Here is my sense of the issues surrounding the high prices of oil, stagnant oil production, and our fuel-lean future. I wrote this in the spring of 2006. The Black Hills Pioneer was gracious enough to print all of it.
The price of gasoline has my neighbors worried. Everyone in my neighborhood can still afford to fill their gas tanks, but with unleaded currently hovering just below $3 per gallon, they are not sure how much they're going to be paying for gas this summer. Surely the price will go down a little, or at least not go any higher? At the same time, oil companies are making obscenely high profits because the price of oil is so high. I hear a lot of complaints about that. The question I hear is "how can we get the price of gas to go back down?"
I want to make sense of the gasoline situation. There are some "infrequently asked questions" that I haven't heard anyone asking, but which we definitely should be asking. The first one, with a less-than obvious answer, is "Why are crude oil prices so high?"
Everyone is assuming that oil companies can set whatever prices they want. This is both true and false. The fact is, oil is sold on the open market. The price of crude oil is set by supply and demand. If an oil company raises its price higher than the market is willing to pay, it won't sell much oil. Oil companies do set their prices, but they set them competitively in the international market. Also, a lot of the world's petroleum is produced by countries who run their own oil businesses.
Now don't get me wrong - I don't like to make excuses for the oil companies. I don't like them either. But they're not ultimately to blame for setting prices. It's a free market out there. Remember supply and demand? Obviously, somebody - everybody in fact - must be willing to pay these high prices. So the next questions are these: "But the price of crude oil is at a sky - high $70 per barrel! How did oil get so high? And when is it going to come back down?"
It turns out that oil prices are up because there are more and more oil buyers who are willing and able to pay premium prices for it. Both China and India, for example, are trying to grow their economies by increasing their oil imports. These countries are big customers. Meanwhile, the western world has not curbed its apparently insatiable appetite for oil. The US, for example, consumes over 20 million barrels of oil per day. Demand is going up, so prices are going up.
In the past when demand for oil increased, oil prices didn't rise very much. This was because, for years, oil companies were able to produce more and more oil every year. Demand and supply were both rising so prices were relatively stable. I say "were", because that's not the case anymore. These days, oil companies are doing all they can to just stay even. They aren't able to pump any faster anymore. This leads to the next question: "So why don't they drill more wells and get us some more oil?"
Actually, oil companies are developing new oil fields as fast as they can. But these new fields are smaller, deeper, or harder to get to than the old easy fields that are now running low. The problem is that every oil field contains only a certain amount of recoverable oil. And once the majority of the recoverable oil is pumped out, production in that field drops drastically. The largest and easiest fields were drilled and produced first. Many of these (like the Texas oil fields) are now in decline and are not producing much oil anymore. So oil is now being sought from smaller, harder to reach fields that cost more to develop, or whose crude product is harder to refine. Every year the oil companies have to work harder just to maintain the same level of production. In fact, worldwide oil production - which was rising for decades - has been flat for the last year and a half.
The Saudis used to be able to increase production at times like this. But now they are pumping at full capacity like every other oil producing nation. Believe me, at $70 per barrel, if any country could increase its oil exports right now, they would. But they can't - mostly because their old fields are running out, and the new fields are just not as productive. It's a simple fact of geology. The remaining oil is harder to get.
Here's what I am afraid we can expect in the long run: As more and more of the giant oil fields go into decline, oil producers will have a harder and harder time coming up with enough oil to keep everyone happy. The price of crude oil is going to keep rising as long as buyers (including you and me) are willing to buy gasoline. I don't like this any more than you do. But that's how it is, and I think it's better to face the facts than to remain ignorant about them.
There are lots more questions to ask. My next ones are: "How is the oil supply doing? Can we keep on producing oil indefinitely? Is oil going to run out?" My next piece will start with these questions.
I've been asking a series of questions that started with trying to understand high gas prices. I found out that prices are high because the world's oil producers, on average, are unable to increase oil production, but countries all over the world still want to increase their oil consumption. How long can we keep using oil?
