Friday, July 15, 2011

The Slow Death of Suburbia, 1: Peak Oil and Peak People


Let’s not kid ourselves. We are all living in a fool’s paradise. The reality of peak oil is upon us now. The first oil well drilled by Colonel Edwin L. Drake in Pennsylvania in 1859 ushered in the modern oil industry. After nearly a century and a half of almost uninterrupted growth, in 2005, world production of crude oil reached a record daily output of some 73 million barrels, and the planet’s oil production entered an irreversible decline. Today, for every six barrels of oil consumed, only one new barrel of oil is being discovered to replace them.

Before the world began to use oil, the total amount of oil beneath the surface of the planet was estimated to be about two trillion barrels. Since the middle of the 19th century, we have extracted and consumed about one trillion barrels of oil--one-half the amount available. These trillion barrels of oil represent the most easily produced and the highest quality oil. In the unlikely event that the remaining one trillion barrels of oil could be extracted at current costs and current rates of production, that oil would last only 37 years at current rates of consumption. We are indeed living in a fool’s paradise.

Although the number of potential users of gasoline worldwide is growing exponentially, oil today is becoming increasingly harder to find, more expensive to produce and--in the extraction process--more hazardous to the planet. The disastrous tragedy played out a mile below the surface of the Gulf of Mexico by BP in 2010 underscores the hazards of drilling at extreme depths in coastal zones.

Sources of Our Oil
Today, the ten largest holders of oil reserves in the world are all state-owned oil companies. Moreover, they are all in countries that aren't particularly friendly toward the West. Over the years, unfriendly governments have pushed the world’s giant independent oil companies--Exxon Mobil, Chevron, Royal Dutch Shell, and BP--out of Mexico, Venezuela, Iran and Libya.

Not only has this reduced production efficiency in those countries, it has also diminished supplies of oil from them because of their lack of technological expertise. Even more worrisome is the declining production of half of the 20 largest oil-producing countries that at one time produced 85 percent of all oil.

Half of the world’s oil is today supplied by a tiny percentage of the world’s oil fields--a number that underscores the importance of giant fields. For example, six giant oil fields account for all of Saudi Arabia’s production. But production in some of these giant fields has peaked and is beginning to decline, further confirmation that the world's oil supply has begun its irreversible downward slide.

Of course, what has been truly unfathomable in the world oil picture is why the oil-importing nations engage in cutthroat rivalry for the dwindling supply of oil when presenting a firm united front to the oil exporters would have given them control of the situation. After all, the oil-producing nations have an organization—actually a cartel--called OPEC (Organization of the Petroleum Exporting Countries), that sets limits on production and thus controls prices. That Western nations supinely allow themselves to be held hostage by OPEC is only another example of the relentless pursuit of governmental folly.

Production in oil fields typically declines after about 50 years. Right now the average age of the world's 14 largest oil fields is already past the half-century mark. Oil from these giant sources still costs surprisingly little to produce--about $1.50 a barrel. Yet it takes voluminous production of such low-priced oil from these fields to offset upward price pressure from the newer, more expensive sources like Alberta‘s tar sands in Canada, where oil can cost as much as $60 a barrel or more to produce.

The United States has a mere three percent of the world’s oil reserves, but consumes 25 percent of the world’s daily oil production. We have now burned through 70% of our own oil and are so desperate for more that we are drilling 40,000 new wells a year--a pace that hasn’t been approached in more than two decades. Nevertheless, domestic production continues to decline. Instead of listening to uneducated exhortations of “Drill, Baby, Drill,” this country would be wiser to buy as much oil as we can abroad, literally husbanding the little we have left for our manifestly dismal future.

Our Competitor--The World’s Growing Middle ClassEven if you are a skeptic about the peak-oil crisis, there's another villain waiting in the wings to pounce on and unsuspecting America.In addition to its diminishing supply, the worldwide insatiable appetite for oil will continue to grow as the planet’s middle class expands. In the coming decade, the world's total population will jump by one billion, and the numbers in its thriving middle class will increase by almost two billion—600 million of them in China alone.

Researchers at the Brookings Institution estimate that by 2020, the middle class will compose 52 percent of the planet's total population--up from today’s 30 percent. By 2025, China will have the world's largest middle class, made prosperous by America’s craving for cheaply made imports manufactured by China’s almost inexhaustible supply of cheap labor. By 2025, India's burgeoning middle class will have increased to ten times its present size.

As the middle class explodes in China, India and other countries around the globe, hundreds of millions of additional automobiles will give rise to even greater demand for gasoline and other petroleum-based products. Today, the United States has 246 million vehicles--750 cars for every 1,000 persons. China, on the other hand, has only four automobiles for every 1,000 persons. With its much larger population and area, should China achieve even one-half the ownership rate of the United States, it will put an additional 400 million automobiles on Chinese roads competing with us for petroleum products.

That's the equivalent of almost doubling the number of American automobiles and adding them to the world’s count. Even if the price of gasoline becomes so astronomically high that it creates diminished demand in the United States and Europe, the use of gasoline will inevitably increase in flourishing economies such as China’s, with its GDP growing at 10% annually.

As the price of oil climbs, the cost of energy from other sources such as coal, natural gas and plant-based ethanol will inevitably rise right along with it. In addition to the problems created by a rapidly rising demand and a decreasing supply of oil, experts estimate that 80% of the world’s existing refineries, pipelines, drilling rigs, and storage tanks are deteriorating to a point where replacement must soon begin. The price tag for repairing or rebuilding these facilities will cost a cool $50 trillion, and that cost will inevitably have to be passed on to the ultimate consumer. The picture of oil’s future is not pretty.

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