Peak Oil Files - 1 - The Importance of Oil

Welcome to Chapter 1 of a series that will explore the notion of peak oil and it’s impact on the world through the lens of supply, demand and price. But before we get into all that, I would like to establish some context - what is oil and why is it so important?

Essentially, oil is energy. Concentrated energy.

But just how concentrated? The standard measurement of oil is the barrel which contains 159 litres or 42 gallons of crude oil. This equates to roughly 16 hundred kilowatt hours worth of energy. A meaningless number to most of us.

To give a human perspective, the average person can can consistently generate around 75 watts of power over an 8 hour working day. If we do some quick maths we can see that the average barrel of oil is the equivalent to over 2700 days of work. Or put another way, the same output as 10 energy servants each working for an entire year. And yes, no holidays.

If we were to pay minimum wage to each of these energy servants, each barrel would cost you well over hundred thousand US dollars and potentially a lot more depending on what country you live in. Historically we have paid somewhere between 20 and 147 US dollars for each barrel, so even the record highs of 2008 can be considered incredibly cheap by comparison.

In 2010 the average American consumed around 22 barrels of oil, so from an energy perspective it can be said most Americans live like kings. And all of this was purchased for the princely sum of 1800 dollars.

Besides its value as an energy dense fuel, it is also a liquid fuel. Meaning it can be easily transported anywhere around the world with only a spark required to use it. A feature that no other major energy source can claim.

Each barrel is a unique mixture of a wide range of hydrocarbon molecules each with distinct properties. We have found many uses for them. Most of it is burnt directly as a fuel, satisfying virtually all of our transport energy needs. Some of these fuels are also used for heating and electricity generation.

Modern farming and distribution methods are also heavily dependent on oil as well as fertilisers derived from natural gas.

The Naphtha and Natural Gas Liquids components are the basis for a lot of our plastics, pharmaceuticals and chemicals while the heavier component of bitumen is often used to make roads.

In fact oil is so prevalent in our lives you would be hard pressed to pick up an item in a typical modern home that has not been touched by oil in some way. 

Due to oil’s incredible value, humans have come to love the stuff, wanting more and more of it each year. In 2010 we consumed 87 million barrels. each - and every - day.

This amount is a bit hard to wrap your head around so this is what it looks like next to some of the worlds tallest buildings. Not a trivial amount.

But this remains in the shadow of the yearly tally - almost 32 billion barrels worth. An amount so large that is more sensible to measure in cubic kilometres or cubic miles.

The scale of todays consumption is a key part in understanding the problems we have in replacing conventional oil with alternatives.

Oil is one of the under appreciated factors behind the huge leaps mankind has made this last century. Not only did oil and the tractor free most of us from shackles of subsistence farming, gifting us the time to develop new skills in science, engineering, law and finance, but oil is also integral in the extraction, processing, transportation and ultimately the cost of so many of the commodities we use every day.

These skills and raw materials are the basic building blocks which have allowed the world economy to reach the size and complexity we enjoy today. This is why oil is known as a master resource.

This exponential trend is reflected through population. With both supporting each other. This exponential trend is reflected through population. The economy enabled increases in population, and human labour enabled the increases in GDP. But energy is what makes this all possible. It was only when we started unlocking the vast quantities of energy in coal and then oil did the human growth story really gather momentum.

Today, people and governments all around the world want this economic growth story to continue. This is especially true in the developing world where they quite rightly want to start enjoying a standard of living considered normal in the west.

The world’s population has exploded, quadrupling over the last 100 years to 7 billion people. Luckily higher standards of living and education does help to reduce birth rates, so there is hope that growth in population will slow down. But the fertility rates in the developing world mean that overall population growth has a powerful momentum that will linger for decades. It is inevitable that there will be an extra 2 to 3 billion mouths to feed by 2050.

Given the direct link between human prosperity and energy use, the expected increases in population and lifestyle, particularly in the developing parts of the world, will require the generation of a lot more energy.

As oil is currently the king of fuels, in terms of both scale and value, it will have to play a critical role in feeding this growing energy demand.

This is the story of per capita oil consumption for the various world regions over the last 40 years. During this period population growth has been the main driver behind the overall increases in oil consumption and this will continue well into the future.

