I have a big smile on my face! AAA Arizona reports the area average for regular gasoline is $3.68 per gallon in metro-Phoenix, AZ. Can you see that big smile on my face?
About a week ago we celebrated Memorial Day. Aside from this being a special holiday set aside to remember the cost that Americans have paid for the freedom we enjoy today, it is also the unofficial mark of the beginning of summer and the summer driving season.
I bought gas yesterday from my local Costco where regular is going for $3.56 and 91-octane is $3.77. I also saw a nice smile on the face of the person in the vehicle behind me. Believe me when I say, “I’d like to pay even less!” I am thankful that the upward rise in gasoline prices has reversed itself. My fear was that the price of gasoline would reach $4.50+ per gallon as it did during the summer of 2008.
I started writing this blog, A Bridge for Business & STEM, three months ago when the cost of gasoline was rising a few cents almost daily. For those of you who continue to read my blog posts, I thank you. While the focus of the blog is not specifically gasoline, crude oil prices or energy, one-third of my posts reflect these topics that have been trending in the news. I use these products in a variety of forms, and like so many others, am concerned about the energy future of the U.S. as well as other countries that are competing for crude oil. The other reason is that I am very interested in the subject of energy, especially alternative and renewable energy sources and systems.
The objective of this post is to look at a concept called “peak oil”, and identify how it factors into the current energy discussion.
What is Peak Oil?
According to Energy Bulletin [Ref 1], peak oil is the simplest label for the problem of energy resource depletion, or more specifically, the peak in global oil production. Since oil is a finite, non-renewable resource…once we have used up about half of the original reserves, oil production becomes ever more likely to stop growing and begin a terminal decline, hence the term peak.
Naturally, when a well first begins to produce oil, the easier-to-reach oil is extracted. The oil pumped first was on land, near the surface, under pressure, light and ‘sweet’ (meaning low sulfur content) and therefore, cheaper to extract and easier to refine. At a certain point, when well production peaks, the remaining oil is more likely to be off-shore, far from markets, in smaller fields and of lesser quality. It requires more money and energy to extract, refine and transport. Under these conditions, the rate of production inevitably drops.
Each oil field eventually reaches a point where it becomes economically, and physically no longer viable. If it takes the energy of a barrel of oil to extract a barrel of oil, then further extraction is pointless, no matter what the price of crude oil is today or five years from now.
Who is M. King Hubbert?
M. King Hubbert is credited with developing the concept of peak oil. While working as a geologist with Shell Oil during the 1950s, he noted that oil discoveries graphed over time tended to follow a bell shape curve. He supposed that the rate of oil production would follow a similar curve, now known as the Hubbert Curve [Ref 1, 2].In 1956, Hubbert predicted that production from the lower 48 states in the U.S.would peak between 1965 and 1970. The top of the curve is termed “peak oil,” or “Hubbert’s peak,” and it represents the halfway point for production [Ref 3]. The Hubbert Curve is used to predict the rate of production from an oil producing region containing many individual wells.
Just in case you are wondering, the U.S.lower 48 oil production did peak in 1970-1971. In that year, by definition, U.S. oil companies had never produced as much oil, and Hubbert’s predictions were a fading memory. The peak was only acknowledged with the benefit of several years of hindsight.
Are we in the Peak Oil Period?
According to Steve Kaye, a retired chemical engineer with significant experience in the oil industry, gas prices will continue to rise in his short article, Save Gas [Ref 4]. His reasoning is that we are entering a time referred to as peak oil. This means that worldwide demand for oil will increase as its availability decreases.
Kaye also says that drilling more oil wells won’t stop peak oil. At best, this might delay it. And producing oil from tar sands or oil shale won’t stop peak oil. These are highly inefficient, uneconomical, and filthy ways to produce oil. Kaye proposes that the best solution is to develop renewable energy systems. I agree.
Guy McPherson, a professor of conservation biology at the University of Arizona, believes “We have sufficient [oil] supply to keep the world running for 30 years or so, at the current level of demand. But that’s irrelevant because the days of inexpensive oil are behind us. And the American Empire absolutely demands cheap oil. Never mind the 3,000-mile Caesar salad to which we’ve become accustomed. Cheap oil forms the basis for the 12,000-mile supply chain underlying the “just-in-time” delivery of plastic toys from China.” [Ref 3]
According to McPherson et. al. “Extraction of oil peaked at 74.3 million barrels per day in May 2005. The two-year decline to 73.2 million barrels per day produced a doubling of the price of crude. Later this year , we fall off the oil-supply cliff, with global supply plummeting below 70 million barrels/day. Oil at merely $100 per barrel will seem like the good old days.”
McPherson, Kaye and other experts agree that the current system of enterprise in the U.S. is based on a cheap oil supply. Oil is used in the extraction and delivering of coal, natural gas, and other energy sources. It is used to manufacture products including solar panels and wind turbines, and to maintain the electrical grid. Ninety percent of the oil consumed in this country is burned by airplanes, ships, trains and automobiles. Our entire system of food production and delivery depends on cheap oil.
Is the Peak-Oil Prediction Rubbish?
