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23 April 2020updated 29 Apr 2020 10:59am

Is this the end of the oil era?

Unless the Covid-19 depression is followed by a rigorous transition to renewable energy, peak oil will return. 

By Troy Vettese

Is the concept of “peak oil” dead? Maybe, but not for long. What is happening now already occurred 25 years ago. We are living through a zombie oil market, a return of the oil era circa 1995, the last time demand was only 70 million barrels per day (bpd). Until this pandemic-induced crash, we were witnessing an energy transition from conventional oil to non-conventional fossil fuels such as bitumen and “shale oil”. Non-conventional firms are among the worst hit by “Black April” when the price of oil futures collapsed to unheard of, negative prices. Yet, unless the Covid-19 depression is followed by a rigorous transition to renewable energy, peak oil will return for a second time alongside its handmaiden, the non-conventional oil industry. 

Much of the confusion over “peak oil” stems from the mistaken belief that the concept refers to scarcity. Rather, peak oil is the moment when conventional oil production can no longer be increased, regardless of price. There remain plenty of hydrocarbons, but the world oil market has changed over the past two decades as non-conventionals’ share has grown. “Conventional” oil conjures the 20th-century vision of free-flowing gushers and pump-jacks. Non-conventionals take novel hybrid industrial forms: bitumen strip-mines, “steam-assisted gravity drainage’’, and kilometre-long horizontal drilling to inject cocktails of water, sand, and unsavoury chemicals (ie hydraulic fracturing). Non-conventional technologies have opened up vast new reserves in areas far removed from the industry’s Middle Eastern heartland, but they are dirty, expensive and, as the recent crash shows, unstable. At the moment it is unclear whether the advance of non-conventionals has been merely temporarily halted or if there is a possibility they could be transcended by a renewable energy system.

The concept of “peak oil” originates with the work of Marion King Hubbert, a Shell geologist who 64 years ago predicted the climaxes of US and global conventional oil production. He noticed that fossil-fuel production tended to follow a pattern of exponential growth, peak and decline. “These curves,” he claimed, “embody just about all that is essential in our knowledge of the production of energy.” If the extent of a reserve could be estimated along with the rate of production, then it would be possible to know when the peak would occur. He argued that peak oil would occur in the US in 1970 – much earlier than his peers expected – with global production following in 2000. His first prediction was correct to the year, and there is good reason to think that the second forecast was only slightly off.

In 2016 David King, an emeritus professor in chemistry at Cambridge University and former chief scientific adviser to the government, and his assistant Oliver Inderwildi observed that the oil market’s behaviour up to 2005 “was attributed to normal elastic supply-demand factors, but crude oil then plateaued, with the rapid price rise clearly attributable to demand exceeding conventional supply capacity, with marginal supplies being met from unconventional sources”. This is what peak oil looks like.

Long before it had to engage in “greenwashing” to talk up its environmental credentials, capitalism ran on renewable energy. The first factory, Richard Arkwright’s cotton-spinning mill in the Derbyshire Dales, depended on the River Derwent for its power, and his imitators also exploited the cheap hydrology of the British countryside. Yet, investments in isolated valleys proved vulnerable to Luddite rage. In the late 19th century, working-class movements learned how to wrest control of the coal-based system by shutting down the railways from mines to cities. Petroleum systems, which moved by pipeline and tanker, needed fewer workers, thus creating an energy regime conducive to capital. Middle Eastern oil workers had trouble constricting the energy system, leading to democracy’s stillbirth in the region. In the Global North too, oil was essential for crushing working-class power. This was perhaps most manifest during the 1984-85 miners’ strike when dual oil-coal power plants proved crucial to keeping Britain’s lights on. 

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The shift to non-conventional oil was unusual because it was not spurred by labour unrest, but by the inability of the previous energy system to keep up with demand. The first tar sands mine opened in 1967, but non-conventional production only took off as Hubbert’s peak approached at the turn of the millennium. Total non-conventional production rose from 8 per cent of global output in 2000 to 19 per cent in 2019 – approximately 19 million bpd. Much of this was produced in North America, with US frackers pumping 9 million bpd and the Canadian tar sands industry 3 million bpd. 

Just as we look back to the pastoral capitalism of the 18th century, we may come to see conventionals as relatively “green” compared to the destruction engendered by fracking and tar sands extraction. Non-conventionals produce more greenhouse gases, and their chemical properties aggravate spills. In a region as dry as Texas’ Permian Basin, nearly 20 Olympic-size swimming pools of water are used per well – and nearly 5,000 wells are drilled every year. Water used during non-conventional production is so polluted that it has to be removed from the hydrosphere. The First Nations in Alberta, home to Canada’s tar sands industry, have reported that rare cancers have increased in their communities, though the government and medical establishment deny there is a problem. Cleaning up the tar sands industry’s tailings ponds alone would cost C$130bn, but firms have paid only C$1.6bn into the provincial remediation fund. Given that the non-conventional industry often struggles to make a profit, it will never reconcile “the economy” with “the environment’. 

