It is a peculiar combination of technological, economic and geopolitical factors that has led to the present crash in oil prices, lulling many observers into dismissing peak oil. Through it all, the fact remains that the production of ‘conventional oil’, drawn mostly from established oil wells, has not gone up since its peak in 2008.
Peak oil is the simplest label for the problem of energy depletion, or more specifically, the peak in global oil production. Oil is a finite, non-renewable resource, one that has powered phenomenal economic and population growth over the last century and a half. The rate of oil ‘production’, meaning extraction and refining (currently about 78 million barrels/day or mbd), had grown steadily almost every year of the last century. Once we have used up about half of the original reserves, oil production becomes ever more likely to stop growing and begin a terminal decline, hence ‘peak’. The peak in oil production does not signify ‘running out of oil’, but it does mean the end of cheap oil, as we switch from a ‘buyers market’ to a ‘sellers market’. For economies leveraged on ever increasing quantities of cheap oil, the consequences may be dire. Without significant political and cultural reform, severe economic and social consequences seem inevitable. (1)
Data analysis shows oil production peaked in 2008, leading prices to shoot up to as much as 147 dollars per barrel, which, according to many peak oil analysts, pushed the world economy to a recession from which it has never fully recovered. Some consider it the longest recession ever, and have even concluded that the world can never really recover from it since depletion of a non-renewable resource like oil is irreversible. Most other non-renewable resources are also expected to peak before 2030. (Clugston). (2) So, it appears we have a window of about 15 years to have an alternative economic and social system to be put in place.
‘But why is oil price falling?’
However, something happened in 2014 that changed things. The price of oil, which hovered around $100 from 2008 onwards, fell that year, dipping below 30 dollars at one point. Now it is above 40 dollars. This led many people to question the validity of peak oil. What actually happened?
Enter ‘unconventional oil’, i.e., oil production from new sources (e.g. tar sands) or which used new technologies (e.g. fracking) that were too expensive to pursue when oil prices were low. The oil industry knew about these for some time, but had to wait for oil prices to rise to above $100 before they could become economically viable. Together, these new sources and technologies, deployed primarily in the U.S. and Canada, added around 5 mbd to the world’s oil output.
The oil glut
The added supply created by new technologies led to a glut in oil markets. The bulk of the increased output came from the U.S., exerting a downward pressure on global prices. At the same time renewable energy sources became competitive and the demand for oil fell. Finally the continued recession also decreased the demand, leading to a glut of oil in the world, and a resultant sharp fall in prices. Normally, in such a situation, leading oil producing countries would cut production so that the reduced supply matches the lower demand and pushes prices back up. However, this time it was different. OPEC, the world’s leading cartel of conventional oil producers, led by Saudi Arabia, whose costs are low, (for Saudi, it is said to be as low as $10!), decided they could not afford to lose their market share, and refused to cut production, leading to a supply glut which pulled prices further down.
Low prices also have the advantage of weakening the economies of rival producers like Iran and Russia (who are also Saudi’s geopolitical rivals), and wiping out newer competitors like the ‘unconventional oil’ producers in U.S. and Canada. While this stubborn strategy has weakened competition and helped it retain clout in the market, it has come at a cost to Saudi, which is drawing from its large foreign exchange reserve to keep its economy going.
It is this peculiar combination of technological, economic and geopolitical factors that has led to the present crash in oil prices, lulling many observers into dismissing peak oil. Through it all, the fact remains that the production of ‘conventional oil’, drawn mostly from established oil wells (the kind that countries like Saudi depends on), has not gone up since 2008. Non conventional oil, in comparison, is far from abundant, which means the second (and the last?) phase of peak oil may be due soon.
Crunching the numbers
Here’s the core of the argument as to why peak oil is about to make a comeback: World oil production as a whole has been on a plateau, in a range of 74-78 mbd since 2005. The non-U.S. oil production too has moved in a narrow band between 68-70 mbd (million barrels per day) during that period. Production of conventional oil peaked at 74.74 mbd some time in Sept 2008 (3), when the financial meltdown occurred and the world moved into a recession, recovery from which has not happened till today.
Soon after, U.S. production moved from 5.2 in 2005 to 9.61 mbd on June 5, 2015 (contributed mainly by fracking from 2011). However, the price at which fracking becomes economically viable for producers is in the range of $60 to $70, whereas oil prices today stand at around $45, thanks to OPEC’s refusal to cut production. At this price the U.S. fracking companies are forced to shut down, just as OPEC wants them to. Some 59 oil and gas companies in the U.S. have filed for bankruptcy and several others are in the bankruptcy pipeline. (4) At the same time, fracking output is falling and is today it is around 8.825 (April 29, 2016). (7) The U.S. monthly oil rig count dropped 41 rigs from March to April 2016 and now stands at 437. The Count stood at 1,925 in November 2014 and is down 1,488 rigs since that point. (5)
Earlier this year, Deloitte predicted that over 35 percent of independent oil companies worldwide are likely to declare bankruptcy, potentially followed by a further 30 percent next year – a total of 65 percent of oil firms around the world. (6) And there are no new sources are on the horizon.
Oil Reserves are inflated
Not only new resources are not available, there is a doubt about the amount of existing sources. It has been known that the oil producing countries and the oil industry inflates their oil reserves.
‘An extensive new scientific analysis published in Wiley Interdisciplinary Reviews: Energy & Environment says that proved conventional oil reserves as detailed in industry sources are likely “overstated” by half. Wiley Interdisciplinary Reviews (WIRES) is a series of high-quality peer-reviewed publications which runs authoritative reviews of the literature across relevant academic disciplines.
