FYI
This is a transcript from Australian Broadcasting Corp Science Show
http://www.abc.net.au/rn/ockhamsrazor/default.htm
*Robyn Williams:* This week, Professor Peter Newman of Curtin University
in Perth, said that Peak Oil has happened. It occurred in 2008 and was
directly linked to the GFC. As oil and therefore petrol became more
costly, so those stretched by mortgages that they couldn't pay, went
broke. The Global Financial Crisis, says Professor Newman, had an oily
origin.
Is he right? Well here's Michael Lardelli, senior lecturer in genetics
at the University of Adelaide.
*Michael Lardelli:* For six years in the 1990s, I lived and did
postdoctoral work in genetics in Sweden. For a time I worked at Uppsala
University, Scandinavia's oldest university that was established in
1477. Uppsala is a beautiful small European city 50 kilometres north of
Stockholm. The area around Uppsala is famous for its Viking heritage
and, on back roads in the area, you can still stop to examine rune
stones erected 1000 years ago. In 1997 I returned to Australia but I
have re-established a connection to Uppsala in an unexpected way. Most
nights once my young children are asleep, I sit down to translate into
English the blog of a Swedish professor of Physics. His name is
Professor Kjell Aleklett, and he works at Uppsala University, and he is
president of the international arm of the Association for the Study of
Peak Oil and Gas, otherwise known as 'ASPO'. This is a story about oil,
his research, and our future.
Anything that happens in the universe happens because energy is being
converted from one form to another. The world economy is part of our
universe and so it too requires energy for anything to happen. Without
energy there would be no food, no mining, no manufacturing, no
commuting, nothing. For the world as a whole, 85% of the energy that
drives the economy comes from converting the energy in the chemical
bonds within fossil fuels into heat and motion energy. Of the fossil
fuels, the most useful is oil because it is easy to transport and has
the most concentrated energy. Indeed, burning one litre of oil releases
energy equivalent to 20 days of hard human labour. *A fully-tanked jumbo
jet contains energy equivalent to around 13,000 years of human labour*.
In July 2008 the price of a barrel of oil spiked up to a record $US147
per barrel. It had been only half that price one year earlier. The
reasons for the price spike are complex. China, it seems, was willing to
pay almost any price to expand its oil stockpile before hosting the
Olympic Games in August of 2008. Speculators had also noticed the rapid
rise in the price of oil and were bidding up the price. The spike in the
oil price was followed in September by the crash of the investment bank
Lehman Brothers that marked the start of the world financial crisis.
Interestingly, an analysis by Professor James Hamilton of the University
of California, suggests that it was the oil price spike of July 2008
that pricked the US debt bubble and hastened the inevitable financial
crash. If you look at the history of economic recessions in the last 50
years you will see that most are preceded by a rise in the price of energy.
As economic activity around the world fell in late 2008 the price of oil
fell too, from July's $146 down to as low as $32 per barrel five months
later. Less consumption of manufactured goods means less energy is
required for mining, manufacturing and distribution. People who lose
their jobs don't need to drive to work. When the price of oil hit $US147
per barrel the world was using around 86 million barrels of oil every
day. Today oil consumption is about 84 million barrels per day, a
decrease of more than 2%.
There is a tendency to dismiss the high oil prices of 2008 as entirely
due to speculation but that cannot be true. Throughout the 1990s oil had
hovered around or below $20 a barrel but after 2002 it began to rise
steadily. The price hit $50 in 2005 and doubled again to $100 by 2007.
Why? Well, the world economy was growing rapidly during this period and
more real economic activity can only occur if more energy is used. But
the simple truth is that the world could not expand its use of energy as
quickly as needed, and after 2005 it ran into real problems. If you look
at the history of world oil production you can see that production was
basically flat from 2005 until 2008 despite the tripling of oil prices
in this period. According to economic theory, this should not have
happened. The high oil prices should have stimulated oil production.
They should have increased the supply and so reduced the price of oil.
Instead the world economy ran into a brick wall. What went wrong?
The flat oil production plateau of 2005 to 2008 was a brilliant
illustration of the fact that the predictive powers of economic theory
are very limited. In spite of its technical jargon and its liberal use
of mathematics, economics is more art and guesswork than a science.
That's why the First Law of Economics states that for every economist
there exists an equal and opposite economist.
On the 27th August last year the world celebrated 150 years since the
first commercial oil well was drilled by Colonel Edwin Drake in
Pennsylvania. The oil industry has now seen over a century of massive
investment and astonishing technological development. The modern
accomplishments of the oil industry sound more akin to science fiction
than reality. The latest discoveries of oil off the coast of Brazil are
a good example. Amid huge ocean swells a gargantuan exploratory oil rig
costing nearly $1 million per day to lease, floats two kilometres above
the seabed. Its drill-bit descends through the ocean depths, then grinds
its way down through another five kilometres of seabed before finding
oil trapped for millions of years under a two kilometre thick layer of
ancient salt. This oilfield, named Tupi, is the biggest discovery in the
past decade. One day its yield may total 8-billion barrels although
extracting it will require a huge amount of investment and a great deal
of time. The first well drilled into Tupi cost almost a quarter of a
billion dollars. Subsequent wells have cost $60 million each.
Every time a so-called 'giant' oilfield is discovered - and 'giant'
means anything over half a billion barrels of oil - our media trumpet it
as the solution to any concerns we may have over future oil supplies.
