Three Nails in the Coffin of Peak Oil

This post was first published on The Oil Drum one year ago.

This post is based on a talk I gave as an “undistinguished speaker” to the American Association of Petroleum Geologists (AAPG) oil finders lunch in Aberdeen a few weeks ago. This will be one of my last posts on The Oil Drum. There should be enough controversy below the fold to keep a hoard of Oil Drummers satiated for weeks;-)

Peak oil – what happened? Before answering “what happened” it is perhaps best to try and define what peak oil actually means. In its simplest formulation, “the theory” is that owing to geological constraints on flow rates from natural finite reservoirs, global oil production will one day reach a maximum point and thereafter inexorably decline. An extension to the theory is to contemplate the possible consequences of peak oil for society. The argument goes that since oil is the pinnacle fuel in terms of energy content, transportability and storability, crucial to the smooth running of modern transport systems, that a decline in crude oil availability may lead to social disruption. The chart top left, shows a typical peak oil profile from Colin Campbell, one of the key Peak Oil analysts of recent decades.

The chart top right shows the oil price for Brent and WTI. The phenomenal rise in price from 1999 to 2008 bore witness to growing scarcity, where demand growth outstripped supply growth. The chart bottom right is a cross plot of the monthly production and price data and shows how supply became inelastic to price from January 2004. Many “peak oilers” were convinced that the time had come.(Click on slides to get a larger version that will open in a new window)

Nail 0

When I submitted the title to the AAPG many months ago I thought there were three main nails in the theory of Peak Oil, but when I came to write my talk I discovered there were four, hence the introduction of Nail 0. For the time being at least, it is an undeniable fact that oil production has continued to rise. Note that in this case, C+C includes conventional crude oil, condensate, shale oil and tar sands production but excludes biofuel and natural gas liquids. All scientists should update their views and theories when new facts come to light.

Nail 1 The first big nail is the ongoing exploration success of the international oil industry. Higher price has encouraged a resurgence in exploration activity that has resulted in tens of billions of barrels being found. Land locked Iraqi Kurdistan alone may hold >40 billion barrels in new reserves. We will of course one day run out of planet to explore but that day does not seem to have arrived yet.

Nail 2 The second big nail has been the expansion of unconventional oil and gas production, especially shale oil and shale gas in North America. Several years ago when I first engaged with this debate no one ever mentioned shale oil as a massive new resource just begging to be exploited. Shale, together with tar sands, biofuels and enhanced oil recovery has transformed the fortunes of US and N American liquid fuel production. 

Nail 3 The third and final big nail may not seem significant but it is symbolic of what can be achieved with technology and the desire to succeed. Oil production in Oman had been in decline since the year 2000 to the disappointment of the Omani people and Shell Oil that operates much of the production in that country through a joint venture with the Omani government called Petroleum Development Oman (PDO). Oman would have been a classic case of a country peaking. But the fortunes were reversed by rolling out an array of enhanced oil recovery strategies. Increasing recovery factors across the globe will add billions more to reserves.

Points At this point many readers may think I have lost the plot, and indeed by the end of the post may still think so. It is important to set the preceding observations in context.

Not all liquids are born equal A careful dissection of global liquids production data shows that conventional crude oil + condensate has been on a bumpy plateau, just over 73 mmbpd, since 2005 – that is for 8 years. Despite record high oil prices, the international oil industry has not been able to grow production of this most lucrative resource that flows freely from the ground. Something is up! All of the meagre growth in liquids production has come from liquids that are very difficult to get, i.e. shale oil and syn crude form tar sand, or from inferior liquids that condense from natural gas production (NGL). Note that in this case conventional C+C excludes shale oil and tar sands. It remains a debatable point whether or not shale oil should be classified as conventional or unconventional oil. 

The IOCs may already be past their peak If the world is awash with oil as many reporters now claim, it is curious that this oil seems out of reach of the biggest independent oil companies in the world. Some of the new supplies may of course be in the hands of the second tier independents but most of it lies in the hands of national governments out side of the OECD. This presents very serious threats to energy security and on-going trade imbalances that lie at the heart of on-going financial system stress.

