It is old, mainstream news that we live in an era of inconvenient truths.
Internalization is a different matter altogether though.
Let’s recap:
The world’s resources are finite.
Our appetite for growth is not.
Something has to give.
Plenty of books, such as “Limits to Growth”, “Plan B 2.0” and “Natural Capitalism” have been written on the strained relationship between the global economy, the human ecological footprint and an earth that is struggling to maintain it. The effects of overshoot – or humanity living beyond the earth’s ability to sustain it indefinitely – are staring us down: Soil erosion, falling water tables, lower crop yields, depleted fisheries and forest decimation. Many of these effects are inter-related by positive feedback loops.
Exaggerating the trend is a global economy based on an industrial system that discounts the true value of natural resources and the services they provide. Fueling the flames of unsustainable growth is an economic system based on relatively unbounded credit expansion and fiat currencies with no direct valuation ties to resource commodities.
According to the Limits of Growth study, since 1981, as an aggregate we’ve been living in overshoot where we consume resources faster than the earth can replenish them. This means that we need more than 1 earth to keep living the way we do. This also means that for example: Water tables are drawn down faster than their refresh rate due to irrigation demands; Timber is harvested faster than saplings can take their place leading to soil erosion; Fish are harvested faster than they can reproduce.

As with any overshoot condition, you can deplete a store of something faster that you replenish it for a while without running empty - Think of running water into a ½-full bathtub while the water drains from beneath at a faster rate. You stay wet for a while, but eventually you’re naked in an empty tub.
Great - Another Oil Peakist
Oil of course is a finite resource, but the issue is not that we are running out of oil. The issue – and in all likelihood the biggest challenge we face in the early part of the first half of the 21st century – is reaching Peak Oil - the period of maximum global oil production. After reaching Peak Oil, the overall trend for oil production is decline towards an unbridgeable supply-demand gap as the cost to extract and produce the oil that remains continues to climb.
The concept of Peak Oil originated with a geophysicist King Hubbert who in 1956 accurately predicted, and was scoffed by many, that US oil production would peak in 1970. Since that time production has declined and the US has imported an increasing share of oil with reprieves with the Prudhoe Bay and North Sea finds. The ideal shape of the production over time curve is the familiar Gaussian or bell shaped curve; however, production curves for individual wells, oilfields, countries or total global output are of course highly variable and shaped by a number of factors.
In reality, the “peak” may look like a bumpy plateau. Peak oil analyst Colin Campbell expects the progression to go as follows:
- Price shock as the capacity limit is breached
- Economic recession cutting demand
- Price collapse as the market overreacts to small imbalances between surplus and shortage
- Economic recovery followed by increased demand
- Price shock as falling capacity limits are again breached
So I’ll Buy a Hybrid
Unfortunately, reaching peak oil production, in our business-as-usual world, has impacts well beyond what we pay at the pump. The social and economic effects of reaching Peak Oil, as the gap between demand and supply widens, on an unprepared and cheap-oil dependent population are absolutely convulsive. We have all heard the environmental battle cries condemning the energy abusive American image of driving an SUV from a McMansion to a Walmart to buy cheap, imported goods sourced by a moving, just-in-time warehouse of planes, ships and wheels from 12,000 miles away.
Taken a step further, cheap oil is so pervasive and so fundamental to just about everything we associate with modern life, that it is a scary thought experiment when you take Peak Oil to the next logical steps. During the oil bonanza, we’ve been tapping into millions of years of solar energy of biomass stored in the form of energy-dense hydrocarbons. Oil is a feedstock for the production of petrochemical building blocks that are used to make everything from furniture, Barbie dolls, toothbrushes, aspirin, CD’s, integrated circuits, house wiring, credit cards, panty hose, deodorant and on and on.
Fundamentally, cheap oil has artificially increased the earth’s ability to support and feed a growing population now over 6 billion. In a major sense, we’ve been eating oil for decades given modern agricultural practices that provide the means to fertilize, cultivate, harvest and transport crop yields. In the current agribusiness model, it takes about 10 calories of energy to bring 1 food calorie to market.
Where In the Curve Are We?
The short answer is no one really knows. Production curves only become apparent from the overused term rearview mirror, but some of the puzzle pieces are coming together. As a reference point, global oil production has held in the 84MBarrels/day range from October 2004-March 2006. “Proven” (in quotes since reserves of many OPEC members, including Saudi Arabia is highly contested) worldwide reserves at the end of 2003 numbered about 1.1 trillion barrels. To date the world has consumed roughly 1 trillion barrels of oil with a total current yearly consumption of about 31 billion barrels.