In order to produce oil, you first have to find it. Over the last 50 years, oil companies have developed increasingly sophisticated equipment and methods for locating oil deposits. Except for the poles, most of planet Earth has been surveyed for oil, and a lot has been found. From 1900 to 1960, more and more oil was continually being discovered. But around 1965, the amount of oil discovered every year started decreasing. Since then it's been harder and harder to find new oil fields, and the ones that are found are smaller than in the old days. The graph shows oil discoveries - the last 40 years clearly show the trend that smaller and smaller amounts of oil are being found.
This decline in oil discoveries is not caused by green legislation or by manipulative oil companies. It's due to the basic fact that almost our entire planet has been explored for oil, and most of the oil has already been found. As we look with better and better tools in the last unexplored areas, some additional oil will be found. But there is no reason to believe that giant amounts of oil are still waiting out there for Shell and Mobil to discover. The gray bars in that graph are going to keep dropping.
The dark line on the graph shows how much oil was produced each year. In the 1930s through the 1960s, it seemed that oil was virtually unlimited, since much more was being found each year than was being produced. But things changed - production kept increasing while discoveries started declining. Then in 1984 the amount of oil pumped out of the ground exceeded the amount of oil discovered for the first time. This didn't raise a warning flag because there was so much oil sitting around in known reservoirs. But as time has gone on, the situation has gotten more serious. Production kept rising and discoveries kept declining. Oil reserves are now being used up.
The data on that graph is fact. You can look up the numbers yourself at the Department of Energy's "Energy Information Agency" website. There is really only one way to interpret that graph - discovery of oil is declining, and the world is now using about five times as much oil as we discover every year. You don't have to be a petroleum geologist to figure out that this can't go on forever. Oil production has to decrease soon. Eventually, we're going to run out of oil.
This news does not make me happy. But if there's bad news I'd rather know it in advance so I can prepare for it, rather than sticking my head in the sand. But when will oil production start declining? And when will it run out?
Oil is not going to totally run out anytime soon. There will probably be oil pumps running for another 50 - 100 years. But the important question is when production will peak, because we will face serious economic challenges as soon as oil production starts declining. To answer this question accurately, it helps to be a petroleum geologist. Different predictions have been made based on different assumptions and data. Some of are more realistic than others. I prefer to trust retired petroleum geologists, who are no longer in the pocket of an oil company or a government. These people have calculated that the world's oil production will start declining before the end of this decade.
I hope this is wrong. But the situation is looking like we may be at the peak of oil production right now. For one thing, world oil production stopped increasing back in October of 2004. For another thing, the price of gas and everything else is going up.
There are some pundits who argue that "oil production is going to continue increasing for twenty years" or that "there's nothing to worry about because a new energy technology will certainly come forward to take the place of oil". But these arguments fall apart when you look at them closely. I'll write more about this in later installments.
Even if the peak in oil production could be put off for twenty years, it would be time to start preparing for it now. Our entire economy depends on petroleum. It will take a long time and a lot of changes in how we do business to get ready for the decline of oil, and we probably don't have enough time. We need to start doing something about the inevitable. We need to start thinking realistically about alternate fuels, we need to restructure our economic system, and we need to figure out how to get by on less oil.
In previous installments I explained the free market cause for high gas prices - demand is still rising, while supply is not. Oil reserves are limited, and it looks like oil production will start declining within this decade. There are lots of questions about this problem. People often ask about alternative fuels. What about ethanol and biodiesel? Can we ramp up production?
Producing that much ethanol is not a trivial task, and there are complications. Growing food crops uses up fertilizer, water, and can damage soil. Drastically increasing the production of fuel crops will make other resource problems worse, and will impact food production. Would you rather eat your food or put it in your gas tank?