Thanks to Matthieu Auzanneau for the splendid chart.

Oil field decline rates In the context of oil production, decline rate refers to the fall in annual production that invariably takes place owing to pressure depletion of the reservoir, the production of oil and the ingress of water or gas into the formerly oil bearing strata. Companies are continually battling decline with strategies like injecting water for pressure support, drilling new infill wells, doing well work overs etc. and the combined effect is to reduce declines from headline numbers that may be much greater than 10% to more manageable numbers in the range 4 to 7%. Therefore, absent new field developments, global oil production would decline every year by about 4.5% according to CERA or 6.7% according to the IEA. Given crude + condensate production of around 73 mmbpd, this means that new fields amounting to between 3.3 and 4.9 mmbpd are required every year to just maintain global production at 73 mmbpd. This is a mammoth task, finding and developing fields equivalent to a province like the North Sea, every year. The industry has been working flat out to achieve and maintain this. Tier one supergiants are being replaced with tier three assets like shale oil, that by comparison require enormous effort to develop and decline much more rapidly. 

The world has changed The world changed in August 2008 with the onset of the financial crisis. This together with a range of other events, that all impinge on the global energy picture, has tended to take the media and public eye away from the energy crisis that was prominent before August 2008. 

Financial crisis Eight years ago I would use images from movies to depict social unrest; now there is no shortage from the real world. There should be no doubt that the crash in oil price in 2008 was brought about by the financial crisis. The role of high oil and energy prices in triggering the financial crisis, however, remains less certain and mainly out of the public and political eye. The sharp recovery in oil prices following the crash is part of the new energy reality. Marginal supply is now much more expensive than in the past and to maintain supplies at current levels, a high price must be paid. 

Financial crisis At a speech I made in Vienna last year I made the assertion that Capitalism was founded on growing supplies of cheap fossil fuels. The financial crisis bears many of the hallmarks to be expected with the end of cheap fossil fuels, and the end of capitalism, the loss of ability to pay rent on savings being one of them. The shale revolution is perhaps the best example of the end of capitalism as oil companies struggle to bring a vast but expensive resource to market and in so doing dump the price below which the resource can be produced. Rex Tillerson, CEO of ExxonMobil kindly affirmed the assertions made by Arthur Berman and others that the US gas industry is losing its shirt on shale. US natural gas prices seem to have bottomed, but are still below the price needed to turn a profit. US shale gas is expensive, and it is curious for me to observe that companies now seek to make it even more expensive by liquefying it and sending it half way around the world. This is curious behaviour for capitalists operating in a broken market. 

Increasing effort required to procure energy I first produced this chart many years ago now, inspired by Nate Hagens and many others. I have grown to realise that low ERoEI energy sources are in fact energy conversions. When we use natural gas to make biofuel or to help procure syn crude from tar sands we are electing to convert “cheap” natural gas into these more prized liquids. ERoEI of the global energy mix will undoubtedly be falling, but on average still so high so as to not be a problem for now. Likely not a problem for many decades to come. 

Increased effort = more drilling When it comes to N American oil and gas, increased effort simply means drilling more wells, more expensive wells, less productive wells. High resolution versions of the charts are given below. In this postI was astonished to see how the USA drilling statistics dwarf the rest of the world. Whilst Europe appears not to be trying, on reflection I am not convinced that covering our remaining countryside with drilling pads and service roads is a wise route to follow. North America has wide open spaces better suited to this type of resource exploitation than the densely populated rural landscape of Europe.



Regional gas


European energy security

Energy security has been a long-running and serious issue for Europe, one of the key factors leading to the expeditionary exploits of Germany in WWII. And yet, as discussed below, European energy policy is currently driven by a unilateral desire to reduce CO2 emissions which so far has achieved virtually nothing.

