My Thoughts on the GAO Report on Peak Oil

As I mentioned yesterday, the Government Accountability Office (GAO) has released a report addressing future energy supplies in the U.S.:

Uncertainty about Future Oil Supply Makes It Important to Develop a Strategy for Addressing a Peak and Decline in Oil Production (1.1 meg PDF warning)

The report is getting a good deal of mainstream media coverage. I believe that there is something of value in the report for everyone, and there are a number of lessons we need to take away from it. Let’s start with Results in Brief:

Most studies estimate that oil production will peak sometime between now and 2040, although many of these projections cover a wide range of time, including two studies for which the range extends into the next century.

That is obviously a very wide range. If you don’t believe that oil production will peak until the latter part of that range, then you may not be at all concerned about the issue. (More in a bit on why you should be anyway). After all, 2040 is over 30 years in the future, and technology could come up with a lot of neat tricks in that amount of time. After all, some believe we will have transcended biologyby then. Perhaps very cheap solar energy will satisfy the bulk of our power needs. Those who tend toward the optimistic viewpoint that science will solve the problem will probably take great comfort in a 2040 estimate.

On the other end of the scale are some of the hysterical reactions that I read yesterday. Some believe that not only is peak NOT 30+ years away, but they believe that it has already happened. After reading some reactions following the release of the report, I had to look outside to make sure there wasn’t rioting in the streets and missiles flying overhead. That was literally the tenor of some of the more hysterical reactions. (For the record, I believe there is a 90% chance of a production peak by 2015, and maybe a 10% chance that production has already peaked).

While I certainly don’t tend toward the apocalyptic viewpoint, I do consider this a very serious challenge and something that needs to be addressed immediately. If oil production peaks in the next few years, and is followed by a 4-8% annual production decline, things could get very bad indeed. The U.S. is simply not prepared to have its oil supply disrupted. As the report notes:

While the consequences of a peak would be felt globally, the United States, as the largest consumer of oil and one of the nations most heavily dependent on oil for transportation, may be particularly vulnerable.

Now, here is why you should care about this situation, even if you tend toward the viewpoint that oil production won’t peak for 30 years:

Other important sources of uncertainty about future oil production are potentially unfavorable political and investment conditions in countries where oil is located. For example, more than 60 percent of world oil reserves, on the basis of Oil and Gas Journal estimates, are in countries where relatively unstable political conditions could constrain oil exploration and production.

Most of the remaining oil happens to be in places like Iran – not on the friendliest terms with the U.S., Nigeria – where the promise of oil wealth has led to much violence (ala Blood Diamond), and Saudi Arabia – generally on “friendly” terms with the U.S., but in a historically unstable part of the world. This is where the oil dollars are flowing. If you think ExxonMobil is making big profits, you would probably be stunned at the amount of money Saudi Aramco is pulling in – with a significant portion resulting from U.S. demand. Some of that money ends up in the pockets of people like Osama bin Laden, who then uses it to fund attacks against the U.S.

So, is that situation desirable for the next 30 years (for those with a 2040 peak view)? I doubt too many people will say yes. Yet the same mitigation efforts for peak oil will also mitigate our dependence on foreign oil. Why don’t we address this? Politics. There is no free lunch. Mitigation will cost money. How many people would be willing to get off of foreign oil if the end result is gasoline prices of $7.00 a gallon? I guarantee you that there is a price point that would enable us to get off of foreign oil. But what percentage would accept such a solution? 5%?

The problem is that people are being promised pie-in-the-sky solutions. They want to get off of foreign oil, but they don’t want their gasoline prices to increase. So, to fulfill the unrealistic expectations we get “solutions” like corn ethanol. I have been warning about the implications of this for a long time. We saw a lot of unrealistic assumptions early on that have now led to a situation in which ethanol has done little to reduce our foreign oil demand, while driving up our food prices. Yet despite the current production of 5 billion gallons of ethanol a year, gasoline prices are once again in record territory. And I believe the worst is still in front of us. (Yes, I know the farmers are getting rich, and their land values are skyrocketing. Maybe we should hit them with a windfall profits tax?)

Biofuels certainly have a part to play if we are serious about getting off of foreign oil. But we have got to be realistic here. The U.S. uses too much energy, because energy has been cheap there for a long time. People are ready to riot because gasoline hits $3.00 a gallon, yet people in Europe have dealt with that situation – and quite well – for many years. But in the U.S., conservation is really being discussed as an afterthought. Cellulosic ethanol, algal biodiesel, and hydrogen cars are not going to save the day. Conservation is the only thing that can save the day, with various energy sources providing the energy we do need.