Non-conventionals have features drawn from previous energy regimes. Like the rivers exploited by 18th-century textile mills, non-conventionals tend to be in remote locations. This isolation allows workers to extract significant concessions in their pay and other compensation, increasing pressure for automated production. Notably, non-conventionals require vast quantities of fresh water, which means that low water flows can threaten production. They also rely on rail and pipeline to get their product to market: the industry’s dependence on long-distance overland transport has been a vulnerability exploited by indigenous and environmentalist protesters, as opposition to the Keystone XL pipeline from Alberta into the US and the Dakota Access pipelines from Dakota to Illinois proved. Non-conventionals need fuel in order to extract fuel, which lowers their energy return on investment (EROI). The EROI for the tar sands industry is a miserable 4:1, far lower than the 100:1 achieved by mid-century US conventional oil producers. These traits add up to an expensive, environmentally destructive and volatile energy system.

The unusual hybridity of the non-conventional industry helps to explain why it has been harder hit by the crash compared to conventionals. Much of the news has focused on how the price for May’s oil futures collapsed into negative numbers for the first time ever, but this was a North American phenomenon. The world’s oil price, the “Brent” index set by North Sea producers, remained on the right side of zero, hovering near $20 a barrel. This is not the first time Brent and West Texas Intermediate (WTI) – the US standard measure – diverged, as when WTI traded at a discount to Brent during 2011-13. 

The tar sands and fracking industries are strewn across a broad hinterland, just as 18th-century textile mills were, meaning that they have trouble reaching the world market. Onland storage, centred on the Oklahoma town of Cushing, is limited and the price of WTI collapsed when it became obvious that there was insufficient space to store the glut. By contrast, Brent’s price reflects the stability of the conventional oil system; production tends to be near ports, where the world’s tanker fleets can become impromptu vaults. 

While WTI’s collapse shows the weakness of the non-conventional system, Brent’s price better reflects the state of the global oil market. The pandemic caused demand to shrink by 29 million bpd, returning us to the conventional era of the 1990s. The market’s hunch that $20 a barrel suffices to produce 70 million bpd seems plausible. The lowest-cost producers, such as Saudi Arabia, need only $13 a barrel, and the North Sea producers $15 a barrel, but ultra-deep-sea (another non-conventional form) requires $30 a barrel. Even exceptionally cheap new non-conventional production in the Permian Basin needs prices in the mid-$30s to break even, while the rate for tar sands is the mid-$40s. 

The price curve for the next marginal barrel of oil is steep between conventionals and non-conventionals, which means prices jump swiftly to several times the historical average when the economy is doing well, but collapse when there is an economic crisis, as there was in 2008, 2014, and now again in 2020. Thus, the $20 a barrel cut-off seems to lie near the conventional/non-conventional divide. With the Opec+ group of producers agreeing to reduce production by only 10 million bpd, consistent low prices will cull producers until supply is rebalanced at around 70 million bpd. Although analysts predict 90 million bpd demand to return by the year’s end, that seems optimistic given the depth of the Covid-19 depression. 

Last year the US Department of Energy praised the fracking industry for producing “molecules of freedom”, but what form does this freedom take? A volatile, ramshackle industry that leaves devastation in its wake? Where the price has collapsed three times in the last dozen years? The compact that society has made with non-conventional capital – we give them the Earth, and they give us abundance – has not fared well. The current depression makes clear that non-conventionals give us neither abundance nor security nor freedom. Yet, instead of reversing the non-conventional transition, the US and Canadian governments have favoured costly bailouts for non-conventionals. Instead, they should have left non-conventional firms to wither, with the state first in line to collect assets to pay off the industry’s gargantuan environmental liabilities. 

With the demise of the non-conventional system we can begin to imagine the end of the fossil fuel ancien régime. For the foreseeable future demand for oil will remain low, giving time to vastly expand renewable energy systems. The accompanying fiscal stimulus will help revive a moribund economy and ensure that there will be enough green energy once demand picks up. First the non-conventional transition will be suspended, and then the conventional one too. However, it seems unlikely that capitalism can return to its renewable roots. Rather, a rupture will be necessary. The future post-carbon society perhaps cannot promise endless abundance, but it could offer a freedom that will never be found in the Permian Basin or tar sands.

This article appears in the 29 Apr 2020 issue of the New Statesman, The second wave