Peak oil is alive, and costing the earth

The Conversation

You might have heard that peak oil – the theory that one day crude oil production will stop increasing, even as demand grows – is dead. Shale oil production is surging in the US. The premiere peak oil website, The Oil Drum, is shutting up shop. Even notoriously left-leaning columnist George Monbiot has announced: “We were wrong about peak oil”.

But he’s wrong about being wrong.

Peak oil is very much alive, and squeezing its hands ever more tightly around the throats of oil-dependent economies. The new economics of oil also have alarming implications for climate change, as Monbiot acknowledged, suggesting this is a subject we dismiss at our own peril.

Peak oil, of course, doesn’t mean that the world is running out of oil any time soon. There is a vast amount of oil left. Over the last 150 years, however, we’ve picked the low hanging fruit, so to speak, meaning that the remaining oil is harder to find and more expensive to extract. This is making it more difficult to increase the 'flow' of oil out of the ground.

When the rate of crude oil production cannot be increased, that represents peak oil. This is considered by many to signify a defining turning point in history, because oil demand is expected to increase as the world continues to industrialise. The theory goes that, as the supply of oil stagnates and the demand increases, the cost per barrel will rise, making the consumption of oil an increasingly expensive and debilitating addiction.

So is this theory alive or dead? Well, it’s not a theory, it’s a fact. Around 2005 the production of crude or 'conventional' oil stopped growing significantly and has been on a corrugated plateau ever since. This plateau has been acknowledged even by mainstream institutions like the International Energy Agency, a position it recently reiterated through its chief economist, Fatih Birol. Global demand for oil, however, has continued to grow significantly, which has put upward pressure on the price of oil.

This upward pressure on price has changed the economics of several sources of unconventional oil, making them financially viable to produce when once they were not. Shale oil was not produced previously because the costs of getting it out of the ground and refining it were significantly more than the market price for oil, historically around $US25 per barrel.

But now that oil is above $US105 per barrel, producers can make money producing shale oil and other unconventional oils, even though their energy and economic returns on investment are considerably lower than conventional oil.

The fact that unconventional oil is much more carbon-intensive than crude oil – exacerbating an already intractable climate problem – doesn’t seem to trouble oil producers or most politicians.

Driven by high prices, this new production has meant total oil production (conventional plus unconventional oil) has been able to meet increasing global demand, even though conventional oil has shown almost no growth in recent years. Because total oil production has increased to meet demand, many commentators have declared that “peak oil” is dead. These declarations, however, are based on a misunderstanding.

The main reason unconventional oils are economically viable is because crude oil production has essentially stopped growing, causing the price of oil to jump. Geopolitical instability in oil rich regions of the world also keeps prices high, with the current situation in Syria being the latest manifestation of this dynamic. Our industrial economies, however, are addicted to oil – the world consumes 90 million barrels of oil every day – and when oil gets expensive, our economies suffer.

At $US25 per barrel – the historic average – 90 million barrels would be $US2.25 billion every day on oil expenditure. At $US105 per barrel, that amounts to $US9.45 billion per day. This is a difference of $US7.2 billion every day, an extra cost to the global economy which is primarily a result of crude oil having peaked. It lacks credibility to pronounce the death of something costing the global economy $US7.2 billion every day – or $US2.6 trillion every year.

The economic costs of peak oil are especially significant for oil importing nations. Due to the price of oil rising in recent years, the US is now spending an extra $US600 million every day on its net oil imports of 7.412 million barrels, which is money leaving the US economy. Had crude oil not peaked and prices remained low, every day the US would have that $US600 million to spend on things other than expensive, foreign oil. This is hardly a phenomenon to dismiss.

When oil gets expensive, everything dependent on oil gets more expensive: transport, mechanised labour, industrial food production, plastics, etc. This pricing dynamic sucks discretionary expenditure and investment away from the rest of the economy, causing debt defaults, economic stagnation, recessions, or even longer-term depressions. That seems to be what we are seeing around the world today, with the risk of worse things to come.

This should provide us all with further motivation to rapidly decarbonise the economy, not only because oil has become painfully expensive, but also because the oil we are burning is environmentally unaffordable.

If people had listened to the warnings of the peak oil school, we could have broken our addiction to oil and had this money to spend on other things. I, for one, can think of better things on which to spend $US2.6 trillion dollars per year – such as renewable energy, bike lanes, better public transport, and local food production.

We have entered a new era of energy and economics, one in which expensive oil is going to make it increasingly difficult for oil dependent economies to grow their economies. This is alarming because almost no attention is being given to this issue at the macro-economic and political levels. Economists and politicians are still crafting their policies based on flawed, growth-based thinking, but the growth model, which assumes cheap energy inputs, is now dangerously out-dated. The climatic implications of exploiting unconventional oils make the math more worrying still.

Granted, we’re not running out of oil any time soon, but we have already run out of the oil that is economically and environmentally affordable.

Samuel Alexander is a research fellow at the Melbourne Sustainable Society Institute at the University of Melbourne.

Samuel Alexander does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

This article was originally published at The Conversation. Read the original article here.