Peak Exports and Our Economic Future

After New York Governor Eliot Spitzer’s fall from grace in a drama worthy of Euripides, the highly popular Oil Drum website ran an article about his successor entitled: “David Paterson: First Openly Peak Oil Aware Governor.” The article highlighted the fact that political leaders are generally oblivious to the very serious problems facing our future supply of oil.

“Peak oil” is the point at which global oil production reaches its high point, after which it irreversibly declines. Peak oil is not just a theory: major oil-producing regions have already reached their peak and are in terminal decline, such as the U.S. itself, the North Sea region, Mexico, Venezuela and many others. Russia’s energy minister recently announced that its oil production was now past its peak. Russia is the second largest oil producer in the world, after Saudi Arabia.

Many governments, businesses and individuals are now taking this issue seriously, but still not moving quickly enough.

The debate is no longer about if we will hit a global peak for oil production, but when. When we do, we can expect prices to climb well above the high of $117 a barrel reached in April of 2008. Unconventional oil supplies can help delay the peak a little, but they simply can’t be brought online fast enough to be much help — not to mention the fact that tar sands, oil shale and coal to liquids entail devastating environmental impacts and may in fact require more energy to produce than they contain.

With more and more experts warning that the global oil peak has already been reached or is very near — including the U.S Army Corps of Engineersi — a secondary issue is the speed at which production will decline once it has peaked. Production peaks in various regions around the world, such as Texas and the United Kingdom, have been quite sharp. If global oil production follows a similar curve, we will likely experience severe shocks to every aspect of our society.

As China, India, and other developing economies continue their furious rates of growth, we can expect competition for scarce supplies to grow increasingly fierce. The 2005 “Hirsch Report” — a report by SAIC, Inc., for the Department of Energy — found that to mitigate the full impacts of peak oil, the U.S. would have to begin serious planning and start transitioning away from petroleum 20 years before the peak. According to this report, if a peak happens within the next 10 years, we will suffer extreme disruptions to our economy because we have not, as a nation, begun to seriously plan for the transition.ii

As bad as peak oil will be for the globe, “peak exports” is an even more serious problem for oil-importing countries like the U.S. In the peak exports analysis, global supply and demand is not as important as global net oil exports. The U.S. imports about two-thirds of its oil, making it extremely vulnerable to global oil markets. U.S. oil production peaked in 1971 and has steadily declined since then (falling from 9.6 million barrels per day to 5.1 million in 2007). The availability of oil exports will have an impact on our future economy that will be rivaled by no other single factor.

Jeffrey Brown and Samuel Foucher have conducted extensive analyses of the top five oil exporting countries’ past and future production. These countries are generally growing fast and consuming more oil domestically, at the same time as they are producing less oil. Brown and Foucher conclude that these countries – Saudi Arabia, Iran, Russia, Norway and the United Arab Emirates — will probably have literally zero oil to export by about 2030. Again: the top five oil exporters, accounting currently for half of all exports, will, under this analysis, have literally zero oil to export by about 2030. The importance of this conclusion cannot be underestimated.

If the top five exporters go to zero exports over the next twenty years or so, it is highly likely that the U.S. and other oil-importing countries will be forcibly weaned from oil over that same period (U.S. domestic oil production will continue its 37-year decline). The question then becomes: will we follow normal crisis planning — taking action after the crisis occurs — or will we bring alternatives online quickly enough to allow for a “soft landing.”

A peer-reviewed 2006 analysis by Roger Stern, published in the Proceedings for the National Academy of Sciences, found that Iran’s exports would, under current trends, decline to zero by 2013. A 2007 Canadian Investment Bank Corporation report found that oil exports would decline precipitously over the next five years. These reports support the more far-reaching analysis performed by Brown and Foucher.

Personally, I often despair that policymakers can act with the alacrity required for these kinds of problems. Major problems often require an overt crisis before solutions are set in motion. Our nation is currently in a slow-moving crisis — not an overt crisis like 9/11 or Pearl Harbor — caused by oil above $117 a barrel and gasoline and diesel over $4 a gallon in many parts of the country. There is not, however, widespread acceptance that these prices are indicative of a long-term trend, rather than a short-lived phenomenon. Yes, there may well be troughs in the long-term price trends as major economies contract and use less oil and some additional oil production comes online due to far higher prices. But the long-term trend for declining oil exports is quite clear.

In my neck of the woods in Central California, we are spearheading a push to take these problems with the utmost seriousness. Shifting minds and then shifting energy infrastructure on a massive and sustained basis is an extremely difficult task. But we have to try our best if we care about our future. Spreading the word about what the future holds is the first step in this process. Market forces alone will be utterly ineffectual in making this transition because they operate too slowly and don’t necessarily internalize the relevant factors.

Governor Paterson represents a new trend among political leaders: someone who is aware of the energy problems facing us. The next step is to take action to move our economies away from oil dependence through dramatic improvements in energy efficiency and conservation. Better mass transit (buses and trains) should lead the way, as well as an increase in ridesharing (car and vanpools), an improved biking infrastructure, telecommuting, and locally produced biofuels from waste products and sustainable feedstocks. Alternatives like plug-in hybrids and electric vehicles will eventually allow our transportation system to use renewable electricity instead of oil, but these alternatives will take decades to make a serious impact. Each region needs to start its planning process now to make this transition — before it is forced upon us.

Tam Hunt is a Lecturer in renewable energy law and policy at the Bren School of Environmental Science & Management at UC Santa Barbara. He is also Energy Program Director and Attorney for the Community Environmental Council in Santa Barbara.

i A recent report by the U.S. Army Corps of Engineers, examining energy security for the U.S. Army, states: “World oil production is at or near its peak and current world demand exceeds the supply.” (“Energy Trends and Their Implications for U.S. Amry Installations,” (Sept. 2005), available at: http://stinet.dtic.mil/cgi-bin/GetTRDoc?AD=A440265&Location=U2&doc=GetTRDoc.pdf.

ii Hirsch, Robert, et al. “Peaking of World Oil Production: Impacts, Mitigation and Risk Management,” SAIC, Inc., February 2005. Online summary: http://www.acus.org/docs/051007-Hirsch_World_Oil_Production.pdf.

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