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Climate policy: Oil's tipping point has passed

Article in Nature · January 2012


DOI: 10.1038/481433a · Source: PubMed

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FUNDING Asking the right
COMMENT BIOGRAPHY Joseph Rotblat’s COSMOLOGY How to create OBITUARY James Crow, genetic
questions can revitalize crusade for nuclear the Universe from a sea pioneer and accomplished
research p.436 disarmament p.438 of nothing p.440 musician p.444
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Production at oil fields globally, including at the Kern River oil field in Bakersfield, California, is declining at about 4–6% a year.

Oil’s tipping point has passed


The economic pain of a flattening supply will trump the environment as a reason to
curb the use of fossil fuels, say James Murray and David King.

I
n many parts of the world, particularly tipped into a new state, similar to a phase that needs to start immediately.
the United States, continuing debates transition in physics: production is now Production of crude oil increased along
about the quality of climate-change ‘inelastic’, unable to respond to rising with demand from 1988 to 2005. But then
science and doubts about the scale of nega- demand, and this is leading to wild price something changed. Production has been
tive environmental impacts have held back swings. Other fossil-fuel resources don’t roughly constant for the past seven years,
political action against rising greenhouse- seem capable of making up the difference. despite an increase in price of around 15%
gas emissions. But there is a potentially Such major spikes in fuel price can cause per year2 (at Brent crude (London) prices)
more persuasive argument for lowering economic crises, and contributed to the from about US$15 per barrel in 1998 to more
global emissions: the impact of dwindling oil one the world is recovering from now. The than $140 per barrel in 2008 (see ‘Oil pro-
supplies on the economy. future economy is unlikely to be able to duction hits a ceiling’). The price still reflects
There is less fossil-fuel production bear what oil prices have in store. Only by demand: it declined to about $35 per bar-
available to us than many people believe. moving away from fossil fuels can we both rel in 2009 thanks to the 2008–09 recession,
From 2005 onwards, conventional crude-oil ensure a more robust economic outlook and and recovered along with the upturn in the
production has not risen to match increasing address the challenges of climate change. global economy to $120 per barrel before
demand. We argue that the oil market has This will be a decades-long transformation1 declining to its value today of $111. But

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© 2012 Macmillan Publishers Limited. All rights reserved
COMMENT

the supply chain has been unable to keep

SOURCE: REF. 2
pace with rising demand and prices. OIL PRODUCTION HITS A CEILING
The idea of ‘peak oil’ — that global pro- OIL PRODUCTION HITS A CEILING
Production followed demand until 2005, when it levelled off despite continued price
increases. There seems to be a production 'cap' at about 75 million barrels per day.
duction will reach a peak and then decline Production followed demand until 2005, when it levelled off despite continued price
78
increases. There seems to be a production 'cap' at about 75 million barrels per day. 140
— has been around for decades, with aca-
78 Apparent 140
demics arguing about whether this peak has

per barrel)
76 production cap 120
Apparent
already passed or is yet to come. The typical

per barrel)
barrels/day)
76 production cap 120
industry response is to point to increasing 74 100

barrels/day)
assessments of global reserves — the amount 74 100

oil, US$
known to be in the ground that can be pro- 72 80

oil, US$
duced commercially. But this is misleading.

(million
72 80

crude
The true volume of proven global reserves 70 60

(million
is clouded by secrecy; forecasts by state oil

crude
70 60

Production

(Brent
68 40
companies are not audited and seem to be

Production

(Brent
exaggerated3. More importantly, reserves 68 40
66 20

Oil price
often take 6–10 years to drill and develop
66 20

Oil price
before they become part of supply, by which 64 0
time older fields have become depleted. It 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
64 0
is far more sensible to look instead at actual 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
production records, which are less encour- PHASE SHIFT
aging. Even while reserves are apparently PHASE
The SHIFT
abrupt change in oil economics can be seen in this scatter plot of production versus price.

increasing, the percentage available for pro- The 140


abrupt change in oil economics can be seen in this scatter plot of production versus price.
duction is going down. In the United States, 140
1998–2004 data INELASTIC
2005–11 data Supply cannot
for example, production as a percentage of 120 1998–2004 data INELASTIC
2005–11 data match demand,
reserves has steadily decreased from 9% in 120
Supply cannot
leading to price
match demand,
1980 to 6% today 2. Production at existing oil
(US$/barrel)

swings.
100 leading to price
fields around the world is declining at rates
(US$/barrel)

swings.
100
of about 4.5% (ref. 4) to 6.7% per year5. Only
80
by adding in production from new wells is
ELASTIC
priceprice

80
overall global production holding steady. Supply can
60 ELASTIC
In 2005, global production of regular match demand,
spotspot

