A summary of:
Hirsch, R. L., et al. February 2005. Peaking of World Oil Production: Impacts, mitigation, & risk management. Department of Energy.
The peaking of world oil production presents the U.S. and the world with an unprecedented risk management problem. As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented. Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking. Page 4
In summary, the problem of the peaking of world conventional oil production is unlike any yet faced by modern industrial society. The challenges and uncertainties need to be much better understood. Technologies exist to mitigate the problem. Timely, aggressive risk management will be essential. Page 7
Oil is the lifeblood of modern civilization. It fuels the vast majority of the world’s mechanized transportation equipment – Automobiles, trucks, airplanes, trains, ships, farm equipment, the military, etc. Oil is also the primary feedstock for many of the chemicals that are essential to modern life. This study deals with the upcoming physical shortage of world conventional oil — an event that has the potential to inflict disruptions and hardships on the economies of every country. Page 8
Use of petroleum is pervasive throughout the U.S. economy. It is directly linked to all market sectors because all depend on oil-consuming capital stock. Oil price shocks and supply constraints can often be mitigated by temporary decreases in consumption; however, long term price increases resulting from oil peaking will cause more serious impacts. Page 20
Oil Peaking Presents a Unique Challenge
The world has never faced a problem like this. Without massive mitigation more than a decade before the fact, the problem will be pervasive and will not be temporary. Previous energy transitions (wood to coal and coal to oil) were gradual and evolutionary; oil peaking will be abrupt and revolutionary p 64
Even if efficient vehicles were mandated or a technology breakthrough occurred, it would take 10-15 years to replace the existing vehicle fleet.
In 2003, the world consumed just under 80 million barrels per day (MM bpd) of oil. U.S. consumption was almost 20 MM bpd, two-thirds of which was in the transportation sector. The U.S. has a fleet of about 210 million automobiles and light trucks (vans, pick-ups, and SUVs). The average age of U.S. automobiles is nine years. Under normal conditions, replacement of only half the automobile fleet will require 10-15 years. The average age of light trucks is seven years. Under normal conditions, replacement of one-half of the stock of light trucks will require 9-14 years. While significant improvements in fuel efficiency are possible in automobiles and light trucks, any affordable approach to upgrading will be inherently time-consuming, requiring more than a decade to achieve significant overall fuel efficiency improvement. Page 4
Any transition of liquid fueled, end-use equipment following oil peaking will be time consuming. The depreciated value of existing U.S. transportation capital stock is nearly $2 trillion and would normally require 25 – 30 years to replace. At that rate, significantly more energy efficient equipment will only be slowly phased into the marketplace as new capital stock gradually replaces existing stock. Oil peaking will likely accelerate replacement rates, but the transition will still require decades and cost trillions of dollars. Page 25
Consider the world resource of conventional oil. In the past, higher prices led to increased estimates of conventional oil reserves worldwide. However, this price reserves relationship has its limits, because oil is found in discrete packages (reservoirs) as opposed to the varying concentrations characteristic of many minerals. Thus, at some price, world reserves of recoverable conventional oil will reach a maximum because of geological fundamentals. Beyond that point, insufficient additional conventional oil will be recoverable at any realistic price. This is a geological fact that is often misunderstood by people accustomed to dealing with hard minerals, whose geology is fundamentally different. This misunderstanding often clouds rational discussion of oil peaking.
Five main ways to solve our oil problems
Page 56: Hirsch believes that these 5 methods could produce 21 million barrels per day (we’re using 19-20 million barrels per day now) after 10 years of building equipment and facilities to produce heavy oil, GTL, Enhanced Oil Recovery, Efficient Vehicles, and Coal Liquids.
…………………………………….Barrels per day……..% of total solution
Heavy Oil 8 38
GTL (Gas-to-Liquid from NG) 5 24
Enhanced Oil Recovery 3 14
Efficient Vehicles 3 14
Coal Liquids 2 10
Besides further oil exploration, there are commercial options for increasing world oil supply and for the production of substitute liquid fuels:
- Improved Oil Recovery (IOR) can marginally increase production from existing reservoirs; one of the largest of the IOR opportunities is Enhanced Oil Recovery (EOR), which can help moderate oil production declines from reservoirs that are past their peak production:
- Heavy oil / oil sands are a large resource of lower grade oils, now primarily produced in Canada and Venezuela; those resources are capable of significant production increases.