I sent the chart on UK primary energy to The UK Department of Energy and Climate Change (DECC) many years ago, asking, if confronted with nothing but this data, what should the UK do? It was and still is clear to me that we must do all we can to reduce our energy consumption (without harming the economy and the populace) whilst doing all we can to boost primary energy production. DECC did reply but did not give the glaringly simple answer I expected to get. In the interim, the government has implemented a totally botched tax raid on UK oil and gas production. And it continues to pursue (interminably) with its £1 billion carbon capture and storage competition that seems designed to give Britain the most expensive electricity on the planet. It should be blindingly obvious that if CO2 can be captured at power stations it should be used to enhance oil recovery from the North Sea. What has made our policy makers so blatantly dumb?

To be fair, the UK does have a raft of sensible measures such as progressive taxation on motor vehicles linked to energy efficiency (or is it linked to emissions?), tax breaks for home solar installations (though I’m still not convinced that solar is a great idea for a country where it is dark for most of the winter when demand is at a peak) and is rolling out smart meters at a snail’s pace. We are still taking two small steps forward for every three large steps back.

European oil and gas production is in free fall, in sharp contrast to North America. We are becoming increasingly dependent upon Russia, Africa and The Middle East for our energy supplies with every day that passes. Covering Britain with wind turbines seems increasingly to me like a bad idea. There is, of course, interminable chatter about fracking in the UK and elsewhere in Europe. This excerpt from an email from Arthur Berman I believe places the great fracking hope in context:

So, most-likely reserves suggest that all of the Wrexham, Blackpool, Nottingham and Scarborough shale reserves may amount to a Barnett Shale-sized accumulation. Not nothing, but on balance, not terribly impressive for an entire country. I’m sure the Brits will love the 30,000 wells necessary to develop 43 Tcf!

Drill baby drill This final slide depicts the very different attitudes to energy policy on either side of the Atlantic pond. The USA, still dominated by free market policies, private ownership of mineral rights and the fossil fuel industries, has pursued a very different course to Europe that is pre-occupied with unilateral emissions reduction policies. So far, this unilateral EU action has achieved essentially zero on the emissions front, any savings made in Europe being wiped out by increased emissions else where. Europeans are being saddled with expensive and less reliable electricity supplies and increasingly loss making energy industries. Only time will tell if the European strategy bears fruit in the long run. The need to increase indigenous primary energy production in Europe does make expansion of renewable energy a sensible option, but I can’t help feeling that 100 GW of new nuclear capacity may better serve the people of Europe.

The future When I first came to The Oil Drum over seven years ago I was looking for information to explain the steadily rising oil price. It has been some ride. In the vastly complex system that is industrial society it is impossible to make predictions about the future, but here, in any case, is my wag. $100+ oil has opened the door to exploitation of more expensive resources and reserves. Society is adapting to the new reality of higher energy prices. Some are becoming more energy efficient, some have installed renewable energy devices at home, some will forgo an expensive vacation they can no longer afford and some have been squeezed out of the labour market, perhaps forever, and will live out their lives on dwindling State handouts, in poverty. The new higher oil / energy prices are here to stay but I believe they will stay range-bound in $100 to $150 / bbl bracket, perhaps for decades as we munch our way through the $125±25 slab of resource. The tremendous uplift in price from 2002 to 2008 may have been a generational one-off investment opportunity where some made billions whilst society lost its shirt. The energy industries are still under-dimensioned for the new reality of harder to get at energy but scarcity of women and machines will gradually ease as the industry continues to upscale.

As for me, I may start my own blog on energy, climate, and policy – that will not be suitable reading for many existing TODers. For the 7+ years I have been involved with The Oil Drum I have not worked and so any new venture will need to be fully funded, somehow.

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17 Responses to Three Nails in the Coffin of Peak Oil

  1. Very nice. The real key is just being discovered — the unlimited upside risk of environmental costs just from past oil/coal/gas emissions.

  2. Sam Taylor says:


    I’ve read this post before on TOD, but it’s good to go over it again. I assume you haven’t changed your mind in the intervening year! Have you been swayed by the significant number of people who seem to be arguing that US shale is a bubble and is set to peak/pop within the now – 2020 time period? That certainly seems to be foremost in Ron Patterson’s thinking these days. Especially now that most of the production growth is just coming from a few sweet spots.

