Toward Energy Literacy: Our "Peak Oil" Reality

A recent MSNBC show allowed a guest to state, without challenge, that U.S. oil production is now at an all-time high. No one, including the host and three other guests, objected to this statement. Many articles in various media outlets are now trumpeting the new “oil boom” in the U.S.

The fact is that U.S. oil production is a bit more than half of what it was at its peak in the early 1970s. It is not even close to an all-time high. This is not a small discrepancy in facts — every pundit should know this information when discussing our current and future energy needs.

The U.S. peaked in oil production long ago, and the globe seems to be at a peak now. The idea of “peak oil” — that a maximum production level is reached for any and all oil fields, followed by a steady bell-curve decline — was made famous when M. King Hubbert, a Shell geologist, accurately predicted in 1956 that the U.S. would hit its peak in oil production in 1970.

Even the major Alaskan North Slope oil fields didn’t do much to slow the U.S. decline. It’s generally been a steady downward slope since our peak — until the last couple of years, as the chart above shows. 

The big news recently is, however, that the national decline in oil production has been halted, and we’ve seen a recent uptick in production. The recent bump in oil production is being hailed by breathless pundits and policitians as a prelude to complete energy independence. This is pure hyperbole, as the first two figures show graphically. 

We produce less than six million barrels of oil per day and we consume about nineteen, a difference of about thirteen million barrels per day. Even when we add liquid fuels from domestic natural gas production and biofuels, we still import about 40 percent of our petroleum.

The increase in U.S. production in the last few years has been due largely to an increase in onshore production in the lower 48, which is itself due largely to an increase in drilling rigs. Rigs are up 60 percent in 2011 when compared to 2010, the highest since 1987. We are, by increasing drilling, generally taking oil out of the ground faster, but not actually increasing the amount of oil we’ll ultimately produce from existing fields. The resource is finite and the pump rate doesn’t change this fact.

Looking to the future, the U.S. Energy Information Administration (EIA) projects increased domestic oil production primarily from increases in “tight oil,” but not much from increased offshore oil. Tight oil is oil from shale, tracking the increase in natural gas production from shale gas, known as “fracking.” Fracking is opening up some new resources, with serious environmental consequences. But even with increased production from tight oil fracking, EIA projects that the U.S. will be pumping 6.1 million barrels per day by 2035, about the same as we’re pumping today. Clearly, fracking is not going to make us energy independent, though it may significantly extend the declining tail of domestic production.  

The increase in domestic oil and gas production is good for the economy in many ways, if not the environment. But the problem, even from a purely economic point of view, is that these new sources of oil are facing serious headwinds in the form of declining oil production from traditional fields, which still comprise the lion’s share of oil production. 

The global picture: running faster to stay in the same place 

The International Energy Agency (IEA) is the West’s energy watchdog, formed after the oil shocks of the 1970s. Its mission is to try and prevent similar oil shocks from happening again. It’s the international equivalent of the EIA. As such, it is considered the authority on international energy statistics and policy recommendations. Its annual World Energy Outlook is eagerly awaited each year. 

IEA finally started listening to the peak-oil crowd in 2008 and completed a supply-side analysis of the world’s 800 biggest oil fields. In previous analyses, IEA had projected oil and other fossil fuel demand based on economic modeling and had simply assumed (literally) that supplies would meet this projected demand. The 2008 analysis used a slightly different approach. Rather than simply assuming supplies would meet demand, IEA looked at the 800 largest oil fields and calculated their rate of decline. They found that these fields were declining far faster than previously assumed, about 7 percent per year rather than the previous estimate of 3.5 percent per year.

This may not sound like a large difference but when we project into the future we see that many millions of barrels of new oil production are required to offset the declines in existing fields. In fact, IEA projected that 64 million barrels per daywould have to come online by 2030 in order to make up for the decline in production from existing fields and to meet increased demand. This is equivalent to the entire production from nine and a half Saudi Arabias. The enormity of this task should be readily apparent.

EIA and IEA projection of future oil supply and demand (2008). 

Gas prices and politics

Given the global oil supply picture, it is no surprise to many people that gas prices are back at record highs, even exceeding the seasonal highs of the last super price spike in 2007 and 2008 when gas and oil prices hit their all-time highs. Many observers fear that a similar, or even higher, price spike will occur this summer. Current price increases are due to a number of factors, including tensions over Iran and Syria. But current highs are due primarily to an ongoing tightness between supply and demand on a global scale.

Discussions about U.S. energy policy are perhaps the most caricatured discussions of any policy area. Politicians, those in office and those running for office, know full well that no short-term policy is going to have any impact on current gas prices. New Gingrich’s pledge to bring prices back to $2.50 a gallon (down from about $4 now nation-wide) is blatant pandering. 

Gingrich knows that oil is traded on a global market, so prices for West Texas Intermediate (WTI), the primary U.S. type of oil, are determined by the consumption of oil in many countries, far more than by the amount of US drilling. I already mentioned that U.S. oil supplies are half of their historic peak back in the 1970s, so any suggestion that U.S. oil production will be able to return back to where it was at its peak, or even to reach a level that would have a significant impact on gas prices, is a pipe dream.