But what most people don't appreciate is that the rate at which humanity
is using oil almost beggars belief - *we consume 1,000 barrels of oil
per second,* which amounts to almost 30-billion barrels per year. *So
half a billion barrels from a 'giant' field could supply the world for
about one week, and the Tupi field might eventually yield enough oil to
supply the world for less than four months at current consumption rates*.
Herein lies the problem. For the world economy to grow current
consumption rates are not enough. To grow the economy we need to
increase the rate at which we use energy. Economic growth simply cannot
be separated from energy growth. Even the world's highest advisory body
on energy, the International Energy Agency, acknowledges this. Indeed,
for most of its history the economists at the IEA have actually
predicted future increases in the rate of oil production based on the
rates of economic growth they were expecting. This 'economy-based'
method of predicting future oil production worked fairly well until, in
2005, our finite planet Earth stopped co-operating. After 2005 it
refused to yield ever increasing flow rates of oil to power the economic
growth. In response to growing scepticism about its predictions the IEA
then changed its methodology, and in 2008, it published a so-called
'bottom up study'. It no longer used anticipated economic growth to
predict oil production growth. Instead, it predicted future production
based on an oilfield-by-oilfield analysis of what it thought individual
oilfields could produce.
The bulk of the world's oil production comes from a relatively small
number of very large fields discovered decades go. Most of these very
large fields now show declining production. The total rate of world oil
production has only been maintained at current levels by finding and
bringing online, an increasing number of smaller fields. The financial
cost, and the energy required to find and develop these new, smaller
fields is constantly increasing. In 2008 the IEA looked at the
production from all current fields and how rapidly it would decline.
They also predicted how much oil would be produced in future years from
as yet undeveloped fields and fields that might yet be discovered. The
result? They saw less future oil production than their previous
estimates but, nevertheless, oil production in 2030 would be higher than
today, so there was a little room for economic growth.
But was the IEA correct? This is where the story gets very interesting
and Professor Aleklett in Uppsala re-enters the picture. Professor
Aleklett heads a group of research scientists called the Global Energy
Systems group at the Angstrom Laboratory of Uppsala University. In
recent years these scientists have been developing mathematical models
of oil production from individual oil fields. They re-analysed the
numbers in the IEA's field-by-field bottom-up analysis. They found that
they could agree with most of what the IEA predicted - namely the
decline rate of existing fields and the volumes of accessible oil in
known but undeveloped fields and in fields that might yet be discovered.
However, they found a glaring error. The IEA had predicted future rates
of oil production from undeveloped and yet-to-be-discovered fields that
were far, far too high. When they took the IEA's data and imposed
rational but nevertheless extremely optimistic limits on future
production rates, they saw to their astonishment, that the maximum rate
of oil production that the world would ever achieve was in 2008. That's
right - the so-called 'peak' of oil production was actually two years
ago and we have now begun the long downward trend in oil production that
will characterise the second half of humanity's oil era.
The re-analysis of the IEA's own data by the Global Energy Systems group
showing that we have passed the peak of oil production is the scientific
equivalent of a 'slam dunk'. It is a beautiful piece of work and I have
been privileged to help them prepare it for publication. I find it
fascinating to see other analyses are also giving similar results.
Indeed, an analysis by Australia's own Macquarie Bank, not of actual oil
production but of oil production capacity, predicted declining capacity
after last year, 2009.
Since the IEA produced its bottom-up analysis the financial crisis has
hit the oil industry hard. Much oil exploration and oilfield development
has been cancelled and this will accelerate the decline in world oil
production. The implication is that, when or if the world economy tries
to grow out of its current slump, we will see demand exceed supply and
oil prices will spike to a level that will, once again, cause an
economic fall. Unfortunately, unless alternative sources of energy are
found and developed, and quickly, the importance of oil to the world
economy means that economic growth will follow the declining production
of oil downwards for many years and probably decades. From a scientific
point of view, there can be no return to the long and heady days of
economic growth seen earlier this decade, no matter what leading
economists of heads of reserve banks may think to the contrary. As a
scientist, and with my two young children in mind, I think we need to be
looking urgently at the implications of energy decline for the most
important things in life. This is especially true for food production
which, in industrialised nations, is highly dependent upon abundant
supplies of oil.
We can no longer afford to sit around discussing whether or not we have
passed the peak of oil production. We cannot wait, complacently, for
price signals to stimulate the development of alternative sources of
energy since oil prices will fluctuate wildly. Every time the economy
tries to grow, oil demand will exceed supply, causing the oil price to
spike up. This will strangle the economy, reduce oil demand and cause
the price to fall. Oil companies cannot invest in the face of these wild
fluctuations in price. Most importantly, we must remember that to do
anything at all requires energy. So, while oil is still relatively
abundant, we must invest as much as we can to develop the energy sources
of the future. Once the oil supply starts to decrease significantly, we
will be too busy just trying to keep food production and essential
services running to have any energy left over for building expensive
high-tech alternative energy infrastructure.
The peak of oil production was two years ago. For the sake of my
children, and your children, we need to just accept that fact and deal
with it. When it comes to investing in energy alternatives, do it now,
because it will not be possible later.
*Robyn Williams:* And you might like to listen to this week's /Science
Show/ in which two potentially huge new sources of energy are featured:
Geothermal in Victoria and Craig Venter's newly created organisms, as a
basis for algal oil. That was Michael Lardelli, Senior Lecturer at the
University of Adelaide.
Next week: Australia's Chief Sceptic Eran Segev.
I'm Robyn Williams, also very sceptical, especially on Sundays.
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