While there is very little debate about whether oil production will peak, there is much debate about when. Dates range from 2006 to 2070. There are a number of issues with predicting when. For starters, nationalized oil companies such as Saudi Aramco are very secretive about field-by-field production and reserve statistics. Additionally, OPEC member countries are motivated to overstate reserve statistics to drive higher quotas and in turn higher oil revenues just as publicly traded oil companies are motivated to boost valuation through higher reserve numbers. There is also much debate about the depletion rates of maturing oil fields which source the majority of the world’s oil. All in all, historically predicting oil demand and supply has been a very inaccurate game.
Despite the lack of clarity on timing, there is little debate that global production will peak with Saudi oil production. In 2003, Mathew Simmons published “Twilight in the Desert”, a detailed assessment of the state of Saudi Arabia’s oil production capabilities. Simmons based his study on technical information on Saudi oil fields sourced from decades of Society of Petroleum Engineers (SPE) journals articles written by Aramco engineers. The findings shook the ground of key assumptions US and world energy planners live by:
- Saudi Arabian oil is so plentiful and can be produced so inexpensively that its supply could be expanded to any realistic level the world might need at least through 2030.
- Saudi Arabia will be able to produce as much as 20-25M Barrels/day within the next 2-3 decades.
These assumptions are clearly expressed through the US Middle Eastern foreign and military policy ensuring the flow of oil to Western markets. Saudi Arabia currently produces about 9M Barrels/day or ~11% of the world total. As I studied Simmons book, several key themes emerged:
- 90% of all the oil that Saudi has ever produced has come from 7 giant fields located in a very small portion of the kingdom.
- The Kingdom’s 3 most important fields - Ghawar, Abqaiq and Safaniya - have been producing at very high rates for over 50 years.
- Ghawar, the world’s largest oilfield, has accounted for ~60% of Saudi’s total production for the 2nd half of the 20th century.
- Production in key fields has been maintained by water injection that keeps pressure high in huge underground reservoirs.
- New projects, originally intended to increase net production are only substituting for depletion of maturing fields.
- According to the Petroleum Review, 90% of known reserves are in production and as much as 70% of the world’s producing fields are now in decline with decline rates averaging between 4 and 6% per year.
- While Saudi Aramco has extensively employed the most advanced oilfield technologies, the general effect of new extraction techniques in other giant oilfields has been to increase the rate of depletion without altering the field’s ultimate recovery.
- Exploration efforts in other parts of the kingdom have been disappointing and yielded very little.
To summarize, Simmons concluded, with painstaking attention to technical findings from engineering journals, that Saudi’s oil output was highly dependent on a small number of aging oilfields, each with very significant and well-documented production challenges. Simmons placed a ton of doubt on the assumption that Saudia Arabia could continue to act as the world’s swing producer indefinitely.
Now consider some other pieces to the puzzle:
- According to ChevronTexaco, oil production is declining for 33 out of 48 significant oil-producing nations.
- According to HIS Energy Inc. in 2005 a total of ~5 billion barrels of oil were discovered in new fields, while ~31 billion barrels of oil were extracted and used worldwide. The analogy here is that the oil industry is replacing whales with minnows.
- According to a separate study by Mathew Simmons, in 2001 the world had only 120 oilfields that produced over 100,000 barrels per day. These giant oilfields accounted for half the world’s oil supply.
- Just about all of these oil fields were discovered in the 1940’s, 50’s, 60’s and 70’s.
- The 14 largest oilfields, which had an average age of over 50 years, accounted for over 20% of global oil supply.
- The peak oil discovery year was 1965.
- In the last 40 years only 4 super-giant oilfields were discovered outside of the middle east and all 4 are in depletion (Daqing - China, Samotler- Russia, Prudoe Bay – Alaska, Cantarell – Mexico)
- Supergiant oil fields, typically experience a 50% production decline within 10 years of peaking.
- The ratio of energy expended in getting the oil out of the ground to the energy produced by that oil in the US oil industry has fallen from 28:1 in 1916 to 2:1 in 2004.
