The trends in the oil industry are clear and undisputed: exploration and production are becoming more costly, and are entailing more environmental risks, while competition for access to new prospective regions is generating increasing geopolitical tension. The rate of oil discoveries on a worldwide basis has been declining since the early 1960s, and most exploration and discovery are now occurring in inhospitable regions such as in ultra-deepwater (at ocean depths of up to three miles) and the Arctic, where operating expenses and environmental risks are extremely high. This is precisely the situation we should expect to see as the low-hanging fruit disappear and global oil production nears its all-time peak in terms of flow rate.
While the U.S. Department of Energy and the IEA continue to produce mildly optimistic forecasts suggesting that global liquid fuels production will continue to grow until at least 2030 or so, these forecasts now come with a semi-hidden caveat: as long as implausibly immense investments in exploration and production somehow materialize. This hedged sanguinity is echoed in statements from ExxonMobil and Cambridge Energy Research Associates, as well as a few energy economists. Nevertheless, it is fair to say that most serious analysts now expect a near-term (i.e., within the current decade) commencement of decline in global crude oil and liquid fuels production. A survey last year of about a hundred of the world’s most respected petroleum geologists by the Association for the Study of Peak Oil (ASPO) found that the vast majority expected world oil production to peak between 2010 and 2020. Prominent oil industry figures such as Charles Maxwell and Boone Pickens say the peak either already has happened or will do so soon. And recent detailed studies by governments and industry groups reached this same conclusion. Toyota, Virgin Airlines, and other major fuel price-sensitive corporations routinely include Peak Oil in their business forecasting models.Heinberg also explores how markets respond to resource scarcity by considering the boom and bust cycle of the petroleum industry. "The standard economic assumption is that, as a resource becomes scarce, prices will rise until some other resource that can fill the same need becomes cheaper by comparison." But oil is different:
Examined closely, the arguments of the Peak Oil naysayers actually boil down to a tortuous effort to say essentially the same things as the Peaksters do, but in less dramatic (some would say less accurate and useful) ways: Cornucopian pundits like Daniel Yergin of Cambridge Energy Research Associates speak of a peak not in supply, but in demand for petroleum (but of course, this reduction in demand is being driven by rising oil prices—so what exactly is the difference?). Or they emphasize that the world is seeing the end of cheap oil, not of oil per se. They point to enormous and, in some cases, growing petroleum reserves worldwide—yet close examination of these alleged reserves reveals that most consist of “paper reserves” (claimed numbers based on no explicit evidence), or bitumen and other oil-related substances that require special extraction and processing methods that are slow, expensive, and energy-intensive. Read carefully, the statements of even the most ebullient oil boosters confirm that the world has entered a new era in which we should expect prices of liquid fuels to remain at several times the inflation-adjusted levels of only a few years ago.
Quibbling over the exact meaning of the word “peak” or the exact timing of the event, or what constitutes “oil” is fairly pointless. The oil world has changed. And this powerful shock to the global energy system has just happened to coincide with a seismic shift in the world’s economic and financial systems.
Once upon a time (about a dozen years past), oil sold for $20 a barrel in inflation-adjusted figures, and The Economist magazine ran a cover story explaining why petroleum prices were set to go much lower. The U.S. Department of Energy and the International Energy Agency were forecasting that, by 2010, oil would probably still be selling for $20 a barrel, but they also considered highly pessimistic scenarios in which the price could rise as high as $30 (those forecasts are in 1996 dollars).
Instead, as the new decade wore on, the price of oil soared relentlessly, reaching levels far higher than the “pessimistic” $30 range. Demand for the resource was growing, especially in China and some oil exporting nations like Saudi Arabia; meanwhile, beginning in 2005, actual world oil production hit a plateau. Seeing a perfect opportunity (a necessary commodity with stagnating supply and growing demand), speculators drove the price up even further.
As prices lofted, oil companies and private investors started funding expensive projects to explore for oil in remote and barely accessible places, or to make synthetic liquid fuels out of lower-grade carbon materials like bitumen, coal, or kerogen.
But then in 2008, just as the price of a barrel of oil reached its all-time high of $147, the economies of the OECD countries crashed. Airlines and trucking companies downsized and motorists stayed home. Demand for oil plummeted. So did oil’s price, bottoming out at $32 at the end of 2008.
But with prices this low, investments in hard-to-find oil and hard-to-make substitutes began to look tenuous, so tens of billions of dollars’ worth of new energy projects were canceled or delayed. Yet the industry had been counting on those projects to maintain a steady stream of liquid fuels a few years out, so worries about a future supply crunch began to make headlines.
It is the financial returns on their activities that motivate oil companies to make the major investments necessary to find and produce oil. There is a long time lag between investment and return, and so price stability is a necessary condition for further investment.
Here was a conundrum: low prices killed future supply, while high prices killed immediate demand. Only if oil’s price stayed reliably within a narrow—and narrowing—“Goldilocks” band could serious problems be avoided. Prices had to stay not too high, not too low—just right—in order to avert economic mayhem. . . .
Not many resources, when they become scarce, have the capability of choking off economic activity as directly as oil shortages can. But as more and more resources acquire the Goldilocks syndrome, general commodity prices will likely spike and crash repeatedly, making a hash of efforts to stabilize the economy.