Possible consequences of peak oil

The wide use of fossil fuels has been one of the most important stimuli of economic growth and prosperity since the industrial revolution, allowing humans to participate in takedown, or the consumption of energy at a greater rate than it is being replaced. Some believe that when oil production decreases, human culture, and modern technological society will be forced to change drastically. The impact of peak oil will depend heavily on the rate of decline and the development and adoption of effective alternatives. If alternatives are not forthcoming, the products produced with oil(including fertilizers, detergents, solvents, adhesives, and most plastics) would become scarce and expensive.

In 2005, the United States Department of Energy published a report titled Peaking of World Oil Production: Impacts, Mitigation, & Risk Management.^[118] Known as the Hirsch report, it stated, “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.”

High oil prices

[edit]Historical oil prices

The oil price historically was comparatively low until the 1973 oil crisis and the 1979 energy crisis when it increased more than tenfold during that six year timeframe. Even though the oil price dropped significantly in the following years, it has never come back to the previous levels. After almost fifteen years of relative stability, the oil price began to increase again during the 2000s until it hit historical heights of $143 per barrel (2007 inflation adjusted dollars) on 30 June 2008.^[119] As these prices were well above those that caused the 1973 and 1979 energy crises, they have contributed to fears of an economic recession similar to that of the early 1980s.^[12] These fears were not without a basis, since the high oil prices began having an effect on the economies, as, for example, indicated by gasoline consumption drop of 0.5% in the first two months of 2008 in the United States.^[120] compared to a drop of .4% total in 2007.^[121]

It is agreed that the main reason for the price spike in 2005-2008 was strong demand pressure. For example, global consumption of oil rose from 30 billion barrels (4.8×10⁹ m³) in 2004 to 31 billion in 2005. The consumption rates were far above new discoveries in the period, which had fallen to only eight billion barrels of new oil reserves in new accumulations in 2004.^[122]

Oil price increases were partially fueled by reports that petroleum production is at^[4][5][6] or near full capacity.^{[8][123][124]} In June 2005, OPEC admitted that they would ‘struggle’ to pump enough oil to meet pricing pressures for the fourth quarter of that year.^[125] The decline in the U.S. dollar against other significant currencies from 2007 to 2008 is also cited as a significant reason for the oil price increases,^[126] as the dollar lost approximately 14% of its value against the Euro from May 2007 to May 2008.

Besides supply and demand pressures, at times security related factors may have contributed to increases in prices,^[124] including the War on Terror, missile launches in North Korea,^[127] the Crisis between Israel and Lebanon,^[128] nuclear brinkmanshipbetween the U.S. and Iran,^[129] and reports from the U.S. Department of Energy and others showing a decline in petroleum reserves.^[130]

[edit]Effects of rising oil prices

In the past, the price of oil has led to economic recessions, such as the 1973 and 1979 energy crises. The effect the price of oil has on an economy is known as a price shock. In many European countries, which have high taxes on fuels, such price shocks could potentially be mitigated somewhat by temporarily or permanently suspending the taxes as fuel costs rise.^[132] This method of softening price shocks is less useful in countries with much lower gas taxes, such as the United States.

Some economists predict that a substitution effect will spur demand for alternate energy sources, such as coal or liquefied natural gas. This substitution can only be temporary, as coal and natural gas are finite resources as well.

Prior to the run-up in fuel prices, many motorists opted for larger, less fuel-efficient sport utility vehicles and full-sized pickups in the United States, Canada, and other countries. This trend has been reversing due to sustained high prices of fuel. The September 2005 sales data for all vehicle vendors indicated SUV sales dropped while small cars sales increased. Hybrid and diesel vehicles are also gaining in popularity.^[133]

In 2008, a report by Cambridge Energy Research Associates stated that 2007 had been the year of peak gasoline usage in the United States, and that record energy prices would cause an “enduring shift” in energy consumption practices.^[134] According to the report, in April gas consumption had been lower than a year before for the sixth straight month, suggesting 2008 would be the first year U.S. gasoline usage declined in 17 years. The total miles driven in the U.S. peaked in 2006.^[135]