- Sada al-Husseini, former head of exploration and production at Saudi Aramco during a recent interview with the New York Times said that the industry could not continue to sustain annual growth in world demand of 2 million barrels and the annual decline in production from existing fields of over 4 million barrels per day.
In February 2005, a report by Science Applications International (SAIC), led by Robert Hirsch, for the US Department of Energy concluded that it would take 20 years of crash program scale of effort of all government and industry resources to avert major fuel shortages. The Hirsh report begins with the statement, “The peaking of world oil production presents the U.S. and world with an unprecedented risk management problem…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.”
Now ask yourself, given the high likelihood of facing Peak Oil within 20 years and the urgency for 20 years of concerted effort to avert widespread social and economic disruptions it will cause, what real actions have you seen by industry or government? Many actions seem to stop with a bumper sticker by populist candidates condemning Big Oil. Yes, there has been some pricing collusion amongst the majors. Get over it. The real issues are geological.
Impacts on the American Empire and Globalism
Our American landscape and economy is shaped by the automobile and an underlying assumption of perpetual cheap oil. Goodyear trumped the trolley, Ford fed on the frontier mythology substituting a car for a horse, Eisenhower got his interstate system and the rest of America’s decentralized lifestyle took its course.
With the end of cheap oil, we may see in our lifetimes that suburban expansion was the biggest misallocation of capital in world history. The American consumer lifestyle, powered by cheap oil and the Federal Reserve credit engine, is now centered on constructing, furnishing, connecting, wiring, supporting and financing suburban expansion. A sudden emergence of Peak Oil would be especially harsh on this unsustainable lifestyle.
Much as been written about a post-Peak Oil universe, so there is little use to do more than summarize in my own few words:
Peak Oil will curb globalization and inevitably spawn an age of re-localization. We will travel less, live closer to where we work, eat more local foods and generally wean ourselves from the orgy of conveniences we’ve grown accustomed to in the blimp of time known as the oil age.
The Dollar System
The Dollar system has a key role in the larger framework of consumption, resource scarcity and oil depletion. Until the last few years it seemed the world generally had faith in the US Dollar as a reserve currency since the time Nixon cut the gold standard. Over time, the US has run up enormous debt and huge trade deficits, but the exporting countries of the world have soaked our debt to keep their exports competitive. In some respects, the Dollar System was a brilliant scheme for a lone superpower.
Meanwhile the US government has followed on the heels of so many past, not to tax and not to cut budgets, but instead to borrow evermore against the future. Never before has the world’s commerce been based in large part on a reserve currency been backed by a country with government and a population so deeply in debt. We just can’t seem to buy enough of what we don’t need with money we don’t have. I can’t think of a time in history when good things happened because a government and its people ran up huge deficits and debts. Think clipping the coins in Rome, burning marks for heat in 1920’s hyperinflation-torn Germany and more recently Argentina. But we’re the US right? We have been the dominant empire for over 100 years. It is the world’s privilege to fund our debt because they need us to consume and in this information age, we no longer need to make tangible things for export. Manufacturing is for poor countries. The same poor countries with a much lower average income but much higher savings rate. The same poor countries that fund our debt and now start to influence our foreign policy.
Since the departure from the gold standard in 1973, the global economy has increasingly become based on US debt-based consumption. No longer was currency fixed to any true store of value – something finite – a rare and precious resource that had to be pulled out of the ground.
Prior to 1973, trade imbalances were usually kept in check because fixing currency values to gold essentially provided a feedback mechanism. When the world was on a gold standard, gold was the only reserve asset with which countries would finance investment and trade imbalances. If much more gold entered a country than left it, economic overheating and inflation would occur since a surplus of gold led to credit creation. When prices in turn rose in the surplus country, its exports would decline (because they were more expensive in other countries) and its imports would rise (because their currency would buy more) until balance was re-established. With dollar-based reserve assets, there is no longer such a feedback mechanism. As the US purchases more from foreign nations than they from the US, and as their investment income from their US investments (including interest they earn on their ownership of many of U.S. Treasury bonds) grows faster than what the US invests in their nations, the US owes them the difference.