But there is also a problem of "energy economics" when you take into account the energy required to produce a fuel. You compare the energy put in to produce the fuel with the energy that comes out of the fuel. This is called "Energy Return On Energy Investment" or EROEI. If it takes more energy inputs to produce a fuel than you get out of the fuel, then you are wasting energy rather than producing it.
For example, in the early days of oil, it only took the energy of 1 barrel of oil to get 100 barrels of oil out of the ground. Now, because the oil reservoirs are smaller, deeper, and require more drilling to get the same amount of oil out, we get an average of 30 barrels of oil for each barrel of oil used in extracting the oil. Petroleum is becoming harder to get, but ethanol has a much worse EROEI.
A recent analysis of ethanol production found that 5 gallons of ethanol or its energy equivalent are required to produce 6 gallons of ethanol fuel, giving a net gain of only 1 gallon every time 6 gallons are made. This is dangerously close to "breaking even" at which point it's better to not even plant the corn in the first place. To put this in perspective, the gross yield of ethanol is about 360 gallons per acre of corn. But if you take into account the tractor fuel, fertilizer, transportation, irrigation, and processing at the ethanol plant, the net increase in fuel is only 60 gallons per acre, or less. If the entire state of Iowa were planted in corn, a year's crop would net enough fuel to run the US for five days at current rates of consumption. It is not very efficient to produce ethanol as a fuel, and we don't have enough land or water to grow corn to fuel everyone's cars.
Personally, I prefer my corn in chips and tortillas, rather than in my gas tank. I get more out of it that way. There are other ethanol sources (such as switchgrass, whose cellulose can be converted to ethanol) that look more promising because of higher energy returns per energy investment, but the same problem holds for all ethanol sources - the EROEI is low, and growing additional crops for fuel will take more land, water, and fertilizer than we can afford.
The same considerations hold for biodiesel. It isn't possible for everyone to fill their tanks from McDonalds' leftover frying oil. In fact, because of the same EROEI problem and soil and water limitations, it isn't possible to produce enough vegetable oil to fuel everyone's cars.
Ultimately, all of the energy we get from every source (except nuclear energy) came originally from the Sun. The energy in corn ethanol is sunshine that corn plants collect and concentrate over a summer's growing season. The energy in petroleum and coal is "stored sunshine" that was accumulated by algae and plants over millions of years. We are using up that energy at a drastic rate, and when it is gone, that multimillion year old legacy will be gone. And we can't replace it with corn.
The fundamental problem with trying to turn to biofuels is that we are in the habit of consuming vast amounts of fossil fuels. It is currently impossible to produce this much energy by any other means because the energy in sunshine is limited. All growing plants on Earth taken together collect and concentrate only about twice as much energy each year as humans currently obtain from fossil fuels. It's not possible to take enough energy out of biomass to make enough fuels to keep our civilization running at the current rate.
I don't like to say this, but it's looking like we will get priced out of driving. I agree we should make biofuels when we can, but they are not going to meet all of our energy needs. What about other alternative energy sources like hydrogen, coal oil, and electricity? Can we use those? That's the next topic.
Oil producing nations and companies are all pumping oil as fast as they can. The remaining oil underground is harder to get to and harder to refine. We should be developing alternative energy sources. My previous piece explained why ethanol and biodiesel can't provide enough energy for us to maintain business as usual. Today's story is about some of the other alternatives like hydrogen, coal liquids, and electricity. People have asked me this question: "What about hydrogen? Aren't we all going to be driving hydrogen powered cars in ten years?"
The big question is "where do you get the hydrogen?" Unlike natural gas and petroleum, hydrogen is not an energy source. It has to be made from something else (usually water), which uses up energy. Coal companies are banking on a yet-to-be-perfected process that will heat coal with steam and oxygen, partially burn the coal, and extract hydrogen gas from the water. The energy stored in the coal is converted into energy in hydrogen. It sounds like a great idea, but this process also generates a lot of CO2 and toxic wastewater. Current plans are to inject the vast amounts of waste CO2 into old depleted gas wells. How long can you count on that CO2 staying down there without leaking out?
