Whatever Happened to Peak Oil and the End of Civilization?
It’s one thing when environmentalists predict the end of civilization. It is quite another when bankers, geologists, oil drillers, and the military agree with them, as was the case with “peak oil” as recently as 2011. The best information available indicated that world oil production would climax by about 2015 and start declining every year thereafter. Meanwhile, demand would keep climbing, leading to spiking oil prices that would drastically impact our economy and our way of life. On the positive side, it was believed that high oil prices would necessitate a rapid transition to a more sustainable way of living. We would be forced to wean ourselves off of fossil fuels, thus halting climate change and saving the planet from global warming.
But in 2012 a completely different picture emerged. Oil production surged, oil prices started falling again, and a new forecast predicts that the United States will eventually become the world’s biggest oil producer and a net oil exporter. The American economy is expected to boom, our way of life will continue as usual, and nobody seems to care that climate change is happening faster than even worst case scenarios predicted. That is a staggering discrepancy between forecasts from one year to the next. How could the experts be so wrong?
The Peak Oil saga is the latest round in a two hundred-year-old debate between Malthusians and Cornucopian beliefs. The overly pessimistic Malthusian perspective perceives natural resources as being like a pie. There is only so much to go around. The overly optimistic Cornucopian belief, on the other hand, is that humans are creative, and we shouldn’t worry about things like over population and resource consumption, because new technologies will produce more pies, and increase prosperity for all. Neither viewpoint accurately models reality.
The Malthusian perspective originated with Thomas Malthus (1766 – 1834), a British economist and philosopher. Being a citizen of an island nation, Malthus naturally predicted that the burgeoning population would continue to expand exponentially, while resource production, especially food, would eventually plateau, leading to inevitable mass die-offs to balance the population with the available resources. The Brits have successfully dodged fate thus far, along with the rest of the industrial world, largely by expanding the resource pie beyond national boundaries, to efficiently exploit natural resources from pole to pole around the globe.
On the surface, the Cornucopian perspective seems blindly dependent on faith that technology will save us from ourselves. To Cornucopians, however, it isn’t blind faith, but rather proven faith in the dynamic interplay of supply and demand. Rising demand initially raises prices, which triggers more investment in production and alternative substitutes, which ultimately expands supply, lowers prices, and leads to increased prosperity.
For example, the price for a gallon of gasoline rose from $1.60 per gallon when George Bush took office as President in 2001, to more than $4.00 per gallon in the summer of 2008, just before the economy faltered. The shocking rise in fuel costs seemed to presage the vastly higher prices that were anticipated when worldwide production peaked and started declining, as was forecast to happen in the near future. But the relationship between supply and demand is vastly more complicated than that.
In the short term, high fuel prices were a contributing factor to the financial crises of 2008 and the resulting recession, which slowed the economy and reduced global oil consumption. That alone helped stabilize oil prices. In addition, rising fuel prices impact everyone. Job or no job, just about everyone reacted to higher prices one way or another. Many people re-evaluated every potential trip and simply drove less than before. Gasoline consumption dropped by 3.2 percent in 2008, stayed about the same in 2009 and 2010, then dropped another 2.9 percent as fuel prices rose again in 2011. Driving less helped to reduce demand and stabilize prices. But it didn’t end there. Consumers also bought more fuel-efficient vehicles, driving more miles on less fuel.
People also embraced new technologies, such as hybrid and electric vehicles, or unconventional alternatives. For example, my brother Alan built a biodiesel processing unit and started making his own fuel from used vegetable oil (basically French fry grease) obtained free from restaurants. My brother Nick experimented with wood gas, driving his truck around on firewood for a while, before switching to a diesel truck with a straight vegetable oil (SVO) system. Across America, people experimented with all kinds of crazy new innovations, looking for ways to squeeze out a few more miles per gallon. Millions of people adapted to higher prices, each in their own way. The result is that fuel consumption has dropped to 2000 levels, even though there are 31 million more people in our country now, and just as many more new cars and light trucks on the road.
