The Post Carbon Reader Series: Energy

Making Sense of Peak Oil and Energy Uncertainty

By Daniel Lerch

About the Author

Daniel Lerch is the author of Post Carbon Cities: Planning for Energy and Climate Uncertainty (2007), the first major guidebook for local governments on peak oil and global warming. He has delivered presentations and workshops to elected officials, planners, and other audiences across the United States, as well as in Canada, the British Isles, and Spain. Lerch is Program Director of Post Carbon Institute.

Post Carbon Institute 2010 613 4th Street, Suite 208 Santa Rosa, California 95404 USA

This publication is an excerpted chapter from The Post Carbon Reader: Managing the 21st Centurys Sustainability Crises, Richard Heinberg and Daniel Lerch, eds. (Healdsburg, CA: Watershed Media, 2010). For other book excerpts, permission to reprint, and purchasing visit http://www.postcarbonreader.com.

Making Sense of Peak Oil and Energy Uncertainty

The new energy reality has enormous implications for just about every aspect of our lives.
For over 65 years we have designed our communities for oil. Weve built nearly 47,000 miles of high-speed Interstate highways, a vast continental network for fuelling and servicing gasoline-powered vehicles, and millions upon millions acres of car-dependent suburbs. This gargantuan legacy of long-term investments has all been made with the assumption that the petroleum fuels which make the whole system work will be available and affordable for the foreseeable future But global trends of oil supply and demand are changing to such a degree that this assumption is no longer realistic. Far more than a problem of higher prices at the pump, the quickly emerging new energy reality has enormous implications for just about every aspect of our lives. Forward-thinking households, businesses, and governments are now rushing to plan for an unprecedented energy crisis, the first phases of which we are already experiencing. What lies behind this 21st century energy crisis? Why cant we rely on the market to fix a problem that is ultimately about supply and demand? To make sense of whats going on, we first need to understand some of the basics of how we harness and use energy, and the limitations of the various energy resources available to us.

Supply and Demand

Our supply of cheap, easy-to-extract conventional oil, from places like the flat plains of Texas and the deserts of Saudi Arabia, is at or near permanent decline1; the remaining unconventional oil, from places like the tar sands of Canada and the depths of the Gulf of Mexico, is increasingly difficult to find, extract, and refine. At the same time, global demand for petroleum is sky-high at 85 million barrels per daytwice as much as in 1969. Thats a lot of oil to keep pouring in to the pipelines to meet business as usual needs, let alone to meet new demand from growing countries like China and India. With the conventional oil dwindling and the unconventional oil thats replacing it increasingly problematic, there will inevitably come a point at which the flow of oil from the wells and the refineries will simply be unable to keep up with global demand. The point at which total global oil production cannot grow any further and begins its permanent decline is known as peak oil, a term that was hardly known outside the petroleum geology field as recently as 2004 but is rapidly attracting attention and concern. A growing number of analysts and government agencies are acknowledging that we will have reached peak oil by 2015, if we havent reached it already. 2

The post carbon reader series

Making Sense of Peak Oil and Energy Uncertainty

A Big Problem
None of this would be a real concern if the product in question were a market commodity like soybeans or pork bellies: Demand and supply would find a new equilibrium without fundamentally threatening the global economy. Oil, however, is unlike any other commodity in four important ways. First, oil is absolutely essential to the most basic functions of the industrialized world. Oil is the key raw material for gasoline, diesel, jet fuel, home heating oil, industrial oils, many chemicals, and most plastics. Many key industries are wholly dependent on oil in multiple forms; for example, the modern global food production and distribution system uses oil as a fuel for farming and transportation, and as a raw material for agrochemicals. Instability in oil supply and price has serious potential consequences for virtually all sectors of the global economy, particularly transportation, agriculture, and manufacturing. Second, there are currently no viable substitutes for oil at current rates of consumption. Although alternatives to oil do exist for many of its uses, they are generally vastly inferior to oil in their energy content and in the ease of which they can be extracted, transported, and turned into a commercially-useable fuel. Net energy or energy returned on (energy) invested (EROI) refers to the ratio between the energy expended to harvest an energy source and the amount of energy gained from that harvest. All alternative fuels have worse EROIs than conventional oil, and some have such poor net energy that they are practically useless to manufacture (see Chapter 18). Even other conventional energy sourcesespecially coal, natural gas, hydropower, and uraniumface serious constraints as potential replacements for oil as our dominant fuel.3 Third, the modern worlds complex inter-firm and inter-governmental economic relationships, made up of movements of raw materials and goods across the globe, very much depend on the price and availability of oil being relatively predictable. If the price of oil
2

becomes very high or very volatile, or both, the globalized economy as a whole will face fundamental challenges.4 Indeed, the threat of peak oil is already creating change and uncertainty in diverse sectors of the global economy: As oil prices surged above 15-year highs after 2004, beef prices rose rapidly in part because the high energy prices (together with new federal subsidies) spurred farmers to sell more corn to ethanol producers and less to cattle feed lotsa chain of events that few predicted.5 More worryingly, during the oil price spike of 2008 it became apparent that much of the airline industry simply cant survive in a world of $110+ oil. 6 Finallyand in part a result of the previous three qualitiesoil is such an intrinsic part of how our world works that the invisible hand of the market is simply unable to deal adequately with the threats posed by peak oil. As a 2005 report on peak oil for the U.S. Department of Energy observed: Mitigation will require a minimum of a decade of intense, expensive effort, because the scale of liquid fuels mitigation is inherently extremely large... Intervention by governments will be required, because the economic and social implications of oil peaking would otherwise be chaotic. 7 Modern oil projects take a lot of money (billions) and a lot of time (years) to bring from pre-discovery to liquids
The post carbon reader series