Another problem with hydrogen is that it is a gas, not a liquid. The hydrogen tanks for automobiles have to be much larger than gas tanks and they have to hold hydrogen at 5000 psi. Developers of these tanks say they are safe in car crashes.
We're not ready for hydrogen yet. No plant is producing hydrogen in the massive quantities needed for widespread use. The energy return on energy investment (EROEI) is low. There also is no system for transporting and storing hydrogen, and there are no hydrogen fuel stations yet. Gasoline is transported in tanker trucks. To transport the equivalent of a single tanker load of gasoline would take twenty tanker trucks of pressurized hydrogen. I don't recommend that we all cross our fingers and wait for hydrogen to save the day. It will be a long wait.
It's unfair to compare hydrogen to gasoline because gasoline is pretty miraculous stuff. It's fairly safe to handle - a ten year old can refuel a lawnmower. It's also very concentrated. One gallon of gas contains the energy equivalent of two weeks of human labor. There isn't any alternative that can match these special qualities of gasoline.
However, it is possible to make new gasoline from coal and water. Coal liquefaction uses the same initial process as for hydrogen production, but produces stuff like gasoline or diesel. The reason that we haven't heard about this process is that it is expensive, it has a low EROEI, and it produces a lot of CO2 and polluted water. Currently there is no coal liquefaction plant in the US. But I expect to see some gasoline produced from coal in the future. This fuel will cost more than $1.50 per gallon.
Imagine the changes that would be needed to replace 20 million barrels per day of petroleum with coal products. It would require a lot of new mining and generate a lot of greenhouse gases and polluted water. Does this seem like a good solution for replacing petroleum?
Other alternative energy sources such as wind, solar, and nuclear power all produce electricity. I'm all for them, particularly wind energy in South Dakota. (Have you ever wondered why there are so few wind farms in this state?) But to use electrical power for driving around you will have to buy an electric car. The problem is making batteries that can come close to doing what a gasoline - powered car can do. Don't count on being able to buy a big powerful battery-powered SUV.
Even if electric cars become practical, there is the problem of vastly increased demand for electricity. As the California brownouts showed us, the electrical grid is operating pretty close to its limits. If everyone was going to plug their car in every day the electrical power system would have to be beefed up drastically.
Chances are that as oil prices continue to rise, we will pursue all of these alternative energy schemes. Every one of them will require significant changes and improvements in technology. These changes will take time and effort, and none of them will replace oil. More likely, all of the alternatives together will provide a patchwork that partly replaces oil. Ten years from now I doubt that we'll be driving our cars the way we currently drive. And I wonder what will happen to the economy as we face mounting energy costs. That's the topic of the next piece.
Gas prices are going up because it has gotten harder to get oil out of the ground and more people want it. The big oil fields are being depleted, and the remaining fields are not easily used. Oil is a limited resource. These are all facts. We don't have to like them, but they are true anyway.
Petroleum geologists have calculated that we can expect the total world oil production to start declining within this decade. Alternatives to oil have multiple problems - they require new technology, they are less efficient, they can't be massively scaled up, they cost more, many generate pollution, and they don't exist yet. We don't have much time to develop those alternatives. All of the alternatives taken together probably won't provide us with enough fuel to keep driving the way we're used to. It looks like the price of gas is going to keep rising, and the time will come when we wish that gas would go back down to $3 a gallon.
I don't like this dark view of the future any more than you do. But after years of gathering information, I'm unable to deny it. I have written these pieces because I believe that we are better off if we know what's in store for us. The sooner we start preparing for the inevitable, the better.
The last 100 years of progress have been like a big party thrown by someone who inherits a large sum of money. Over a hundred years ago, humanity discovered a wealth of energy available in fossil fuels, and began increasing everything -- wealth, technology, more food, and more population. After a century of continual growth it seems like life will always be this way. But when this windfall energy from fossil fuels starts declining, this extraordinary party will end, and we will have to go back to low-energy ways of living.