But the developing world is doing just that, developing and this will mean more energy and more oil per person.

Lets throw some numbers into the mix. In 2010 the world consumed around 87 million barrels of oil per day.

If we freeze these individual consumption levels, population growth alone will mean that we need around 105 million barrels a day by 2030 - and 118 million barrels a day by 2050. But we know the world will not stand still and because the developing world will continue to slowly catch up we can expect numbers a fair bit higher than this.

But where exactly is the world heading in the long term?

Today there are perhaps 1 billion people who have naturally reached their oil saturation point, a point where the volume of travel and general consumption is high enough to have reached a natural limit. But this limit depends a lot on income and technology. For example more efficient cars might not compensate enough for increased air travel.

And there will be at least another 8 billion people aspiring to a similar lifestyle wanting to catch up and reach their own oil saturation point. If they decide to adopt the American dream we would need more than 6 times as much oil as we consume today. A European lifestyle would mean three times todays volumes.

This begs the question - Where will all this liquid energy come from? Is this even possible? Surely there must be a limit on this finite planet of ours. And what will happen when we get close to this limit?

Human history has shown that we aren’t very good at recognising such limits ahead of time and organising ourselves to avoid them. Usually we plough head long into them and then try to adapt to whatever fallout that follows.

If the high oil prices of recent years is any guide, we might be closer to this limit than many of us realise. There were no major supply disruptions during this period that can explain why oil prices increased 3-4 times since 2004 and have remained so high for such a long period.

Could it be that supply is starting to lose it’s battle with demand?

This is an extremely important question as it has such huge economic ramifications for us all. The laws of supply and demand dictate that price rises will be the result and history has shown the damage that this can cause.

There have been a number of oil shocks in the last several decades and they all coincide with periods of economic decline. This is not to say high oil prices are the singular cause of all these recessions, but they most certainly act as an artificial tax that weighs everyone down and helps expose the weak points in the overall economy.

So is it a coincidence that the largest economic decline since the Great Depression followed immediately after the largest price spike ever experienced?

The political events of the 1970s that triggered the oil shortages and price spikes, made this cause and effect relationship plain to see. But today this link has been largely missed. Despite the media’s almost ceaseless coverage on the state of the economy and the numerous post mortems on the financial crisis, most people still seem to be unaware of the fact that the world experienced it’s 3rd major oil shock.

One of the few elephants remaining in the room.

The shock has not ended. 2011 was the first year in human history where oil prices were consistently over $100 a barrel and this price band appears to be the new normal.

Even with the hype surrounding fracking in America it is difficult to see enough new supply coming online to significantly reduce prices. And if demand outpaces supply, the price rises of the last 10 years could easily repeat themselves. It is not inconceivable that oil prices could double or triple to 200 or 300 dollars a barrel.

You don’t need to be an expert to know this kind of price rise will be a sizeable kick in the pants to the world economy.

This risk is doubly important due to the current state of the world’s finances. Today we live in a highly interconnected global economy that operates under a debt based money system. This means that economic growth is required to service these debts just to keep the whole system operating. If there is no growth and confidence is lost, the whole system can crash in a matter of hours, just like it did in 2008.

These debts have not gone away, in fact they are larger than ever and the whole system is balancing on a knifes edge. An oil price rise might be enough to tip the world economy over the edge and into collapse. The stakes are very high indeed.

Over the last 100 years oil has shaped the world unlike any other substance, to the point where it is embedded in virtually every form of economic activity in the world today. This has allowed humanity to expand, diversify its skills and enjoy a standard of living unprecedented in human history.

But this strength is also our greatest weakness as more than ever we as individuals are dependent on today’s globalised economy to provide us with all our basic needs. We are reliant on this economy and this economy is reliant on oil.

So the quantities of oil we consume and the role it plays over the next 100 years will be critical in determining humanities future economic prosperity.

But most of us are more worried about our own immediate future and oil prices will play a big part in determining that. With the world economy on the brink of another collapse, now more than ever do we need to pay attention to the impact oil and it’s price has on our economy and on our lives.

Now that we have established why this topic of oil is so important it’s time to get the task of analysing the current situation so that we can get a better idea of what the future has in store for us.

Please click the link for the next chapter where we identify the real issue - Energy Security. Thanks for watching.