According to standard sources like the Oil & Gas Journal, BP’s Annual Statistical Review of World Energy, and the US Energy Information Administration, the world contains 1.7 trillion barrels of proved conventional reserves.
However, according to the new study by Professor Michael Jefferson of the ESCP Europe Business School, a former chief economist at oil major Royal Dutch/Shell Group, this official figure which has helped justify massive investments in new exploration and development, is almost double the real size of world reserves.
According to Professor Michael Jefferson, who spent nearly 20 years at Shell in various senior roles from head of planning in Europe to director of oil supply and trading, “the five major Middle East oil exporters altered the basis of their definition of ‘proved’ conventional oil reserves from a 90 percent probability down to a 50 percent probability from 1984. The result has been an apparent (but not real) increase in their ‘proved’ conventional oil reserves of some 435 billion barrels.”
Global reserves have been further inflated, he wrote in his study, by adding reserve figures from Venezuelan heavy oil and Canadian tar sands – despite the fact that they are “more difficult and costly to extract” and generally of “poorer quality” than conventional oil. This has brought up global reserve estimates by a further 440 billion barrels.
Jefferson’s conclusion is stark: “Put bluntly, the standard claim that the world has proved conventional oil reserves of nearly 1.7 trillion barrels is overstated by about 875 billion barrels. Thus, despite the fall in crude oil prices from a new peak in June, 2014, after that of July, 2008, the ‘peak oil’ issue remains with us.”(6)
The crisis today
The crisis today is not just peaking of oil but the continuing recession it engendered since 2008. Since 2014, with oil prices and most non-renewable commodity prices falling (Iron leading with a 50% fall), the recession has in fact been accelerated. At present, it is GDP growth that is falling, not oil. Oil production will fall, not just because the production costs keep on increasing, but also due to the decline in demand.
How will the recession play out? Will there be a recovery? Many who read this would point out that life is normal, cars are running and there seems to be an increase in luxury goods. However others would maintain that this luxury is at the cost of the poor and that inequality has been increasing rapidly since 2008. All the recovery packages of the government has mainly benefited the rich. Some observers have shown the long drawn recession has accelerated since 2014. Inequality has continuously increased since 2008, while and job losses have grown since 2014.
So while there is apparent calm, there is a slowly increasing unrest. The stories of job losses, suicides, petty crimes do not make the headlines. Still less the stories of apathy and depression. A slow crumbling of society is happening around us. This can explode, unless some other alternatives emerge. Let us explore this a little.
Is there a hope? What can people do?
It is not possible to answer this question in general for the whole world. I feel different parts of the world will have different responses depending on their history.
For a starting point, let us take Cuba and North Korea. When the Soviet Union, their biggest supplier of energy, collapsed in 1990, both these countries were forced to face the same problems the world is collectively facing today. But whereas Cuba had a ‘Special Period’ in which it achieved an inspiring recovery within five years by transforming itself into a more sustainable economy reliant on its own resources, North Korea grew dependent on China and turned into a ‘rogue state’ hell bent on nuclear weapons.
What were the reasons for Cuba’s success? The most significant were: social awareness of exploitation and oppression; struggle for equity; tradition of democracy in society and in political parties; high level of literacy and education; awareness of environmental degradation, global warming, peak oil and its consequences; understanding the current global economic crisis and initiatives in exploring alternatives to it. (8)
For rest of the world: wherever regions share or identify with some of Cuba’s features, there is a greater chance of implementing these lessons. The erstwhile socialist block, which shares Cuba’s features, may respond as fast as Cuba did when faced with the crisis. More so because Cuba’s experience is better known in these countries.
In present day Russia, a 10-book series called ‘The Ringing Cedar Books’ by Vladimir Megre have sold nearly 12 million copies. They advocate a return to nature and have inspired the creation of some 300 eco-villages in Russia alone. (9)
Starting from Ireland in 2005, the Transition Town movement has caught the imagination of the citizens of capitalist countries and some 1000 Transition Towns have come up. (10)
We also hear of reports of towns and villages in various parts of the world who have done advanced political and social work for a greener future. Similar success stories exist in a few Indian villages too. (11)
In India, the West coast, particularly Kerala, coastal Karnataka and Goa have geographical and socio-economic features similar to Cuba, and may be be able to face the coming crisis better. West Bengal, in spite of CPI (M)’s unfortunate present policies, may eventually emerge to play a significant role. But no one can predict the future with a decent degree of accuracy – it always has a store of surprises.
I will be accused of painting an excessively optimistic picture by some. I stand guilty. But why not, aren’t there enough gloom and doom wallahs already?
1. Peak Oil Primer, By former Energy Bulletin editor Adam Grubb.
2. Scarcity, Humanity’s Final Chapter? Christopher O. Clugston, 2012
4. Saudi Arabia is winning the oil war, Deccan Chronicle editorial, May 6, 2016
5. Global Rig Count Continues To Fall, Ron Patterson, May 9, 2016, http://oilprice.com/Energy/Energy-General/Global-Rig-Count-Continues-To-Fall.html
6. Where did all the oil go? The peak is back by Nafeez Ahmed, Middle East Eye http://www.peakoilindia.org/2016/04/30/where-did-all-the-oil-go-the-peak-is-back/#more-2551
8. Cuba Without Isms: Road to a fossil fuel free society, T. Vijayendra, 2012
9. Ringing Cedars of Russia – Official Web-Site
11. The Miracle Water Village;
May 12, 2016
T. Vijayendra may be contacted at [email protected]