So, what depends on oil? It's more than just vehicles - you might instead ask what doesn't depend on oil. I have a hard time thinking of anything.
There's transportation. Most of the things we buy come from out of state or out of the country, and were shipped here thanks to relatively inexpensive diesel fuel. I ate grapes from Chile this winter. When the price of diesel starts rising in earnest, those goods and foods won't be inexpensive anymore, and may not be available.
Then there are industries that rely on diesel, such as mining, logging, construction, manufacturing, and others. These industries will have to pass on their increased fuel prices as higher prices for their products. Some companies will be driven out of business by rising costs. If you are paying more for things now, ask yourself how much the price of fuel has contributed to that rise.
Finally, there is food. The "green revolution" was the result of applying modern technology - mostly petroleum technology - to farming. Modern farming has been called "the use of land and water to turn oil into food". Without ammonia-based fertilizer (made from natural gas) and pesticides (made from petroleum) it just isn't possible to produce so much food per acre as farmers normally get. In the long term, as oil production declines, so will food production. More people will get very hungry. Agriculture experts have estimated that without oil and gas inputs to support modern farming, the Earth can feed a population of 1 billion people.
Our entire economic system is a web that is powered at every point by fossil fuels. Oil is a key fuel. When the energy inputs to our economy become more expensive, the entire web will suffer. Everything will cost more but few of us will earn more. I believe that the economic stress brought on by a shortage of petroleum will push most of us into poverty.
I don't know this for sure, but I have an idea that businesses may have a harder time coping with high petroleum prices than will most car owners. When the price of oil goes up, who will keep buying gas, and who will cut back? I suspect that businesses may be forced by costs to cut back first, resulting in losses of jobs and economic activity. Meanwhile, car owners may not cut back - until they lose their jobs. Surely there has to be a better way to deal with declining oil production. I have two questions: "Would it help to cut back on gas use?" and "What do we do?"
Gas prices are high because demand is climbing but crude oil production is flat. Oil producers (nations and companies) are generally unable to increase their rates of production - at least in the average. Careful analysis of geological data tells us that oil production is going to start declining within a few years. My previous writings have focused on questions of producing oil and alternative fuels. It looks like none of the alternatives can keep us going the way we are used to. We're going to be forced to use less oil in the future.
However, as the price of gasoline rises, would it even make a difference if we tried to use less right now? By conserving, could we reduce demand on oil enough to ease the price? To think about this you have to know where petroleum goes.
Worldwide petroleum production is currently about 30 billion barrels per year. The US uses 7.5 billion barrels per year. Our nation is using 25% of the total world's oil but we have only 5% of the population. If you divide this petroleum use on a per person basis, the worldwide average is half a gallon of oil per day per person. The average US citizen uses 3 gallons of oil per day. We are using 6 times as much as the world average.
What do we do with that oil?
In the US, two thirds of our oil is used to power transportation in the form of gasoline, jet fuel, and diesel fuel. The remaining one third is used in industry to provide heat and make plastics, fertilizers, and all manner of goods. Gasoline and diesel for private vehicles account for almost half of all the petroleum used in the US.
One eighth of the world's petroleum goes into our gas tanks. This is a large share, considering the US has only one twentieth of the world's population.
If American drivers were to reduce their gas consumption in a big way, that would cause a substantial decrease in the world's demand for oil. Who knows whether gas prices would go down or not, but they would certainly stop climbing for awhile. I believe that a concerted effort by all Americans to conserve gasoline could make a big difference in the future price of gasoline, and could postpone the inevitable decline of oil. However, we would all have to be convinced that serious conservation is in everyone's best interests (including our own), and be willing to act to the benefit of the common good.
