Peak Oil Primer
Oil is one of the world's primary sources of energy and is fundemental to almost every important function of modern life. It fuels 95 percent of land, sea and air transport, so the efficient movement of raw materials and goods, as well as personal mobility, is almost entirely oil-dependent.
Food production too relies heavily on oil to run farm machinery and to make fertilisers, herbicides and pesticides. Oil generates 40 percent of the world's commercial energy, provides heating fuel, and drives industry and commerce. No other existing energy source can match the versatility, convenience and low cost of oil. Moreover, it supplies feedstock for many thousands of manufactured products as diverse as plastics, medicines, clothing and building materials.
Global demand for oil has increased seven-fold over the past half-century due to rapid population growth and industrial expansion. The world now consumes about 82 million barrels of oil a day. (A barrel is the equivalent of 42 U.S. gallons or 159 litres.) Demand is generally expected to continue growing at an average annual rate of one to two percent. The International Energy Agency forecasts that worldwide oil demand could exceed 100 million barrels a day by 2020. The greatest rise in demand is expected to come from developing nations. Growing transportation needs throughout the world would account for up to three-quarters of the projected increase.
Oil industry leaders acknowledge that new sources of oil are becoming increasingly difficult to find and more costly to exploit. New oilfield discoveries have been declining steadily for 40 years despite extensive exploration with the most advanced technology, and most importantly, finding giant new fields is becoming ever more rare. Recently, major oil companies have had to cut their production growth targets. In 2002, the world used four times more oil than was found from new sources. Since about 80 percent of the oil that will be necessary to meet projected needs in 10 years time is not currently in production, unprecedented levels of investment and yet-to-be-achieved technological advances will be required to balance supply with future demand.
The industry's ability to locate and recover ever-smaller volumes of oil has improved significantly but the physical limitations of the resource are inescapable. Operating experience from tens of thousands of oilfields shows that the rate of production always rises to a peak and then begins to fall off when about half the recoverable oil has been extracted. Since the world's total endowment of oil is finite and non-renewable, in due course, as new discoveries become insufficient to offset the natural depletion of existing reserves, overall output will reach its maximum limit and begin to decline.
The world has now consumed almost half the total amount of conventional oil most experts estimate will ever be available for recovery. Assessments of the world's ultimately recoverable oil reserves vary but 65 published studies by oil companies, geologists, government analysts and consultants over the past 50 years have produced remarkably consistent estimates. The overwhelming majority of these put the world's original endowment of recoverable oil at no more than about 2,400 billion barrels; the average estimate is 2,000 billion barrels. Cumulative worldwide consumption had exceeded 900 billion barrels by the end of 2003.
A growing number of experts now foresee a permanent downturn in global oil production rates within a matter of years. Although past premature forecasts have led many to view warnings of impending oil scarcity with a great deal of scepticism, no fewer than a dozen recent independent analyses, using different assumptions and demand growth projections, all show global production reaching its natural peak within the coming decade. Even the most conservative of these, based on what some consider an implausibly high estimate of the total oil endowment, forecasts the peak by 2020.
As growing demand exceeds available supplies, oil prices will rise substantially and the effects will be felt throughout the global economy. Oil is the world's single largest traded commodity, accounting for over half the total value of all commodity transactions. Fears of oil supply disruptions alone can create financial panic. The few episodes of dramatic oil price rises in the past 30 years, due mainly to events in the Middle East, have shown how vulnerable the world economy is to the impact of supply restrictions. High oil prices fuel inflation, contribute to economic recessions and create the greatest hardship for those least able to bear the additional costs.
The world will become increasingly dependent on oil from the Middle East as supplies from elsewhere decline. Already over 50 oil-producing countries have passed their peak production, including the United States, once the world's largest producer, which now relies on imported oil for over 60 percent of its domestic needs. Most other producing nations are expected to reach their peak within the next few years. The only exceptions will be a handful of oil-rich Persian Gulf states, which hold about two-thirds of the world's proven reserves. Saudi Arabia alone controls 25 percent of those reserves.
The productive capacity of Middle East oilfields is uncertain and the risks of supply disruptions are heightened by continuing political instability in the region. Oil from the Middle East currently accounts for almost a third of the world's supply and that share will grow steadily in the years ahead. While it is commonly assumed that some excess production capacity is available to meet short-term increases in demand, little is known about the longer-term potential for growth. In any case, intensified worldwide competition will inevitably accelerate the depletion of those reserves and the onset of falling output. Moreover, securing reliable supplies from the region comes at a substantial additional expense. Some estimates put the military costs of protecting pipelines and tanker routes, borne mainly by U.S. taxpayers, at around $15-20 a barrel.
The era of cheap, plentiful supplies of oil is coming to an end, requiring fundamental restructuring of the world's energy systems. Any shift towards new, more costly alternatives is bound to be difficult and time consuming. Growing recognition of the serious environmental damage and climate-changing effects caused by burning oil (and other fossil fuels) is beginning slowly to drive new, long-term energy policies. The approaching peak and decline in oil supplies adds urgency to the need for greater energy efficiency measures and more rapid development of sustainable energy alternatives.