Have We Really Hit Peak Oil?

Last week, Senate Democrats introduced legislation that would halt a U.S. arms sale to Saudi Arabia worth $1.4 billion. The implication is clear: no more war toys for the Saudis unless they agree to up their oil output.

The same day, the House approved a Senate plan to suspend oil deliveries to the Strategic Petroleum Reserve in hopes of diverting that oil to the market, thus lowering the pump price a tiny amount. A week earlier, a handful of Senators proposed a bill threatening a trade dispute with members of OPEC if the organization doesn't stop "its anti-competitive practices and illegal export quotas on oil."

It's understandable that our elected leaders would want to do something about the meteoric rise of gasoline, diesel, and heating oil prices that are now bankrupting independent truckers and forcing many folks in colder states to choose between being able to stay warm and being able to drive to work. Yet efforts like the ones just mentioned are based on a profound misperception of why oil prices are rising. The real problem is summed up in the phrase "Peak Oil."

Petroleum is a finite substance and we have reached the inevitable point at which it simply isn't possible to increase the rate at which we extract it from the ground. Most oil producing countries, including the US, have already seen their glory days and are now watching output from their wells gradually dwindle. Only a few nations are early in the production cycle and able to ramp up the rate of flow. Here is a concise definition of Peak Oil from my colleague Chris Skrebowsi, the editor of Petroleum Review in London. He says: "Global oil production falls when loss of output from countries in decline exceeds gains in output from those that are expanding."

Well, how are we doing? Who's winning, the decliners or expanders?

According to last year's scorecard, the decliners won. The same happened in 2006. And that's with oil prices at record highs, presumably offering every incentive for nations that can produce more oil to do so. Does this mean we are at the all-time peak of global oil flow rates now? Not necessarily. There are large new production projects coming on line this year and next, including one in Saudi Arabia that will add several hundred thousand barrels a day to that nation's productive capacity.

However, on the other side of the balance there is some very bad news. Russia, the world's leading oil producing nation and the country that has been responsible for the lion's share of the world's production growth over the past decade, has gone into decline. Optimistic analysts hope Russia will be able to keep production more or less flat for a few years, but that may not be possible. The past few months have seen reductions in output. Other important exporting nations like Nigeria and Mexico are also in trouble.

The timing of the global peak may still be unclear. But surely we can't afford, as a matter of national policy, to assume that it will be decades in the future -- given that all of the symptoms are staring us in the face now. Some economists say that current high oil prices are largely due to the falling value of the dollar, or to speculation. Simple arithmetic tells us that dollar depreciation has added only ten or fifteen percent to oil's cost over the past two to three years.

As for speculation, one has to ask why investors are choosing to park their money in oil contracts. It must be because they see the fundamentals supporting rising prices. In a situation where demand is headed higher but supply isn't, speculation is inevitable. So speculation is a symptom; it isn't the cause of the problem. Given all this, how much sense does it make to spend our time and effort blaming OPEC for not producing more, or to neglect saving some petroleum for the inevitable point in the future when our problem isn't just high oil prices, but actual shortages of fuel for emergency vehicles and food delivery trucks?

If I were a Saudi or a Kuwaiti, I would be advising my government not to pump more oil. After all, these countries earn nearly all of their income from selling the stuff; once the oil's gone, what can they do for an encore? No, it makes more sense for them to husband the resource, sell it for higher prices, and invest in renewable energy sources at home in preparation for the day when nature's patrimony is gone. In fact, however, in recent years most OPEC countries have been pumping flat out; only the Saudis claim to have any spare production capacity to speak of.

But isn't it a good idea for some country somewhere to keep some capacity in reserve in case of a real emergency -- a major pipeline outage, another hurricane in the Gulf of Mexico, or a revolution in one of the other main producing countries? Should efforts at responsible resource management make these people our enemies?

The blame game makes for good sound bites on the floor of Congress. It plays well with folks back home who are struggling to find the money to fill up their SUVs but can't find Saudi Arabia on a map. All they have been taught to know is that Arabs have lots of oil and they are bad people. But think where this might lead: suppose we get tough with the Saudis and end up destabilizing the kingdom so that forces unfriendly to us take over. Then we will feel more or less forced to invade in order to maintain access to our national drug of choice. Where would it end? Does any of this help?

Rather than looking for villains, we should be exploring how we can adapt to having less oil next year, and even less the year after that. Rebuilding our oil-dependent transport, agricultural, and manufacturing infrastructure is going to be a big job, and it's going to take time. So the sooner we start, the better. The real problem is that we use too much oil. It's that simple and that difficult. If we truly want to reduce our vulnerability to high prices, the best way to do so is to reduce consumption. One way or another, we will adapt.

We will drive less, we will fly less, and we will grow our food more locally with fewer inputs. But these changes will go far more smoothly if we plan for them, rather than being forced into them at the nozzle of an empty gas pump. There is a cliché in action films: "We can do this the hard way, or we can do it the easy way." Blaming OPEC while doing nothing to rein in our domestic demand for petroleum only ensures that we will be adapting to Peak Oil the hard way.