Although our lives are highly dependent on cars, there are ways to begin extricating ourselves from them. We can reduce our driving by combining trips, sharing rides with others, and deciding whether it really is necessary to "go there right now." We can buy cars with better gas mileage, live close to our work, and walk or bike when possible. The more frequently you leave your vehicle parked, the more money you save and the better the oil situation for everyone.
I know what you're thinking - "you stop driving first". Okay, I cut way back. I still drive some, but not much anymore. Now it's your turn.
The problem of high gas prices goes far beyond our pain at the pump. We live in a world that is highly dependent on petroleum. Not only do we use it to power cars and trucks, but all facets of our economy rely on cheap petroleum. But the world's supplies are running down, and it's only a matter of time before oil production starts declining. We hear of various alternatives but they are not ready to replace the vast flow of oil, and they will never fully replace it. The frightening truth is that we face a future of decreasing oil supply and rising prices. The upcoming 50 - year - long decline of oil has been termed "The Long Emergency". I'm sorry to say this, but it is not going to be a fun ride.
Elected officials can't tell us this story because if they did they would never be re-elected and their political party would suffer. News media won't turn a profit if they tell this story. I don't like telling this story myself, but I have a responsibility to share what I know.
I'm not asking anyone to unquestioningly believe me. However, I am asking you to think about it, and dig up more information yourself. Do a web search for "oil depletion" and decide what it shows you. If you think that there is plenty of oil and I'm making trouble for no good reason, then set yourself a trigger point beyond which you would have to admit that there is a serious problem. What gas price would convince you that there is an oil shortage on the horizon? $5/gallon? $10/gallon? What price per barrel for crude oil? Then write that price on the inside of your car's gas door where you'll see it at the critical moment.
Regardless of how seriously you take this issue, it is something we need to be talking about. There have to be reasons why gasoline is so expensive, and simply blaming oil companies stops us from looking for the underlying reasons. This is no time for denial.
If you are wondering what you can do, remember the old proverb - "If we don't change our direction, we may end up where we are headed." There are things we can do to change our direction, and there are things we can do to deal with where we are going to end up. I don't have room here for specific recommendations - each of us needs to work out for ourselves what has to be done.
If we follow our present path, then in the future our nation will fight more and more increasingly desperate wars to maintain control of petroleum and other resources. But it doesn't have to be that way. The "Oil Depletion Protocol" is a plan that could reduce violence and suffering for generations to come. It is the only solution that will allow us to make a peaceful transition to a post-petroleum world. This plan needs to be seriously considered by every government, and soon.
As individuals, we can help by using less gasoline and diesel. The oil companies don't need our money anyway. Serious conservation would delay the decline of oil, and gas prices would stay lower for longer, preserving a functioning economy for longer. We can do this if we choose to.
There will be an economic crunch that will worsen as oil becomes ever more expensive. It is inevitable. To prepare, we have to be aware of the ways that we rely on cheap fuel. Then we have to imagine what we would have - and not have - when fuel is increasingly expensive. We have to figure out alternative ways to meet our basic needs, and prepare to give up on unnecessary luxuries.
Small communities will become increasingly dependent on their own resources. If everyone is willing to help their local community, there will be fewer problems that are truly insurmountable. Make friends with your neighbors, if you haven't already.
A lot of people will lose their jobs, but there will still be important work to be done. Food production is going to be very important. Are you prepared to grow food? Do you have the hand tools you need? Manual skills from the old days will become useful again.
By the time oil production gets down to about half of the present rate, most of us will be hungry. The population IS going to decline - by war, starvation, disease, or by our own determination to reduce births. Which do you prefer? I hope that young people will think twice before having children.
I personally believe that Americans have the goodwill and ability to do what needs to be done when things get really serious. We don't always behave generously in this wealthy age because it's not necessary. We rely on government, insurance, city services, utility companies, and charities to care for us and others. But unless a miracle occurs, I think we are headed for desperate times. In those darkening days I believe that we will re-learn how to willingly work together for the common good.
Back to my oil depletion info page