There are some who argue that the peak oil argument is no longer valid. According to Tim Worstall, a contributor to Forbes Magazine, “One of the things that really rather annoys me about the peak oil (and in the UK, there’s a similar one about peak gas) argument is that it entirely ignores the impact of changing technology. Worstall refers to a recent article, The peak oil brigade is leading us into bad policymaking on energy, that appeared in the Guardian, a British magazine, on October 18, 2011 [Ref 5]
“The earth’s crust is riddled with fossil fuels. The issue is not whether there is a shortage of the stuff, but the costs of getting it out. Until recently, the sheer abundance of low-cost conventional oil in places like the Middle East has limited the incentives to find more, and in particular to go after unconventional sources. But technical change has been driven by necessity – and the revolution in shale gas (and now shale oil, too) has already been transformational in the U.S., one of the world’s biggest energy markets.”
Now, there is some truth to Worstall’s statements. The earth does have an abundance of oil, gas, and coal. Good news! Worstall is also right that our conventional use of oil from the middle East and else where made us lazy and short-sighted when thinking about other energy resources. Making the point that new technological developments take time to [develop and] penetrate markets, and customers may not feel the benefits for quite a while is also true.
I believe Mr. Worstall and I would both agree that the finite resources of crude oil are continuing to be drawn down as the U.S.and the rest of the world continues to use it as their primary source of energy. The good news is that there are abundant supplies of other energy resources like coal, natural gas, and shale oil and gas. Figuring out how to extract them safely and cost effectively is the present problem. In the spirit of ingenuity – where there is a will there is a way!
Joel Kotkin, Fellow with the National Chamber Foundation, shares similar sentiments, but perhaps from a different angle. Kotkin acknowledges that previous growth in America was largely based on its huge oil and coal reserves. However, in the last half of the 20th century, America fell into the position of a major importer of raw materials—especially oil. Constituting at times close to half of U.S. imports, a persistent negative balance in energy had been eroding the country’s economy for years. [Ref 6]
Kotkin feels that those who predicted the end ofAmerica’s mostly suburban way of life due to depleted resources are over the top, especially given the recent shifts in energy discoveries. Due in part to new technologies, such as hydraulic fracking and vertical drilling, estimates ofNorth America’s energy resources have skyrocketed. By 2020, theUnited States, according to the consultancy PFC Energy, will surpassRussiaandSaudi Arabiaas the world’s leading oil and gas producer.
In 2011, the U.S.became a net exporter of petroleum products for the first time in 62 years. Kotkin also reminds us that American imports of raw petroleum have fallen from a high of 60 percent of its total demand to less than 46 percent. Overall, according to Rice University’s Amy Myers Jaffe, U.S.oil reserves now stand at over 2 trillion barrels (Canada has slightly more). America and Canada together constitute more than three times the total estimated reserves of the Middle East and North Africa. Observers such as Michael Lind believe that new discoveries, particularly of natural gas, mean that we might actually be living in an era of “peak renewables” and are at the onset of a “very long age of fossil fuels.”
Summer Gas Prices are Lower
Now back to that smile on my face. Historically, we have seen prices rise or continue to rise at the pump around Memorial Day and into the summer. “Drivers are getting a respite,” says Rodney L. Waller, a senior vice president at Range Resources, an oil and gas company based in Fort Worth. “But it’s a tenuous respite based on all the changes in the global oil market and the opening and closings of refineries across the U.S.” [Ref 7]
Gasoline prices are dropping because of a hodge-podge of variables around the globe. First, the tension between the U.S. and Iran back in December 2011 over a possible closure of the Strait of Hormuz appears to have either gone away or has been minimized [discussed in an earlier post, Market Volatility: Reading the “Tea Leaves” in Crude Oil Prices]. The end result is a reduction in oil prices from $100+ per barrel to around $90/barrel today. The slowly recovering global economy has also reduced demand for oil and other commodities, particularly in Europe. Demand growth in China, a main driver of oil prices in recent years, has slowed in recent months. And while gasoline demand in the U.S. has diminished in recent months because of the soft economy, oil supply inventories recently reached a 22-year high.
The current prices appear to be holding steady. It remains to be seen if any changes in oil producing countries, refinery closures, less demand around the globe due to the economy, will impact gasoline prices further. For now, I am feeling less peaky as it relates to crude oil, extremely bullish on a secure energy future for the U.S., and I’m still smiling.
- Peak Oil Primer, http://www.energybulletin.net/primer.php
- Feeling peaky: The economic impact of high oil prices, April 21, 2012, http://www.economist.com/node/21553034
- View Point: End of the World as We Know It, Guy R. McPherson, Professor, University of Arizona, Arizona Republic, April 6, 2008, http://www.azcentral.com/arizonarepublic/viewpoints/articles/0406vip-mcpherson0406.html?&wired
- Save Gas, Steve Kay, http://www.squidoo.com/savegas
- Peak Oil, Entirely Nonsense: As is Peak Gas, Forbes Magazine – Online Edition, Tim Worstall, Contributor, http://www.forbes.com/sites/timworstall/2011/10/19/peak-oil-entirely-nonsense-as-is-peak-gas/, October 19, 2011
- Are We Reaching America’s Moment, Joel Kotkin, Fellow – National Chamber Foundation, Business Horizon Quarterly
- Gas Prices Modestly Lower at Start of Driving Season, Clifford Krauss, The New York Times, Business Section, page B1, May 25, 2012