Thursday, April 22, 2010

Peak Oil is Official!

The US Department of Energy has finally admitted that global petroleum production will soon be heading into permanent decline. Glen Sweetnam, a high official of the Energy Information Administration, revealed this new assessment in a little-noted statement on March 30. Until recently, his agency predicted large increases in oil production over the coming 2-3 decades.

The Energy Information Administration (EIA) publishes widely-used data on global oil production, consumption and prices. Though Sweetnam rejected the validity of “peak-oil” theory, his statement was widely seen as an admission that the theory has predicted trends far more accurately than his agency has done. He acknowledged that world production has reached a “plateau” and would not rise significantly higher.

Until recently, the EIA predicted that production would rise from the current level of about 85 million barrels per day to 120 million by 2030. After five years of unchanged global production, as recorded by the EIA’s own data, those predictions are now considered laughable. People inside the agency have confessed that production estimates were not based on any study of new oil discoveries, but simply by projecting increases in demand and assuming supply would keep pace.

Not only did Washington insist on wildly optimistic scenarios, but it put pressure on the International Energy Agency to publish growth-oriented numbers. The IEA also “predicted” that world production would rise as high as 120 million barrels per day. The Guardian newspaper discovered that IEA officials had fabricated the numbers because they were afraid to “anger the Americans.” US and IEA numbers were considered definitive and used by most governments for energy-related policy making.

So the secret is now out. The world’s energy policy was based on a lie.

Demand for oil is now rising rapidly, as economies grow again, but oil production is stuck in a short-lived plateau-peak, to be followed soon by a rapid decline. In fact, private EIA data show that world production may actually fall rapidly, to just about 40 million barrels per day by 2030 - one third the earlier estimate - while world demand at present rates of increase would have risen to 110 million bpd. The difference, as shown in a private EIA’s graph, will depend on “unidentified projects” – that is, wishful thinking. A gap of 70 million bpd will have opened. With demand nearly three times supply, oil will be scarcer than caviar, driving prices to extremely high levels (thousands of dollars per gallon perhaps).

So what is being done by Washington and other governments to address this unprecedented crisis? Time is short and the implications vast. The leaders have not made any announcement or devised emergency measures. President Obama, Prime Minister Brown and the rest have avoided the issue almost entirely. Meantime, growth is up, auto sales are rising, and we are headed for the energy abyss.

Today, Earth Day, it is time to begin thinking very differently. Private EIA graphs show production declines beginning as soon as 2011. The end of the oil era is very, very near.


  1. There isn't any solution - safe from a major culture shift. Not only oil is reaching its peak, but almost any other natural resource. You have to imagine a world without battery (shortage of lithium), without plastics (mostly derived from petroleum), without engine oil (derived from petroleum), without tyres (derived from petroleum), without global trade... even the internet is likely to be impacted.

    Yes, starting to "think very differently", the question is what to think exactly?

  2. Any discussion about oil prices over the next decade must include an attempt to quantify emerging economy demand as an important driver at the margin. Here is a simple thought experiment using Chinese demand to give some idea of the magnitude of the supply issues we face:
    - China moves from 3 bbls/person/year to the South Korean per capita consumption level of 17 bbls/person/year
    - Transition takes 30 years
    - No peak in global production

    In next 10 years we must find 44 million BOPD. If you superimpose peak production on top of this demand profile using the following parameters oil prices would increase approximately 250% in real terms over next 10 years:
    - Oil demand elasticity of -0.3
    - Current production 84 million BOPD, current price US$ 80
    - Peak production 100 million BOPD
    - Post peak decline rate of 3-4%

    If you want to try the model for yourself using your own assumptions it can be found at: