With the stock market, and therefore the retirement savings of millions of US consumers, forcing financial writers to search their thesauruses for yet more synonyms for “unprecedented”, it’s as predictable as it is depressing that peak oil has fallen off the radar screen of so many. Gasoline is now selling at the stunning price of only $1.82/gallon, something few people not confined to a psych ward would have predicted six months ago. More to the point, it’s seen by many individuals as “proof” that There Is No Oil Problem, There Wasn’t and Oil Problem, and There Never Will Be An Oil Problem.

Yes, this is, once again, Lou’s Favorite Topic #473: Perception vs. Reality and Their Role in the Infowar. For once, I’ll spare everyone the details and instead point you to an excellent piece on the general topic, written by Robert Bryce, “Gasoline’s Cheap Again, But Peak Oil Still Looms Large”, which I found via Jim Kingsdale’s site:

And yet – and yet – some of the best minds in the energy business insist that this latest bear market is only baiting the trap for a huge price run-up that will likely come around 2015. And – despite all of the current turmoil – they may end up being right.

Before going further, I readily admit that I have, for several years, had a rather flippant attitude toward peak oil. When asked my opinion, I would generally respond: so what? My rationale being, we will only know that we’ve hit peak oil when the event has actually passed. And second, regardless of prices or supplies, we will only move away from oil when something else comes along that is cheaper/cleaner/more convenient, or all of the above. Thus, I’ve long felt that all the fretting about peak oil has been largely misplaced and that even if the peak were imminent, there would be little that the U.S. or any other country could do to avoid the difficult energy transitions that are looming.

That said, I’ve spent a good bit of time over the past couple of months talking to two of the sharpest analysts in the oil business: Peter Wells and Charley Maxwell. And both are convinced that peak oil is real, it’s coming, and the pain that will accompany its arrival will be severe.

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What sets Wells apart from the pack of alarmists is that he has done the deep and dirty analysis of individual field production data. In fact, Wells utilized field output info supplied by Denver-based consulting firm I.H.S., which owns one of the world’s most extensive oilfield databases. This same field-by-field data was utilized in 2006 by an I.H.S. subsidiary, Cambridge Energy Research Associates (CERA), to come up with their study on future global oil production, which claimed that global output could reach an “undulating plateau” of 130 million barrels per day by 2030. The study concluded that the peak oil argument “is based on faulty analysis which could, if accepted, distort critical policy and investment decisions and cloud the debate over the energy future.” The study also claimed that the remaining global oil resource base is about 3.74 trillion barrels.

Wells took the same data and came up with a far different conclusion. He estimates that global liquids output will peak in about 2015 at no more than 100 million barrels per day. And that’s when things will get very interesting for automakers like Toyota and, of course, for the rest of us.

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So will demand destruction take the peak out of peak oil? While it’s tempting to answer in the affirmative, several factors appear to show that it will not. Before going to those factors, let’s look at the forces that could lead to slower demand growth. They include, most obviously, a sustained recession. If world economic growth stalls for a sustained time, oil demand will continue to be slack. Second, automakers are working hard on hybrid vehicles and electric cars that could slow gasoline demand. Third, new tougher efficiency standards for U.S. automakers, combined with ongoing additions of billions of gallons of corn ethanol into the gasoline pool, will likely further dampen U.S. gasoline demand. (Note, however, that decreasing gasoline demand will not necessarily mean lower overall oil consumption, as refiners will still have to refine crude in order to produce diesel, jet fuel, and other products.)

Even so, there are major differences between the current situation and the conditions that existed in the ’80s and ’90s. First and foremost is the paucity of spare production capacity to be had. Further, there are far fewer oil producers with big reserves remaining to be tapped. As shown in Table 2, 10 different oil-producing nations peaked between 1996 and 2004. Those producers will not be able to add significant amounts of new crude production to the global market.

