The End of 'Easy Oil'

When "peak oil" theory was first widely publicized in such path breaking books as Kenneth Deffeyes' Hubbert's Peak (2001), Richard Heinberg's The Party's Over (2002), David Goodstein's Out of Gas (2004), and Paul Robert's The End of Oil (2004), energy industry officials and their government associates largely ridiculed the notion. An imminent peak -- and subsequent decline -- in global petroleum output was derided as crackpot science with little geological foundation. "Based on [our] analysis," the U.S. Department of Energy confidently asserted in 2004, "[we] would expect conventional oil to peak closer to the middle than to the beginning of the 21st century."

Recently, however, a spate of high-level government and industry reports have begun to suggest that the original peak-oil theorists were far closer to the grim reality of global-oil availability than industry analysts were willing to admit. Industry optimism regarding long-term energy-supply prospects, these official reports indicate, has now given way to a deep-seated pessimism, even in the biggest of Big Oil corporate headquarters.

The change in outlook is perhaps best suggested by a July 27 article in the Wall Street Journal headlined, "Oil Profits Show Sign of Aging." Although reporting staggering second-quarter profits for oil giants Exxon Mobil and Royal Dutch Shell -- $10.3 billion for the former, $8.7 billion for the latter -- the Journal sadly noted that investors are bracing for disappointing results in future quarters as the cost of new production rises and output at older fields declines. "All the oil companies are struggling to grow production," explained Peter Hitchens, an analyst at the Teather and Greenwood brokerage house. "[Yet] it's becoming more and more difficult to bring projects in on time and on budget."

To appreciate the nature of Big Oil's dilemma, peak-oil theory must be briefly revisited. As originally formulated by petroleum geologist M. King Hubbert in the 1950s, the concept holds that worldwide oil production will rise until approximately half of the world's original petroleum inheritance has been exhausted; once this point is reached, daily output will hit a peak and begin an irreversible decline. Hubbert's successors, including professor emeritus Kenneth Deffeyes of Princeton, contend that we have now consumed just about half the original supply and so are at, or very near, the peak-production moment predicted by Hubbert.

Since the concept burst into public consciousness several years ago, its proponents and critics have largely argued over whether or not we have reached maximum worldwide petroleum output. In a way, this is a moot argument, because the numbers involved in conventional oil output have increasingly been obscured by oil derived from "unconventional" sources -- deep-offshore fields, tar sands, and natural-gas liquids, for example -- that are being blended into petroleum feedstocks used to make gasoline and other fuels. In recent years, this has made the calculation of petroleum supplies ever more complicated. As a result, it may be years more before we can be certain of the exact timing of the global peak-oil moment.

On tap: The tough-oil era

There is, however, a second aspect to peak-oil theory, which is no less relevant when it comes to the global-supply picture -- one that is far easier to detect and assess today. Peak-oil theorists have long contended that the first half of the world's oil to be extracted and consumed will be the easy half. They are referring, of course, to the oil that's found on shore or near to shore; oil close to the surface and concentrated in large reservoirs; oil produced in friendly, safe, and welcoming places.

The other half -- what (if they are right) is left of the world's petroleum supply -- is the tough oil. They mean oil that's buried far offshore or deep underground; oil scattered in small, hard-to-find reservoirs; oil that must be obtained from unfriendly, politically dangerous, or hazardous places. An oil investor's eye-view of our energy planet today quickly reveals that we already seem to be entering the tough-oil era. This explains the growing pessimism among industry analysts as well as certain changes in behavior in the energy marketplace.