Supply can
crude oil reached about 72 million barrels 60 modulating
match demand,
prices.
World

per day. From then on, production capacity 40 modulating


prices.
World

seems to have hit a ceiling at 75 million bar- 40 Transition


rels per day. A plot of prices against produc- 20 point
Transition
tion from 1998 to today2 shows this dramatic 20 point
transition, from a time when supply could 0
respond elastically to rising prices caused by 0 60 62 64 66 68 70 72 74 76 78 80
increased demand, to when it could not (see 60 62 64 Crude
66oil production
68 (millions
70 of 72
barrels per
74day) 76 78 80
‘Phase shift’). As a result, prices swing wildly Crude oil production (millions of barrels per day)
in response to small changes in demand.
Other people have remarked on this step
change in the economics of oil around the ‘oil junkie’s last fix’ — is expected to reach than the 2005 figure and about five times less
year 2005, but the point needs to be lodged just 4.7 million barrels per day by 2035 (ref. than assumed by some older, high-coal-con-
more firmly in the minds of policy-makers. 6). Production from Venezuela’s tar sands is sumption scenarios of the Intergovernmental
currently less than 2 million barrels per day7, Panel on Climate Change. The US National
EASY ACCESS with little prospect of a dramatic increase. Research Council’s Committee on Coal
We are not running out of oil, but we are Many believe that coal will be the solution Research, Technology, and Resource Assess-
running out of oil that can be produced eas- to our energy needs, and will stay cheap for ments to Inform Energy Policy noted in
ily and cheaply. The US Energy Information decades. But several recent studies suggest 2007 that “present estimates of coal reserves
Administration optimistically projects a 30% that available coal is less abundant than has are based upon methods that have not been
increase in oil production between now and been assumed. US coal production peaked reviewed or revised since their inception
2030 (ref. 2). All of that increase is in the form in 2002, and world coal-energy production in 1974 … updated methods indicate that
of unidentified projects — in other words, oil is projected to peak as early as 2025 (ref. 8). only a small fraction of previously estimated
yet to be discovered. Even if production at Whenever coal-reserve figures are updated, reserves are actually mineable reserves.”11
existing fields miraculously stopped declin- the estimates are usually revised downwards: Natural gas is still abundant and large
ing, such an increase would require 22 million estimates of world reserves (79% of which are discoveries have been made recently, notably
barrels per day of new oil production by 2030. held in the United States, Russia, India, China, in Israel and Mozambique last year. Power
If realistic declines of 5% per year continue, Australia and South Africa) were decreased plants using natural gas provide 25%, and
we would need new fields yielding more than by more than 50% in 2005, to 861 gigatonnes rising, of electricity generation in the United
64 million barrels per day — roughly equiva- (ref. 9). That study put the ultimate produc- States. Production of conventional natural
lent to today’s total production. In our view, tion of coal (the total amount that humanity gas in North America peaked in 2001 (ref. 2),
this is very unlikely to happen. will be able to extract from the ground) at but energy companies have worked hard to
Non-conventional oil won’t make up the 1,163 gigatonnes. A 2011 independent esti- promote the idea that hydraulic fracturing
difference. Production of oil derived from mate of ultimate production came to just of shale rock will lead to ‘the age of natural
Canada’s tar sands — sometimes called the 680 gigatonnes (ref. 10), some 40% lower gas’. There is no doubt that US shale-gas

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© 2012 Macmillan Publishers Limited. All rights reserved
COMMENT