The Export Land Model states that after peak oil petroleum exporting countries will be forced to reduce their exports more quickly than their production decreases because of internal demand growth. Countries that rely on imported petroleum will therefore be affected earlier and more dramatically than exporting countries.^[136] Mexico is already in this situation. Internal consumption grew by 5.9% in 2006 in the five biggest exporting countries, and their exports declined by over 3%. It was estimated that by 2010 internal demand would decrease worldwide exports by 2,500,000 barrels per day (400,000 m³/d).^[137]

Canadian economist Jeff Rubin has stated that high oil prices will likely result in increased consumption in developed countries through partial manufacturing de-globalisation of trade. Manufacturing production would move closer to the end consumer to minimise transportation network costs, and therefore a demand decoupling from Gross Domestic Product would occur. Higher oil prices would lead to increased freighting costs and consequently, the manufacturing industry would move back to the developed countries since freight costs would outweigh the current economic wage advantage of developing countries.^[138][139]

Economic research carried out by the International Monetary Fund puts overall price elasticity of demand for oil at -0.025 short term and -0.093 long term. ^[140]

Long-term effects on lifestyle

A majority of Americans live in suburbs, a type of low-density settlement designed around universal personal automobile use. Commentators such as James Howard Kunstler argue that because over 90% of transportation in the U.S. relies on oil, the suburbs’ reliance on the automobile is an unsustainable living arrangement. Peak oil would leave many Americans unable to afford petroleum based fuel for their cars, and force them to use bicycles or electric vehicles. Additional options include telecommuting, moving to rural areas, or moving to higher density areas, where walking and public transportation are more viable options. In the latter two cases, suburbia may become the “slums of the future.”^[141][142] The issues of petroleum supply and demand is also a concern for growing cities in developing countries (where urban areas are expected to absorb most of the world’s projected 2.3 billion population increase by 2050). Stressing the energy component of future development plans is seen as an important goal.^[143]

Methods that have been suggested^[144] for mitigating these urban and suburban issues include the use of non-petroleum vehicles such as electric cars, battery electric vehicles, transit-oriented development, Car-free Cities, bicycles, new trains, new pedestrianism, smart growth, shared space,urban consolidation, urban villages, and New Urbanism.

An extensive 2009 report by the United States National Research Council of the Academy of Sciences, commissioned by the United States Congress, stated six main findings.^[145] First, that compact development is likely to reduce “Vehicle Miles Traveled” (VMT) throughout the country. Second, that doubling residential density in a given area could reduce VMT by as much as 25% if coupled with measures such as increased employment density and improved public transportation. Third, that higher density, mixed-use developments would produce both direct reductions in CO₂emissions (from less driving), and indirect reductions (such as from lower amounts of materials used per housing unit, higher efficiency climate control, longer vehicle lifespans, and higher efficiency delivery of goods and services). Fourth, that although short term reductions in energy use and CO₂ emissions would be modest, that these reductions would grow over time. Fifth, that a major obstacle to more compact development in the United States is political resistance from local zoning regulators, which would hamper efforts by state and regional governments to participate in land-use planning. Sixth, the committee agreed that changes in development that would alter driving patterns and building efficiency would have various secondary costs and benefits that are difficult to quantify. The report recommends that policies supporting compact development (and especially its ability to reduce driving, energy use, and CO₂ emissions) should be encouraged.

An economic theory that has been proposed as a remedy is the introduction of a steady state economy. Such a system would include a tax shifting from income to depleting natural resources (and pollution), fair limits to income inequality, gradually eliminate fractional reserve banking; as well as the limitation of advertising that stimulates demand and population growth. It also includes the institution of policies that move away from globalization and toward localization to conserve energy resources, provide high-quality local jobs, and maintain local decision-making authority. Zoning policies would be adjusted to promote resource conservation and eliminate sprawl.^[146][147]

Mitigation

To avoid the serious social and economic implications a global decline in oil production could entail, the 2005 Hirsch report emphasized the need to find alternatives, at least ten to twenty years before the peak, and to phase out the use of petroleum over that time.^[148] This was similar to a plan proposed for Sweden that same year. Such mitigation could include energy conservation, fuel substitution, and the use of unconventional oil. Because mitigation can reduce the use of traditional petroleum sources, it can also affect the timing of peak oil and the shape of the Hubbert curve.

