Peak Oil

After exposing the origin of oil (see article “Oil from formation to production”) and its fundamental role in the modern economy (see article “Oil from consumption to growth”), an uneasy question arises: what will happen when we run out of oil? For some, the issue is spurious for three main reasons:

  • There is plenty of oil in the ground: the EIA estimates global oil resources at 6,146 billion barrels [1] which represent close to 180 years worth of consumption (at current rates).
  • The market is a very efficient machine: when we will lack oil, prices will automatically go up which will spur new investments and supply will be back.
  • Technology will improve in defiance of peak oil: extraction techniques will become more sophisticated and even if oil went missing, new transports technologies will take over.

This article will not attempt to answer each of these statements but rather, will try to question them by providing a certain number of insights surrounding peak oil.

What is peak oil?

Oil takes dozens of millions of years to form and given our current consumption is close to 94mb/d [1], oil can largely be considered as a non-renewable resource. This physical limit inevitably means that, someday, oil consumption will go down to zero whether it is by force or by choice. The moment when consumption will stop to increase and start to decline is simply called the “peak”. Besides, this rationale applies to every non-renewable resource (e.g. coal, gas, uranium, aluminium, iron, copper). Henceforth, the only relevant questions are: what impacts could the contraction of oil have and when will it happen?

How is oil exploited?

Oil resources refer to the total amount of oil present in the deposits. However, oil is only valuable when it can be recovered economically with existing technologies. This subset of a resource is called an oil reserve. According to the IEA estimates, global oil reserves (technically recoverable) represent around 28% of global oil resources [1].

Economic rationality imposes that the exploitation of natural resources begins with the most accessible deposits within range. In the case of oil, it means that companies will first focus on shallow, large concentrated oil deposits with high pressure in the reservoir, where topology and geology make it easy to drill. When the oil reservoir is depleted, the story goes on and producers will look for other wells to develop. As the number of “low hanging fruits” reservoirs dwindle, oil production becomes more complicated and generally more expensive.

Since oil is a form of primary energy, one can calculate the ratio between the energy content of oil and the energy required to extract it. This metric is called the Energy Return on Investment (EROI) and the higher it is, “the greater the amount of net energy delivered to society in order to support economic growth” [2]. It is estimated that a minimum EROI of 3 is required to sustain growth [3, 4]. The following chart shows an estimate of the EROIs of different thermal fuels [4]. Conventional oil has the highest EROI while low-grade liquids such as unconventional oil (tar sands and oil shale) and biofuels have much lower EROIs (see article “Oil from formation to production”).

There is strong evidence that EROI for oil and gas have been declining over time [2, 3]. In other words, despite technology improvements, it takes more and more efforts to extract oil and new developments can only be lower-grade liquids such as unconventional oil. A study has even modelled that global EROI of oil peaked in the 40s-50s and has almost halved since then [2].

Conventional oil

Regarding conventional oil which is the highest-grade form of oil, with the highest energy return and the most produced on Earth, data from the IEA and the EIA (Energy Information Agency) [5] shows that the global production of conventional oil has reached a plateau in 2005/2006 (see the article “Oil from formation to production”).

Oil market dynamics

As per the graph below, there is no evident link between the price of oil and the production [6].

Unfortunately, the oil market is highly inelastic which makes it hard to gauge volumes based on prices. The oil industry works in cyclical periods of investments and increased production with lags in between. For instances, it takes 5 to 10 years for offshore projects to start producing [6]. In addition to being influenced by supply and demand, the price of oil is also driven by geopolitical factors. In facts, the 2014’s fall in the oil price might the result of OPEC keeping low prices artificially to test and undermine the development of the US shale oil [7].

Instead of buffering oil depletion by smoothly balancing supply and demand, another analysis shows that price dynamics could actually accelerate the decline in extraction rates: “during the growth phase of oil extraction, low prices increased demand, and high prices increase supply, during the contraction phase, low prices will diminish supply, and high prices will diminish demand” [6]. Oddly enough, oil scarcity can hardly be assessed through its price.

When will peak oil occur?

Forecasting the date of peak oil is a thorny challenge, and few accept to take the risk. Nonetheless, a very comprehensive modelling work on future global oil production was carried out in 2009 by the Australian Department of Infrastructure, Transport, Regional Development and Local Government (BITRE)[1]. The result of the modelling shows that the turning point in the world total liquids production could occur around 2020 as per the graph below [8].



Elliot MARI

Energy Researcher at Sustainable Energy Network Solutions




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