Has Peak Oil Become Self-Evident Yet?

Only electrification can save us - or maybe not

Photo by Ashlee Attebery on Unsplash

“All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.”

Arthur Schopenhauer

Rystad Energy, a renowned energy research company headquartered in Norway, has made quite a statement recently: “Global recoverable oil reserves hold steady at 1,536 billion barrels; insufficient to meet demand without swift electrification”. In plain English: although there is still plenty of oil out there, it is physically not enough to meet demand, unless we rapidly electrify everything. There are a couple of things to unpack here, so let’s address them one by one. 

Before we go into the weeds, though, let me add some context first. The world consumes around 30 billion barrels of oil (1) each year, which, in theory at least, indicates that we still have 51 years left till we suck all proven and probable reserves dry. Oil is not a ‘product’ rolling off from a manufacturing line, though. It is a finite natural resource with its own set of limitations. After drilling a well oil starts to flow at a relatively moderate — but ever increasing — rate, but only up to a certain point (when roughly half of the oil in that given well is still underground). From that point on, however, pressure starts to drop and the flow gradually slows to a mere trickle. To delay this slow-down in production, oil companies push more and more water and/or CO2 underground to force the remaining oil to the surface, until the effort is no longer worth it. Keeping the equipment pumping burns a lot of energy and machine time, while it returns an ever smaller amount of oil every day. Thus, after reaching an economic cut-off point, the well gets plugged and abandoned, in many cases with quite some oil left in it. The same is true in aggregate to an oil field (or province), and if added together, the world in total. This leaves us with a more or less smooth bell-curve, with its highest point marked as peak oil, after which production is expected to fall. Not in a crash and burn manner, mind you, but rather following a long and undulating path back to zero in a multiple decades time.

With that out of the way let us also put the global reserve figure into its proper context. Much of the big gains during the past forty or so years came from revisions — adding numbers to proven reserves on paper only — ostensibly reflecting changes in drilling technology, moving previously uneconomic to exploit resources into the reserves category. However, as Kurt Cobb explains, there were unexplained massive one-year jumps in oil reserves of major OPEC producers in the 1980s, and other anomalies in reporting who has what and how much. When it comes to real discoveries, however, the rate of finding new oil has been far below the actual consumption rate for decades now, (adding around 11 billion barrels per year on average versus the 30 billion consumed every year). In 2022 and 2023 notably, oil companies have discovered 5 billion barrels only, replacing a mere one sixth of what has been consumed that year.

“To make matters worse, 2023 was an expensive year, with drilling costs rising due to a significantly tighter rig market than in prior years, worsening the blow of a low success rate.”

It is very important to understand here, that just like lifting oil from underground, discoveries, too, get more expensive with each passing year. Not just because of equipment shortages, but also due to the fact that we are running out of easy to access locations on land and in shallow, nearshore seas. You see, it is one thing to put a rig to work in central Texas, where you have roads, infrastructure, hotels, supermarkets, you name it. It is quite another, though, to pull off the same feat in choppy antarctic waters beset with icebergs and frequent storms, not to mention the thousand-mile long supply route. And it’s not just the cost which goes up in this case, but also the energy expended during the operation; making energy returns on investment worse still. Of course, there are plenty of variations in between, but the trend is clear: we are moving towards harder and harder to find (and then more and more expensive to extract) resources.

M. King Hubert and his famous bell-curve, which he calculated for (conventional) US oil production. Source

Now back to the Rystad article cited above. Quote: “This total recoverable oil resource of 1,500 billion barrels gives an upper limit of how much oil can be produced over the next 100 years or more. Of course, this upper limit is only realistic and economical if oil demand is not impacted by the energy transition, meaning oil prices would rise far above $100 per barrel. In this theoretical “high case,” total oil production would peak around 2035 at 120 million barrels per day (bpd), then decline steeply to 85 million bpd in 2050.”

What? Oil production would peak around 2035? Aren’t we supposed to believe, that the shale revolution has saved the day, and that peak oil was just another bogus theory? Well, perhaps it isn’t so... There are now studies upon studies pointing to the same issue. Peak oil hasn’t gone anywhere, it just kept a low profile for a while… But now, it’s back with a vengeance. In fact, conventional oil production was on a plateau ever since 2005, and only the “shale revolution” (and a massive accounting trick counting natural gas liquids as oil) has made it appear so that oil production was growing. Actually, (not counting the growth in LNG production) we have hit an all time high in crude oil (conventional plus shale) production in 2018 already, at 83611 barrels per day on average. So, while there is at least a theoretical possibility of surpassing that figure — especially if we continue to stick with the false definition of “oil” and include natural gas liquids, too — even these artificially inflated figures will eventually hit a peak and start to decline in ten years… 

Were it not for two major flawed assumptions in the statement from Rystad above. 

