A Brief History of the Age of Oil

Peak Moment TV describes the current human condition as follows:

“We are living at a peak moment in human history, a peak of human innovation, information, wealth and health, but we're also at a peak of population and consumption, with rising temperatures and declining resources as a result.”

The fuel that got us to this peak moment is oil. The incredible abundance of energy released when oil is burned has supplied humanity with the fuel necessary to make unprecedented advances in technology, population, wealth, etc. You can see it very clearly if you look at global population growth over the last century. Since 1900, human population has risen from around 1.6 billion to 6.6 billion (this period also corresponds roughly with the age of oil.)

The early industrial revolution was fuelled by coal, but in the late nineteenth century, we transitioned to crude oil. Ecologist Richard Heinberg says this was "like winning the energy lottery" because oil is such a uniquely energy-dense resource, and it is relatively easy to transport through pipelines. It is also about twice as potent as an equal volume of coal. So burning this marvelous stuff effectively increased the carrying capacity of the planet beyond our ability to comprehend at the time. At the dawn of the industrial revolution, we had no way of knowing that burning fossil fuels would lead to such explosive population growth, let alone climate change; the sky was the limit for the new economic growth made possible by burning oil.

However we have known for a long time that crude oil is a finite, non-renewable resource, and geologists have observed repeatedly the bell-shaped curve of oil field production. In fact, back in the 50's an American petroleum geologist accurately predicted that the peak in U.S. crude oil production would occur between 1965 and 1970. In retrospect, we know for a fact that we peaked in 1970 because despite huge investment in exploration and new discoveries like Prudhoe Bay in Alaska, the U.S. has never been able to produce as much oil as it did in 1970. The U.S. currently produces approximately half as much oil as it did in 1970. Consequently, we've gone from being the world's leading oil exporter (pre-peak) to the world's leading oil importer (post-peak).

Of course the impact of this peak was not felt by most Americans because we were able to import oil cheaply from overseas. This supply of imports has been fairly reliable and stable, with the notable exception of the Arab oil embargo of the 70s, which caused a huge price spike, leading to record prices that were not surpassed until earlier this year. Incidentally, we've not only broken the record, we've shattered it completely -- prices increased another 50% after surpassing the inflation-adjusted high of 1980. We hit the record price of $147 a barrel without an embargo or a hostage crisis!! Imagine what could happen to prices if there was a serious supply disruption.

The cause of the price spike over the summer has been debated ad nauseum by all of the experts. Was it supply and demand or was it speculation? This always struck me as a false debate – it was clearly both. But speculation does not start trends; it reinforces existing trends, so I still feel that the market fundamentals of supply and demand were the main forces driving prices up.

Soaring demand from the emerging BRIC economies (Brazil, Russia, India, China) created an extraordinarily tight market before and during the summer of this year. And most oil exporting countries were producing flat out, meaning that they had no spare production capacity. In fact many key non-OPEC producers, such as Mexico, Britain, Norway and possibly Russia have entered an irreversible phase of declining production. Saudi Arabia and Iraq are the only countries in the world with significant spare capacity. This is a basic description of the supply and demand situation during the summer. And while the oil market was tightening, investors were moving loads of capital out of equities and into commodities to protect their assets from inflation. Oil became the commodity of choice for these investors because of the pre-existing trend in the market.

Prices have fallen sharply from their summer peak as demand slackened and recession fears drove speculators out of the market. But at over $60 a barrel, oil is still pricey relative to historic levels; and the recent price drop shows how volatile the market has become over the past 5 years. It is interesting to note that with the exception of the price spike during the embargo of the 70s, the price of a barrel of crude has stayed below $40 (2007 dollars) since the 1870s, and usually hovered around $25 until 2003.

Since the U.S. invaded Iraq in 2003, oil prices have quadrupled -- rising sharply from around $35 a barrel in 2003 to over $145 a barrel at the peak in July. During this period, the price of oil has risen dramatically and in a non-linear fashion, characterized by huge price swings. The most recent and severe price swing punctuates a worrying trend: increased volatility in the market. This is consistent with the predictions of energy analysts who are concerned about peak oil.

So, when will global oil production peak? Some in the oil industry, including Texas oil men, T. Boone Pickens and Matthew Simmons think it’s already happened; some think it’s happening now; others think it will happen sometime between 2010 and 2030. That covers most of the predictions I’ve seen, although there are a few who don’t believe in the peak oil hypothesis at all (mostly those who have a conflict of interest with honesty, such as OPEC and ExxonMobil).

There are also those who believe that oil is an inexhaustible resource that derives from non-organic sources. I guess, according to them, we should stop calling oil a fossil fuel! The main point is that just as there is a broad scientific consensus that recent climate change is anthropogenic, there is likewise a consensus that peak oil will happen within our lifetime. We can quibble all day long about when it might happen, but it really isn’t important. Just as it isn’t important to predict exactly when we will pass the point of no return with climate change.

The important fact staring us all in the face, but often ignored, is that burning fossil fuels is not sustainable ecologically or economically. Therefore, the energy transition must start now. We are living in a fool’s paradise, and the sooner we begin moving toward fossil fuel independence, the smoother the future will be.

Here is a good overview of peak oil by one of the world's foremost peak oil researchers, Richard Heinberg.



**for more information on peak oil, check out The Oil Drum website. The link is listed in my favorites.