The other impact of higher oil prices is that it makes the oil business more lucrative, rewarding anyone who can increase the supply by conventional or innovative new means. Setting aside the issue of fracking for the moment, there are tremendous reserves of oil shale and coal buried underneath this country, enough to fuel the economy for several hundred years, as noted in my book Direct Pointing to Real Wealth (Fifth Edition, 2000). Converting oil shale or coal to gasoline is more expensive than just pumping oil out of the ground, but higher prices make these alternatives more lucrative, thereby increasing production and further stabilizing oil prices. Oil prices may or may not go down, but each rise in price results in lower consumption and greater production, which helps stabilize prices over the long haul.
These checks and balances in the price of oil cost Texas banking executive Matthew R. Simmons a $10,000 bet. Malthusian in his perspective, Simmons wagered ten grand against New York Times columnist John Tierney in 2005 that the average daily price of crude oil would exceed $200 per barrel in 2010. Oil rose from $65/barrel in 2005 to $145/barrel in 2008, then dropped to $50/barrel in the aftermath of the global financial crises, and back up to $80/barrel in 2010 (or $71/barrel when adjusted for inflation). Simmons died before the wager ended on January 1, 2011, but his estate paid up on the debt. Even then, lay persons and analysts alike were forecasting peak oil and the decline of civilization in just a few short years.
The biggest factor in stabilizing oil prices for the foreseeable future is fracking, which is short for hydraulic fracturing. Oil companies pump a witches’ brew of toxic chemicals into the ground under intense pressure to fracture the rock and force residual oil or natural gas back to the wellhead for extraction. Fracking is a comically appropriate term, given that “frack” and “fracking” has been used as a television-friendly expletive in the show Battlestar Galactica since 1978. We are indeed fracking the planet.
Some of the chemicals utilized include hydrochloric acid, polyacrylamide, ethylene glycol, sodium chloride, borate salts, sodium and potassium carbonates, glutaraldehyde, isopropanol, and methanol. There is a little hope and a lot of denial that these toxins won’t somehow contaminate the groundwater now or in the distant future.
The incentive to live in denial is huge. Fracking allows us to increase oil production, stabilize or lower prices, expand the American economy, and avoid dealing with realty for another day. And the reality is that our economy places zero value on the future.
In terms of resources, anything that can be extracted and profited from today has value. Anything left behind for future generations has no value. For example, oil wells often produce a great deal of natural gas, but often too far away from any pipelines that can get it to market. The problem is easily remedied by venting the natural gas into the atmosphere and setting it on fire, called flaring. OPEC countries previously burned off enough natural gas to supply world needs for several hundred years, because it had zero value to them at the time. The same thing is happening now on a smaller scale in the Bakken oil fields in North Dakota. As an alternative fuel, natural gas is relatively clean and low in carbon content, but as a waste product, we are presently adding as much carbon to the atmosphere as 70 million cars, but with nothing to show for it.
In another famous bet, Malthusian Paul Ehrlich, author of The Population Bomb (1968), wagered against economist Julian Simon of the University of Maryland that resource scarcity would lead to a rise in the cost of copper, chromium, nickel, tin, and tungsten from 1980 to 1990. On paper, they invested an imaginary $1,000 ($200 in each metal) and waited ten years to see happened. If prices went up (adjusted for inflation), Simon would pay Ehrlich the value in excess of the original $1,000, and vice versa. Ehrlich lost the bet and paid Simon $576.07 for the difference between the original imaginary investment and the final price. This story has become part of the Cornucopian mythology, in spite of the fact that four out of the five metals have since increased in their inflation-adjusted prices.
Resource extraction used to be as easy as it was for Jed Clampett of the Beverly Hill Billies: “Come and listen to a story about a man named Jed. A poor mountaineer, barely kept his family fed, then one day he was shootin’ at some food, and up through the ground came a bubblin’ crude. Oil that is, black gold, Texas tea.” Our descendants will never have it so easy. Speculators are only interested in the easiest, most accessible resources to extract. Past investments made it possible to go all over the globe skimming the cream off the top. There is still plenty of everything to be extracted, but the deposits are of lesser and lesser quality.
In the case of fracking, investors are drilling more than 15,000 wells a year in the U.S., but unlike oil fields in the Middle East, these are small volume, short-lived wells. In the Bakken shales, production can decline by 80 percent within the first two years. Some experts believe that the new oil boom will be shockingly short-lived.
