The Energy Watch Group Weighs in on Peak Oil

The Energy Watch Group, also known as the Energy Working Group, is a German organization of energy professionals who from time to time issue documents on matters of major long term concern to the industry. Their previous writings have dealt with uranium and coal reserves and have been discussed in earlier articles in this publication. Their most recent study, released on October 22, considers the oft discussed topic of peak oil and sheds what I think is new light upon it.

Cut to the Chase

The report, which has already received extensive coverage in Europe in major newspapers and none at all in the U.S., is a bombshell. Using figures in the public domain from standard sources the Energy Watch Group demonstrates that in all probability the peak of oil production has already arrived, occurring in 2006. This, interestingly, is also the opinion of Tadeusz Patzek, a professor of civil and environmental engineering at U.C. Berkeley, whose well publicized writings on biofuels have ignited storms of controversy in the past.

The Energy Watch Group figures show production by major independent oil companies, who must report accurately on these activities to their stockholders, as essentially flat for several years. (The production of national oil companies such as Aramco in Saudi Arabia is subject to no such requirements, and thus figures from these firms are more suspect.) The fact that these private companies do not seem able to raise production at a time of record high prices when they could surely profit by doing so is ominous. What it suggests is that peak is indeed at hand and that it has been temporarily flattened into a plateau by the widespread employment of extremely aggressive and expensive enhanced oil recovery techniques such as CO2 and nitrogen injection.

In the past many expert peak oil pessimists such as Colin Campbell and Daniel Deffeyes have suggested that peaking could occur around the end of this decade, but no one has argued persuasively that it is now at hand. That this is now the judgment of two authorities is, to say the least, disturbing.

What Next?

You can bet your life that none of the U.S. presidential candidates will touch this topic even if oil reaches $100 per barrel prior to the election, which it very well might. They won't because none of them has any very plausible solution to the problem and certainly nothing that can be encapsulated in a soundbite. Better to discuss the threats from Islamo-fascism or gay marriage or undocumented Mexicans.

But what about next year after the election is over and presumably an individual other than George W. Bush occupies the White House? What will that individual tell the electorate?

By 2009 it should be obvious whether a production peak has been reached. If production continues to stagnate or declines somewhat as it may this year, then it will be reasonable to assume that the dreaded event has in fact occurred.

And then? If the bell shaped curve of theory obtains, production will drop relentlessly year after year, but my guess is that oil producers will resort to ever more pervasive applications of EOR (enhanced oil recovery) techniques in an effort to hold the line. The question then becomes how long can they hold the line and what happens afterward?

One can certainly extend a plateau for a few years but probably not for a decade. In the past when EOR has been applied to a field that has then manifested an extended plateau of peak production, that field has then declined by about fifteen percent per annum once production starts to droop. It's kind of like taking methamphetamines to get through a crash assignment. You can work longer hours but when you eventually crash you'll be completely prostrated.

Now there are those conservative economists who say not to worry, manufacturing will become ever more efficient, thus staving off the effects of rising petroleum prices, but is that really a credible position? Most manufacturing equipment represents a major capital cost and its efficiency is fairly fixed for the duration of its operating life which is necessarily lengthy. There's no way it achieves steady efficiency gains sufficient to counterbalance increases in energy prices. One can of course argue that computerized back office functions will contribute efficiency gains of several percent every year, but who really believes that? That's just so much IT department bullshit.

So what about all of the alternatives we've been covering this past year? It should be boom times for them, shouldn't it? It should be and it almost certainly will be. The problem is that alternative fuel capacity is apt to come up at a pace well behind that of conventional fuel decline. It won't save the economy.

But let's go back for a moment to considering the plight of our next President confronting this unpalatable situation. He or she has gotten elected by beating the ideological drum and scaring the bejesus out of us by raising the specters of Mexicans, Muslims, and gay couples, and now that new President elect has to deal with the decline in petroleum production with all that implies.

What does Mr. or Ms. President do then?

The expedient course of action is to try to patch things together for four more years. Empty the strategic reserve, abolish the gas tax, allow income tax deductions for gasoline expenditures, and send enough people into Iraq to stop the sabotage and then drain the place dry while jawboning the oil companies to sell Iraqi oil to Americans at below the world price. There's all kinds of crazy shit the next President could do to hold the line for four more years to get that second term and then to hell with it after that.

Of course it leaves a much bigger mess for whoever succeeds our next President, but who thinks that far ahead? Nobody does except to plan the Presidential library.