call the complex, interrelated set of developments described above? Should we dub it “the thermodynamic collapse of industrial civilization”? That has a nice techno-apocalyptic ring to it and is probably more accurate. But it has too many syllables and requires too much background explanation. Only geeks could ever get it.
Something is happening here, whether we have a snappy buzzword for it or not. And we can’t afford to ignore it, regardless of how hard it is to explain it to economists, policymakers, and even many environmentalists. My colleagues and I keep trying to do just that. But at this point it also makes sense to batten down the hatches and build resilience close to home.
[Richard Heinberg is a U.S. journalist and educator who has written extensively on energy, economic, and ecological issues. He is the author of 13 books, including, in 2003, The Party's Over: Oil, War, and the Fate of Industrial Societies, one of the first full-length analyses on the issue of peak oil. He presently serves as the senior fellow at the Post Carbon Institute.]