Have We Reached Peak Oil?

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There are indeed very large reserves of "heavy" oil, and some deep-sea oil. Canada's Athabasca Tar Sands are estimated to contain 1.7 trillion (1.7 million million) barrels of "heavy crude" oil, a quantity comparable to the entire world's known reserves of "light crude" oil (what we normally think of). There is a similar quantity of heavy oil in Venezuela's Orinoco Tar Sands. There are some similarly huge sources of "shale oil". But none of this matters. Reserves are not the issue; demand and supply rates are, measured in barrels per day. That distinction explains how it can be, that the Athabasca oil is producible for about $40 per barrel, yet crude oil is selling for over $140 per barrel. Here's how that works:

(1) The cost of producing a barrel of oil only matters as long as the daily demand is less than the daily supply. Then producers have to compete for sales, and the price drops close to the cost of production. But when, as now, the world wants more oil (87 million barrels per day) than there is (85 million barrels per day), then buyers have to bid for their share, and the price of oil goes up until some people can't stand it anymore - until the daily demand drops to the daily supply available. Thus, once the demand exceeds the supply, the cost of producing the oil becomes irrelevant, all that matters is what buyers can pay. In the "Peak Oil" scenario, the supply shrinks, and the price rises, until the demand shrinks to match the supply (measured in barrels per day) available from tar sands, deep-sea wells, and other sources. Only then does the cost of producing from those sources finally matter.

(2) In 2006, production from the Athabasca Tar Sands reached 1% of global oil consumption. Yes, that fraction will increase over time, but not nearly fast enough. The Government of Alberta forecasts that oil production from the Tar Sands might reach 5 million barrels per day by 2030. That quantity is 6% of today's global demand. Meanwhile, when oil fields go into decline, a 6% drop each year is ordinary. If Peak Oil is occurring today, we would need the Tar Sands to be producing, next year, the number of barrels forecast for 2030, and twice that, the year after. It is physically impossible. It is impossible even if all Tar Sands and Shales everywhere ramped up production as fast as possible.

(3) Oil production from Tar Sands is more like mining than pumping. Huge quantities of sand have to be moved, defrosted, and treated to extract the oil. Of course, production is beginning with the easiest areas of the Tar Sands, under which only 10% of the field's reserves are economically recoverable today. In other words, 90% of the Tar Sands oil will cost more than $140 per barrel. No matter how much oil is available for $200, $400, or $600 per barrel, you should not feel reassured.

(4) Similar facts of production rate, difficulty, and cost, apply to deep-sea oil. For example, a deep-water drilling platform costs half a billion dollars to build, costs half a million dollars per day to operate, takes months to drill a hole, and there may or may not be any oil at the bottom. A well containing a total of 20 million barrels (an average size) - if it could all be produced instantaneously - would supply the U.S. for just one day. However, a deep-water production rate of 20,000 barrels per day is cutting-edge technology, so there would have to be 1,000 deep-water wells to supply the U.S., ten times the number producing today. Such a plethora of 1,000 average deep-water wells would supply the U.S. for 1,000 days, or 3 years. But, 875 of those 1,000 wells don't exist today, and if we continue to announce only 10 deep-water discoveries per year, we'll need 87 years to find them... to get 3 years of supply. We really need to find deep-water oil fields containing 200 billion barrels, and festoon them with 1,000 cutting-edge oil wells, ASAP. That will carry us for about 27 years. Unfortunately, that's bigger than the biggest "light crude" oil field ever discovered anywhere.

The above points explain why even "large reserves" of heavy and deep-water oil may not bring the price of oil back down, until long after most of us can't afford to buy it anymore. We must ensure that all sources of energy combined, and conservation, will avoid a demand-driven price spiral. Complacency based on (insufficiently) "large reserves", ignoring multi-year lead-times and production rates, will surely lead to great economic pain.

If I have convinced you that we are driving into trouble and have to act fast, please (a) click on the "Recommend" button above, to help others see this Debate, (b) drive a much more fuel-efficient vehicle, or even no vehicle at all, and (c) make Congress wake up, e.g. by signing up at PickensPlan.com