It's the End of the Oil As We Know It

Excerpt from the Post Carbon Institute, 24 November 2010

Once a year, the International Energy Agency (IEA) releases its World Energy Outlook (WEO), and it's our tradition here at ChrisMartenson.com to review it. A lot of articles have already been written on the WEO 2010 report, and I don't wish to tread an already well-worn path, but the subject is just too important to leave relegate to a single week of attention.

Because some people will only read the first two paragraphs, let me get a couple of conclusions out right up front. You need to pay close attention to Peak Oil, and you need to begin adjusting, because it has already happened. The first conclusion is mine; the second belongs to the IEA.

Okay, it's not quite as simple as that; there are a few complexities involved that require us to dig a bit deeper and to be sure our terms and definitions are clear so that we are talking about the same things.

But if we can simply distinguish between two types of "oil" (you'll see why that term is in quotes in a second), the story becomes much easier to follow.

• "Conventional oil" is the cheap and easy stuff. A well is drilled, pipe is inserted and oil comes up out of the ground that can be shipped directly to a refinery. Whether the oil is "sour" or "sweet" doesn't matter; it's still conventional oil.

• "Unconventional oil" refers to things like tar sands, ultra-deep-water oil, coal-to-liquids, oil shale, and natural gas liquids. In other words, oil that is much more difficult and expensive to produce.

The IEA has been producing annual reviews of the world energy situation for a long time and has not mentioned the term "Peak Oil" (as far as I know) until this year's report...

Colin Campbell, one of the earliest analysts of peak oil who has decades of oil field experience, is on record as saying that the "fields yet to be developed" category, originally introduced to the world as unidentified Unconventional in 1998, is a "coded message for shortage" and was, off the record, confirmed as such by the IEA. That coded message is getting easier and clearer to receive by the day...

This means that over the next 25 years, the global economy will have to make do with less than half the rate of growth in oil that it enjoyed over the prior 25 years. How will the economy grow with less oil available? What will happen to the valuations of financial assets that explicitly assume that prior rates of growth stretch endlessly into the future?

To cut to the chase, the admission by the IEA that we will not be achieving past levels of energy growth should be the most gigantic red flag in history, at least to those who might care that their money or other paper-based forms of wealth be worth something in the future. What if that future growth does not emerge? What happens when the collateral for a loan goes sour? The IEA report indicates an enormous set of risks for an over-leveraged world reliant on constant growth.

The bottom lines are these:

• The IEA now admits that conventional crude oil peaked in 2006. Permanently. Any gains from here are due to contributions from unconventional oil and natural gas-to-liquids.

• Under no scenario envisioned will future growth in fossil fuel supplies be equal prior rates of growth.

• Energy from here on out is going to be (much) more expensive.

I cannot state this strongly enough: The WEO 2010 report is an official admission that Peak Oil is not only real, but it's already here...

...the IEA has modeled the OECD as actually decreasing its consumption of coal and oil by significant amounts (that's what a negative 'incremental demand' requires: a decrease in current consumption). The difference is made up from a mix of renewables, biomass, nuclear, and natural gas.

Never has such a thing happened in the entire industrial history of the OECD. Never. There are no models or examples to follow here. No guidance is offered to suggest how such a monumental feat will be accomplished, beyond tossing a few more bucks at renewables, as if money alone could correct for vast differences in energy quantity and quality.

To suggest that the next 25 years for the OECD will be characterized by a significant reduction in the use of the two primary industrial fuels is an astonishing claim, and so it deserves to be carefully examined. But, speaking bluntly, this is not going to happen.

Any suggestion that the OECD is going to reduce its use of coal for electricity and oil for liquid fuels has to be accompanied by evidence of massive programs of investment towards energy transitioning that, truth be told, have to have been started a decade or more before the arrival of Peak Oil. Hinting that it might possibly be a good idea to move these renewable dreams to the drawing board after the advent of Peak Oil is akin to playing tunes on a sinking ship; at best, you are providing a captivating diversion.

Regardless, no such programs operating at appropriate scale are even remotely in sight.

