All About Oil

The following is another guest post from Free Money Finance reader Rod Ferguson. Though not strictly a personal finance piece, I find this very interesting and think anyone who drives a car will as well.

Oil and Its Uses

Global output of oil is approximately 88 million barrels every day, or about 1,018 barrels per second – and demand is increasing.  People all over the world use oil to move around, by means of planes, trains, or automobiles (yes, I saw the movie.)  But people also eat oil (in the form of fertilizers, refrigeration, processing) and wear oil (in the form of synthetic fibers.)  People rely on oil to stay healthy (in the form of plastics) or get well (in the form of petroleum-based medicines).  Our entire distribution system in the US is based on oil; imagine of the trucks, ships and trains stopped running for just one day – while we’d all appreciate the lack of trucks on the road, our stores would empty out is short order.  Oil is as essential to our lives today as the very air we breathe.

What is Peak Oil?

“Peak Oil” is shorthand phrase for describing the condition of oil resource depletion, or more specifically, the peak in our ability to produce (meaning extraction and refining) this resource from the crust of the Earth.  The “peak” comes when we have produced half of the existing reserve; from the point of the “peak” on, easy to extract and process oil will decrease and production will become more costly, both in money and energy. 

People have, naturally, extracted the easier-to-access, cheap and clean oil first. The first oil well was built and began pumping in Pennsylvania in 1859.  Subsequent oil wells were also drilled on land, usually found near the surface, were under pressure, ‘light’ (which refers to the specific gravity of the oil) and 'sweet' (which means low sulfur content.) These wells made getting to the oil easy and the oil itself was easy to refine; moving the oil to refiners was quick and shipping refined petroleum to its usage centers was fast and efficient. Most of these wells reached peak decades ago, with the exception of some larger deposits in the Middle East.  What undiscovered oil that remains is more likely to be offshore, far from refineries, in smaller deposits and of lesser quality.  Producing this oil will cost more and take more energy turn it into gasoline than before; land-based deposits will encounter the same problem the emptier the deposit becomes.  Eventually, all deposits will reach a point where the cost (both in money and energy) to produce a barrel of oil will exceed a barrel of oil.  While we can manipulate the cost in money somewhat, doing the same to the energy cost is difficult; if it takes a barrel of oil to produce a barrel of oil, then why produce more oil?

When will we hit Peak Oil?

In 1949, a geologist named M. King Hubbert came up with the idea of Peak Oil and began to graph deposits in the US.  In 1956, he predicted a US peak somewhere between 1965 and 1970; we hit Peak Oil in 1970/1971.  Hubbert later graphed deposits around the world and made the same prediction about global production peaking between 2000 and 2005.  The dates vary across the world, but production has peaked in almost every major oil-producing region on the planet. 

Have we hit Peak Oil globally? It’s hard to tell; back in 1970 the prediction was forgotten as 1970 had the highest production levels in US history (3.52 billion barrels).  It wasn’t until many years later, when our oil production dropped significantly and our imports skyrocketed that we were able to pinpoint “peak oil.”  Many believe we hit global “peak oil” in May of 2005, but it could be another 10 years before we know for certain.

What does this mean?

In addition to peak oil, we also have exploding global demand as well as a lack of proper machinery to drill and a lack of properly trained personnel to operate that machinery.  Technological improvements have increased efficiency in extraction, but haven’t come close to offsetting the increase in demand; the situation isn’t going to get any better any time soon.  Our current initiatives to create and encourage alternative fuel usage is more than just a desire to control the monthly budget; it may be necessary in our (or our children’s lifetimes) to stop using oil to power automobiles.

My Opinion

Since I first heard about Peak Oil in the late 90’s, I have been concerned about what it may mean for us.  Most of what we think of as civilization is based on oil – if you want to imagine what life would be like without oil, imagine life as it was in the mid 1800’s.  Luckily for me, global production should reach the same levels we were at in the 1960’s by the 2050’s, which should be at the limit if not beyond my lifespan; I will probably have access to plastic and medicine in my sunset years.  But, the next generation might not be so lucky.

What can you do about Peak Oil?  Minimize your petrol consumption as much as you can.  I’ve been carpooling to work for years now; not only does it save money, but I use about half of the gasoline I used to use.  Use public transportation whenever possible; if you can get to where you need to go while reading a book and save money… why not?  Buy a fuel-efficient vehicle; yes, you lose the power, but you save the gas; the other effect of Peak Oil is the price per barrel – it’s now a sellers market.  If you think that oil prices have gotten out of control, you haven’t seen anything yet.

Comments

[Servius]

Here's a post about "Peak Oil" at The Reference Frame.

http://motls.blogspot.com/2008/06/bp-peak-oil-reached.html

[Jake]

"Many believe we hit global “peak oil” in May of 2005"

This would be very difficult, since 2008 production has been greater than 2007 production, which was in turn greater than 2005 production.

[MrAtoZ]

Past predictions along Malthusian lines, i.e. that we'll outstrip our resources, have never been accurate. Not to say it couldn't happen, but I doubt we will run out of oil in the lifetimes of anyone reading this site.
That said, I do think we have reached peak CHEAP oil. But higher prices will always create incentives to extract petroleum from locations (offshore) and places (tar sands) where before it wasn't profitable.

There is no shortage of oil !

