In “There Will Be Oil” (September 17, WSJ, Page C1), Daniel Yergin concludes that a peak in global oil production is “nowhere in sight.” By focusing on the timing of such a peak, however, he dangerously distracts attention from the monumental challenges facing the oil and gas industry today, and the new energy and economic reality the world has entered. With demand for oil and all forms of energy continuing to rise exponentially—including rapid growth in China, India, and other developing countries—and huge uncertainty whether fossil fuels can keep pace—the most foolish course of action would be business as usual.
For evidence we have a serious problem—aside from rising oil prices and their obvious ripple effects on the economy—one need look no further than a landmark report by the National Petroleum Council, an advisory body created by the federal government to draw from expertise within the oil and gas industry to inform public policy. Facing the Hard Truth About Energy, released in 2007, documents the range of technical, economic, and geopolitical factors that are hindering access, investment, and profitable development of the world’s oil resources. The report clearly recounts why increasing supply to meet rising demand will be far from a cakewalk.
So what is Mr. Yergin glossing over? He states that so-called “unconventional” oil resources will become a familiar source for petroleum—such as deriving oil from tar sands, heavy crudes, or even oil shale. However, the costs and risks of getting unconventional resources out of the ground—technical, financial, economic, and environmental—are completely different than for conventional oilfields on which we have relied to this moment in history. Increases in unconventional production will be hard-pressed to offset declines in key oil-producing countries, such as Russia, Kuwait, Mexico, Venezuela, and Norway.
Mr. Yergin also counts other liquid fuels—such as natural gas liquids and biofuels—in his figures for “World Oil Production.” These fuels, however, are significantly different from conventional crude oil and face their own constraints. They comprise more than a third of the current U.S. production shown in Mr. Yergin’s graph, but this masks that U.S. crude oil production has fallen from its 1970 peak of 10 million barrels per day to less than 6 million barrels today.
Let’s all loudly agree: we are not running out of oil! But we are rapidly depleting the high-quality relatively easy-to-extract-and-refine oil that has fueled a tremendous expansion of the world economy since the dawn of the petroleum age. Yes, petroleum companies may continue to make money developing new resources, especially if rising global demand helps drive high fuel prices. But overall “energy profits” for society —the energy returned from invested resources—are shrinking rapidly, even as oil prices and corporate profits may rise. Energy return for world oil operations dropped by half (36:1 to 18:1) in the last dozen years, by some estimates. How consumers will fare and how the world economy will function under this new energy reality is cause for serious concern, discussion, and action.
Jan Lars Mueller is Executive Director for the Association for the Study of Peak Oil & Gas USA (ASPO-USA), which promotes open dialogue and understanding of Peak Oil, resource depletion, and the role of energy in the economy. ASPO-USA is hosting its annual conference November 2-5 in Washington DC.