The acute problem of the Gulf oil spill makes the cost of corruption-afflicted government front page news. Lax Federal offshore drilling oversight under Bush 43 has cost us dearly. However, our society’s vulnerability to any trouble with this critical resource should also remind us of the chronic problem: peak oil.
Oil production follows a bell-shaped curve rising to a peak, then declining. Whether world oil production has reached its peak is hotly debated, but about U.S. peak oil there is no controversy. Even the American Petroleum Institute (the oil lobby) admits that U.S. domestic production peaked in the early 1970s. Even if we got all the projected offshore and Alaska oil, U.S. production will never return to that peak.
At the U.S. peak, oil cost less than $2 a barrel, and only 30% of domestic consumption was imports. Currently, nearly 70% is imports and the price is around $80 a barrel. Since demand hasn’t declined, unless we revise our energy use, we can expect to be increasingly reliant on imports, and on drilling in difficult locations like the deep waters of the Gulf.
Even though the U.S. uses about half the energy per dollar of GDP that it did in the 1970s, the Europeans and Japanese currently use roughly half our energy per dollar of GDP, so there is still room for improvement. These folks are not living it yurts, either, so we could have a fine, first-world lifestyle burning only half the oil we currently use. Conservation is cost-effective, too. It’s competitive with conventional energy now.
Most, conventional, non-renewable energy is subsidized, and the subsidy is enormous. The World Resources Institute estimated in 1989 that petroleum received $300 billion in annual subsidies from the U.S. That includes tax breaks (the “depletion allowance” for oil producers), transportation infrastructure not paid for by gas taxes, and security for the increasingly-important overseas oil. Nuclear power is even more heavily subsidized.
Perhaps the most insidious subsidy is the accounting fiction that classifies oil production as “income” rather than “natural capital.” Income is, by definition, what is left over after capital is replenished. But oil wells run dry, they don’t magically replenish.
To appreciate what this means, imagine going to your bank for a mortgage. You say your “income” is $2,000, but what you really have is a savings account with $2,000 (capital). The loan officer would call security to have you ejected as a crazy person, but that is literally how accountants classify oil production now.
Finally, consider “Energy Return On Investment” (EROI) -- a principal reason oil remains tenaciously our fuel of choice. Historically old East Texas oilfields (now long past their peak) return as much as 100 times the energy invested to retrieve oil. Currently oil, coal and tar sands return roughly 22 times the energy it takes to retrieve them. Nuclear takes between 5 - 15 times as much, and wind returns 18. (See this for the footnotes) Nostalgia is not an energy source.
Domestic peak oil means we can expect increasingly reliance on difficult-to-get, or imported oil, increasing our vulnerability to spills, resource wars in places like Iraq and Afghanistan... or ... we can embrace conservation, and renewables like wind. And we can stop building sprawl, which literally casts our petroleum dependence in concrete. Public policy is the most effective way to make the change, but even personal choices matter.
Coming soon: Peak Oil 102: What to do now.
- The Financial Times just published a story estimating petroleum subsidies at $550 billion.
- To see the peak in more areas than oil, Chris Martenson's crash course is a real eye opener.