Kjell Aleklett

Newsweek and “Cheap Oil forever”

in Peak Oil by

(This article is published by ASPO International, www.peakoil.net, and the article can be published as printed or on the web by making this reference. Translations to other languages are also accepted. An original Swedish version that is translated into English by Michael Lardelli can be found at Aleklett’s Energy Mix.)

Kjell Aleklett
The President of ASPO International, Association for the Study of Peak Oil&Gas,
Professor in Global Energy Systems, Uppsala University, Sweden

Newsweek’s cover declares that we shall have “Cheap Oil Forever.” Furthermore, on their homepage, they promise that we shall be told “The truth about oil” and the person who will tell us is Ruchir Sharma, Head of Emerging Markets at Morgan Stanley Investment Management. Of course, I want to know who he is and, with the help of Google, I discover Ruchr Sharma as a smiling young man in the prime of his life. With great interest I examine the article “If It’s in the Ground, It Can Only Go Down,” the article that will show me the truth that my research group strives daily to find, that truth that the entire world seeks.

As I began to read the article I was struck by the thought, “I have heard this before” and a memory of the cover of the Economist from March 1999 with the headline, ”Drowning in Oil” forced its way into my consciousness. That was ten years ago when we consumed 27.6 billion barrels per year. Back then, the flow of cheap oil was meant to grow, and prices were to drop by half from $10 per barrel. Of course, the oil continued to flow, and last year we consumed 31.2 billion barrels. But it was not $5 per barrel that we paid or even $50. Instead, we approached $150 per barrel when the market crashed.

That higher prices affect consumption can be seen most clearly in the USA where consumption of oil was highest at the beginning of 2007 after which it began to decline. But the decline was not sufficient so that, ultimately, the doubling of the price to the consumer was too much for our unstable economic system to tolerate. Some consumers could not manage the increased energy prices, the higher food prices and the higher costs for accommodation. The rest of the world was not affected as severely because the value of US dollar fell and many other nations had higher energy taxes. But like a snowball that begins rolling high up and becomes larger and larger, the problems in the American economy accelerated until they dragged the rest of the world down with them. It is interesting to note that the crash now and in 1979 came when the cost of oil exceeded 7% of global GDP.

During the last ten years, we have consumed 300 billion barrels of oil and that oil is gone forever. If it had been copper, iron or some other metal that we had used then the possibility of recycling would have existed. But oil cannot be recycled. Although the economy has crashed and steel production has fallen by 40%, oil consumption has fallen by only 3%. When idling, the world’s economic motor needs 30 billion barrels of oil per year. The reason for this is that the number of people in the world is increasing every year and these additional people must have food. Today, there is no food produced without oil.

As individuals, we need 2500 kcal of energy in food per day, and this means that the world’s population needs 7100 TWh per year. Expressed as the equivalent amount of energy in oil this is 610 Mtoe or 4.2 billion barrels of oil. If one remembers that part of grain production is the seed for sowing the following year’s crops, then the world’s annual agricultural production constitutes a net food energy amount of 9400 TWh. It means that there is currently just enough food energy for the world’s population. However, for agriculture to produce 1000 kcal of food energy it requires 1600 kcal of oil equivalents on the farm. When that food has finally reached the dinner table in the USA the energy that was required has grown to 7500 kcal, and most of that was from oil. It means that a large part of the world’s oil production is required just to prevent starvation.

What is it that makes economists such as Ruchir Sharma adopt an authoritative voice and cite the playwright Arther Miller,  “An era can be said to end when its basic illusions are exhausted.?” It seems the fact that the price of oil has more than halved during a few months has transformed him into an illusionist with an illusionist’s dreams of the future. The concept of a peak of world oil production is treated as something that should already have happened even though it is well documented that we at ASPO, the Association for the Study of Peak Oil and Gas, have always said that peak oil is estimated to occur sometime between 2010 and 2018.

King Hubbert analyzed US oil production in the 1950s and concluded that the production would reach a maximum between 1966 and 1970. In 1970 the illusionists/economists of that era dismissed King Hubbert as a prophet of doom and declared that he was wrong because oil production in that year was the highest ever. The reality is that one produces most oil when one is at the peak of production. 1970 was the peak year for the USA.

It is production from individual oil fields that collectively comprises global production. The reality is that it is depletion and decline that determine production from these individual fields. The International Energy Agency, IEA, and we at Global Energy Systems at Uppsala University have shown that production of crude oil from currently producing fields is declining by 6% per year or approximately 4 million barrels of daily production. This reality is not part of Ruchir Sharma’s future vision. This fact did not exist in 1979.

The main players in the oil industry have become the real illusionists as they try to hide reality. In the 1930s it was the large oil discoveries in Texas that must be concealed, and the illusionist then went by the name of the Texas Railroad Commission. Then it was the massive oil discoveries made during the 1950s, 60s, and 70s and the illusionists’ art of concealment were to play with various types of reserve classification. The master among the illusionists is BP who, even today in its BP Statistical Review, tries to make us believe that the greatest volume of oil was found during the 1980s although we who work with reality know that this is false. The only people that BP deceives are economists, and it is this illusion that entrances Ruchir Sharam causing him to declare, “This long-term price decline is due mainly to the constant discovery of new fields and greater energy efficiency, making nonsense of the idea that the world is rapidly running out of oil.”

The reality is that we now find far less oil than we consume. During the last ten years, we have not discovered new oil to replace the 300 billion barrels we have consumed. The trend for the next decade is that we will find less than 100 billion barrels of oil. The question is whether this together with the remaining reserves will make it possible for us to consume 300 billion barrels in the next ten years. If we cannot then, we have reached Peak Oil and our reality will not be the illusion projected by Newsweek. Rather, it will be something that we all need to cope with. Most importantly we must manage to produce more food with less oil.

If we remove the illusionists’ veil and accept reality, it is our hope that we can build a future for all. If the illusionists continue to hold sway, they will certainly continue their efforts to conceal the future reality of a depleted world that we need to understand.

Kjell Aleklett is Professor of Physics at Uppsala University in Sweden where he leads the Uppsala Global Energy Systems Group (UGES).

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