Peak Oil, Part I

Peak oil is a model invented by M. Hubbert in 1956 to predict the peaking of global oil production. It has accurately predicted that US production would peak between 1965 and 1971. Nevertheless, it has so far failed with the other major oil producers.

Peak oil has limited capability because it concerns with existing production only. It takes little account of world reserves which are difficult to estimate. With the melting of northern polar icecaps and the adoption of the new fracking technology, world oil production will probably grow by 8.4 million barrels per day over the next five years according to the International Energy Agency (IEA).

Despite the unknown factors of reserves and new technology which bring some optimism to production, one thing is certain regarding the rising price of oil. First, Saudi Arabia wants high oil prices to maintain its current lavish expenditures. Second, for any oil well, the more you pump, the higher is the cost due to decreasing quality of the oil extracted, and more efforts required to force the oil out. Third, even with a new reserve being discovered, you must build the infrastructure for extraction and transportation, which adds to the cost, not to mention environmental impacts.

Now comes the second part, which is the demand side. Despite optimism shown by major oil companies, some analysts at Citibank predict that world demand will peak at around 92 million barrels per day within the next five years. The reasons are as follows:

The demand for oil in industrialized countries has already peaked a few years ago. This is a consequence of rising efficiency of automobiles in terms of fuel consumption and weight, and more stringent government regulations. The analysts calculate that oil demand will be constrained if the fuel efficiency of cars and trucks improves by an average of 2.5% a year. In comparison, the new US standard announced in 2013 requires all cars and light trucks to achieve 54.5 miles per gallon by 2025, which is equivalent to an average improvement of about 8% per year. Adding to the fuel efficiency is the inroads made by hybrids, electric cars, and cars powered by synthetic fuels. Furthermore, an increasing number of trucks and buses and ships are running on natural gas instead of oil.

The demand for oil is increasingly coming from emerging countries, where China is expected to overtake the US in oil imports this year or next. Despite its growing middle class wanting to go behind the wheels, the Chinese government has imposed other regulations to restrict the number of driving days for private cars. There was also discussion for a policy to leapfrog its transport system to hybrid and electric in order to decrease oil consumption.

In the near future, the alternative for oil will largely come from natural gas, a cheaper and less polluting fossil fuel that can be carried in liquefied or compressed form. The new supply source is the US and Canada where fracking is producing a bonanza. Already, natural gas is replacing dirtier coal and oil in electricity generation, and in heating and cooking, too. Trucks and buses are being converted from diesel to natural gas to save cost and the environment.

All signs point to the fact that the energy of the future is moving away from oil in a gradual process to natural gas and electricity. Dirty fossil fuels like oil and coal may not disappear as fast as we hope, but they are receding on the path to becoming yesterday’s fuels.

September 2013

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