I wonder sometimes what would have happened if we had long ago raised the price of fossil fuels with “green taxes.” Instead of paying income taxes, what if the cost of oil, gas, and coal were several times higher and that funded our government? What if we had a tax system where citizens could reduce their tax burden by investing in energy efficiency, rather than merely looking for loopholes on paper? How would the world be different today? It is likely we would be driving 100-mpg cars, live in much more efficient houses, and have a stable climate. But we didn’t do that. Instead, we used up all the easy oil in an orgy of inefficiency. Rather than making conservation profitable, we facilitated yet more resource exploitation.
The problem is that the next generation cannot bid against us for the resources we use. Investors and speculators comb the planet for every marketable resource, trying to make a quick buck. As a society, we leave nothing behind for future generations, except for toxic mining sites, toxic fracking sites, and a destabilized global climate.
Ironically, the more damage we do to the environment, the more dependent we become on additional energy consumption and resource extraction. Is the climate too hot? Turn on the air conditioner and burn up more fossil fuels. Are the crops dying from lack of rain? Build pipelines, pumps, and perhaps desalination facilities to get water to the fields. Are superstorms destroying our cities and infrastructure? Consume more energy and resources to repair the damage or build levees for protection. Our children and our grandchildren face not only the challenge of depleted resources, but also the challenge of living on a fracked planet with a fracked climate and a fracked government with trillions of dollars in federal deficits to pay off.
The Malthusians were wrong about Peak Oil because they failed to grasp the complex system of checks and balances that work to stabilize supply and demand. But the Cornucopians were also wrong, because we have not expanded the resource pie. We have merely increased our efficiency at exploiting whatever worthwhile resources remain. We are fracking the planet to save ourselves.
The tragedy is that we could have invested in energy efficiency decades ago. We could have built more fuel-efficient vehicles and better insulated houses to reduce our dependency on fossil fuels at a profit, increasing our prosperity and keeping prices lower in the short-term, while ensuring a supply of resources for the future. Instead, history may remember us as the most irresponsible people in all of human history.
My home state of Montana has especially high oil consumption, the sixth highest in the country measured on a per capita basis, while being thirty-eighth in the nation for median household income. Between those two factors, Montanans spend a bigger chunk of their income on oil than most other Americans. As a matter of necessity, people here drive big, heavy-duty trucks for pulling horse trailers, hauling supplies, or driving up into the mountains to cut firewood. Being a mostly rural state, a trip to the grocery store often exceeds 100 miles of driving. Just getting a 40-pound kindergartener to school can entail a thirty-mile drive twice a day, often achieved with a full-size pickup truck, capable of carrying a one-ton payload!
Personally, I really appreciate fossil fuels. I appreciate being able to drive to town and back (120 miles) twice a week with my son for fencing lessons. I appreciate that my neighbor plows my very long driveway for me. I appreciate the fact that a small amount of gasoline in my truck and chainsaw enables me to bring home a much larger supply of firewood to stay warm through the winter. I would hate to do all that work with handsaws and a team of horses.
I value fossil fuels enough to want to conserve them for future generations. It is for this reason that I built an energy-efficient passive solar home and installed solar panels to generate electricity. Likewise, I drive the most fuel-efficient truck I could find on the market, which happened to be a 38-mpg, 1982 diesel Toyota truck. My “green vehicle” belches black smoke and doesn’t go more than 35 miles per hour up a hill, but it gets noticed at the gas stations. I get compliments from every guy with a monster truck as they watch their dial roll past $100 to fill up the gas tank. If a company built a better truck today, I would be the first to buy it. I value fossil fuels, our climate, and all our natural resources enough to do whatever I reasonably can to make a positive difference for the next generation.
In the short term, we have enough oil to keep the economy rolling. In the long term, we might wean ourselves off of fossil fuels before we run out. Solar power and other alternative energy technologies are increasing in efficiency and dropping in price, just as computers did. We can look forward to the day when virtually every human-made object becomes a source of energy, from solar panels blanketing every roof to windows that generate electricity. Even the paint on our houses and cars will one day generate electricity. The Cornucopians will prevail, and we will inevitably build a sustainable economy… but not before we destabilize the climate, toxify the planet, and wipe out half of all life on earth! We will ultimately succeed in building a green economy on a dead planet.