As Oil Majors Chime In, the Reality of Peak Oil Lurches Closer

One by one, the world's oil companies are coming out of the closet. For years operating under the assumption and public assertion that world oil supplies were plentiful and would be for years to come, now many of the world's most powerful and well known oil giants are talking about scarcity or, even, the dreaded peak in world oil supplies.

For the uninitiated, Peak Oil is not the point where oil runs out but where it becomes physically impossible to grow the amount coming out of the ground and onto the world oil market. For all intents and purposes, Peak Oil is the top of the curve beyond which world oil production goes into inexorable decline. With a world economy largely dependent on oil for transportation, chemicals, and a range of synthetic products, even a plateau in world oil supply spells trouble.

So let's see what some influential people in the industry have to say about oil supply.

In 2005, Chevron's CEO announced to the world that the era of easy oil was over and went on a major advertising campaign to announce its solutions. In 2007, Total's CEO stated "we have all been too optimistic about the geology..." and went on to state that he couldn't see world supply ever going any higher than 100 million barrels per day. Also in 2007, the former CEO of Talisman stated "I think it's fair to say that the era of cheap energy is over." Then in early 2008, Shell CEO Jeroen van der Veer issued a public email that stated "Shell estimates that after 2015 supplies of easy-to-access oil and gas will no longer keep up with demand."

What's revolutionary is that these major oil companies are talking about the idea of scarcity at all. But the concept that world supply of oil might struggle to increase, much less meet demand? To many this situation still seems a remote concept relegated to some far off future date.

The facts are a bit more disconcerting.

In large part, just such a thing has been happening since 2005. Since that time, Energy Information Agency world liquid fuel production figures have hovered just below or above 86 million barrels per day. Since demand for oil was rising the failure of the market to supply more oil, or liquid fuel interchangeable with oil, resulted in prices rising throughout 2005, 2006, and 2007 making a new high in January 2008 of just more than $100 per barrel.

Overall these high prices have not been good for the world economy. The United States, in particular, is vulnerable to high priced oil. With imports at 10 million barrels per day, at $100 per barrel oil is a 1 billion dollar a day US addiction. And though the US economy is quite large, we are, in large part a debtor nation. We owe foreign countries trillions of dollars both in public and private debt. So what happens when the supply of oil is scarce and the US, essentially, must borrow more money to buy more oil? The value of the dollar goes down. This paradigm creates a double impact with oil going up in value and the dollar going down and US consumers and companies take the hit.

While many have marveled at the stunning resilience of the US economy in the face of high oil prices, ever since mid 2007 there hasn't been much to marvel about. Suddenly vulnerable to rising interest rates on adjustable mortgage home loans and other high risk loans, more and more US consumers slid into default. By fall of 2007 reports came out in the Associated Press that as many as 7 million home owners were in danger of default. While many analysts have claimed the high price of oil and the housing crisis are unrelated, I don't think it's possible to entirely avoid the fact that the housing crisis occurred at a time when high energy prices are constraining consumer budgets more than at any time since the 1970s.

Owners of SUVs, that popular dinosaur drive-all of the nineties, were suddenly paying $60, $75, or even $100 every time they visited the gas pump. In what is, usually, a weekly ritual for most Americans the nearly tripled costs could have added as much as $300 to the monthly gas bill. At $3600 per year and, probably, financed by more debt this may well have been enough to put many in the middle class, already living paycheck to paycheck, over the edge.

But the gas pump isn't the only place where higher prices have an impact. With increased costs for fuel and fertilizer a wide number of essential items have increased in price. Not the least is food. According to the US Department of Agriculture, the average monthly cost of food for a family of four with two young children was $675 in January of 2005. In December 2007 the same family paid, according to the USDA, $943.

With the average American family with two cars and two kids paying more than $500 each month in added food and fuel costs alone, is it any wonder so many are slipping into default? Or put it this way -- when was the last time you got a $6000 dollar a year raise after taxes and didn't keep a dime? No wonder food and fuel have been removed from the inflation index. But you have to ask the serious question -- why? These are costs we can't avoid. For the most part, if you live in America, you need a car to drive to work and I haven't yet met the person who can go without eating.

The added costs, however are broader than just food and fuel. Postage increases every time the price of oil jumps, as do airfares. Pressure increases on any industry that must ship goods or make a product out of things like plastic or nylon, that come from oil, to increase prices. If the industry fails to pass costs on to the consumer, it shuts down and puts workers out of well paying jobs. One way or the other, wage earners take the hit.

Regardless of whether or not these added costs are the root cause of the financial crisis or a further insult, they are clear indications of the impact of rising oil prices. The oil prices themselves point toward constrained supply and Peak Oil.

As mentioned earlier, the production of all liquids interchangeable with oil has hovered around 86 million barrels per day since 2005. Underlying this total liquids figure is a more ominous number. The number measures total production of all crude oil + all condensates. Crude oil is what we think of as real oil -- the stuff that comes from a well. Condensates can be a product of oil or of natural gas but it all goes to making gasoline and other oil products. In total, the crude + condensate number represents what many in the industry think is the crucial figure as all liquids can include more expensive products like oil from tar sands or even ethanol.

So how much crude + condensate has the world been producing lately? According to the EIA, In 2005, crude + condensate production maxed out at 74.3 million barrels per day. Since then, according to EIA figures through October of 2007, crude + condensate production has never again reached such a high number. Many in the Peak Oil camp, including Matthew Simmons and Boone Pickens, state that we may well have seen the peak in world oil production in 2005 and they point to the crude + condensate production level as evidence.

Whether or not the peak in world oil production has already happened or will happen sometime in the near future, we are already seeing its effects on a number of levels both in the US and worldwide. Food, raw materials, money, they all become more difficult to access in a time of constricted energy supply. The wealth of energy oil has been providing to us for the last 150 years is now being taken away. We are at the point in history where we must begin to chart a new energy future with new and different kinds of energy. It will be anything but easy. Perhaps, this is the defining moment of the 21rst century, if not that of modern human history. Can we step away from our dependence on fossil fuels without wrecking our civilization, culture, and planet? Or will we, as many have warned, return to a new dark ages?

It's possible, just possible, that oil industry executives are sounding the alarm. They would like to warn us in plain terms what we're facing but are constrained by the interest of their boards of directors and major stockholders. Perhaps we should listen a little more carefully and think about what it all means for us as individuals, families, and as human beings. A chance for each of us to show our quality and, maybe, just maybe, preserve an ounce of prosperity for our children.