Making Sense of Peak Oil and Energy Uncertainty

in the pipeline. As oil prices go up, markets (and oilproducing countries) respond by putting more money into exploration and production. But the combination of the exploration-to-production lag time, the enormous financial risks on big unconventional oil projects, imperfect information on international oil reserves, and other factors means that the private sector has not yet seen the incentives (and indeed, may never see them) to respond at a sufficient scale to the peak oil threat. 8 Clearly, peak oil is much, much more than a problem of higher fuel prices. In Post Carbon Cities, I used the term energy uncertainty to collectively describe the wide and growing range of economic and social uncertainties that are being driven by peak oil. In a similar way, global warming is driving a wide and growing range of economic, social, and of course environmental uncertainties, which I collectively termed climate uncertainty. Energy and climate uncertainty is an important joint frame for understanding and approaching the these two crises because our responses to one inevitably affect the other.

Portions of this chapter originally appeared in Daniel Lerch, Post Carbon Cities: Planning for Energy and Climate Uncertainty, (Sebastopol, CA: Post Carbon Press, 2007).

What Can Be Done?

The private sector is limited in the degree to which it can respond to energy uncertainty. Governments have been slow to recognize the problem, and will be unlikely to respond decisively until economic conditions worsen severely. Although energy uncertainty is difficult to address even at scale of our largest governments and businesses, it is essential that public and private sector decision-makers be educated rapidly about the realities of peak oil, and what the possible responses are. The other chapters in Part Eight (Energy) of this book provide a basic overview of this information: Chapter 17 on the remaining fossil fuel resources in North America, Chapter 18 on the many challenges of developing alternative energy sources, and Chapter19 on the ramifications of peak oil for the economy.

The post carbon reader series

Making Sense of Peak Oil and Energy Uncertainty

Endnotes
1 Global discoveries of conventional oil peaked in the 1960s and are uniformly expected to continue declining, thus the future of conventional oil production is relatively straightforward to forecast. Indeed, practically all analysts (including the major oil companies) agree that conventional oil production will be in permanent decline by 2015 at the latest. 2 Terry Macalister, US Military Warns Oil Output May Dip Causing Massive Shortages by 2015, The Guardian, April 11, 2010. Richard Heinberg, Quacks Like a Duck, March 29, 2010, http://www.postcarbon.org/blog-post/85699quacks-like-a-duck. UK Industry Taskforce on Peak Oil & Energy Security, The Oil Crunch: Securing the UKs Energy Future, October, 2008, http://www.peakoiltaskforce.net.

Acknowledgments
Cover art by Mike King. Design by Sean McGuire. Layout by Clare Rhinelander.

3 For an in-depth exploration of the net energy constraints of both renewable and non-renewable fuels, see Richard Heinberg, Searching for a Miracle: Net Energy Limits & the Fate of Industrial Society, (San Francisco: International Forum on Globalization, 2009). 4 Robert Hirsch, et al. Peaking of World Oil Production: Impacts, Mitigation, & Risk Management, (Washington, D.C.: U.S. Department of Energy, 2005), 4. Andrew Farrell, Ethanol Demand Burns Meat Producers, Forbes, March 9, 2007. See The HPL Timeline of Airline Bankruptcies, Mergers, Acquisitions, and Fiascos in Howard Lichtman, The Crash of Commercial Aviation and Telepresence, September 8, 2008, http://www.telepresenceoptions.com/2008/09/ the_collapse_of_commercial_avi/. Robert Hirsch, et al. Peaking of World Oil Production: Impacts, Mitigation, & Risk Management, 5.

5 6

8 Numerous books and studies describe these marketlimiting factors; one recent summary is Phil Hart and ChrisSkrebowski, Peak Oil: A Detailed and Transparent Analysis, Energy Bulletin, May 30, 2007, http://www. energybulletin.net/node/30537. For discussion on the more recent development of price constraints on oil production, see Richard Heinberg, Goldilocks and the three fuels, Reuters Environment Forum, February 18, 2010, http:// blogs.reuters.com/environment/2010/02/18/goldilocksand-the-three-fuels/.

Photo Credits
Page 2, I280 and US101 interchange cbna topherous. Images marked c are under a Creative Commons license. See http://creativecommons.org.
4 The post carbon reader series

The Post Carbon Reader

Managing the 21st Centurys Sustainability Crises
Edited by Richard Heinberg and Daniel Lerch
In the 20th century, cheap and abundant energy brought previously unimaginable advances in health, wealth, and technology, and fed an explosion in population and consumption. But this growth came at an incredible cost. Climate change, peak oil, freshwater depletion, species extinction, and a host of economic and social problems now challenge us as never before. The Post Carbon Reader features articles by some of the worlds most provocative thinkers on the key drivers shaping this new century, from renewable energy and urban agriculture to social justice and systems resilience. This unprecedented collection takes a hard-nosed look at the interconnected threats of our global sustainability quandaryas well as the most promising responses. The Post Carbon Reader is a valuable resource for policymakers, college classrooms, and concerned citizens. Richard Heinberg is Senior Fellow in Residence at Post Carbon Institute and the author of nine books, including The Partys Over and Peak Everything. Daniel Lerch is the author of Post Carbon Cities.
Published by Watershed Media PUBLISHED FALL 2010 544 pages, 6 x 9, 4 b/w photographs, 26 line illustrations $21.95 paper 978-0-9709500-6-2

To order online: www.ucpress.edu/9780970950062 For a 20% discount use this source code: 10M9071 (please enter this code in the special instructions box.)