'Peak Oil' drives urgent energy alternatives

In the furore over increasing oil prices, the two words our leaders seem determined not to mention are “Peak Oil”. Having built our prosperity on cheap energy from fossil fuels, particularly oil, it is perhaps understandable that they cannot bring themselves to admit that business-as-usual is over as cheap energy disappears - first due to the need to address global warming, and second due to the peaking of global oil supply, which will probably have an even greater impact than global warming in the short term.

Peak Oil takes its name from the bell-shaped curve that typifies the production profile of any oilfield. Once an oilfield is discovered, oil wells are drilled and production rises until drilling saturation is reached, whereupon production levels off at the peak. It then drops along the declining segment of the bell shape until the reservoir is exhausted. This profile applies to an individual oilfield, to all oilfields in a region and now to the globe, although it may become distorted along the way by geopolitics, for example.

Oil does not run out at the peak, as roughly half of the ultimately available oil remains to be produced. However, it is the point at which further expansion of global oil production becomes impossible because production from new oilfields is more than offset by the decline of production from existing fields.

It may be a sharp peak if, for example, some of the giant fields start to decline rapidly, or it may be an undulating plateau spread over a number of years if, for example, oil demand is destroyed as a result of recession or if developing countries are no longer able to afford high oil prices. Once demand begins to exceed supply, oil prices rise -, as they have been doing over the last few years. The bigger the gap, the higher the price.

The “official view”, until recently, from organisations like the International Energy Agency (IEA) - the energy watchdog of the developed world - was that we had abundant oil resources available from both conventional and unconventional sources, and these would meet rapidly expanding global demand as China and subsequently India became large consumers. The economists took comfort as the oil price rose on the grounds that higher prices would stimulate additional production so that supply eventually balanced demand and forced the price down. As an eminent Australian economist colourfully put it: “If the price of eggs is high enough, even the roosters will start laying!”

Peak approaching

Maybe so, but it’s one thing to have oil resources in the ground and it’s quite another to convert those resources into oil flows to the market. It now seems there are unexpected problems in so doing, to the extent that we are probably approaching the peak of global supply. We may have already passed the peak, or it may be some years ahead, but the exact date is less important than accepting the principle and taking action to prepare for it.

The “official view” is now scrambling to catch up with reality. As the Chief Economist of the IEA recently commented: “Putting these two things together, the short- and medium-term security of our oil markets, plus the climate change consequences of this energy use, my message is that if we don’t do anything very quickly, and in a bold manner, the wheels may fall off. Our energy system’s wheels may fall off.” In urging OECD governments to rapidly change policy from “business-as-usual” he commented: “We must leave oil before it leaves us”.

The reasons that supply is not expanding are:

• we are not discovering new oilfields quickly enough;
• data on existing fields is suspect, particularly in the Middle East, so we may not have as much oil as we thought;
• production from many existing oilfields is declining as part of the natural process, often more quickly than admitted officially;
• unconventional oil resources, such as deep water and tar sands, are proving more difficult to develop, technically and economically, even with higher prices. They also have major environmental problems, such as high carbon emissions and high demand for water and energy, to the point where in some cases almost as much energy is needed to produce the oil as is ultimately recovered; and
• oil-producing countries are using more oil domestically and are less prepared to export it.

Price hikes and shortages

Given the absolute dependence of modern societies on oil and gas, price hikes and supply shortages will be traumatic, as is already evidenced by current unrest in Europe and protests in the Middle East and Asia as oil subsidies are withdrawn.

Australia is particularly vulnerable, but the issue was ignored by the previous Federal government and is barely acknowledged by the new government. Peak Oil is arguably the biggest issue Australia will have to contend with in the next decade. Strange it did not even rate a mention at the 2020 Summit.

Oil prices may well drop temporarily if we move into recession, or if increased oil discoveries do result from the exploration triggered by current high prices, but the general price trend is probably upwards and it is misleading to pretend otherwise. We should be preparing for that eventuality now, not playing King Canute in futile attempts to turn back the global tide with 5¢ fuel excise or GST reductions.