The Spectre of Peak Oil - Part 1

Why a peak and fall in oil extraction is inevitable?

Photo by Arvind Vallabh on Unsplash

There is an increasing amount of evidence that we are close to (or most likely have already passed) peak oil supply. But why is this so hard to tell? How can people argue that there is no such thing at all, while others keep warning us about an imminent decline in oil production? What is peak oil anyway? How do we know if such thing exist, and if it does when will it arrive? Well, in order to understand what peak oil is (or a maximum daily petroleum output which could be no longer surpassed, ever) we have to become familiar with some basic concepts. Let’s start with some very basic ideas and move towards ever more complex topics, all of which I tried to keep as simple as I could.

1. Earth has a finite volume — as every sphere or body in physics has — and thus cannot hold an infinite amount of any liquid. This means, that at least in theory, we can put a finite number on how many barrels of oil can be extracted from this planet.

2. Earth is not an bonbon filled with oil though. Petroleum can only be found in specific locations where conditions were ideal for large amounts of dead marine organisms (such as plants, algae, and bacteria) to accumulate. Over millions of years and under the weight and heat of Earth’s crust, this graveyard of dead plankton was turned into a solid mass of organic matter mixed with sedimentary rocks. Oil then slowly seeped from this so called ‘source rock’ into underground reservoirs (porous or cracked rock formations) from where it can be extracted. Geologists are fully aware of this process and by studying Earth’s ancient history they also know where to look for oil… and where not to. With that said prospecting for oil is far from being a success story all the time. More often then not exploration companies end up with dry holes, and relatively few of their good finds turn out to be a valuable reserve which can be tapped later at a profit.

3. Oil is brought to the surface by drilling into these reservoirs. At first, pressure from underground rock formations are enough to force oil to the surface, but later pumps must be installed to haul the remaining petroleum. At later stages CO2, water (or even seawater!) must be pumped underground to keep up the flow of oil. As a result, however, the substance brought up will contain more and more water, increasing the so called ‘water cut’. Beyond a certain point (or above a certain water cut) it simply takes too much pumping to get the last remaining barrels of petroleum and the well gets plugged with some oil still left in it. As a result each well has a production curve: rising fast in the beginning, then peaking and finally slowly falling to zero. In case of shale (or more precisely ‘tight’) oil this process is even more pronounced.

4. Obviously we are pumping oil at a much faster rate than wells get replenished from the source rocks. Thus we must keep drilling newer and newer wells every year to keep oil flowing into the economy. As one well, or an entire reservoir runs low, a new one has to be tapped. This happens on a daily basis: some wells run dry, some just get started. There is a fine balance between the two: as long as there are more wells (with more output) starting to produce than starting to run on empty we have a growing global oil production. If on the other hand we would not drill as many new wells — or stop drilling altogether as proposed by some activists — oil extraction would fall precipitously as older wells run out one after another.

5. In order to keep up with natural decline, and in order to ensure oil production year after year, we must thus have an inventory of oil reserves. Oil is not located in one single large interconnected reserve, though, but in some bigger and an almost innumerable amount of smaller reservoirs. We have discovered most of our oil fields — the super large ones — already in the middle of the 20th century, and mostly made adjustments as to how much oil these formations contain, or how much can be economically recovered ever since. We have long past peak discoveries, or the year when we have discovered the most oil. What amounts to our findings these days barely cover 1/4 of the world’s annual consumption. (The fact that discoveries turn out to be just as bad as predicted twenty years ago shows that it is possible to calculate the discovery rate rather accurately based on a scientific method called the Creaming curve.)

6. Burning more oil than it gets discovered or replenished means that we are living up our savings account, accumulated mostly in the 1950’s and 1960’s. Sooner or later every economically accessible oil field will get pumped dry, with costly to recover dregs of oil left behind in poorly plugged — then abandoned — wells leaving a ticking ecological time bomb for future generation to deal with (beyond the climate change caused by all this burning frenzy). One day our entire savings account will run down to zero, but not now — nor in the near future — that is not the point here.