WTI crude prices are currently at about $110 a barrel, still well short of the record of $147 reached in summer of 2008 or the inflation-adjusted high of about $200 a barrel reached in 1981 in the wake of the Iranian revolution. This summer may, however, test new highs as the global economy recovers. 

Much of Europe and Asia relies on the Brent crude oil price, which is produced in the North Sea and acts as a price benchmark for Europe and other parts of the world, just like WTI does for North America. Brent crude reached an all-time high, at $126 a barrel, in late February of 2012. Reaching a record high in February all but guarantees that Europe will see far higher prices by summer and will face significant economic woes as a result. This is not good news as Europe attempts to fix other economic problems. 

Many politicians and pundits are calling for allowing more offshore drilling in the U.S. as a way to bring down prices. This is also a pipe dream, according to the EIA itself. It simply won’t result in very much new oil, compared to global totals, and thus won’t have much of an impact on U.S. or global prices. In fact, the EIA projected that allowing drilling in all U.S. offshore locations would, literally, result in a price decline of only three cents per gallon of gas by 2030.

We seem to be at a global peak in oil production and we’re running faster and faster to stay in the same place — let alone to meet new demand as the global economy heats up. 

Some good news

There is some good news from the point of view of energy dependency. The U.S. has seen a marked decrease in fossil fuel imports due to the recession and an increasingly efficient economy, as well as the recent increase in production of oil and natural gas discussed above. Our net energy imports are lower, on a net basis, than they have been for about ten years. We now import about 46 percent of our petroleum needs, down from about 60 percent a decade ago. EIA projects that this figure will fall to 36 percent by 2035. This seems very optimistic to me given our knowledge about decline rates from existing oil fields, but, as always, time will tell. 

Historical and projected U.S. oil supply and demand, millions of barrels per day, including, natural gas liquids, biofuels and other non-petroleum liquids (Source: EIA 2012 Annual Energy Outlook).

The picture is still better when we look at all US energy imports. We import, on a net basis, about 22 percent of our energy and this is projected to decline to 13 percent by 2035. 

U.S. energy imports total, quadrillion BTUs (Source: EIA 2012 Annual Energy Outlook).

Half of all U.S. oil imports come from the western hemisphere (Canada and Mexico, primarily). One quarter comes from Africa and the remaining quarter from the Persian Gulf and other regions. 

The bottom line, however, is that the U.S. will still be a substantial importer of energy even in 2035, and particularly of oil, under our current energy policies. I’ve written before about the geopolitics associated with net fossil fuel exports. The U.S. is looking at a future in which not only is the world beholden to backwards nations like Saudi Arabia and Kuwait, but also to nations like Russia, which is now the world’s biggest oil producer. Russia is also by far the world’s biggest net hydrocarbon exporter and its power will grow as the world’s remaining fossil fuels continue to decline. 

Net hydrocarbon exports of selected countries in 2010 (million tons of oil equivalent) (source: EIA). 

What to do?

It is indeed surprising and encouraging (from the point of view of energy supplies, if not with respect to climate change or the environment more generally) that the U.S. has increased its oil production at this time, while we’re in the declining tail of the bell curve. But this reversal in the long-term trend is very likely to be temporary and not replicable in other places around the world. Moreover, as mentioned above, this increase is largely due to a dramatic increase in the number of drilling rigs, which is simply pulling more oil out of the ground, earlier, and not adding to long-term supplies. 

So what happened to peak oil? The short answer: we’re in the global peak now, as evidenced by record-high Brent crude prices, WTI prices well over $100 a barrel even while global consumption is still shy of its peak in 2008, and the fact that total global production has barely budged for almost ten years even as demand has increased. 

Recent increases in U.S. production show that massively increasing the number of rigs, as well as new technologies like fracking, can help extend the tail, and perhaps keep us on an “undulating plateau” of production for a little longer. But the inexorable decline of the existing large fields, which produce the lion’s share of global oil, is the more important underlying factor.

Even the leading energy agencies are finally coming clean on peak oil. The IEA’s chief economist, Fatih Birol, stated bluntly in 2009 that “we have to leave oil before oil leaves us, and we have to prepare ourselves for that day.” 

Birol stated in the same 2009 interview, presciently, as we can see now: “[Tightness in oil supply] will be especially important because the global economy will still be very fragile, very vulnerable. Many people think there will be a recovery in a few years’ time but it will be a slow recovery and a fragile recovery and we will have the risk that the recovery will be strangled with higher oil prices.”

We are now faced with dramatically high prices yet again and if they remain high or go even higher it seems all but certain that the U.S. and the world will soon dip back into recession.

This is the discussion we should be having in the U.S. presidential election, instead of the inanity we are witnessing instead. We need to rely on facts that aren’t cherry-picked to support a narrow point of view or a political point. 

How do we get off oil and other fossil fuels? By working vigorously now to become more energy efficient, conserve more, build massive amounts of renewable energy (wind, solar, biomass, geothermal, etc.) and over the next few decades shift to using electricity to transport people and goods. Energy efficiency and conservation alone can do far more than increased oil production — as recent history has amply demonstrated.

For this transformation away from fossil fuels to happen, we need to educate ourselves on energy. It’s time to learn a new vocabulary and to pay attention to what may seem like arcane facts. These arcane facts are going to become extremely important in the coming years.