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Perhaps the best single point was made by Maxwell, who said that peak oil will not be as damaging to the U.S. and other developed countries as it will to the less-developed world. Why? Because higher oil prices will mean “rationing by price.” That is, the wealthier countries and consumers will be more able to afford motor fuel that costs $5, $10, or even $15 per gallon. Consumers in poor countries will be unable to compete for fuel at those prices. And that could create serious social problems. Wells largely agrees with this outlook, saying, “Rising prices will drive demand destruction and the development of new technologies to make much better use of supply.” He goes on, explaining in a recent e-mail, “This will be painful and potentially fatal in the really poor countries of the world where access to fuel for generators, fertilizers, transport, etc., will mean risk of famine/starvation/reduction of the capacity of nations to provide basic services.”

Of course, consumers have long had rationing by price for other commodities, such as Rolex watches and Mercedes cars. But the rationing of a commodity that is so crucial to modern society could have dramatic negative effects on billions of people around the world. After all, some 2.5 billion still use biomass – dung, wood, straw, etc. – for their home cooking needs. If they are completely priced out of the market for hydrocarbons, they will be destined to continue living in dire poverty.

But Wells and Maxwell, and the many other analysts who have been predicting peak oil, could still be proven wrong. Given the cyclical nature of the commodities sector and the recent slump in oil prices, it is foolish to make huge bets on oil prices. Furthermore, as the ongoing financial crisis seems to prove, no one knows anything. Forecasts and models are handy, but markets – and of course, prices – are inherently chaotic. A prolonged recession or a depression could choke world oil demand to the point where a peak in production matters little. And of course, other technologies could come along that could allow significant substitution for oil.

But inventors and investors have been searching for an alternative to oil for decades, and they have yet to find anything that approaches the flexibility and versatility of crude. The sudden oil price drop may result in a corresponding investment decline in alternative energy technologies. The punch line seems obvious: consumers around the globe will be relying on oil for decades to come. The unanswerable question is equally obvious: how much will that oil cost in 2015, 2020, or 2030?

If Wells and Maxwell are right, and I’m increasingly inclined to believe that they are, the U.S. and the rest of the world would be well served if they began taking steps to ameliorate the potential disruptions that will come from the oil price shocks that are looming large on the horizon.

A few observations:

• I’ve said many times here that the only useful way to assess world oil production is via a bottom-up analysis, and I stand by that opinion.
• The conclusion that our current economic circus doesn’t change the cold fact that peak oil is coming, still at a rate of about 86 million barrels/day, is likewise unshakable. The amount of oil in the ground isn’t changed by our economic woes up here; if anything, the amount of oil that’s economically recoverable is less at $50/barrel than it is at $147/barrel. If you focus on what can possibly come to market in a useful time frame, then that $97/barrel price swing makes a huge difference.
• I don’t think there’s an appreciable probability that a near-term peak can be avoided. The question of a supply peak vs. a demand peak (i.e. we use less oil because we must or because we choose to) will likely become moot, simply because of the timing involved. We’re too close to the peak to make enough of a voluntary transition away from oil to escape all but a small portion of the pain.
• Sadly, I can’t disagree with the conclusion that peak oil will hit the developing world much harder than it will the developed countries. The explanation given above is right, and it could well result in considerable human suffering.
• The last point I quoted above from Bryce, that it’s in our own best interest to get to work now, before the pain of a supply peak is felt, is why I find peak oil to be a relentlessly depressing topic. We here in the US certainly could have done far more than we did over the last 20 or 30 years to help ourselves, but we never quite got around to it. It was far too easy to buy a shiny new SUV and believe the fairy tales that “there’s plenty of oil to last forever (i.e. at least until I’m dead)”, “we’ll find a substitute for oil”, “car companies will find a way to get 100 miles/gallon”, etc., than it was to believe the scientists and other experts who warning us that we had a problem, even if it wasn’t biting us in the wallet yet.
• The shortsighted countries like the US, plus those like China with an equally warped view of our shared future, have signed up ourselves and the whole world–some more so than others–for one hell of a rough ride in the coming years and decades. I’m just glad that there’s nothing else of equal importance and scale we have to deal with, like, say, the billions and billions of tons of CO2 we pump into the air every year triggering phenomenally quick climate change, ocean acidification, and a looming, worldwide fresh water crisis. That would be really bad.