This is why, even if I knew oil production wasn’t going to peak for 30 years, I would still be concerned. We are very vulnerable. Supply and demand will remain tight. Look at Chris Skrebowski’s latest Megaproject update. As Chris noted:

It is only possible to draw two conclusions from this latest megaprojects analysis. First, data on production, project performance and depletion rates is wholly unsatisfactory, particularly for the Opec producers. Second, the large volumes of new capacity being added between 2007 and 2012 may not translate into the sort of increased production flows the world economy needs to underpin economic growth.

Supply can’t open up a gap on demand, so oil prices are going to remain high. As long as the U.S. maintains the status quo, riches will continue to flow into countries like Iran and Venezeula, imminent peak or not.

There is a section of the report devoted to various mitigation possibilities. That is a pretty realistic assessment in my opinion, and probably worth another post in the near term. The report concludes:

The consequences would be most dire if a peak occurred soon, without warning, and were followed by a sharp decline in oil production because alternative energy sources, particularly for transportation, are not yet available in large quantities. Such a peak would require sharp reductions in oil consumption, and the competition for increasingly scarce energy would drive up prices, possibly to unprecedented levels, causing severe economic damage. While these consequences would be felt globally, the United States, as the largest consumer of oil and one of the nations most heavily dependent on oil for transportation, may be especially vulnerable among the industrialized nations of the world.

That is not an acceptable situation. Policy makers must wake up and find the courage to address the vulnerability.

16 thoughts on “My Thoughts on the GAO Report on Peak Oil”

  1. “People are ready to riot because gasoline hits $3.00 a gallon, yet people in Europe have dealt with that situation – and quite well – for many years.”

    With all due respect, in Europe, much of the high price for fuel is due to taxes. We are generally prepared to pay these taxes as we have a far better welfare state as well as universal health care provision. In general employees are far better protected and enjoy a greater overall provision of benefits, including a much greater holiday allocation.

    As the US has a far less comprehensive state benefits programme and certainly nothing remotely resembling universal health care, I can understand why steep increases in the price of fuel may have a far greater impact on Americans than the comparison with Europe may suggest.

    For what it’s worth, I live due south of you in one the of more affluent Home Counties. However, I have spent a great deal of time in the US.

  2. “Oil on the brain” by Lisa Margonelli is an interesting read and provides a realistic, albeit somewhat disheartening, perspective on the worldwide oil economy. Regardless of whether the “oil peak” has passed or is in the not too distant future, oil supply is very uncertain and implementation of an intelligent energy strategy as soon as possible is warranted.

    http://www.oilonthebrain.com/

  3. RR,

    Another well measured response…hope you end your hiatus soon and return to the Drum…

  4. Shouldn’t we be doing more to get state and local governments involved in this. I would think we might have more luck getting the proper attention from our local leaders. And given a critical mass of local and regional leaders discussing the issue, the federal government would have no choice but to pay attention.

  5. With all due respect, in Europe, much of the high price for fuel is due to taxes.

    That’s right, but the lesson from Europe is that high gas prices needn’t bring the economy to a standstill. It is just that the U.S. was built on cheap fuel, and so the transition will be painful. But it would be less painful in the long run if we did it with high gas taxes. If prices start to rise unexpectedly due to shortages, the situation will be far worse.

    But Europe shows that the quality of life can be quite high despite high fuel prices. My life here in Scotland is every bit as comfortable as it was in Montana, and I am using probably half the fossil fuels I was using before (and I wasn’t using all that much even in Montana).

    Cheers, RR

  6. Hi Robert,

    I initially came out against your self-enforced exile from TOD, believing that you were giving up a useful platform for your views. But I have to say I’m enjoying reading your comments here away from the combative atmosphere that drove you away.

    And what the hell has happened to TOD recently anyway? When I first started reading it last year there was a whole range of views, from doomer to cornucopian. You could read knowledgable debates and really feel that you were learning something, seeing people’s claims and ideas being tested. Now, however, it’s Radio Doomer: all doomer all the time.

    The contributing articles still make it worth paying a visit, but the state of the comments is dire. It’s turned into LATOC lite down there and the masses are wailing (some with joy) as they perceive the mothership to be coming in for landing. One comment in particular stood out to me as sadly typical of the recent fare:

    OMG! This is CNBC ???

    Better get the remaining ducks in a row….

    I wish all TOD readers and posters the very best.

    Prof G – I notice alot more gardening ideas, etc from readers. I would ask if you could partion a space for TOD members to share ideas. Some of these folks are way ahead and it looks like we need to get moving asap…

    Thank you for creating this site, best to you and yours.

    OMG he looks worried….

    OMG indeed. You’re well out, Robert.

  7. Well said, Robert. Even if the peak isn’t upon us, it is simply smart policy to wean America from it’s oil addiction as soon as possible. The status quo is simply an unsustainable option – economically, politically and environmentally.

    Cheers,

    Jesse Jenkins

  8. Now, however, it’s Radio Doomer: all doomer all the time.

    I saw someone refer to this as a “reinforcing paranoia loop.” I can guarantee you that the editors and other contributors are not happy about the recent tenor. Stuart has mentioned writing an article about this.

