Last week I discussed peak oil which happens when the maximum rate of world oil production is reached and the production rate enters terminal decline.

Conventional oil production seems to have reached a plateau or peak around 74 million barrels a day since a few years ago and therefore I concluded by saying: "There is more evidence pointing in the direction of peak oil than not, but what will happen if it is more severe or if our fears are unfounded?"

A report issued in February 2010 by the US Joint Forces Command stated that "by 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day."

It goes on to say that a severe energy crunch is inevitable and "one should not forget that the Great Depression spawned a number of totalitarian regimes that sought economic prosperity for their nations by ruthless conquest." One hopes that this is not the US agenda - or is it?

As early as 2005, the US Department of Energy published a report titled Peaking of World Oil Production: Impacts, Mitigation, & Risk Management. It said that "the peaking of world oil production presents the US and the world with an unprecedented risk management problem," and that "liquid fuel prices and price volatility will increase dramatically," and "without timely mitigation, the economic, social and political costs will be unprecedented."

Falling exports

Therefore, such thinking in the largest oil consuming country in the world should not be overlooked by producing countries that may be forced to reduce their exports to cater for internal demand growth.

It has even been suggested that a "steady state economy" be introduced where tax is on depleting natural resources rather than income, to limiting advertising that stimulates demand and population growth and to moving away from globalisation to a local economy where conservation is encouraged.

There are even harsher suggestions as geologist Dale Allen Pfeiffer contends that current population levels are unsustainable and that to achieve a sustainable economy and avert disaster, the US population would have to be reduced by at least one third, and the world population by two thirds.

Such changes in lifestyle and attitudes may not be popular, but they do indicate the risk ahead. However, there are counter arguments where unconventional oil will come to the rescue and that "the year ahead could see the death of the peak-oil hypothesis."

According to Daniel Yergin, author of the Prize, technological advances and new discoveries have allowed oil reserves worldwide to keep growing. This may be so, but reserves are not production. Production is real and reserves are just a number announced by a government or a company.

The added reserves are mostly for unconventional oil where many uncertainties surround the production of shale oil, especially with the growing opposition to the controversial hydraulic fracturing and its water requirement and environmental risk.

Even the often thought promising biofuels have problems. The majority are still produced from food-related products, raising food prices worldwide and opposition in some countries such as India. The US mandate to develop and use cellulosic ethanol with a target of 2 million bpd by 2022 is slipping and intermediate targets are reduced such that this year's target is 8.5 million gallons, a fraction of what was originally planned.

The risk of over-reliance on unconventional liquid fuels is there to see as their contribution does not negate the possibility of peak oil, as long as conventional oil production is where it is today.

But the expensive-to-produce unconventional fuels are supporting the price of oil and giving credence to the notion that while the world may not be running out of oil, it is surely running short of cheap oil.

As far as Opec is concerned, the greater majority of its crude oil output is conventional, apart from some non-conventional production in Venezuela. Therefore Opec's conventional oil output is expected to increase from 29.3 million bpd in 2010 to 39.3 million in 2035, thus compensating for the decline in output elsewhere.

Oil demand has been declining in OECD countries in recent years due to prices, taxes, efficiency improvements and the growth registered in other energy sources. But demand in the rest of the world is growing strongly and it will take many years before this growth can be arrested by peak oil.


The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.