Positive aspects of peak oil

Some observers opine that peak oil should be viewed as a positive event.^[149] Many such critics reason that if the price of oil rises high enough, the use of alternative clean fuels could help control pollution from fossil fuel use, and mitigate global warming.^[150] Permaculture, particularly as expressed in the work of Australian David Holmgren, and others, sees peak oil as holding tremendous potential for positive change, assuming countries act with foresight. The rebuilding of local food networks, energy production, and the general implementation of ‘energy descent culture’ are argued to be ethical responses to the acknowledgment of finite fossil resources.^[151]

The Transition Towns movement, started in Totnes, Devon^[152] and spread internationally by “The Transition Handbook” (Rob Hopkins), sees the restructuring of society for more local resilience and ecological stewardship as a natural response to the combination of peak oil and climate change.^[153]

[edit]Criticisms

Some do not agree with peak oil, at least as it has been presented by Matthew Simmons. The president of Royal Dutch Shell’s U.S. operations John Hofmeister, while agreeing that conventional oil production will soon start to decline, has criticized Simmons’s analysis for being “overly focused on a single country: Saudi Arabia, the world’s largest exporter and OPEC swing producer.” He also points to the large reserves at the U.S. outer continental shelf, which holds an estimated 100 billion barrels (16×10⁹ m³) of oil and natural gas. As things stand, however, only 15% of those reserves are currently exploitable, a good part of that off the coasts of Louisiana, Alabama, Mississippi, and Texas. Hofmeister also contends that Simmons erred in excluding unconventional sources of oil such as the oil sands of Canada, where Shell is already active. The Canadian oil sands—a natural combination of sand, water, and oil found largely in Alberta and Saskatchewan—is believed to contain one trillion barrels of oil. Another trillion barrels are also said to be trapped in rocks in Colorado, Utah, and Wyoming,^[154] but are in the form of oil shale. These particular reserves present major environmental, social, and economic obstacles to recovery.^[155][156] Hofmeister also claims that if oil companies were allowed to drill more in the United States enough to produce another 2 million barrels per day (320×10³ m³/d), oil and gas prices would not be as high as they are in the later part of the 2000 to 2010 decade. He thinks that high energy prices are causing social unrest similar to levels surrounding the Rodney King riots.^[157]

Dr. Christoph Rühl, chief economist of BP, repeatedly uttered strong doubts about the peak oil hypothesis:^[158]

Physical peak oil, which I have no reason to accept as a valid statement either on theoretical, scientific or ideological grounds, would be insensitive to prices. (…)In fact the whole hypothesis of peak oil – which is that there is a certain amount of oil in the ground, consumed at a certain rate, and then it’s finished – does not react to anything…. (Global Warming) is likely to be more of a natural limit than all these peak oil theories combined. (…) Peak oil has been predicted for 150 years. It has never happened, and it will stay this way.

According to Rühl, the main limitations for oil availability are “above ground” and are to be found in the availability of staff, expertise, technology, investment security, money and last but not least in global warming. The oil question is about price and not the basic availability. His views are shared by Daniel Yergin of CERA, who added that the recent high price phase might add to a future demise of the oil industry – not of lack of resources or an apocalyptic shock but the timely and smooth setup of alternatives.^[159]

Clive Mather, CEO of Shell Canada, said the Earth’s supply of hydrocarbons is almost infinite, referring to hydrocarbons in oil sands.^[160] Engineer Peter Huber believes the Canadian oil sands can fuel all of humanity’s needs for over 100 years.^[160]

Industry blogger Steve Maley echoed some of the points of Yergin, Rühl, Mather and Hofmeister.^[161]