The U.S. Department of Energy has long disavowed peak oil theory: the notion that annual world oil production will peak, plateau, and then enter a decline. But the agency’s stance appears increasingly at odds with the future predicted by many world energy analysts, including the US military.
In February, the United Kingdom Industry Taskforce on Peak Oil and Energy Security—a group comprised in part by renewable energy companies—published a report warning that global peak oil would probably occur within the next decade.
And in March, the U.S. Joint Forces Command released its Joint Operating Environment 2010 report, a forecast of likely national security challenges. Drawing on several energy information sources, the report concluded that "world surplus oil production could disappear by 2012, and shortages of 10 million barrels per day could be seen as soon as 2015."
With the BP Gulf oil disaster continuing with no resolution in sight and mounting public concern over the wisdom of offshore drilling, more pressure is mounting on DOE to justify its optimistic forecasts and its belief that the nation will be producing millions of more barrels of oil a day within two decades.
Change in DOE stance?
A few weeks after the joint force report came out, there was speculation that the DOE had endorsed peak oil theory after Glen Sweetnam, former director of the International, Economic and Greenhouse Gas division of the DOE’s Energy Information Administration (EIA), told French paper Le Monde that, "if the investment is not there," world oil production could enter a "decline" by 2011.
Sweetnam has since left the EIA on a yearlong reassignment: a development unrelated to the interview he gave Le Monde, according to Lauren Mayne, a liquid fuels analyst at the agency.
Mayne clarifies that the EIA does not expect oil production to peak in 2011. When asked if the EIA expects to see oil production ever peak and diminish, Mayne replied that the agency does not anticipate a peak oil scenario resulting from supply shortages: “We do not see a peak, if a peak means a sharp retraction in oil production.”
In fact, Mayne argued, the world’s total projected oil consumption in 2030 "could be met, given current resource estimates."
That claim is backed up, according to Mayne, by the EIA’s country-by-country estimate of future oil production. "Actual production, of course, will likely differ somewhat, but we do feel from an analytical basis that these production estimates are likely to progress in a way that’s shown" by EIA models, she said.
Those models predict significant production increases in several countries over the next two decades. In a presentation from a round-table of oil economists that Sweetnam presided over in April 2009, several graphs showed estimates of the world’s liquid fuels supply through 2030, and how production would change in the current top 15 oil-producing countries.
But all the estimates of project production were based on a "proprietary database," according to Linda Doman, another forecaster at the EIA, and the exact numbers behind the charts cannot be released.
So it’s difficult to figure out how the agency derived, for example, the predictions that the United States will produce approximately 1,750,000 more barrels of oil per day in 2015 than it did in 2007, and approximately 2,700,000 more barrels per day in 2030 than in 2015.
Localized peak oil
It’s especially confusing to James Hamilton, an economics professor at the University of California, San Diego, who has published extensive research on the macroeconomics of oil prices. Most energy analysts, according to Hamilton, agree that the U.S. is "well into a period of declining oil production," along with Mexico, the North Sea region, and Indonesia.
"At the level of those particular geographic areas, peak oil is not a theory, it’s not a conjecture; it’s a very clearly established fact," said Hamilton.
Even so, the early release overview of the EIA’s Annual Energy Outlook 2010 indicates specific U.S. sites where the agency expects increased domestic oil production: "Production increases are expected from the deep waters of the Gulf of Mexico and from onshore enhanced oil recovery projects."
But after the catastrophic British Petroleum oil rig spill in the Gulf last month, investment in domestic drilling projects seems much less certain to some, including Joe Purser, director of the joint force unit that produced the Joint Operating Environment 2010 report.
The prediction that the U.S. will increase oil production "is now much more in question," for Purser. "It’s not a foregone conclusion. It’s more of a hope-based projection."
Other projections, such as the possibility of extracting crude oil from Venezuela, or developing the tar sands of Canada, are equally hope-based, in the estimation of Purser. And for the joint force, he pointed out, "hope is not a solution, hope is not a course of action." Still, Purser eschews the label "peak oil theory" for the Joint Operating Environment report — he doesn’t "want to mince words with the DOE," he says.
Investing in production
Mayne acknowledged that lots of investment in new oil production projects will be necessary to prevent a decline in production. But still, she said, "we fully expect that investment will continue," and that further resources will become available in the world market.
Hamilton’s not so sure. "Most of the oil reserves in the world today are not available to private oil companies. They are national resources owned by Saudi Arabia, Venezuela," and the other states in the Organization of Petroleum Exporting Countries (OPEC) he pointed out. "The issue of adequate investment in those resources is necessarily tied in to what the political situation is in those countries." And many of the countries in OPEC — which also includes Iraq, Iran, and Nigeria, among others — are already politically volatile.
In its World Energy Outlook 2009, the International Energy Agency also issued a dismal prognosis for future investment in energy production: "financing energy investment will, in most cases, be more difficult and costly in the medium term than it was before the [financial] crisis took hold."
Nor is the prospect of oil demand exceeding supply a far-off fantasy, according to Hamilton: "It’s exactly what the world ran into in 2008." When oil prices shot up in 2008 because of increased demand from China, he said, it was because the world had actually run out of excess supply and hit the short-run production constraints of oil.
"I’m pessimistic about the ability of world production to continue to increase at the rate that you would think is necessary if you project current demand trends, particularly from places like China," Hamilton said. "I’m not sure what would give the DOE such confidence about getting through the next decade and beyond."
Moreover, the political situation in an oil-producing country typically worsens when oil demand and prices rise, according to some of the oil economists at Sweetnam’s round-table last year.
Trusting market forces
But according to Mayne, the EIA expects demand for oil to flatten out into an "undulating plateau" in the long term. "We see a slowing in the rate of increase in oil consumption over time. During this time, market forces will drive alternative fuels production higher," she said.
Purser, like Hamilton, doesn’t see compelling evidence that demand for oil will drop before it clashes with supply constraints, however.
"Based upon the current demand that we see, especially in China and India, and given that coal and oil are relatively cheap compared to other sources, it seems that there will be continued and growing demand for [fossil fuel] sources," Purser said.
Indeed, according to the IEA’s World Energy Outlook 2009, oil demand is expected to grow at a steady rate of one percent each year between now and 2030.