Has The Peak Oil Idea… Peaked?

And if so, does the planet stand a chance?

by Gordon Campbell

They call it oil, but it just might as well be quicksilver. In this year’s Budget, all the energy cost assumptions were based on the oil price for West Texas crude falling from above $US100 a barrel in the March quarter of 2012, to $US94.4 a barrel by the June quarter of 2016. Well, hello. At time of writing (June 18, 2012) the price of West Texas crude was already down to $US83.27 a barrel and falling towards a predicted low of $US65 by next year. In part, this plunge is a reflection of the economic slowdown in the global economy – and sure enough, a fall off in demand can only have helped to send the price of Brent Crude tumbling from its four year high of $US128 a barrel in March to $95.76 in mid June, a trend that has (finally!) flowed through to lower prices at the petrol pump. Short term, that sounds good, right?

There is more to this story however, and there are forces out there keen to defy gravity. At the last OPEC meeting on June 14, the Saudis indicated they would be managing production outputs to stabilise Brent at around $90 a barrel for the rest of the year, despite the bounce back upwards in price that some might have been expected once the sanctions against Iranian oil begin to take effect on July 1st. So we’re probably talking lower prices, but not through the floorboards. Because looking further out, the price declines that we’ve seen in the past few months also happen to be a precursor of a global resurgence in oil and gas production that is imminent, if not already upon us. And not even the Saudis may be able to stand against this incoming tide.

We should all be feeling nervous at the prospect. Whatever happened to the peak oil scenario, in which fossil fuels were supposed to go the way of the dinosaurs, and where their increasing scarcity might actually help to save the planet, by making the switch to renewable energy sources both (a) inevitable and (b) affordable?

The recent BBC story “Is Peak Oil Idea Dead?” is asking much the same question while other commentaries are reaching grim conclusions (“Sad News For Peak Oil Disciples”) about the trendlines. The Wall St Journal on the other hand, seems quite cock a hoop that happy drilling days are here again.

For clarity’s sake, it may be necessary to back up a little, and get a few fallback positions clear. The term “peak oil” never did herald the end of oil itself, but merely the optimum point for oil production at a economically rational cost of extraction. Moreover, the more sophisticated advocates of the original peak oil theory never assumed that production would fall off a cliff (it was always assumed the fall-off would look more like a bell curve ) or that die-hard energy industry advocates wouldn’t re-double their efforts to exploit less accessible sources of oil by say… drilling out in deep water, or extracting oil and gas from tar sands. So optimists could still try to argue that the end times of peak oil are still unfolding, as predicted.

That’s not the case, unfortunately (see below). For a time (we’re talking about the heady days of 2005–2008) the peak oil milestone gave a crucial political momentum to the transition to renewables, and to the business models associated with alternative sources of energy. Essentially, peak oil gave politicians around the world a mandate to fund the transition to clean energy. Essentially, it is that momentum that’s in trouble right now, in the short to medium term at least.

Renewables investments worldwide during Q1 2012 were the weakest they’ve been since 2009, according to Ernst & Young. Tariff cuts and grid challenges in Germany and Italy reduced the short-term attractiveness of the renewables sector. The US has returned to boom-bust as a result of uncertainty over the Production Tax Credits and insufficient grid access in China is stifling the wind energy market, according to a report. The analysis also suggests the end of a tax break incentive in India is likely to dampen wind sector growth through 2012…

There are a few glimmerings in the gloom. The same Ernst and Young report sees ground for optimism in the longer term, if costs can be controlled. And on that score, the cost of renewables has been falling as reported here and here which might conceivably keep the transition to more planet-friendly technologies cost competitive, especially given the wider health and environmental costs that are still going to be incurred with the continued use of fossil fuels, regardless of the price per barrel.

What can’t be denied though, is that the economic margin for renewables has got much tighter, and some major clean energy players in the US (such as Solyndra) have already crashed and burned despite receiving large government subsidies. The political attack on clean energy in the US presidential campaign has already begun, with the conservative Koch brothers stumping up for a $6.1 million ad campaign against the Obama administration’s support for clean energy technology.

In sum, any room for complacency about peak oil and the political will to finance the shift to renewables has evaporated. Remember how, as recently as 2008, a major UK bi-partisan parliamentary report on peak oil could conclude:

While large resources of conventional oil may be available, these are unlikely to be accessed quickly and may make little difference to the timing of the global peak. A peak in conventional oil production before 2030 appears likely and there is a significant risk of a peak before 2020.