One, oil prices cannot sustainably ‘rise far above $100 per barrel’ without bankrupting the world economy. The only period in history where this has happened (between 2011 and 2014) was marked by zero interest rate policies making financing burgeoning debt levels a breeze. Before that, in the run up to the 2008 crisis, oil prices rose only briefly above $140 — a figure not seen ever since. This steep price hike was in significant part reflecting the increased production cost of the marginal barrels (2) — contributing to the 2008/9 global recession — and due to the lower EROI ratios and higher CO2 emissions of those marginal barrels (R W. Bentley et al, 2020). 

During the past 10 years, however, the price of oil went above $100 only once (in the wake of the Ukraine crisis in 2022); consequently causing a significant slowdown of the Eurozone economy, one of the largest importer of crude worldwide. Prices are hovering around $80 ever since. So — just like Art Berman — I’m, too, skeptical about higher oil prices. Due to the massive destructive power of higher prices (when it comes to demand), I find a real scarcity scenario developing on the oil market highly unlikely. When oil prices go above a hundred per barrel, demand slackens, and so does exploration and development of new (costlier than ever) fields. Instead of a bidding war, prices will thus continue to be driven by real and perceived geopolitical threats — of which there is no shortage these days.

The global economy simply cannot function without cheap oil. Mining, agriculture, long distance transport all depend on low-priced fuel oil (diesel). Since none of these use cases could have been replaced by hydrogen and batteries — both well known and mature technologies — for decades now, it is unrealistic to expect that these “new” power sources will suddenly break through and scale up to colossal levels in the ten short years before liquid fuel production peaks. The reason is simple: the energy density (the kilowatts per kilogram delivered), not to mention the return on investment (and thus the price) of these “alternatives”, are nowhere near that of oil’s…(3) And as we have seen, much higher costs cannot be sustained for much too long. This is why, as Kurt Cobb correctly observed:

“Oil continues to be the largest source of world energy — almost 30 percent — and it is critical for transportation where it supplies more than 90 percent of total transportation fuels.”

This takes us to the second flawed assumption, namely that the fall in oil production can be compensated by electrification. The analysts at Rystad somehow managed to overlook the fact that copper, lithium, cobalt, and just about anything from gravel to limestone is still mined and moved by diesel trucks. Thus, it would be impossible to continue with electrification — a massively material intensive undertaking — in a world where liquid fuel supply would be falling. Remember, diesel oil is a much needed input to agriculture, too, so it is inconceivable that a dwindling supply of this indispensable fuel would be diverted towards mines producing metals for electric vehicles, instead of farms growing food. So, no: neither higher prices, nor electrification can save us from peak oil. Once it’s here, we will have to kiss goodbye to a lot of things — and electric vehicles might be the first ones to go. Simply put: we haven’t got the technology and the time left to wean ourselves off of oil. The time for alternatives and false hopes is up. It’s time to get real. This brings us to a more down-to-earth scenario laid out by Rystad in the same article:

In a more realistic outlook for oil production, total output would peak in 2030 at 108 million bpd and decline to 55 million bpd in 2050, with oil prices staying around $50 per barrel in real terms. Under this scenario, about one-third of the world’s recoverable oil, 500 billion barrels, would become stranded due to unprofitable developments.

Now, that sounds more reasonable, doesn’t it? So, while there might be another peak in daily oil production in the coming five to six years, we face a massive decline after that: halving our everyday petroleum supply in a mere twenty years (translating into an annual 3–4% drop in fuel supply, year after year). Again, not a precipitous drop, but a long undulating decline… And while this is certainly good news for the climate, as much less CO2 will be released from burning oil than previously estimated, such a steady decrease in oil production would certainly spell doom to the globalized world economy. 

Think about it: everything from growing food and biofuels, to transporting goods or mining minerals for “renewables” and batteries depend on cheap and abundant petroleum supply — not to mention its many other uses from paint to asphalt, or from shower gel to plastics. Take a good look around you and divide everything you consume by two: halve the food, halve the plastic packaging, halve the sofa, halve the mattress in your bed. Halve the car — be it electric or gas powered, it doesn’t matter — halve the width of the road in front of your house. Damn, just halve everything.

And it gets worse. I don’t mean to rub salt into this wound, but I need to remind my readers about another peer reviewed study examining the amount of energy needed to be re-invested into continuing drilling operations and pumping oil, even as supply continues to diminish:

“The total energy needed for the oil liquids production thus continually increase from a proportion equivalent today to 15.5% of the gross energy produced from oil liquids, to the half in 2050. We thus foresee an important consumption of energy to produce future oil liquids.”