7. If we have a finite amount of material, which fails to magically replenish itself overnight, then its consumption cannot grow indefinitely. This is a mathematical certainty rooted in physics, not a theory. It follows that there must be a peak rate at which we extract this substance somewhere between the first discovery and when the last drop leaves the last wellhead. In theory, we could grow extraction up to the very last day, and then run out of all the oil the next morning (and sadly, this is how far thinking about future supply goes these days…) In practice, though, this is entirely impossible due to the nature of extraction explained above. The process of rise, peak and fall of global oil production is a sum of individual wells rising and falling as well as fields being added then retired. If oil is finite, which it is, and production from individual wells rise and fall, which it does, then peak oil must happen at a certain point in time. The only question up for debate is: when will that happen?

8. There are two factors to consider when trying to estimate peak supply. One is that we humans always pick the lowest hanging fruit, or tap the easiest and cheapest to drill reserves first, then move on to the increasingly harder and harder to tap ones. No one in their sane mind would start building floating rigs capable to drill into reserves under thousands of feet of water and rocks, when one still have a gusher on a nearby land (a shallow well from which oil spurts like a fountain). This low hanging fruit principle is perfectly reflected in the energy invested in bringing a barrel of oil to the surface. In the good old days it took 1 barrel of oil (in terms of energy content) to bring 100 barrels of oil to the surface, now 1 barrel brings up only 15 or less on average. Drilling for oil will thus take ever more materials and energy as we move forward in time, raising the costs of drilling and the cost of a barrel of oil higher and higher. We have drilled all the easy to tap large reserves first and now what is remaining is increasingly smaller and harder to get. We would need to drill more and more wells, at a higher and higher energy cost each, to maintain the same level of petroleum output. As we run out of easy to extract oil though, we will reach a point where it would take more energy to get a barrel of petroleum than what we would obtain by refining it and filling it into our tanks. At this point oil would stop being an energy resource and drilling for more would no longer make much sense.

9. The other factor in determining peak supply is economics. The number of wells drilled at any given time is a result of a cost-benefit calculation based on the costs of drilling and the long term (expected) price of oil. This is not to say that as long as the price of oil is rising production will rise just the same: as we have seen above at a certain time in the future it will be meaningless to grow production as it would cost more energy than what we could get in return. What this cost-benefit calculation helps us to understand is why we have multiple peaks and why it is extremely hard to predict when we have passed the final and highest peak.

10. There is a limit to what the economy can pay for a barrel of oil though. At a certain point — which we might have already passed — new oil will become too expensive for buyers to buy, and at the same time too costly for producers to extract. As the amount of money, energy and raw materials spent on oil increases, so will the cost of growing food, mining metals and transporting goods do (as oil is still used to power all these activities). This will continue to fuel inflation and leave even less money in people’s pocket to spend on driving around or shopping for consumer products (including solar panels and electric vehicles) — all made with the use of oil. Demand would falter as a result, leaving more and more oil for the richer parts of the world to buy. And while overall global supply may fall (in response of faltering demand) so will the price of oil do, preventing any new investments to be made in replacing old wells.

With that all said I give you some time to digest this information. I let you do your own research and perhaps ponder on the logical consequences of these fundamental concepts. What are the possible ramifications? How will the future after peak oil look like? What will we do when we indeed reach a zero energy return scenario? These will be the topics of the second part of this series.

Until next time,

B

Disclaimer: although I’m no petroleum geologist by profession, the topic always fascinated me. In order to fill in this knowledge gap at least somewhat, I’ve read countless articles, studies published in scientific journals and listened to experts elaborating on the topic for hours on end. If you happen to be a trained geologist you are more than welcome to correct me on any mistakes I made (which I tried to avoid as best I can by vetting every piece of information against scientific literature and expert views on the topic).