    But this is the atmosphere I had faced lately. I was not reinforcing the paranoia loop. I was suggesting that at least some of the paranoia was misplaced. Ultimately, it was obvious that while I can find the time to write essays, arguing with 20 people at once was taking up far too much of my time.

    I think it will be this way until we find out if Saudi has more oil up their sleeves. If they raise production, the tenor will change somewhat. I know that some have already contrived a scenario in which Saudi can raise production by oil laundered from Iraq, but I think most people will step back and re-evaluate their position if Saudi increase production this summer (which I expect them to).

    Cheers, Robert

  9. Even if the peak isn’t upon us, it is simply smart policy to wean America from it’s oil addiction as soon as possible.

    OPEC supplies about 1/4th of U.S. oil. If the U.S. had the same per capita oil consumption as most European countries, there would be no need for OPEC oil at all. In fact, if the U.S. could cut its per capita energy consumption to that of Europe, there would scarcely be a need for imports. We would be almost energy independent. Our current imports from Canada would likely be all the imports we would need.

    Will we do it? Of course not. Because consumers will complain about OPEC, but if they find out that higher prices is what it will take to eliminate the need for OPEC oil, they will just hold their noses and maintain the status quo. Yet this keeps us incredibly vulnerable.

    Cheers, Robert

  10. My first thought was that the report was right to focus on the uncertainty, and the fact that no one actually knows when peak will come.

    And I think they are also right that the rational responses to that are (1) try to refine the data, and (b) do a little more alt-energy insurance.

    I don’t think they were hard enough on corn ethanol (limits to how much we can actually grow), and I don’t think they talked up efficiency (or better yet, conservation) as far as they could … but a good start.

    This is really about an uncertain energy future.

  11. “I saw someone refer to this as a “reinforcing paranoia loop.” I can guarantee you that the editors and other contributors are not happy about the recent tenor. Stuart has mentioned writing an article about this.”

    I think the “drumbeat” has been building for some time.

  12. OK, I’ve got to say it. I warned of those feedbacks and the choice TOD was making six months to a year ago.

    I laid out that it was TOD’s choice.

  13. Corn based ethanol is the first step in a long process. Read Buckminster Fuller’s 1982 book Critical Path. Or consider what Christopher Columbus must have said to King Ferdinand of Spain. He didn’t know there was gold when he set out to find the New World.

    Cellulosic ethanol is the future. That’s the gold that lies on our horizon. If we stay the course and keep the sails trim we’ll get there in under one year! Already huge advances are already being made at Iogen in Ottawa and at GreenField Ethanol’s plant in Tiverton, Ontario.

    And know this – corn grown to supply ethanol plants is not the same crop used to make corn flakes. And so what if Canadian farmers get paid more for their hard work in the future… I’d rather see our citizens profit more than Esso (Exxon) and Shell. Keep your money here at home and not in the pockets of the Arabs or the terrorists they fund, and keep our soldiers here at home.

    And by the way corn crops don’t require any more fuel to produce than any other crop that’s already being grown today. And with modern crop rotation farmers don’t apply that much chemical fertilizer – just nitrogen. You know, there is a reason that you nay sayers are being ignored – because you are uninformed and your ignorance perpetuates unhealthy myths that are encouraged by petroleum companies.

    read Fuel Ghoul at
    http://roberrific.typepad.com/drunkenmoose/

  14. Speaking for myself, I am actually technologically neutral. I don’t think any of us should pick, our use our influence on government to pick “a winner” prematurely.

    I only come down against corn ethanol because it is heavily subsidized in the US, and for I think all the wrong reasons.

    http://odograph.com/?p=103

    I think picking corn ethanol because cellulosic ethanol might work is … premature … just as I thought the Hydrogen Highway was premature when that was the government’s “winner.”

    I’ve only got a B.S. Chemistry, but my short time in the science departments told me that a lot of profs have great ideas. Those ideas need time to flower. It’s not time to build the X-station, when X is still in the research stage.

  15. know, there is a reason that you nay sayers are being ignored – because you are uninformed and your ignorance perpetuates unhealthy myths that are encouraged by petroleum companies.

    Yeah, thanks for stopping by AGAIN and letting us know we are being ignored. 🙂

    RR

  16. Come on. The sooner we hit peak oil, the better. And gas at my corner station is nearly $4/gallon (not $3), and I don’t see much complaining, much less riots on my street. The US economy can seamlessly absorb much higher energy prices. If we can afford to dump $3 trillion into destabilizing Iraq, without hardly blinking an eye, none of this energy stuff is a big deal. All of this whining about how terrible it’s going to be when energy prices rise remind me of the Y2K panic. The sooner the better, I say again.

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