    I guess there’s also the question of whether or not the financial system can cope with the post 2005 energy paradigm. As you say, the end of capitalism may well be near, as our current financial model is basically built on a whole raft of assumptions which are no longer valid. My worry is that one of the rather horrible things that David Korowicz (are you familiar with his work?) prophesies might well come to pass if and when the financial system gives up the ghost, regardless of whether or not the energy picture is still relatively healthy.

    • Euan Mearns says:

      Sam, I’m actually on vacation and so have little time to respond. But I have not changed my mind much since a year ago. I’m not sure I’d call shale a bubble. The price of shale gas has been too low. If the price goes up and USA can live with it then the “bubble” goes away. Its true that sweet spots have been keeping things going, but sweet spots are real. Bakken, Eagle Ford and Marcellus will all peak one day – but when? I’d guess all before 2020.

      I try to avoid commenting on financial system. It seems possible / likely that those who foresee a meltdown may be proven right one day. But when? The think that impressed me most about the post 2008 response was the resolve of the system to protect itself. If those wheels come off then all bets are off.

      • Sam Taylor says:

        I guess, then, my followup question would be, what happens after 2020? I suppose it’s a hard one to answer.

        Enjoy the holiday!

  3. Roger Andrews says:

    The phenomenal rise in price from 1999 to 2008 bore witness to growing scarcity, where demand growth outstripped supply growth. The chart bottom right is a cross plot of the monthly production and price data and shows how supply became inelastic to price from January 2004.

    I tend to think more in terms of the effect of oil price on consumption, which I submit has been largely inelastic to price since at least 1975:

    We see inelasticity between 1975 and 1979, when consumption recovered strongly after the 1974-75 recession even though the real oil price was about five times higher than it had been a year or two earlier.

    We see inelasticity in the opposite sense between 1979 and 1983, when consumption continued to fall even though the oil price almost halved.

    We see it between 1998 and 2007, when consumption increased steadily despite a fourfold increase in oil price (and at about the same rate as it did between 1983 and 1998, when oil prices fell by a factor of four).

    We see it again after 2009, when the recovery in consumption after the 2008 global recession coincided with a near-doubling of oil price.

    Oil consumption is controlled by recessions, not price. It falls during recessions simply because people are short of money. It recovers as soon as they begin to feel wealthy again, regardless of what the oil price happens to be. People can live without vacations, or going to the movies, or eating out, but like George Patton’s tanks, they gotta have gas.

  4. Ed says:

    I would like to make a comment but there is nothing significant that I could add. It is good to see the article republished so it can be seen by a new audience. May I also suggest the Export Land Model article by Jeffrey Brown as another article worth reading.

  5. Glen Mcmillian says:

    I must compliment you for writing one of the best balanced pieces I have read on peak oil and especially on your making a point of acknowledging what is fact and what is your own opinion.Not many writers on such controversial subjects meet high standards in this respect.

    There are a couple of things that don’t quite make sense.The one that puzzles me the most is your remark about American companies wanting to export natural gas and make it even more expensive than it is. I assume this is an example of that famous dry English or British humor but such humor is apt to be misinterpreted in a piece that is so serious in tone otherwise.

    There is only one thing I find unfortunate about this fine piece and than is the choice of title.I understand very well why you chose it.

    BUT unfortunately it will often be referred to as proof-from a prominent person in the peak oil community no less -that peak oil is nothing to worry about by other writers and other organizations and most of their readers will never have even the foggiest idea about all the worrisome data you have included and your sober statements about decline rates etc.

    That is a real shame.

    One other thing I have to say at the moment is that it is a matter of little consequence in the grand scheme of things whether we have peaked or are approaching peak in terms of the big picture. A decade is a very long time in the lives of men but it is only an hour or a day in terms of history and only an eye blink in biological or geological time. The peak will matter a great deal of course in terms of my own life and any others who might see this comment. But in historical terms ten or twenty years either way don’t mean much at all except from the perspective of what we might do to prepare to deal with the problem and all the associated other resource and economic problems.

