Guest Post: Peak Oil - The Long & The Short

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Submitted by Jim Quinn of The Burning Platform

Peak Oil - The Long & The Short

Does it seem like we’ve been here before?

A barrel of Brent Crude (the truest indicator of worldwide oil
scarcity) sits at $118, up from $75 per barrel in July 2010 – a 57%
increase in eleven months. In the U.S., the average price of gasoline is
$3.69 per gallon this week, up 37% in the last year and up 100% in the
last 30 months.

The pundits and politicians are responding predictably. They blame
the Libyan revolution, the dreaded speculators and that old fallback –
Big Oil. When the Middle East turmoil began in earnest in January, gas
prices had already risen 15% in three months, spurred by increased
worldwide demand and by Ben Bernanke’s printing press. Congressmen have
reacted in their usual kneejerk politically motivated fashion by
demanding that supplies be released from the Strategic Oil Reserve.

Congress has a little trouble with the concept of “strategic.” They
also have difficulty dealing with a reality that has been staring them
in the face for decades. Politicians will always disregard prudent,
long-term planning for vote-generating talk and gestures.

The Long Term

Peak oil has been a mathematically predictable occurrence since
American geophysicist M. King Hubbert figured out the process in 1956.
His model predicted that oil production in the United States would peak
in 1970. He wasn’t far off. In 1971, when the U.S. was producing 88% of
its oil needs, domestic production approached 10 million barrels per day
and has been in decline ever since.


The Department of Energy was established in 1977 with a mandate to
lessen our dependence on foreign oil. At the time, the U.S. was
importing 6.5 million barrels per day. In 1985 the country was still
able to produce enough to cover 75% of its needs. Today, 34 years later,
the U.S. imports 10 million barrels per day, almost half of what it

President Obama’s 2011 Budget proposal included priorities for the DOE:

  • Positions the United States to be the global leader in the new
    energy economy by developing new ways to produce and use clean and
    renewable energy.
  • Expands the use of clean, renewable energy sources such as solar,
    wind and geothermal while supporting the Administration’s goal to
    develop a smart, strong and secure electricity grid.
  • Promotes innovation in the renewable energy sectors through the use of expanded loan guarantee authority.

That’s what goes on in talk space.

Back on planet Earth, not a single U.S. oil refinery or nuclear power
plant has been built  since 1977. Decades of inaction and denial have
left our energy infrastructure obsolescent and decaying. Pipelines,
tanks, drilling rigs, refineries and tankers have passed their original
design lives. The oil industry is manned by an aging workforce of
geologists, engineers and refinery hands. Many are nearing retirement,
and there are few skilled personnel to replace them.

Denial of peak oil becomes more dangerous by the day. The Obama
administration prattles about clean energy, solar, wind and ethanol,
when petroleum powers 96% of the transportation sector and 44% of the
industrial sector. Coal provides 51% of the country’s electricity, and
nuclear accounts for another 21%. Renewable energy contributes only 6.7%
of the country’s energy needs, mostly from hydroelectric facilities.

Ethanol works nicely as a slogan but poorly as a solution. The
ethanol boondoggle diverts 40% of the U.S. corn crop to fuel production.
The real cost to produce a gallon of ethanol (tariffs, lost energy,
higher food costs)  exceeds $7 and has contributed to the price of corn
rising 112% in the last year. The 107 million tons of grain that went to
U.S. ethanol distilleries in 2009 would have been enough to feed 330
million people for one year.


The most worrisome aspect of peak oil is that our government leaders
have known of it  and have chosen to do nothing. The Department of
Energy requested a report from widely respected energy expert Robert
Hirsch in 2005. The report clearly laid out the dire situation:

    The peaking of world oil production presents the U.S. and the
    world with an unprecedented risk management problem. As peaking is
    approached, liquid fuel prices and price volatility will increase
    dramatically, and, without timely mitigation, the economic, social, and
    political costs will be unprecedented. Viable mitigation options exist
    on both the supply and demand sides, but to have substantial impact,
    they must be initiated more than a decade in advance of peaking.

Some of his conclusions:

  • World oil peaking is going to happen, and will likely be abrupt.
    World production of conventional oil will reach a maximum and decline
  • Oil peaking will adversely affect global economies, particularly
    the U.S. Over the past century, the U.S. economy has been shaped by the
    availability of low-cost oil. The economic loss to the United States
    could be measured on a trillion-dollar scale.
  • The problem is liquid fuels for transportation. The lifetimes of
    transportation equipment are measured in decades. Rapid changeover in
    transportation equipment is inherently impossible. Motor vehicles,
    aircraft, trains and ships have no ready alternative to liquid fuels.
  • Mitigation efforts will require substantial time. Waiting until
    production peaks would leave the world with a liquid fuel deficit for 20
    years. Initiating a crash program 10 years before peaking leaves a
    liquid fuels shortfall of a decade. Initiating a crash program 20 years
    before peaking could avoid a world liquid fuels shortfall.

World liquid oil production has never exceeded the level reached in
2005. It becomes more evident by the day that worldwide production has
peaked. Robert Hirsch was correct. The world will have a liquid fuel
deficit for decades.

The Short Term

The International Energy Agency has been increasing its estimates for
world oil consumption to over 90 million barrels per day by the 4th
quarter of 2011, led by strong demand from China, India and the rest of
the emerging world. World supply was already straining to keep up with
this demand before the recent tumult in the Middle East. The mayhem in
Tunisia, Egypt, Libya, Bahrain, Yemen and Iran has already taken 1.5
million barrels per day off the market, according to the IEA.


The Obama administration and mainstream media continue to downplay
the economic impact of the conflagration spreading around the world. The
risk that oil prices gush toward the 2008 highs is much greater than
the likelihood that this turmoil will subside and oil prices fall back
to $80 per barrel. As the following chart shows, the daily oil supply
coming from countries already experiencing revolution or in danger of
uprisings is nearly 8 million barrels per day, or 9% of world supply. No
country can ramp up production to make up for that shortfall.

  Proven Oil Oil
Reserves (billion barrels) Production Per Day
Saudi Arabia


The Washington DC spin doctors are now assuring the American people
that Saudi Arabia can make up for any oil shortfall. Saudi Arabia has
declared it has already turned the spigot on and will produce 10.0
million bpd, up from 8.5 million bpd.

Is this replacement production real? A leading industry expert
revealed that the Saudis were already producing 8.9 million bpd in
January. Hype and misinformation won’t fill your SUV with cheap gas.
Saudi production peaked at 9.8 million bpd in 2005. When prices spiked
to $147 per barrel in early 2008, their production grew only to 9.5
million bpd. Saudi oil fields are 40 years old and are in terminal
decline. Their “spare capacity” doesn’t exist.

And the media ignore the quality difference between Libyan crude and
Saudi crude. Libya’s oil is a perfect feedstock for ultra-low-sulfur
diesel. The oil Saudi Arabia will supply to replace it is not. It takes
three barrels of Saudi crude to yield the same quantity of diesel fuel
as one Libyan barrel of crude, and only specially designed refineries
can process high-sulfur Saudi oil.

The problem isn’t just turmoil in the Middle East. The Persian Gulf
provides 17% of U.S. imports; 22% comes from Africa, 10% from Venezuela
and 15% from Mexico. Many of these countries hate us. Mexico, although a
relatively friendly country, will become a net importer of oil in the
next five years, as its Cantarell oil field is in rapid decline. They’ll
have nothing to sell to us.

The long and the short of it is that sunshine, corn and wind will not
keep Americans from paying $5 per gallon or more for gas in the near
future. The financial implications are that oil and energy investments
will produce solid returns over the coming years.