There is a lack of will to pump out what is there, such as Alaska and the eastern Gulf of Mexico. There is a lack of will by speculators to give up the huge profits they've been making with the recent runup in prices. As the Saudi's said a few days ago, the true cost of getting a barrel of oil is only about $55. Even the hard to get at oil, such as the newly discovered pool off the coast of Brazil doesn't approach the current price per barrel. Switching to alternatives just isn't practical today, as solar, nuclear, and wind just aren't as cost effective a source of energy as petroleum. One day, our cars, houses, industries, power plants, etc. will find other means of power, but for the near future, our global economy cannot afford to delay exploration, drilling, and refining petroleum. We can safely and productively extract the oil reserves that we've identified for many decades to come, until those alternatives are in place. But for now, we shouldn't hold the global economy hostage to a bunch of Chicken Littles with "wishful thinking"

[LotharBot]

http://en.wikipedia.org/wiki/Hubbert_peak_theory#Criticism

Again, a very sub-par post for FMF. I expect better from you.

[Foobarista]

Personally, I think the recent big runup is OPEC realizing that petroleum will be supplanted by other sources of hydrocarbons where necessary, and other power sources where possible. The combination of global warming worries, the fact that nobody trusts the collection of dictators, monarchs, and brigands who run OPEC, and technology advancement means that the "parasite" strategy they pursued for most of their history will quit working, so they may as well charge what the market will bear.

And, as usual, the US will do the right thing (nuke baseload, solar/wind topload, algae-based biodiesel, increasing domestic production) after trying everything else (whining about "Big Oil", silly "windfall profits taxes", etc).

[Rod Ferguson]

Wow - lots of negative comments to address today. I guess I hit a nerve.

Servius: Yes, one of the problems with running a Peak Oil calculation is it's only as good as the data you have. New discoveries, new estimations of old reserves, new extraction technologies, etc, can move the date around. Additionally, when 1.8 billion Indians and 1.6 billion Chinese decide to start using oil when they weren't before also moves the date around. The point is - oil won't last forever and is becoming too valuable to burn as fuel.

MrAtoZ: I was going to talk to oil sands and shale oil, but that would be an article unto itself. We could expand our oil supplies significantly for a short time by tapping those alternate sources. But I agree with you - the era of cheap oil is over. In the end, though, unless we figure out something else to use for our autos we're going to be in a world of hurt.

|: See my responses above and remember that cost is only one part of oil production; energy is the other. Demand is outstripping supply, even if the supply hasn't decreased. The Peak Oil calculation measures all wells in a region and calculates each well's peak as part of the overall number; a single well or collection of wells may very well exceed last years production depending on size and remaining reserves. We didn't realize we hit peak US production until years after.

LotharBot: Yeah, the difference between Hubbert and Campbell is that Campbell was trying to make money using Hubbert-esque calculations while Hubbert was just trying to figure out when we'd run out of oil. CERA and ASPO, while trying to act as a reality check for those "Campbell's" out there still agree that Peak Oil itself is valid. Too many people have this "focus on today" mindset and the idea that we may run out of oil in 41 years or 75 years or 100 years is just too far in the future to worry about. Our grandchildren might have something to say about that, though.

Foobarista: First off - I love the handle :). I think the price runup on oil is just a matter of supply and demand. Essentially stable supply with a huge runup in demand. The 380 or so million people in the US consumed 80% or so of the worlds oil. Now, we have another 3 billion or so cash flush Chinese and Indians wanting a US lifestyle all running out and buying cars. I think the folks at OPEC can count and see that unless they ration their oil a bit (by not increasing production) they won't be in the position of global importance they currently hold. Watch the movie Syriana to get an understanding of this; most of the OPEC nations don't have a secondary or tertiary export that the world needs as much as their oil.

To everyone: We all seem to think that the remaining oil will somehow find it's way to the US. This isn't a crazy idea; it has in the past. But to assume it'll continue in the future is naive. All the talk of "alternative energy" has no teeth; we only have the systems in place for petrol and we're not doing much to change those. Technology transition on this scale will take time and cost lots and lots of money. About the best thing we've come up with in the last 20 years is a gas-electric hybrid, and that only works because we can get gas anywhere (how many ethanol stations, or hydrogen stations or biofuel stations have you seen?) We're just not serious about alternate fuels, but we know that the oil won't last forever. I know many of you might disagree with me, but I believe that rather than wait till the last minute we should be looking at a serious alternative today so we might transition to it in the next 20-30 years. Everyone reading this blog will probably not have to live in a oil-strapped world; I said as much in the article. But to ignore the problem now is to pass on a bigger problem to the next generations.

[Paul]

Most of responses seem focused on the cost only (the speculators, true (monetary) costs, production being up, what the market will bear). I guess that since this is a finance site, some of you are glossing over the rest of the article. Regardless of how good we have it now, there is clear trouble ahead. It is coming soon.

I love $4 gas. I would like $6 gas even more. Until gas it $4, people I know just whined about the cost. As the price stays high, I’m finally seeing people actually change their ways.

[Mark]

I'm right there with you, Paul. A gallon of gas at $6 might be the best thing to happen to us. I've noticed people changing their lifestyle too, and the adaptations have been mostly positive. After trying to convince my coworker to move closer to work for many years, he's finally come to his senses, rather than paying $600 a month commuting 70 miles rountrip in his SUV. Since I live within 3 miles of a huge employment center, my property value may start to tick up dramatically at $6 a gallon. My house might even become a good investment.

In Europe, high gasoline prices are taken for granted, and yet they've adapted. Public transportation, more fuel efficient cars, better urban planning, etc., have all been a result of higher energy costs. Unemployment is higher, but much of that can be attributed to liberal immigration policies than encourage the influx of refugees and the unskilled.

[rwh]

We're rethinking selling our house. The reason is it's located in the center of town, within walking or biking distance to most places we regularly go, like work and shopping. And we're also on the bus line. I've noticed the values of homes are stable in my neighborhood, while outlying neighborhoods seem to have experienced a decline just since late winter/early spring.

I think it is related to the price of gasoline.

But you will never hear me say I love $4 gas or $6 gas. I have great sympathy for those who are stuck having to buy it regularly just to get to work.