    Renewables technologies may and probably will improve substantially in twenty years and energy efficiency standards and practices are certain to improve substantially.I for instance believe that led lighting will be mandated by law within ten years almost across the board unless it is displaced by some other even more efficient technology that is cheap enough to be universally deployed.

    • Euan Mearns says:

      Glen, regarding gas price. The objective of US exporting gas is to get rid of surplus and push US prices up, hopefully into the domain of making a profit. This may lower prices else where, like Europe. The huge spread in international gas prices is not sustainable.

      • Glen Mcmillian says:

        Well we are certainly in total agreement on this point concerning businessmen and their desire for profits.

        But the way the relevant remark reads to me it comes across as humor / sarcasm or else it just doesn’t make sense.Every once in a while the written word of somebody from the ” other side of the pond” as an old English man who lived near here used to put it fails to ” scan ” as reading teachers put it.A little bit of humor or sarcasm is unexpected in such an otherwise sober composition.

        It is often said that the UK and the US are two countries separated by a common language.

        It would be a comfort to me to believe we are going to be able to continuously produce ever more and more gas for a long time to come but I personally doubt this will happen and I certainly am opposed to betting my own and other countries future safety and prosperity on the possibility.

        My own gut belief is that gas prices are going to follow conventional crude prices up up and up some more until the world economy chokes on the price of gas just as it is currently choking on the price of oil.Hopefully this will not come to pass in the very near future however.Every year counts in deploying more wind and solar and getting a few more nukes built and above all in improving energy efficiency and changing our lifestyles to lower energy consumption.

        Adam Smith’s Invisible Hand is not on the end of Superman’s arm but it can nevertheless work miracles given time.Unfortunately consumers and businesses are not going to respond today to vastly more expensive energy ten years from now;the market is a wonderful thing but the market signal arrives with higher prices rather than well in advance of such higher prices.

        IF we don’t change our ways NOW we are going to be in damned deep doodoo in a decade WHEN prices spike again and we are still using energy in our same old wasteful ways. This remark applies much more to my country than yours of course but it applies across the board everywhere.

        Improving energy efficiency and changing lifestyles are goals that are in principle quite easily accomplished goals but in practice achieving them is a slow,slow, slow process.Too much old energy hog infrastructure, too many people locked into payments on existing inefficient cars, etc, etc.Too many people and more every day trying for a share of what is incontestably a finite resource. Too many people convinced that change is not only necessary but inevitable and too many low life businessmen and paid for mouth pieces telling the public there is nothing to worry about that energy is always going to be plentiful and cheap.

        This is not going to end well.

        People who are reading Ron Patterson’s blog and actually commenting right now seem to be convinced the whole world is irrevocably headed to hell in a hand basket due to peak oil in particular and peak resources in general. I feel about as lonely over there right now as an advocate for the survival of industrial civilization- at least in countries such as the USA and Canada – as I do as an advocate of renewables here.

        I wouldn’t be caught in Egypt or a similarly situated country ten years from today for all the money in the world.The good Reverend Malthus has always gotten the last laugh one place or another every year since he wrote his essay and he is going to get the last laugh in many many places in the not so distant future.

        IF I were a Limey myself and had nothing to tie me tightly to my hometown I would be very seriously thinking about moving to Canada.

        Given my partly Irish ancestry I love a fight and a fuss and may take either side just to keep it going but my remarks will always be honest. I never advocate any policy that I believe is not good for society over the long haul.

        One of these days you will be damned glad for all those wind machines when they enable you to keep your refrigerator cold by filling half of it with jugs of salt water and the other half with your food.That will work for as long as three or four days even with a poorly insulated fridge.Set the thermostat low enough to freeze the water in a separate compartment and you are good to go for a whole week.Dealing with intermittent energy is not actually impossible. I would put a smiley face here if I knew how.

  6. Jacob says:

    In the red-blue graph about EROI, titled “The energy cliff” you put the EROI for wind at about 16-38, and for solar pv at 8-28.
    I think these numbers are way too high.
    In a booklet published by Prieto and Hall they calculate the EROI for solar to be about 2.45 in Spain, much less in Germany. This is based on longtime experience of Pedro Prieto in building and managing PV systems.