Well, “conventional” turned out to be the key word in that last sentence. Unconventional production techniques and locations are altering the energy landscape, and the prospect of cheap-ish fossil fuel energy for the foreseeable is putting the political impetus for the shift to renewables in jeopardy. Oil and gas production is no longer on its death bed – in fact, some in the industry are claiming to be on the brink of “a new golden age of petroleum”. The production outlook for the next decade has changed dramatically, as this June 2012 analysis in the industry Oil and Gas Journal appears to confirm:

The downside risk we saw in oil prices has started sooner than we had expected….We continue to see downside pressure for oil prices into 2013, as our oil model points to a severely oversupplied global oil market. While lower demand is part of the story, robust production growth in the US is the monster lurking in the shadows. We expect this bogeyman to fully show himself before the end of this year. Accordingly, we believe Saudi Arabia will begin to noticeably cut production in the fourth quarter, while US producers will begin to curb activity in upcoming weeks…Combining the US-driven resurgence in non-OPEC supply with our lackluster demand expectations, we believe that once the market’s focus shifts from demand to supply, the oil price picture will get uglier.

If that surge was a short run, last fling thing for fossil fuels, we might all breathe a little easier. But it isn’t. Most of the supply predictions on oil and gas productions runs to 2030, or 2035.

On most available measures, supply is likely to be outpacing demand for the next couple of decades. The supply drivers have been huge finds in Russia, in deep water deposits off the coast of Brazil, in the eastern Meditteranean, Kenya, Angola, and off the Falklands, to cite only a few. More importantly, new-ish extraction methods such as the process of hydraulic fracturing (aka fracking) have unlocked vast new sources of oil and gas.

Such is the forecast rise in production, Canada’s oil output by the end of the decade could almost be the same as the current volume from Iran, OPEC’s No. 2 producer. Even if the extraction practice involves dirty and very expensive technology, and even if the fall off in such fields tends to be steep, the size of the North America fields alone seems likely to be a game changer for the next couple of decades, at least. And these happen to be the crucial decades, if runaway climate change isn’t to become a reality. At the very least what we are talking about is a shift in the current balance of fossil fuel use – from OPEC to non-OPEC suppliers, and with more emphasis in future on natural gas vis a vis oil – rather than the wholesale replacement of fossil fuels altogether. The main brakes on production will not be a lack of fossil fuel supply but (a) a lack of capacity in pipelines to handle it and (b) such a surge will occur that prices may drop to a point where some major projects get shelved as uneconomic. Either way, these are not exactly green solutions.

Is there any countervailing good news? Well… not much. Leaving aside what will happen to energy prices when the global recovery takes place and demand rises – neither of them likely any time soon – production still appears likely to keep pace, if only because there is such an obvious convergence of interest on the supply side when it comes to price.

What I’m getting at here is that both the new and the old oil and gas suppliers have a common interest in the price staying out of the basement, and up in the mid-range. The conventional players within OPEC and the big players outside it can live with Brent prices in the $90-100 price range. Go any higher, and the fear both within and beyond OPEC is that this could cause a re-run of the latter half of 2008, when sky-high oil prices sparked a massive global investment in alternative, cleaner forms of energy. For the industry, the trick will be to keep prices just high enough to protect the profit margins that are required (on top of the higher costs of exploration and extraction) but without throwing renewables a life line. That’s going to be the challenge: let prices rise too high and renewables will get breathing space. Go too low and both fracking and renewables become uneconomic, and all sorts of mayhem ensues.

As mentioned, the new players (the frackers and the deepwater oil and gas explorers ) have a different motive than the Saudis for converging around much the same price. To repeat: they need the price to stay relatively high (maybe just south of $100 a barrel) to deliver a return on their relatively expensive activities. Trouble is, the break-even estimates do vary quite widely on this point – with anything from $60-130 a barrel being cited as the break-even point for fracking when conceived as anything more than a hit and run operation. The balancing act that will need to be sustained here will be a struggle, especially next year when an oil glut is possible, and – as mentioned – this could exceed even the Saudis’ supreme skills in production management, especially in the event of a Romney presidency that goes for broke on US energy independence and for supremacy over OPEC, at last! In sum, the bigger risks are still weighted towards lower prices and over supply, not higher ones.