A point that I try to make clear in my upcoming book (due out in March 2011 from Wiley) is that such an energy transition would be evident by such things as the trillions of dollars being dedicated to it, by eminent domain actions to secure new land for natural gas pipelines, and by vehicles that could run on electricity or natural gas being churned out by the millions. While we can debate whether we might get there someday, there can be no doubt that we are not there today...

Seriously, any country or corporation that cannot foresee the end of cheap and abundant oil is being run by dangerous people. To suggest that even the most optimistic assessment of oil, which has it peaking in 2030, is too far away to begin planning for today is just silly. Really, now...responsible planners considering major capital projects with multi-decade life spans (which can be 30 years or more for many things) should just ignore energy? That's the message here? Goodness, gracious...

At this point, it may be good to remind ourselves that last year an IEA whistleblower said that the organization had willfully underplayed looming shortages due to political pressures from the US.

Please read the following very carefully; it represents very important context for what we are about to discuss next. (I'm quoting at length because it's all essential):

The world is much closer to running out of oil than official estimates admit, according to a whistleblower at the International Energy Agency who claims it has been deliberately underplaying a looming shortage for fear of triggering panic buying.

The senior official claims the US has played an influential role in encouraging the watchdog to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves.

The allegations raise serious questions about the accuracy of the organisation's latest World Energy Outlook on oil demand and supply to be published tomorrow – which is used by the British and many other governments to help guide their wider energy and climate change policies.

Now the "peak oil" theory is gaining support at the heart of the global energy establishment. "The IEA in 2005 was predicting oil supplies could rise as high as 120m barrels a day by 2030 although it was forced to reduce this gradually to 116m and then 105m last year," said the IEA source, who was unwilling to be identified for fear of reprisals inside the industry. "The 120m figure always was nonsense but even today's number is much higher than can be justified and the IEA knows this.

"Many inside the organisation believe that maintaining oil supplies at even 90m to 95m barrels a day would be impossible but there are fears that panic could spread on the financial markets if the figures were brought down further. And the Americans fear the end of oil supremacy because it would threaten their power over access to oil resources," he added.

A second senior IEA source, who has now left but was also unwilling to give his name, said a key rule at the organisation was that it was "imperative not to anger the Americans" but the fact was that there was not as much oil in the world as had been admitted. "We have [already] entered the 'peak oil' zone. I think that the situation is really bad," he added.

(Source)

The idea expressed above is simple enough: The oil data has been fudged to the upside by the IEA. Pressure has allegedly been applied upon the IEA to paint a rosier picture than a strict interpretation of the data would warrant. To speculate, the reason why is that there are a host of interlocking vested interests in the financial but especially political spheres that would find the public recognition of Peak Oil to be disruptive and therefore unwelcome.

This is just another example of Fuzzy Numbers, but the consequences of fibbing to ourselves about oil are far more dire than when we lie about employment. If it weren't so serious, it would be just another somewhat regrettable obfuscation of reality created to serve narrow and temporal political purposes.

Note: There is a well-recorded history, going back at least 13 years, of the IEA being fully aware of Peak Oil but bowing to political pressure to soften the message. Read paragraphs 4 & 5 of this piece by Colin Campbell for some more essential background.

Conclusion

Here's where we are:

• The IEA has known about looming Peak Oil issues for more than a decade and is only now explicitly recognizing the idea in their public documents.

• People inside and outside of the IEA say that the organization has downplayed both the timing and potential severity of Peak Oil.

• Peak Conventional Oil has already happened.

• Any possible growth in future oil that the IEA can envision - and we might suspect that even this is fudged to the upside and will retreat in subsequent reports - is going to be almost entirely eaten up by China and India.

What this means is very, very simple. There will be an energy crisis in the near future that will make anything we've experienced so far seem like a pleasant memory.

The very best personal investments you can make at this stage will involve increasing your energy resilience. Make your house require less heating and cooling, use the sun wherever and whenever possible, and increase your personal storage of the fuels you use (if and when possible).

The potential knock-on effects of less energy to the complex system known as our economy are unpredictable in their exact details and timing, but are thoroughly knowable via their broad, topographical outlines. The economy will become simpler and less ordered...'