This means that, depending on how far we get with the electrification of drilling operations, we could utilize only a fraction of that diminished petroleum supply for other purposes. Heck, worst case you might need to chop that sofa in four instead of two... Of course, I’m oversimplifying things, but perhaps not that much. This massive reduction in available fuel supply (partly due to falling production post peak, and partly due to an increasing hunger for energy to maintain drilling activities) will lead to massively uneven outcomes. For example: while you might have food on the table, road repairs will be postponed (forever) — unless you live in the same street as the mayor. Inflation, especially when it comes to food and other essentials, on the other hand, will continue to soar higher and higher, till you have no money left to go on a vacation, or buy a new sofa, let alone a car. Fuel will be diverted to essential services and agriculture, the remainder of the economy will have to face shortages and rationing.

Take (very-very) good care of what you have today: the products around you will have to serve you for a much longer time than they were originally intended to do.

It’s not all doom and gloom, however. Depending on how fast population might decline (especially in East Asia and the overdeveloped world), the onset of this great unraveling might be delayed considerably. You see, a falling (and ageing) population rarely goes hand in hand with rising demand for anything. Older people have already bought what they needed, but as more and more of them (boomers) pass away, their assets (homes, stocks, cars etc.) will eventually flood the market. As strange as it may sound, soon we might find ourselves in an oversupply of homes stocks and bonds — putting an end to the everything bubble. (Presuming that a massive financial crisis does not wipe us out till then.)

Limits to Growth, Recalibration23. While industrial output is expected to fall precipitously (starting just about now), population can be expected decline following a much smoother curve. Source

The decline of western economies (due to their lack of access to cheap resources and fuel putting an end to their economic and military hegemony), combined with a fall in Asian population (and their corresponding economic crisis), could easily offset the coming decline in oil production — making peak oil look like “peak demand” at first glance... At least until production decline accelerates further, and the lack of fuel could no longer be explained away by demand destruction. By then, however, no price hike will save the oil market — it will be way too energy intensive to continue with business as usual — not to mention that there will be no globalized world economy left to speak of by then. (I would put this stage into the late 2030’s, maybe early 2040’s if you ask me.)

The world will not end in 2050, consumer societies will.

Again, the end of the oil age is not an end of the world. The globalized world economy — once again — will become a set of loosely connected, local economies; producing much less stuff for their much smaller populations. Today, humanity is in absolute ecological overshoot, consuming and polluting much more every year than what could be regenerated or absorbed by Nature. Fish. Forests. Minerals. You name it. 

We have been living on borrowed time, however, as all the abundance we enjoyed so far was a byproduct of a one time fossil fuel bonanza. The party is coming to an end, though, and soon we will not have enough energy to continue exploiting Earth’s riches as we did so far. Oil was, and still is, the basis of our economy: it drives all the machinery responsible for mining, transporting and harvesting resources from coal to iron, from potash to phosphorus, or from wood to grains. With oil production peaking then receding, the destruction of this planet will gradually come to a screeching halt. Giant machinery, which used to eat their way through entire mountains, will grind to a standstill — and begin their slow decomposition into a pile of rust and microplastics. Without oil, it will be impossible to continue the “energy transition” (which obviously never was), and all our dreams of ‘Electrifying The Titanic’ will have to be abandoned — together with space exploration and hydrogen fusion. A bitter pill to swallow.

Instead of a material transformation — or continuing ecocide by different means — we need a spiritual, mental and psychological transformation more than ever. The evil spirit of Wetiko must be left behind. As the planet starts to heal itself from the ravages of civilization (restoring its forest cover and absorbing much of the CO2 released), so must humanity heal from its addiction to technology and overshoot. While I have absolutely zero hope for this civilization — reviewing the facts one cannot deny that its beyond redemption — I have a very strong faith in the re-birth of a much smaller scale, more humane, ecothechnic society in the not so distant future. 

Let’s hope that future generations will be wiser than we were.

Until next time,

B

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Notes:

(1) Not everything is oil what’s reported as such. Pundits usually talk about a world output of a hundred million barrels per day (giving us an annual 36.5 billion barrels), but this number includes (among many other things) natural gas liquids, biofuels and synfuels, too. However, technically speaking, none of these liquids are coming from petroleum, and thus are not a part of the officially stated reserve figures above. Real petroleum production (that is: crude and condensate) actually stood at 82636 barrels per day in 2023 on a global average, or 30.16 billion barrels per year.

(2) Marginal barrels mean extracting the next barrel from an already established (drilled and piped) oil field. It does not include the cost of exploration and “developing” a new resource.

(3) If electric vehicles (especially trucks and heavy duty machines) were a viable thing, and were indeed as cheap and “energy efficient” (providing a much better return on investment than oil) as touted by its promoters, they would have already won the market competition — even without subsidies. The withdrawal of these subsidies, and the subsequent sharp fall in sales tell a completely different story, however… Well, the proof is in the pudding, as the British saying goes.