Wednesday, March 25, 2009

Oil Prices : Part 10

If you think my last post is gloomy, you are certainly right. I’m not the first person to make these predictions though. Back in 2004, the US Department of Energy became very concerned about the possibility of peak oil. On one hand, economists where saying that the oil supply was virtually limitless. As long as prices increased, production would follow. On the other hand, geologists warned that known oil fields were declining and there were not many places left to look for additional reserves. The US government needed to know who was right - so they hired Dr. Robert L. Hirsch to find the answers.

You can read an excellent synopsis on of the report - which is titled “Peaking of World Oil Production: Impacts, Mitigation, and Risk Management” on Wiki here:

Or you can find a link to the entire report at the end of the wiki article.

If you would like a very short summary -

From the introduction:

"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."

The report ends with these 10 conclusions:

* World oil peaking is going to happen, and will likely be abrupt.
* Oil peaking will adversely affect global economies, particularly those most dependent on oil.
* Oil peaking presents a unique challenge (“it will be abrupt and revolutionary”).
* The problem is liquid fuels (growth in demand mainly from transportation sector).
* Mitigation efforts will require substantial time.
o 20 years is required to transition without substantial impacts
o A 10 year rush transition with moderate impacts is possible with extraordinary efforts from governments, industry, and consumers
o Late initiation of mitigation may result in severe consequences.
* Both supply and demand will require attention.
* It is a matter of risk management (mitigating action must come before the peak).
* Government intervention will be required.
* Economic upheaval is not inevitable (“given enough lead-time, the problems are soluble with existing technologies.”)
* More information is needed to more precisely determine the peak timeframe.

In the end, the Hirsch report gives 3 scenarios:

* Waiting until world oil production peaks before taking crash program action leaves the world with a significant liquid fuel deficit for more than two decades.

* Initiating a mitigation crash program 10 years before world oil peaking helps considerably but still leaves a liquid fuels shortfall roughly a decade after the time that oil would have peaked.

Initiating a mitigation crash program 20 years before peaking appears to offer the possibility of avoiding a world liquid fuels shortfall for the forecast period.

The bad news is that when Dr. Hirsch reviewed data from the world’s top energy research institutes and collated the answers he found that all the experts agreed that world oil production would peak in the near future. Nine of the eleven predicted peak would occur between 2005 and 2010. The more optimistic estimates suggested peak would occur sometime around 2020.

If Peak oil is inevitable, and the industrialized economy is completely dependent on oil for energy, what will happen? Either changes will be made in the way energy is utilized or economic activity will decline at the rate of production. In a world that is based on annual increases in national GDP, what would be the result of a declining economy?

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