    • Glen Mcmillian says:

      I am not an energy specialist and have no way of knowing personally how good ereoi figures may or may not be but I have seen some that are much better than 2.45 that are published by apparently reputable people.

      Now the discussion of ereoi must be considered from two basically different viewpoints.I am reasonably sure the 2.45 figure given includes every input the author could think of and quantify and that his work is probably competent and honest.

      This indicates that solar power over the very long run is probably not going to ever going to support an industrial society unless the ereoi can be improved substantially.

      For what it is worth I do believe it will be possible to substantially improve the ereoi on solar power over time and that it is inapproiate to include all costs since a great many of these costs are going to be incurred under any circumstances.The workers will be employed in other fields that most likely will not generate any energy at all thereby having a zero energy return energy invested.There is no energy return on the glass that goes into automobiles for example.

      But we are not as individuals and societies dealing with the very long run. We are dealing with the present and the short to medium term in solving our energy and environmental problems.

      And for now the ereoi simply does not really matter so long as the dollars and cents or euros and cents work out ok because we still have plenty of cheap fossil fuel that is going to get burnt ANYWAY regardless of whether the energy in question is invested in solar power production or in some other way – some of the other ways just to be clear include racing automobiles and flying on vacations and heating and cooling poorly insulated buildings and keeping the lights on at closed office buildings and building and driving millions of cars.

      The people involved in the work are going to be working at SOMETHING and thus consuming all the energy used by the workmen involved in building shipping and installing pv ANYWAY.

      Hence the ereoi of solar is of only academic interest for now and for the easily foreseeable future.

      If one has a hundred dollars in his pocket and spends it on cards or other games of chance it is not nearly so well spent as only ten dollars saved out of that hundred and spent on something essential such as paying for food.

      We can certainly afford to spend energy on pv if we can spend it on any thing that pays no long term return at all.

      Later on the ereoi will be a critical consideration once fossil fuel starts getting to be in truly short supply and truly expensive.

      At that time the utility of even small amounts of on site locally generated fuel free electricity may be enormous.

      I for instance could run some extremely useful power tools for three or four hours a day most days with only a one thousand watt installation. Those tools more than double my efficiency as a carpenter or mechanic.

      That would be enough to keep a well insulated refrigerator with an ice reservoir cold for week without sun. Putting a price on that would be hard to do but a lot of food is highly perishable and quite expensive.

  7. A C Osborn says:

    Euan, do you have some way to contact you off thread?

  8. A C Osborn says:

    Sorry for not contacting you earlier, that is my Tech Guys Forum email address and I only check when responding to Tech Guy poster’s questions.

  9. Even though certain politicians love to bemoan the supposedly sorry state of U. S. refineries (no new oil refineries built in the USA since whenever, etc.) it is also true that many U.S. Gulf coast refineries appear to be increasingly good, even world leaders, at converting low-value residuals and various heavy oil feedstocks into the classic high-value transportation fuels of gasoline, diesel and jet fuel. This is made possible by the addition of the latest processing equipment such as crackers, cokers, etc., to their “old” existing refineries. Such new refinery components can easily cost in excess of $1 billion USD each* , but they can also enable a proven, modern-day version of alchemy.

    Like much oil refinery processing this upgrading of heavy residuals is typically very energy intensive, often requiring very high temperatures and pressures to be sustained. But the prevaling low price of U.S. natural gas supplies to these same refineries during recent years makes such value-add processing even sweeter.

    * NOTE: I can never remember what the British say instead of “billion”, but the $1 billion I mean has nine zeros! Or, is it only at the “$1 trillion” level (twelve zeros) where there is a divergence?

  10. Leo Smith says:

    Peak oil isn’t about running out of oil.
    Its about running out of CHEAP oil.

    You are straw manning here.

    The definition is simply that peak oil is when global oil productions peaks for whatever reason Unavailability of oil altogether is in fact the least likely one.

  11. Here is Jean Laherrère (ASPO France) answer to people who believe peak oil is a myth. He ran this presentation last April at a conference with the MIT Club of France

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