The mid June outlook showed just how hard the balancing task will become, looking out for a decade:

In Houston, analysts at Raymond James & Associates Inc. reduced their 2013 price forecasts for crude to an average $65/bbl for WTI, down from $83/bbl previously, and to $80/bbl for Brent, down from $95/bbl.
Both of these new forecasts are now well below the futures strip and consensus estimates,” they said. They also reduced their 10-year outlook for WTI to $80/bbl from $90/bbl.

In the meantime… while renewables are still competitive players, the political pressure to scrap the subsidies for wind and solar is already strong, and likely to become more intense. As a consequence, there may not be quite as many green jobs created via renewables as seemed likely during the heady days of late 2008.

In the UK for instance, the picture is a classic good news/bad news situation. Yes, costs for producing offshore wind power are on course to steeply decrease by up to 30% but the Tories have also signalled their intention to scrap by 2020 the large subsidies being paid to the producers of onshore wind energy.

Despite opposition from the Liberal Democrats, who strongly support more renewable energy, the subsidy regime for onshore wind and solar panels is now firmly expected to be phased out by the end of the decade….At present, householders pay for subsidies to renewable energy producers through an extra charge on household electricity bills. An email sent by Oliver Letwin, the Cabinet Office minister, makes it clear that financial support both for onshore wind and solar panels is expected to have “disappeared” within eight years.

On the other side of the Atlantic, the ‘clean energy’ aspects of the Obama energy plan are also coming under heavy fire, as the presidential campaign heats up. Bearing the brunt of the criticism are the U.S. clean energy subsidies — spending, tax breaks, loan guarantees etc — which increased from $17.9 billion in fiscal 2007 to $37.2 billion in fiscal 2010, according to the Energy Department. Yet according to analyst Charles Lane in the Washington Post, the overwhelming market advantages enjoyed by fossil fuels have already produced a litany of clean-energy company failures, from electric cars to Solyndra. Lane’s analysis draws heavily upon a scientific report carried out under the aegis of the centrist Brooking Institute, and he concludes :

The best-laid plans are vulnerable to unforeseen market developments — such as the boom in oil and natural gas “fracking” over the past decade, which Obama has now embraced…..As for job creation, clean-energy subsidies shift demand for labor; they don’t increase it. “I’m not aware of a single peer-reviewed economic study that shows these programs create jobs in the long run, and on a net basis,” [according to Brooking Institute scientist Adele Morris] . Solyndra and its 1,861 vanished jobs proves her point…

Well, not exactly. The Solyndra bankruptcy was bad, but its failure alone doesn’t prove the case that renewables can’t create a net number of new jobs. All the same, if renewables can’t in the end compete head to head with fossil fuels on narrow economic grounds, the argument may need to be pitched (and won) on other grounds. On the Foreign Policy site, US energy analyst Steve Devine makes that point, and states the challenge facing clean energy technology very succinctly:

Clean-tech is under a perfect storm of challenges around the world: Subsidies are under threat or have already been withdrawn not just in the U.S., but in Spain; U.S. and German companies are in trouble because of competition from China; meanwhile, a surge in oil and natural gas discoveries has undermined the peak-oil rationale for cleantech development. Solar and battery companies are dropping like flies.

Only in China do cleantech companies seem safe. Otherwise, cleantech does seem at an inflection point, which is that it must establish a rationale on its own merits. It must persuade the public not that the world is running out of oil, that China is about to eat the West’s lunch, or that cap-and-trade is needed to save civilization. Instead, the industry must show that clean is simply better.

Easier said than done. True enough, the market prices for fossil fuels do not capture all the costs of procuring them, or of consuming them. Such truths however, seem like shouting into a cyclone given the vast amounts of fossil fuel energy and dirty tech jobs expected to accrue from shale oil deposits in Alberta, Canada and from the Bakken field that stretches from North Dakota into Saskatchewan, to the point where the US could be close to energy independence in the near future. Everyone, from the Calgary Herald, to Forbes magazine has been counting the potential output:

[Bakken field production] went from a mere 3,000 barrels a day in 2005 to 225,000 in 2010, according to the [US] government’s Energy Information Administration. EIA thinks it will produce 350,000 barrels a day by 2035, but most analysts think that estimate is far too low. According to Harold Hamm, president of the energy company Continental Resources, it could produce a million barrels a day by 2020.

