Thoughts on the Future of Petroleum

Significant price fluctuation has been the rule with crude oil and gasoline for the past several years. As the economy picks up, many experts predict higher oil prices during 2011. Graph: Wall Street Cheat Sheet. Click on image to enlarge.

It's fitting that this first blog of 2011 takes a look into the crystal ball--at the energy source that pretty-much defines our culture.

That we consume oil prodigiously is an understatement. The world guzzles this highly concentrated fossil fuel at a rate of nearly one thousand barrels per second (29.2 billion barrels in 2009, according to the BP Statistical Review of World Energy 2010). The U.S., with 4.5% of the world's population, consumes 22.2% of its petroleum. A lot of that (71%) is for transportation; 97% of our vehicles are powered by petroleum fuels.

A few years ago, to get a sense of how quickly the world is consuming oil,  I spent several days digging into historical oil production statistics. I wanted to know how much of the world's cumulative oil production had occurred since I was born (in 1955). Each year I've updated the spreadsheet I created with new oil production data, and here's where we stand: Of all of the oil extracted since the dawn of the petroleum age (going back to 1859--see last week's blog), 92% of that oil has been extracted since 1955. A remarkable 51% of the world's cumulative oil extraction has occurred just since my older daughter was born in 1986. Put another way, over half of the oil extracted from the earth and consumed by humans has happened in just the past 25 years--a mere heartbeat in geologic time--and all that stored carbon has been converted into the greenhouse gas carbon dioxide.

So what's ahead for petroleum? Are we running out? Has "peak oil" been reached, marking the point at which petroleum production reaches a maximum and begins an inexorable decline? Will we soon be paying $5 or even $10 per gallon for gasoline at the pump? Where are we heading and how should we plan for it?

Unfortunately, no one really knows the answers to these questions--though the blogosphere is full of opinion on it. I too have opinions, which I'll share here.

Are we running out of oil?

The short answer is "no." There is still a great deal of oil that can be extracted, and mammoth new discoveries deep under the Gulf of Mexico and off the coast of Brazil are adding to known reserves. However, we may be running out of "cheap oil." The really easy-to-extract, inexpensive oil is in short supply. It is this cheap oil that fueled the petroleum age and our car-dependent development patterns.

Oil supply, demand, and pricing are driven by a complex interplay of different forces. As easy-to-extract oil reserves are depleted, we have to turn to deeper wells that are more expensive to operate (and carry greater environmental risk). But oil can only be profitably extracted from these sources when the price of oil is high enough to justify the cost of production. Oil prices are determined, to a significant extent, by demand. When demand is high, relative to available supply, the price goes up. But as the price goes up, consumers figure out ways to use less: we drive fewer miles; we trade in our SUVs for hybrid cars; we turn down our thermostats; and we insulate our houses. Those conservation measures, in turn, drive down demand, which reduces cost.

As if all that isn't complicated enough, there are various layers of subsidies and taxes that also affect the economics of oil production and regulate demand. In smart countries, governments have levied significant taxes on petroleum products to artificially reduce consumption and spur energy conservation and the development of alternatives; this is why vehicles and buildings tend to be far more energy-efficient in Europe than in the U.S.

There is also the troubling issue that much of the world's most accessible oil is in places that are either politically unstable or where the wellbeing of Americans isn't a top priority. Unanticipated political changes could significantly affect the oil price equation.

So we're not running out of oil, but we are probably in for several decades of fairly wild price gyrations: rapid price increases followed by price collapses. Emerging economies, such as China and India, will have a tremendous influence on these gyrations. If those economies continue to expand, even if the U.S. remains in an economic slump, expect oil prices to rise significantly. If the U.S. economy recovers while China and India are booming, oil price increases could be dramatic--with crude oil even hitting $200 per barrel within the next five years (though such price increases would likely slow the economic recovery).

We won't run out of oil, but if the price climbs significantly higher, it will become impractical to use it for low-grade needs like home heating--where energy conservation, passive-solar energy, natural gas, cordwood, and wood pellets can provide cheaper alternatives. Increasingly, I expect to see electricity used for home heating (via heat pumps) and transportation (via plug-in hybrids)--which opens up the question of how we will be producing that electricity. But that's the subject of another column.

In addition to this Energy Solutions blog, Alex contributes to the weekly blog BuildingGreen's Product of the Week, which profiles an interesting new green building product each week. You can sign up to receive notices of these blogs by e-mail--enter your e-mail address in the upper right corner of any blog page.

Alex is founder of BuildingGreen, Inc. and executive editor of Environmental Building News. To keep up with his latest articles and musings, you can sign up for his Twitter feed.