The Current Account is the broadest gauge of the country's trade performance, because it not only measures trade in goods and services, but also investment flows between nations. At the end of 2005, the cumulative Current Account deficit was $3.8T. Foreign central banks in Asia and US trading partners with large trade surpluses have reinvested their dollar surpluses in US dollar-denominated assets to prevent increased valuation of their currency which would reduce exports. This foreign acquisition of US stock, corporate bonds and US agency debt (e.g. Fannie Mae, Freddie Mac and the Federal Home Loan Bank system) have helped fuel the stock market bubble, led to the misallocation of corporate capital and helped drive US property prices to excessive levels. In short – asset inflation. Consider that over 17 years, the Dow Jones Industrial Average rose over 1000% between 1983 and 2000 and US aggregate housing values increased 73% between 1997 and 2005.
The credit creation that the dollar standard made possible has resulted in overinvestment across most industries, producing excess capacity. Additionally, globalization and free trade with countries with very low labor costs has reduced the price of goods that the US imports, holding down inflation. In short, the consumption engine is still running with plenty of credit fuel and cheap foreign labor to extract resources, package and ship them overseas to willing US buyers.
The rest of the world has become reliant on exporting to the US and has allowed the US to pay for much of its imports on credit. As a result, the ratio of total US debt to GDP increased from 169% in 1980 to 292% in 2002. This last statistic quantifies the common perception that many Americans are living beyond their means. For now the world is willing to accept paper for real goods and services.
At this point, record numbers of bankruptcies and corporate and agency accounting fraud have raised serious doubts about the creditworthiness of the US. As a result, exporting countries have 2 choices: To continue to invest their dollar surpluses in US dollar-denominated assets despite reasons to believe they are less secure or to convert their dollar surpluses into their own currencies, which would cause their currencies to appreciate causing their exports and economic growth to decline. The unwinding of these trade imbalances would culminate in a substantial devaluation of the US dollar and a global economy slump because the US economy will soon no longer be able to generate a supply of secure US dollar-denominated investments used by the rest of the world to recycle its now $700B annual current account surplus.
In the meantime, since the Stock Market collapse in 2000, US Federal Reserve monetary policy of running the money print presses and sustaining artificially low interest rates led to hyper-inflated asset values and the current housing bubble. Low interest rates and higher property values resulted in a consumer-led recovery (US consumers accounted for about 70% of GDP in 2001) funded in large part by borrowing against home equity. Goldman Sachs estimated that total housing-equity withdrawal rose to 7.4% of personal disposable income. Once home prices stop rising, and this income from capital gains vanishes, US consumers will spend less and the largest component of the GDP will contract having a major impact on the global economy. As of October 2006, even with a slumping housing market, consumers are pedaling along. Eventually, the housing slump may spark the recession that temporarily decreases oil demand as we bump along the peak oil plateau.
How dependent are we on sprawl powered by cheap oil? On June 18th of 2005, the “Economist” quantified the current housing bubble in a time when property values are central to the US economy. Over the last 4 years, consumer spending and residential construction have accounted for 90% of the total growth in GDP and 2/5ths of all private-sector jobs have been in the housing related sector.
How big is the housing bubble? During the last 5 years, the total value of residential property in developed countries rose by more than $30T to over $70T, an increase equal to 100% of those countries combined GDPs.
History shows that asset bubbles such as that in the US before the Depression, Japan in the 1980’s, Thailand in the 1990’s and the US stock market in 2000 begins with an excess of credit due to trade and investment surpluses. The crucial characteristic these crisis had in common was that in one way or another, either through trade imbalances or extraordinary capital inflows, foreign assets entered the banking system of the country affected and acting as high powered money triggered through a process of credit creation and over-investment, an unsustainable surge in asset prices and economic activity that ended in severe recession, a systemic banking crisis and drastically higher government debt.
In bubbles, investment turns to speculation. Bubbles burst when the credit extended to finance the speculative ventures can not be repaid. Imagine how suburban housing and its inhabitants will fair as we start to tumble down the right side of the oil production curve.
So Now What?
I suppose I’m un-American for not believing the seamless transition to the mythical hydrogen economy through a transition phase where biofuels and other alternatives fill the fossil fuel void. After all, we’ve been conditioned to worship technology with the frontier outlook that resources are abundant.
I’m also discouraged by most alternative energies which have so far demonstrated terrible energy ratios and are all in some way, shape or form based on a fossil fuel platform. The Tar Sands of Canada – the North American cornucopia argument - deserve a lengthy treatment but to date have proven to be very energy intensive and no substitute for high oil flow rates required to replace conventional sources. Meanwhile, deep sea, Arctic and Antarctic frontiers are speculative projects that can only delay peak oil rather than avoid it.