The biggest oil problem

It is impossible to substantially impact current high oil prices for more than a very short time, but it is possible to begin to impact our biggest oil problem. Time is of the essence, because looming in the relatively near future is the challenge of world oil production going into decline. When that happens, oil shortages will ensue, oil prices will skyrocket, and the associated economic pain will be much worse than what people are experiencing today.

Oil provides the energy for most transportation worldwide, and almost all material things that we use and consume come to us via our oil-fueled transportation system. Worldwide, the volumes of oil consumed are enormous, so when world oil production decline begins, the economic consequences will be dire.

This problem is often called “peak oil.” It’s not a theory, as some pejoratively suggest. Production from all conventional oil fields reaches a maximum and then goes into a long decline. The fact that countries with many oil fields experience production declines is thus understandable.

U.S. oil production peaked in 1970 and has been in decline ever since. The same happened in the U.K., Norway, Indonesia and Mexico, to name a few. In 2005 the Swedish Royal Academy noted that 54 out of 65 of the largest oil producing countries were in decline, so it is not difficult to comprehend that world oil production will decline before long.

World oil production has been relatively flat since 2004. Production has been on a fluctuating plateau for roughly four years after decades of rising in sync with growing world GDP. The flattening of world oil production happened despite huge increases in oil prices and significant advances in technology, which economists expected would lead to greater supply.

The problem is that oil production depends largely on geological factors and secondarily on human efforts. To many analysts, the plateauing of world oil production is a harbinger of the impending production decline, meaning that fewer and fewer barrels will be available each ensuing year until dramatic action takes hold — action that has yet to be seriously contemplated, let alone initiated. As we contemplate the future, it is not hard to envision gasoline prices above $10 per gallon and a government rationing program started sometime thereafter.

There are a multitude of actions that will help us cushion the economic shock that will accompany world oil production declines. Recent analysis indicates that all reasonable options will have to be pursued in parallel.

Conservation and energy efficiency will be extremely important, but even with the highest priority, they cannot impact on a large scale for more than a decade, because of the huge size of the world’s fleets of cars, trucks, planes, ships, power plants, and so forth.

These fleets have very long lifetimes, represent huge investments, and cannot be replaced quickly. Unless we are willing to drastically curtail our economic activities — committing ourselves to an ever-deepening recession, we must provide our transportation fleets with oil or oil substitutes for decades while we replace them with technologies that are not dependent on liquid fuels.

Given wartime priority, much more than a decade, and huge investments, the following options can help the U.S. to overtake runaway world oil production declines: Intensive conservation and energy efficiency, enhanced oil recovery, offshore drilling and opening the Arctic National Wildlife Refuge, coal-to-liquids, biomass and shale oil. Elsewhere, some of these same options will have to be pursued along with opportunities not open in the U.S., such as heavy oil / oil sands and gas-to-liquids.

Instead of facing these issues squarely and realistically, much of the current energy dialogue is focused on finding a single “silver bullet.” People argue about various technological shortcomings. What is seldom recognized is that all energy options have their strengths and weaknesses, so compromises will be essential to minimize the deeply negative economic consequences of doing nothing.

The error that many make in proposing “energy” solutions is to ignore the fundamental differences between liquid fuels and other energy forms. The world’s fleets of liquid-fuel-consuming machinery represent on the order of $100 trillion in investment with lifetimes measured in decades. It is humanly and economically impossible to dramatically change those fleets as quickly as oil production is likely to decline, so liquid fuels of one sort or another must be provided until the world phases over to technologies that depend on other, more sustainable energy forms.

The good news is that plug-in hybrid and pure electric vehicles are close to commercial readiness and could displace current vehicles, but that cannot happen quickly under the best of conditions. On the other hand, there is nothing on the drawing boards to replace liquid-fueled airplanes.

What is needed is 1) broad-scale energy education and a serious, open, non-partisan discussion of what growing oil shortages will mean to our economy, 2) a serious, urgent plan for mitigation, and 3) a national priority to press ahead. We can dramatically impact with existing technologies, while we simultaneously phase into a more sustainable energy future.  

Hirsch is senior energy adviser at Management Information Services Inc. He has had a long career in most aspects of energy in industry, the federal government and the non-profit sector. He is past chairman of the Board on Energy and Environmental Systems at The National Academies and lead author of the “The Hirsch Report” — formally known as Peaking of World Oil Production: Impacts, Mitigation and Risk Management — sponsored by the Department of Energy.