resources are immense, but recent reports that many have simply avoided considering fossil-fuel production will be faced with
suggest that both reserves and future it. The International Monetary Fund, for potentially major blows to their economies
production rates have been substantially example, still projects economic growth of even before rising sea levels flood their coasts
overstated12. For sites such as the Barnett and 4% of gross domestic product for the next or crops begin to fail catastrophically.
Fayetteville shales, where a long production five years: near the top of the historical range The solutions are not secret or mysterious.
history can be studied, there has been an since 1980. Yet to achieve that will require Globally we get 55 × 1018 joules of use­ful
extremely large annual decline in produc- either a heroic increase in oil production of energy from 475 × 1018 joules of primary
tion rates. Geological consultant Arthur 3% per year, increased efficiency of oil use, energy from fossil fuels, biomass and nuclear
Berman, director of Labyrinth Consulting more energy-efficient growth or rapid sub- power plants. The difference is due to energy
Services in Sugar Land, Texas, and a world stitution of other fuel sources. Economists losses and inefficiencies in the conversion
expert on shale gas, has put this decline in and politicians continually debate policies and transmission processes. By increasing
the range of 60–90%. For shale-gas wells that that will lead to a return to economic growth. the efficiency, we could get the same use-
are more than five years old, about 30% are But because they have failed to recognize ful energy by burning less fuel. We need to
sub-commercial because of rapid decline that the high price of energy is a central specify conservation goals for improving
combined with the low price of gas. problem, they haven’t identified the neces- the efficiency of use of fossil-fuel energy.
sary solution: weaning society off fossil fuel. These include taxing oil to keep prices high
STUNTED GROWTH The UK Industry Taskforce on Peak Oil and to encourage a reduction in energy use;
What does this mean for the global economy, and Energy Security and the UK govern- encouraging nuclear energy; questioning
which is so closely tied to physical resources? ment’s Department of Energy and Climate if and how economic growth can continue
Of the 11 recessions in the United States C hange are ver y without an increase in fossil fuels; lower-
since the Second World War, 10, including “The price aware of these risks, ing speed limits on roads and encouraging
the most recent, were preceded by a spike in of oil is likely and have made a public transport; or redirecting tax credits
oil prices13. It seems clear that it wasn’t just to have commitment to work towards renewable-energy development.
the ‘credit crunch’ that triggered the 2008 been a large together to protect the The transformation will take decades, so we
recession, but the rarely-talked-about ‘oil- contributor to United Kingdom and must begin as soon as possible. Emphasizing
price crunch’ as well. High energy prices the euro crisis its economy from ris- the short-term economic imperative from
erode family budgets and act as a head wind in southern ing oil prices. The task oil prices must be enough to push govern-
against economic recovery. Europe.” force, formed in 2008, ments into action now. ■
The United States and Europe each spends warned that Britain
$1 billion per day on oil imports. The aver- must not be caught out by the oil crunch, James Murray is in the School of
age price of petrol in the United States and said that policies to address ‘peak oil’ Oceanography, University of Washington,
increased from 75 cents per litre in 2010 to must be made a priority. In 2011, its chair- Seattle, Washington 98195, USA. He
95 cents per litre in 2011. Because the United man, John Miles of architects and design was founding director of the University
States consumes about 1.4 billion litres per engineers Arup in London, said: “We must of Washington’s Program on Climate
day, the nation spent about $280 million a define the risks and develop sensible contin- Change. David King is director of the Smith
day more on petrol in 2011, leaving less for gency plans. This means thinking critically School of Enterprise and the Environment,
discretionary items. about what we should be doing now if we University of Oxford, Oxford OX1 2BQ, UK,
Another powerful example of the effect of knew that the oil price would soar over the and senior science adviser to the bank UBS.
increasing oil prices can be seen in Italy. In next five years.” Such joint industry/federal He served as chief scientific adviser to the
1999, when Italy adopted the euro, the coun- government recognition of the problem does UK government in 2000–07.
try’s annual trade surplus was $22 billion. not exist in the United States, where action e-mail: jmurray@u.washington.edu
Since then, Italy’s trade balance has altered has largely been at the state or city level. The
dramatically and the country now has a UK government has embedded by parlia- 1. Hirsch, R. L., Bezdek, R. & Wendling, R. Peaking of
deficit of $36 billion. Although this shift has mentary statute a commitment to decrease World Oil Production: Impacts, Mitigation, & Risk
Management (US Department of Energy, 2005).
many causes, including the rise of imports carbon dioxide emissions by 80% by 2050 2. US Energy Information Administration Annual
from China, the increase in oil price was compared with 1990 levels. The US Congress Energy Outlook 2011 (DOE/EIA, 2011).
the most important. Despite a decrease in has rejected any such commitment. 3. Owen, N. A., Inderwildi, O. R. & King, D. A.
imports of 388,000 barrels per day compared Energy Policy 38, 4743–4749 (2010).
4. Cambridge Energy Research Associates Finding
with 1999, Italy now spends about $55 billion FASTER ACTION the Critical Numbers: What Are the Real Decline
a year on imported oil, up from $12 billion in Climate change and changes in fossil-fuel Rates for Global Oil Production? (IHS/CERA, 2007).
1999. That difference is close to the current production are generally seen as separate 5. International Energy Agency World Energy
Outlook 2008 (IEA, 2008).
annual trade deficit. The price of oil is likely phenomena. But they are closely linked. The 6. Canadian Association of Petroleum Producers
to have been a large contributor to the euro risk of fossil-fuel supply limitation should be Report of the Dialogues on the Oil Sands (CAPP,
crisis in southern Europe, where countries included when considering the uncertainties 2011).
7. Hirsch, R. L., Bezdek, R. H. & Wendling, R. M. The
are completely dependent on foreign oil. of future climate change. The approaches Impending World Energy Mess: What it is and What
The International Energy Agency has needed for tackling the economic impacts it Means to You! (Apogee Prime Press, 2010).
made it very clear that the global economy is of resource scarcity and climate change are 8. Energy Watch Group Coal: Resources and Future
Production, EWG-Series No. 1/2007 (EWG, 2007).
at risk when oil prices are greater than $100 the same: moving away from a dependence 9. World Energy Council 2010 Survey of Energy
per barrel — as they have been in recent on fossil-fuel energy sources. Whereas the Resources (WEC, 2010).
years, and will surely continue to be, given implications of climate change have driven 10. Rutledge, D. Int. J. Coal Geol. 85, 23–33 (2011).
11. National Research Council Coal: Research and
the inelastic response of global production. only slow policy responses, economic con- Development to Support National Energy Policy
Historically, there has been a tight link sequences tend to drive shorter-term action. (National Academies Press, 2007).
between oil production and global economic We know from the historical record that 12. Hughes, D. Will Natural Gas Fuel America in the
growth. If oil production can’t grow, the when there are oil-price spikes, the economy 21st Century? (Post Carbon Institute, 2011).
13. Hamilton, J. D. Causes and Consequences of the
implication is that the economy can’t grow begins to respond within a year. Govern- Oil Shock of 2007–08. Brookings Papers on
either. This is such a frightening prospect ments that fail to plan for the decline in Economic Activity. 215–259 (2009).

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