- Coal liquefaction is a well established technique for producing clean substitute fuels from the world’s abundant coal reserves; and finally,
- Clean substitute fuels can be produced from remotely located natural gas, but exploitation must compete with the world’s growing demand for liquefied natural gas. However, world-scale contributions from these options will require 10-20 years of accelerated effort. Page 4
2) TAR SAND SOLUTION
The reasons why the production of unconventional oils has not been more extensive is as follows:
- Production costs for unconventional oils are typically much higher than for conventional oil
- Significant quantities of energy are required to recover and transport unconventional oils
- Unconventional oils are of lower quality and, therefore, are more expensive to refine into clean transportation fuels than conventional oils
- In addition to needing a substitute for natural gas for processing oil sands, there are a number of other major challenges facing the expansion of Canadian oil sands production, including water and diluent availability, financial capital, and environmental issues, such as SOX and NOX emissions, waste water cleanup, and brine, coke, and sulfur disposition. P 41
4) LNG SOLUTION
LNG –Delayed Salvation
A) Gas production in the United States (excluding Alaska) now appears to be in permanent decline, and modest gains in Canadian supply will not overcome the US downturn. Page 34
B) Because of NIMBYism and fear of terrorism at LNG facilities, a number of the proposed terminals have been rejected. Page 35
Problem with implementing any of the above:
What used to be termed the “not-in-my-back-yard” (NIMBY) principle has evolved into the “build-absolutely-nothing-anywhere-near-anything” (BANANA) principle, which is increasingly being applied to facilities of any type, including low-income housing, cellular phone towers, prisons, sports stadiums, water treatment facilities, airports, hazardous waste facilities, and even new fire houses. Construction of even a single, relatively innocuous, urgently needed facility can easily take more than a decade. P 46
The implications for U.S. homeland-based mitigation of world oil peaking are troubling. To replace dwindling supplies of conventional oil, large numbers of expensive and environmentally intrusive substitute fuel production facilities will be required. Under current conditions, it could easily require more than a decade to construct a large coal liquefaction plant in the U.S. The prospects for constructing 25-50, with the first ones coming into operation within a three year time window are essentially nil. Absent change, the U.S. may end up on the path of least resistance, allowing only a few substitute fuels plants to be built on U.S. soil; in the process the U.S. would be adding substitute fuel imports to its increasing dependence on imports of conventional oil. P 47
VI. MITIGATION OPTIONS AND ISSUES A. Conservation Practical mitigation of the problems associated with world oil peaking must include fuel efficiency technologies that could impact on a large scale. P 37
How it will unfold
When oil prices increase associated with oil peaking, consumers and businesses will attempt to reduce their exposure by substitution or by decreases in consumption. In the short run, there may be interest in the substitution of natural gas for oil in some applications, but the current outlook for natural gas availability and price is cloudy for a decade or more. An increase in demand for electricity in rail transportation would increase the need for more electric power plants. In the short run, much of the burden of adjustment will likely be borne by decreases in consumption from discretionary decisions, since 67% of personal automobile travel and nearly 50% of airplane travel are discretionary. Page 24
For the U.S., each 50% sustained increase in the price of oil will lower real U.S. GDP by about 0.5 percent, and a doubling of oil prices would reduce GDP by a full percentage point. Depending on the U.S. economic growth rate at the time, this could be a sufficient negative impact to drive the country into recession. Thus, assuming an oil price in the $25 per barrel range — the 2002-2003 average, an increase of the price of oil to $50 per barrel would cost the economy a reduction in GDP of around $125 billion.
If the shortfall persisted or worsened (as is likely in the case of peaking), the economic impacts would be much greater. Oil supply disruptions over the past three decades have cost the U.S. economy about $4 trillion, so supply shortfalls associated with the approach of peaking could cost the U.S. as much as all of the oil supply disruptions since the early 1970s combined.
The effects of oil shortages on the U.S. are also likely to be asymmetric. Oil supply disruptions and oil price increases reduce economic activity, but oil price declines have a less beneficial impact. Oil shortfalls and price increases will cause larger responses in job destruction than job creation, and many more jobs may be lost in response to oil price increases than will be regained if oil prices were to decrease. These effects will be more pronounced when oil price volatility increases as peaking is approached. The repeated economic and job losses experienced during price spikes will not be replaced as prices decrease. As these cycles continue, the net economic and job losses will increase.
Sectoral shifts will likely be pronounced. Even moderate oil disruptions could cause shifts among sectors and industries of 10% or more of the labor force. Continuing oil shortages will likely have disruptive inter-sectoral, inter-industry, and inter-regional effects, and the sectors that are (both directly and indirectly) oil-dependant could be severely impacted. Monetary policy is more effective in controlling the inflationary effects of a supply disruption than in averting related recessionary effects. Thus, while appropriate monetary policy may be successful in lessening the inflationary impacts of oil price increases, it may do so at the cost of recession and increased unemployment.
Monetary policies tend to be used to increase interest rates to control inflation, and it is the high interest rates that cause most of the economic damage. As peaking is approached, devising appropriate offsetting fiscal, monetary, and energy policies will become more difficult. Economically, the decade following peaking may resemble the 1970s, only worse, with dramatic increases in inflation, long-term recession, high unemployment, and declining living standards.
(1) Dr. Robert L. Hirsch is a Senior Energy Program Advisor at SAIC.
His past positions include Senior Energy Analyst at RAND; Executive Advisor to the President of Advanced Power Technologies, Inc.; Vice President, Washington Office, Electric Power Research Institute; Vice President and Manager of Research, ARCO Oil and Gas Company; Chief Executive Officer of ARCO Power Technologies, a company that he founded; Manager, Baytown Research and Development Division and General Manager, Exploratory Research, Exxon Research and Engineering Company; Assistant Administrator for Solar, Geothermal, and Advanced Energy Systems (Presidential Appointment), and Director, Division of Magnetic Fusion Energy Research, U.S. Energy Research and Development Administration. During the 1970s, he ran the US fusion energy program, including initiation of the Tokamak fusion test reactor. He has served on numerous advisory committees, including the DOE Energy Research Advisory Board. He has been a member of several National Research Council (NRC) committees, including Fuels To Drive Our Future and the 1979 and recent NRC hydrogen studies. He was chairman of the NRC Committee to Examine the Research Needs of the Advanced Extraction and Process Technology Program (Oil & gas). He is immediate past chairman of the Board on Energy and Environmental Systems and is a National Associate of the National Academies.
Other authors: Project Leader Roger Bezdek, MISI, Robert Wendling, MISI