Friday, May 2, 2008

Why I Think We're On the Downside of Hubbert's Peak

I have several reasons. Let me list them in order:

1. In May 2005, global “oil” production (that is, oil defined in the strict sense as crude plus petroleum condensates or C+C) reached a peak of 74,298,000 barrels per day, according to the United States Energy Information Administration (EIA). From that time until January 2008, that record was not exceeded, despite a massive increase in price for crude oil and refined products. According to the EIA, January 2008 saw a new record – but just barely; global C+C production averaged 74,466,000 barrels per day. This is a difference of only 168,000 barrels, or 0.23 percent.

2. There are very good potential explanations for the very small rise in crude oil production observed in January 2008. After all, the International Energy Agency (IEA), along with several national governments, begged OPEC to increase oil production in the summer of 2007. And OPEC agreed in their September meeting to do just that, promising to raise production by 500,000 barrels per day, starting in November. But there were energy observers who doubted that OPEC had sufficient spare production capacity to add significantly to their oil output. Although oil production figures from the EIA indicate increased OPEC production during this last winter, peak oil theorists were skeptical that the production could be maintained for anything longer than a few months. If this proved to be true, the production increase could be explained by the blowing down of gas caps in fields and wells that were nearly depleted, or by the release of crude that was being kept in storage. And in fact, production figures published by the IEA for the months of February 2008 onward show that OPEC production has quietly begun to fall. Also, OPEC has publicly stated that they will not raise production any more than they promised last September.

3. Both the EIA and the IEA began over two years ago to stop focusing solely on crude oil output, choosing rather to introduce another measure of petroleum production – the concept of “total liquids.” This includes not only crude plus condensates, but also biofuels, natural gas plant liquids, coal turned into liquid fuel, and synthetic petroleum made from tar sands. According to the IEA, world “total liquids” production reached a peak of 86.13 million barrels per day in July 2006. This figure was not exceeded until October 2007. According to the IEA, from October 2007 until February 2008, total liquids production increased from roughly 85 million barrels per day to 87.5 million barrels per day. However, in March 2008, world total liquids production decreased by 100,000 barrels per day.

4. The significance of these IEA total liquids numbers must be discussed. The IEA regularly performs petroleum demand forecasts for the world economy. If you dig into these, you will find the IEA saying things like, “World total liquids demand is expected to grow to XX million barrels per day over the next year.” This simply means that the global industrial economy depends on petroleum in order to run, and that because most economic transactions and policies are based on the assumption that the economy will grow by a certain percentage every year, the supply of petroleum liquids must also grow by a certain percentage every year. If the total liquids supply does not grow as fast as the expectations of economic growth require, or if the total liquids supply remains static or begins to shrink, then the price of petroleum products begins to spike. The funny thing is that the IEA projected world demand for petroleum liquids for January 2008 was around 88 million barrels per day. According to the IEA, the world produced nearly that much petroleum liquid in January 2008. So why then did prices of crude oil and finished products rise from the $65 per barrel range in July 2007 to over $100 per barrel by February? In the minds of many observers, the IEA total liquids numbers are suspect.

5. Crude oil prices continue to rise at an accelerating rate, like a raging fever or a cough spiraling out of control. One result of this is that refineries in the United States are running at far less than capacity, because refinery profits on finished goods are being eaten up by the high cost the refiners must pay for their raw material, which is oil. Some refiners, such as Valero, are starting to sell their US-based refineries and to move their operations offshore.

6. The list of countries whose oil production is past peak and now in decline keeps growing. Russia seems to have joined that list this year ( Other long-time members of that list include Mexico, Indonesia, Britain, Norway, Venezuela, Iran, and the United States. Indeed, a crude oil supply report published by the German Energy Watch Group in 2007 shows dozens of countries who are past their peak of oil production.

7. That Energy Watch Group report, entitled, “Crude Oil – The Supply Outlook,” can be found at The report was sponsored by the German government, by the way. Don’t read it before bedtime if you want a peaceful night’s sleep, because it concludes that world oil production probably peaked in 2006, and will very shortly begin to decline at a rate of several percent per year, leading to severe economic changes. So far, many of those changes seem to be happening.

What do I expect to see in the months ahead if the world is really past peak? The following things:

  1. Continued feverish escalation of crude oil prices.
  1. The appearance of spot shortages of fuel even in the First World, including the United States.
  1. More refiners moving their operations out of the United States.
  1. A general trend for weekly petroleum and finished product inventories to decrease over the next several months, although there may be a few weeks here and there where that does not occur.
  1. Increasing signs of strain and breakage of elements of a society built and based on cheap oil – more airline failures, truck transport failures because of cost and lack of availability of diesel fuel, increased difficulty in operating industrial agriculture because of the lack of diesel and of fertilizer and pesticides, etc.

Meanwhile, there are strains appearing very close to home. This week, when I went to the store to buy rice, it was gone. Clean gone – except for a handful of one pound bags. Shortages of basic foods are beginning to appear in the United States. People are being squeezed by a combination of foolish personal choices and astronomical prices. Even in the ritzy areas within a 20 mile radius of my working-class neighborhood, realtors are having to auction off houses. On my way home from work, I saw a cluster of 9 McMansions, each for sale for over $1 million. I had watched them being built last September. Only one of them has sold thus far, and I suspect that it will be a long time before the others sell – for much less than $1 million.

But I leave you with a couple of pictures of one activist’s thoughts on the present crisis. Looks like the sort of art that could have been done by someone like Banksy – except that he would have done it in stencil.

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