Energy supply : From Expansion to Contraction
Many people ask: Are we running out of oil? The simple answer is; Yes, we started doing that when we consumed the first gallon. But running out is not the main point when what matters much more is the onset of decline which now dawns as we enter the Second Half of the Age of Oil. Britain’s energy policy begins to attract much comment, mainly in connection with the threats of climate change, but the underlying issue of oil supply may deserve more urgent attention.
Some 400 million people lived on the Planet at the time of Christ, and the number no more than doubled over the next seventeen centuries as people lived sustainable lives, relying on muscle-power, delivered by themselves, their slaves or oxen, and supplemented by minor amounts from wind, water and firewood.
Then came coal, followed by oil and gas only 150 years ago. These resources provided a massive flood of cheap energy, making possible the rapid expansion of industry, transport, trade and agriculture, which allowed the population to expand ten-fold in parallel. In addition, this extraordinary chapter in history saw the rapid expansion of financial capital as banks lent more than they had on deposit, confident that Tomorrow’s Expansion was collateral for To-day’s Debt, without necessarily recognising that it was the abundant supply of energy that made the Expansion possible. In parallel with the expansion came the subject of Economics with its underlying faith in market forces to ensure that supply must match demand.
So how far through the Oil Age are we? Oil is clearly a finite resource, formed in the geological past, which means that the more we use, the less is left. This introduces the issue of Rate. As every beer drinker knows : the quicker he drains the glass, the sooner it is empty. The same principle applies to oil, carrying the curious irony that the great advances in technology that the industry has achieved have served mainly to accelerate depletion without adding significantly to the resource itself.
The fundamentals of the situation sound so simple, and yet they are clouded by confusion and misinformation. The first issue is to decide what to measure : there are several different types of oil, ranging from that delivered by a free-flowing well in the Middle East to digging up a sticky tar in Canada. It is useful therefore to identify Regular Conventional Oil, defined to exclude the heavy oils, the deposits in deepwater and polar regions, and the liquids derived from gas. It has supplied most to-date and will dominate all supply far into the future.
The second step is to determine both how much has been produced so far, and how much remains in known fields, using the past discovery trend to estimate how much is left to find. Estimating the size of an oilfield, early in its life, poses no particular scientific challenge, although, like all estimates, is subject to a degree of uncertainty. The reporting of its size is another matter deserving special attention.
The Oil Industry, since its early days, has been subject to strict Stock Exchange rules, which were designed to prevent fraudulent exaggeration while smiling on under-reporting as laudable commercial prudence. Accordingly, it made sense for the international companies to report the minimum needed to provide a satisfactory financial result, and then revise their reserves upwards over time to deliver a comforting, but in fact misleading, image to the investor.
The OPEC countries for their part faced difficulties on how to share the burden of cutting production to support price. They decided to base their individual production quotas on what they reported as Reserves. In the mid 1980s, low oil prices were putting them under pressure, prompting Kuwait to break ranks in 1985 when it increased its reported reserves from 64 Gb (billion barrels)― a number consistent with the long prior trend ― to 90 Gb, although nothing particular had changed in the oilfields. Two years later, it announced a possibly valid small increase of 2 Gb. But it exhausted the patience of the other OPEC countries, which were forced to announce massive increases to protect their quotas. Abu Dhabi announced 92 Gb (up from 31 Gb) to exactly match Kuwait; Iran went one better at 93 Gb (up from 49 Gb), while Iraq capped both with a rounded 100 Gb (up from 47 Gb). Venezuela increased from 25 to 56 Gb by the inclusion of heavy oils not previously counted, and Saudi Arabia came in with a massive increase from 170 to 258 Gb in 1990, evidently not being able to match Kuwait because it was already reporting more. It is possible that Kuwait had started reporting the total discovered, not the amounts remaining. Its oil minister, Sheik Ali Jarrah Al-Sabbah, has however recently confessed to reserves of only 48 Gb, far below the reported number, no doubt having good political reasons for doing so in the new situation that unfolds as the Middle East countries no longer have spare capacity to control.
Piecing it all together with the skills of a detective suggests that about one trillion barrels of Regular Conventional Oil have been produced, and that about 900 Gb remain, including about 130 Gb yet-to-find, based on the long downward trend of discovery, which peaked in the 1960s.
It is evident from the above numbers, and making provision for the entry of Non-Conventional oils, which tend to be costly and slow to produce, that we face the dawn of the Second Half of the Age of Oil. It will be characterised by the decline of production and all that depends on it.
This threatens to be a discontinuity of historic proportions. It is often said that the Stone Age did not end for want of stones, as we went on to bronze, iron and steel, but the Oil Age will end without sight of a better substitute. It follows that we face a new age of Contraction, contrasting with the Expansion of the past, which in turn implies that debt is losing its collateral. Oil prices have soared in recent years but the price primarily represents profiteering from shortage by the Middle East countries as the actual production costs have not changed materially. The resulting flood of petrodollars threatens to be inflationary undermining an already vulnerable financial system.
Governments face political difficulties in admitting to this fundamental discontinuity, although the evidence has been building for many years. The peak of oil discovery in Britain, for example, was in the 1970s, meaning that the looming corresponding peak of production has long been evident for those with eyes to see.
There are many steps that could be taken to provide for a managed contraction. Turning to gas is no solution, as it is subject to the same constraints. Indeed, the terminal decline of gas tends to be steeper than is the case for oil, simply because it is a gas not a liquid. The full spectrum of renewable energies from sun to tide can be tapped, and there remains the nuclear option, sensitive as it is. But, in the longer term, it is evident that consumption, and especially waste, will have to be radically reduced. Above all, new economic and financial principles will have to be developed to intelligently manage the contraction, which contrasts with the expansion of the past. In all probability, this will involve a return to regional living and the adoption of the 100 mile diet as soaring transport costs force people to rely on local produce.
This is not necessarily a doomsday scenario because a new benign age may dawn for the survivors. But in any event, the transition threatens to be a time of great tension as countries vie with each other to control the remaining supplies, much lying in Russia and the Middle East.