Peak Oil

The public hates negativity and pessimism. When Geophysicist M. King Hubbard predicted in 1956 that oil production in the U.S. would peak in the early 1970’s, both the scientific community and the public made him a pariah. However, when production peaked in 1970 as he predicted, many scientists accepted him as a prophet (most of the public remained unaware of his predictions). Many people don’t remember that up until the early 1970’s the U.S. was the Saudi Arabia of the world. However, since the early 1970’s the U.S. has increasingly depended on foreign countries like Saudi Arabia to feed its voracious appetite for oil. We now rely on unstable third world countries to fuel our cars, and we finance despots and wars to maintain our precious oil supply. Even George W. Bush acknowledged in 2008 that the U.S. is addicted to oil. The effects on foreign countries of the U.S. addiction to oil are very similar to the effects of the U.S. addiction to illegal drugs: the flow of money from the wealthy U.S. leads to corruption, crime, and political instability in third world countries. Our addiction has caused scores of countries and millions of people to suffer. Moreover, our dependence on foreign countries for oil has obviously decreased our national security.

Now that the U.S. depends on foreign countries for 2/3 of its oil, we must be concerned not only about the reliability of our existing suppliers but also the natural limits to oil production. When will global oil production peak and then begin a steady decline of decreasing supply and increasing demand and cost? In his book “Hubbert’s Peak: The Impending World Oil Shortage”, a Geologist from Yale University named Kenneth Deffeyes [1] argued that the peak would be somewhere close to the year 2005. I used data made available by BP Oil on their website to plot world oil production through 2007:

 

The data indicate that oil production peaked in 2006 (we will need to collect data for a few more years to confirm this). The increase in gasoline prices and the gas shortages of 2008 certainly made U.S. citizens acutely aware of their addiction to  gasoline:

Good evidence that the peak has already arrived is given by Andrew Nikiforuk in his book “Tar Sands: Dirty Oil and the Future of a Continent”[2]. He notes that the biggest supplier of oil to the U.S. is no longer Saudi Arabia, but our next-door neighbor Canada. U.S. citizens are happy because there is less of a risk that money we spend on oil will end up in the hands of terrorists who target us. However, Canadian oil primarily comes from the Athabasca tar sands in Alberta, and mining of this “dirty” oil creates huge environmental problems, including much higher CO2 emissions per unit energy because large amounts of natural gas are used to refine this dirty oil. Production of tar sand oil emits roughly 100 to 650 pounds of CO2 per barrel, compared with North Sea oil that emits only ~20 pounds per barrel. Nikiforuk calls this “a switch from bloody light oil to dirty heavy oil”, and concludes that it is not in the best interests of the U.S. or Canada.

Of course, the concept of peak oil is neo-Malthusian. There is a finite supply of oil in the ground, so it cannot last indefinitely. I don’t think that Cornucopianists dispute this; rather, they believe that through our ingenuity we will find other sources of energy. However, it bears reminding that any non-renewable resource can ultimately become depleted, so taking the long-term view, it makes sense to increase our reliance on renewable sources of energy. Non-renewable resources are finite and subject to Malthusian limits. Renewable resources are unlimited.

Let me give an example of how knowledge can give you an economic advantage. I have always favored small cars, initially because they produce less pollution, but later because I knew the price of gas would increase due to Malthusian limits. Having small, fuel-efficient cars gave me some decided advantages. For example, in the wake of hurricane Rita in 2008 there were gas shortages in several major cities, including my home in Nashville. My family’s fuel-efficient cars were able to get us through the weeklong shortage without a refill. Also in 2008, the price of gas increased to $4 per gallon. Suddenly everyone wanted to trade in his or her large SUV’s for smaller, more economical cars. The value of large vehicles plummeted, and it became so bad that car dealers stopped buying large used SUV’s, and wouldn’t even take them for trade-ins because they were piling up in the dealer’s lots. Domestic auto manufacturers, who had promoted large vehicles for years, were caught off-guard. The market had changed suddenly, and most of the vehicle models they offered were no longer in demand. Sales and profits plummeted, and the auto manufacturers started hemorrhaging money. In this case, the market punished both individuals and large corporations for their short-sightedness. Individuals not only were stuck filling up their gas-guzzling trucks and SUV’s with $4 per gallon gas, but the value of their vehicles plummeted and they had great difficulty selling them. Although the price of gas dropped precipitously in late 2008 due to the economic recession, I can state with confidence that it will soon go back up to $4 per gallon and higher. Take my word for it: don’t buy a large vehicle. It is a bad investment. Purchase a small, economical car, preferably a hybrid car, because it will not only be a better investment, but will also be better for the environment.

1. Deffeyes, K.S., Hubbert's Peak: The Impending World Oil Shortage. 2001, Princeton, New Jersey: Princeton University Press. 208.

2. Nikiforuk, A., Tar Sands: Dirty Oil and the Future of a Continent. 2008, Vancouver, BC, Canada: Greystone Books.