More is to come, with the potential extractable output from Bakken being in time, in the region of 80 billion barrels :

By itself, the Bakken formation, a deep shale layer beneath North Dakota, Montana, and Saskatchewan, is said by state and industry geologists to contain 22 billion barrels of recoverable oil. That is five times more oil than the U.S. Geological Survey estimated a few years ago. State geologists say the entire formation holds 168 billion barrels of oil, and industry engineers say that the development of production technology is proceeding so steadily that perhaps half of the reserve is conceivably recoverable.[ ie. If the price holds up high enough.]

To its credit, the Canadian Financial Post proceeded to cite some of the downsides. As mentioned before in this article, the depletion rate in some fracking-driven fields can be precipitously high, and this may function as a deterrent to the investors needed to secure the gains. That’s the hope – for the planet, at least.

In addition, new oil drilling and fracking technologies are very expensive. The research we’ve read shows the cost of developing many of these unconventional oil plays requires a break-even price ranging from US$60 to US$130 per barrel, depending on the play type, which happens to be quite similar to the breakeven price for many Canadian oil sands projects.

Many of these unconventional fields also exhibit high initial decline rates to the tune of 60% to 80% in the first year alone. Therefore, should there be any prolonged downturn in oil prices, the high cost structure of developing these plays would result in less overall third-party capital being made available to keep up the pace. The end result would be a supply response to the downside.

Right. Which goes to underline the delicate balance we’re talking about here. The trick for the industry will be open up new fields of production without flooding the market in a way that renders those same endeavours uneconomic to pursue. Ironically this could affect New Zealand in the form of a fairly grim, green joke. Ultimately, what might well save the East Cape from the exploration and extraction activities of the Brazilian oil form Petrobras is a fossil fuel boom that could turn the local deepwater drilling plans of the (already stretched) oil giant into a no-longer-viable bet.

Ultimately, this means that our best bet of saving East Cape from potential pollution could rest upon a plunge in oil prices that puts the entire planet at further risk from climate change. ( Save East Cape or save the planet: take your pick.) Because here’s the thing: what we do know is that some of the current deepwater/fracking operations look likely to be big enough to extend affordable fossil fuel use beyond the point of no return for the planet. As the BBC article linked to earlier noted, clean tech has been put on the back foot:

The worry over energy security was helping to drive development of renewables and nuclear. Now that has slipped, a flood of cheap gas on to the world market threatens to starve wind and solar…[Yet] to meet the carbon cuts that scientists calculate are needed by 2020, the IEA says, the world needs to generate 28% of its electricity from renewable sources and 47% by 2035. Yet renewables now make up just 16% of global electricity supply… On carbon capture and storage, the picture is even worse: the world needs nearly 40 power stations to be fitted with the technology within eight years, and so far none at all have been built.

Moreover, a further hope had existed (in some quarters at least) that new and safe, non-carbon emitting forms of nuclear energy could help to rescue the situation – but such hopes have taken a hit since last year’s nuclear accident at Fukushima, Japan. “Expectations for atomic energy capacity in 2025,” the BBC’s Roger Harrabin adds, “have been scaled back by 15%.”

Okay, forget about the celebratory ululations from the oil and gas industry for a moment. How’s the current outlook for the planet? Not great, according to the data presented to an April meeting in London of energy ministers from the world’s biggest economies:

… “The world’s energy system is being pushed to breaking point,” according to Maria van der Hoeven [pictured left], executive director of the International Energy Agency. “Our addiction to fossil fuels grows stronger each year. Many clean energy technologies are available but they are not being deployed quickly enough to avert potentially disastrous consequences.” On current form, she warns, the world is on track for warming of 6C by the end of the century – a level that would create catastrophe, wiping out agriculture in many areas and rendering swathes of the globe uninhabitable, as well as raising sea levels and causing mass migration, according to scientists. “Energy-related CO2 emissions are at historic highs, [van der Hoeven added] and under current policies we estimate that energy use and CO2 emissions would increase by a third by 2020, and almost double by 2050. This would be likely to send global temperatures at least 6C higher within this century.”

The environmental imperatives behind the peak oil concept remain. Thanks to the resilience of the fossil fuel industry though, the political battle has suddenly become a whole lot harder.