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Originally published October 17, 2014 at 3:00 PM | Page modified October 19, 2014 at 9:21 AM

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‘Peak Oil’ peaked and then some, so what’s next?

Oil is still costly, a head wind to economic growth.


Special to The Seattle Times

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The first calls of peak oil were in the 80s - 1880s Someday someone will guess right. MORE
Swallow more corporate kool-aid, Jon. The price of oil has NOTHING to do with supply or demand or a "worldwide... MORE
Come on, Jon, you can't hide your (real) skills behind a poorly researched and reasoned column like this. For example,... MORE

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So how’s peak oil working out?

Crude prices have fallen about 20 percent since June. A gallon of gasoline is on average 20 cents cheaper than it was a month ago. The world is facing a glut of petroleum and, for the first time in 40 years, America is exporting oil. Obviously this is not the scenario of limits sketched out by some geologists, environmentalists and industry observers a few years ago.

At the risk of oversimplifying, peak oil, which originated with petroleum geologist M. King Hubbert in the 1950s, generally stated that the planet would soon use up half of its available oil. The easy and inexpensive to reach and refine half. The theory was borne out when the continental U.S. hit peak around 1970.

I wrote about peak oil as one of many disruptions headed our way.

Nor was peak oil a tin-foil-hat coven on the margins. A famous Chevron advertisement in the mid-2000s encapsulated the theory well: “It took us 125 years to use the first trillion barrels of oil. We’ll use the next trillion in 30.” The sober, establishment International Energy Agency (IEA) was concerned about peak in its 2010 annual report.

But, as Yogi Berra said, “It’s tough to make predictions, especially about the future.”

Or as the IEA put it in its most recent World Energy Outlook, “Many of the long-held tenets of the energy sector are being rewritten.”

One profound change has been the effectiveness of methods to extract unconventional sources, especially so-called tight oil using horizontal drilling and hydraulic fracturing.

Fracking opened oil fields in the Bakken formation of North Dakota and other places outside the traditional oil patch, and extended the life of some existing fields.

As a result, American crude production has increased after an almost unabated decline of more than 40 years. The U.S. Energy Information Administration estimates that the country will produce 8.5 million barrels per day this year.

Other unconventional sources of oil, as well as rising natural-gas output, have changed the energy equation, too. Alberta’s tar sands represent a good example. Earlier this month, Kuwait’s state-owned oil company spent $1.5 billion for a stake in the Duvernay shale basin.

Outside of the oil fields, energy efficiency and more fuel-efficient cars are also helping reduce demand in America and Western Europe.

OPEC members are reported to be quarreling about a response to these cartel-cracking events. Saudi Arabia is willing to let prices fall to hold its market share. But cheaper oil is devastating for other members, as well as production-reliant nonmembers such as Russia.

What’s not to like?

Unfortunately, quite a bit.

Falling oil prices don’t merely reflect a new fracking bounty. They are a result of a world economic slowdown, including a sharp contraction in parts of Europe. Even the United States, which is doing relatively better, is performing below its potential. These concerns are partly driving the turmoil in the stock market.

Also, the peak theorists weren’t completely off. Much of the world probably did hit a conventional oil peak ahead of the Great Recession and developing countries are using ever more oil. So prices remained relatively high despite the deep downturn. This provided the incentive for the race to unlock unconventional supplies of oil.

Fracking requires heavy capital investment and depends on much debt financing, including junk bonds. Tar sands are even more costly. The staying power of fracking is unknown. Can it keep up with the wholesale depletion of existing oil fields? Americans alone consume 19 million barrels per day.

Fracked wells play out faster than conventional ones, requiring much more drilling just to keep production from falling. It is unclear how long these new plays will be economically viable if prices keep falling.

Fossil fuels benefit from huge subsidies — $544 billion worldwide in 2012 vs. $101 billion for renewables. The armies and fleets America deploys to keep oil flowing are another stealth subsidy.

Adjusted for inflation, the cost of oil and gasoline remains high by historical standards. For example, last week’s oil between $81 and $83 a barrel was lower than the record in 2011 but much most costly than prices that prevailed from the mid-1980s until the eve of the Great Recession.

Real gasoline prices are on average about 15 cents less than during the recession-causing oil embargo of the last 1970s.

This cuts two ways. On the one hand, it shows continued price support for fracking and the benefits of energy efficiency. On the other, oil is still costly, a head wind to economic growth. We’re a long way from the $20 a barrel in 1970 that sustained the happy motoring era. With most Americans still struggling financially, no wonder demand is weak.

Also, although renewable energy shows promise and its costs are falling, it can require more fossil-fuel inputs than the energy it produces. It also can’t easily be retrofitted onto much of the existing economy that depends on oil, especially transportation.

So the date of peak oil has at least been pushed back. But we shouldn’t wallow in technological hubris. Making the transition away from oil could take decades and the current abundance will tempt us to nap.

Finally, every mention of oil’s staying power must be tempered by climate change. The planet is quickly closing in on a nightmarish level of greenhouse gases pumped into the atmosphere.

Although those costs aren’t yet a part of our conventional energy calculus, they should be. Even the Pentagon considers climate change an immediate risk to national security.

We can’t frack our way out of this danger.

You may reach Jon Talton at jtalton@seattletimes.com



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About Jon Talton

Jon Talton comments on economic trends and turning points, putting them into context with people, place and the environment in the Pacific Northwest
jtalton@seattletimes.com

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