Oil Alternatives

Oil Alternatives

Location: New York
Author: Ken Silverstein
Date: Thursday, August 27, 2009

If folks thought this recession has been a doozy, they may want to consider the one that could hit in a decade as the demand for oil permanently exceeds production.

The International Energy Agency says in a report that the 800 biggest fields around the world that comprise three-quarters of all reserves have already hit peak. Moreover, the pace of the decline in production is about twice that of what it was in 2007. That means that the so-called peak oil theory whereby global oil demand meets declining production is 10 years away, all according to the agency's chief economist Fatih Birol.

In an interview with the British newspaper The Independent, he says that the production at existing sites is down 6.7 percent a year. That's compared to 3.7 percent in 2007. If the bleeding were to stop, he says that the world would need the equivalent of four more Saudi Arabias. He adds that a reasonable mind could conclude that oil will surpass $200 barrel by 2020 and consumers will pay $5 a gallon.

"One day we will run out of oil, it is not today or tomorrow, but one day we will run out of oil and we have to leave oil before oil leaves us, and we have to prepare ourselves for that day," Dr. Birol was quoted as saying. "The earlier we start, the better, because all of our economic and social system is based on oil, so to change from that will take a lot of time and a lot of money and we should take this issue very seriously."

Critics counter that peak oil is decades away. In the intervening years, technologies will improve while oil-based substitutes will be developed. Canada's tar sands, for example, are plentiful and thought by some to be a viable alternative to Middle Eastern oil.

But environmentalists are warning that the reliance on oil sands is unsound. The extraction of those resources consumes a lot of water and energy and only compounds the issue of global warming. In fact, the International Energy Agency's 2008 World Energy Outlook says that the world is trending toward higher temperatures and as such advocates green energy solutions and conservation -- not more oil production.

While the Obama administration does not have an official position on the peak oil theory, it is nonetheless inclined to propose the positions offered by the energy agency. Toward that end, it is pushing higher fuel efficiency standards and the development of green energy alternatives, chiefly those that would be geared toward the transport sector.

"It will be especially important because the global economy will still be very fragile, very vulnerable," Birol told The Independent. "Many people think there will be a recovery in a few years' time but it will be a slow recovery and a fragile recovery and we will have the risk that the recovery will be strangled with higher oil prices."

Global Lifeblood

Oil is clearly the lifeblood of international commerce. As supplies dwindle and as demand rises, prices go up. Countries will therefore be competing for a shorter supply of oil. For the United States that's a big problem: It has 2 percent of the world's reserves, consumes 25 percent of its oil and imports two-thirds of the oil it uses.

The U.S. Department of Energy predicts the peak will occur in 2037. But in a report on the subject, it says that nearly all of the largest oil fields have been discovered and that production is past its prime in some areas. As such, the cost to find new discoveries is getting expensive. But the "rollover" at the peak to lower levels of production is likely to be gradual and not a sharp point capable of being broadcast at the time.

Robert Esser, director of global oil and gas resources for Boston-based Cambridge Energy Research Associates, disagrees with the peak oil theorists. He says that the world is not running out of oil anytime soon, if ever. His group envisions an "undulating plateau" in two to four decades. The current model to determine "peak oil" is flawed, he adds, and fails to incorporate technological, economic and regulatory evolutions.

He especially disputes the thinking that says global production will top off in the coming years, noting that his firm's analysis shows a substantial build-up of liquid capacity in the same time frame. An increasing share of oil supplies will come from non-traditional sources that include oil sands and from ultra-deep water. Indeed, he projects that world oil production capacity has the potential to rise from 84 million barrels per day now to as much as 108 million barrels by 2015.

"Peak Oil theory is garbage as far as we're concerned," says Esser, in an interview with Business Week online.

Times and technologies will change. But the fact remains that the unmitigated demand for oil can't continue forever and particularly with declining current oil supplies. That's why a host of reputable sources say that the peak oil theory is real, although their estimates vary as to when it will happen. Some say that it is too late. The International Energy Agency says it will occur in 10 years. Others say it will take decades.

The answer therefore is not to ignore the problem; rather, it is to confront it head on by forming a collaborative effort between the public and private sectors and allocating the financial resources to expand the portfolio of green fuel options. It will be a complex and expensive solution. But that course will ultimately seem penny wise when compared to the consequences from an oil-starved world.