27 June 2008

Kenneth S. Deffeyes, Professor Emeritus of Geology at Princeton University and author of the book Hubbert's Peak, on the current oil crisis (excerpts):

May 27th, 2008


In 2005, world oil production stopped growing and oil prices shot up uncontrollably. My graph of production versus price is now two weeks old and the price is already off the top of the paper. This morning, West Texas Intermediate is $130 per barrel. In Econ 101, they taught us that increasing prices would enlarge the supply. The economists may have envisioned a large inventory of oil wells, temporarily shut down because of low oil prices.

What happened? We hit "peak oil" – also called "Hubbert's peak," – a geological limitation to the oil supply in the ground. With no additional supplies, a bidding war began in 2005 over the remaining oil in the ground. This is not a news story that goes away after a month...

How big is the problem? Multiplying production (barrels per year) times the oil price (dollars per barrel) gives a total cost in dollars per year. It's an enormous number; tens of trillions of dollars per year. To put a scale on it, the three thin curves on the graph show the oil cost in contrast to the total world domestic product; the annual value the goods and services added up for all the world's countries. The three curves show the oil cost at one percent, two and a half percent, and five percent of the total world economic output. At $130 this morning, we are at six and a half percent.

Oil production obviously cannot consume 100 percent of the world's income. My intuitive, uninformed guess is that it cannot go above 15 percent. If we see oil at $300 per barrel, we will be looking out over the smoldering ruins of the world's economy...

So what about the experts and the oil companies who assure us that peak oil won't happen anytime soon? They have plenty of stories to tell:

  • The USA is now a service economy; we don't need as much oil as before.
  • Energy and food prices are too volatile to be included in the "core price index."
  • Oil prices have gone up, but we are still surviving, sort of.
  • Oil companies could find plenty of oil if they were allowed access for drilling.
  • Alternative energy sources will appear that replace conventional oil.
Despite the all the arguing, the oil problem really does matter.
  • Been to the grocery store lately? Agriculture is a heavy user of energy.
  • Ford and General Motors are having difficulty selling big SUVs.
  • By my count, seven passenger airlines have flown to that great airport in the sky.
  • After many consumers pay for gasoline and food; they don't have money left to make their mortgage payments.
What do we do? First – admit that there is a problem. Several analysts are still in the initial denial stage: Jad Mouawad, Michael Lynch, Daniel Yergin, and ExxonMobil...During the upcoming presidential campaign, let the candidates know that peak oil is the issue of overwhelming importance. A modest tax write off for wind energy is too little and too late. It's the oil supply, stupid.