Peak Oil Now? Airing Saudi Arabia's Dirty Little Secret

When the OPEC cartel begins its meeting Sept. 11, some analysts expect Saudi Arabia's dirty little secret will come out: It, and the world with it, has hit peak oil.

Oil, these analysts think, is running short -- leaving a yawning gap between supply and demand that will eventually send the world economy into a tailspin and could even lead to war.

Saudi Arabia, the line of reasoning goes, will refuse to increase oil production not because it doesn't want to -- but because it can't.

"If they actually do say they're not increasing their supply for this that or the other reason, it would give a clue that it's a problem," said Gail Tverberg, who blogs as Gail The Actuary on The Oil Drum blog, a leading proponent of the Peak Oil theory.

UPDATE: OPEC Makes "Token" Oil Production Increase

What is Peak Oil?

Oil is a finite resource -- it is produced by subterranean pressure over the course of millions of years. So what we've got is all we've got. Oil drillers go for the easy and most profitable crude first -- the stuff that requires the least energy to pump out of the ground and the least refining to make into a useable product. When that is gone, what's left is harder and more expensive to get at and deliver to the market.

The peak oil theory says that when we've pumped about half the crude in the world, demand for oil keeps rising but the supply falters. Maybe it hits an "undulating plateau." Maybe it falls in fits and starts. Maybe it drops like a stone. Off a cliff. But it falls -- leaving a widening gap between supply and demand.

That will not only mean higher gas prices, but higher prices for just about everything because petroleum is the basis for many of the products we use. If oil runs short before there are alternatives available, expect big geopolitical shifts as nations vie for control of the oil reserves that remain.

Are We There Yet?

Some say we've reached, or are near to reaching, that point -- the peak, when the earth's geologic formations no longer yield enough oil fast enough to meet the world's ever-growing demand. After all, most nations outside the Middle East have already peaked, according to the Government Accountability Office. The United States peaked in 1970 and now pumps half of what it did 35 years ago. But how do we know? That's where the OPEC conference that convenes Sept. 11 comes in.

OPEC nations control 80% of the world's known reserves of oil, and pump about 40% of its current supply. Analysts doubt that these countries have as much oil as they say they do -- because they don't admit to drawing down the tank, so to speak. Despite continued pumping, and despite having failed to find any significant new oil fields, their stated reserves remain relatively stable. And countries like Saudi Arabia keep investing in oil infrastructure with no obvious increase in production -- suggesting the Saudis might be working harder and harder to get at dwindling reserves.

Saudi Arabia, with about a quarter of proven world reserves, hasn't admitted to any difficulties pumping enough oil to maintain production, though other OPEC nations have.

So, the theory goes, when OPEC meets, they must confront the growing world demand for oil (unless, that is, the recent upheaval in the U.S. credit market has slackened demand significantly). One would expect them to increase production to meet that demand, but the suspicion is that they will not boost production. Because they can't. Because they too have reached the peak.

Shifting Sands

But if it is a milestone, it will be difficult to recognize. The Peak Oil argument is clouded with unknowns: How much oil is there in the ground? How much does Saudi Arabia really have? How fast can new technology be developed? How politically stable will oil-producing nations be?

"Once you get a handful of this sand, it just goes through your fingers," said the pseudonymous Prof. Goose, who co-founded The Oil Drum and hides his true identity. "That's why it's so fascinating, but also why it's so frustrating."

Only the most aggressive analysts believe the world has already reached the peak. Others believe the peak could come in five, 10 or as many as 35 years.

Even those who discount that peak oil is near or relevant -- like the industry bigwig Cambridge Energy Research Associates -- do not promote "a view of endless abundance." They place their faith in undiscovered deposits in the Arctic and elsewhere, or in upcoming advances in technology that will make hard-to-extract reserves such as oil sands, oil shale or deep-water deposits easier and cheaper to get. CERA says the peak will come around 2030, followed by several decades of an "undulating plateau" of supply. They say we have decades to develop alternatives.

But even they say it's important to develop those alternatives now.

Preparing For The Inevitable Peak

"This means that there is time to consider the best way to develop viable energy alternatives that would eventually provide the bulk of our transport energy needs and ensure that there is a useable production stream of conventional crude for some time to come," a November CERA report called Why the Peak Oil Theory Falls Down concluded.

Advocates of the Peak Oil theory point out that even if technology and unconventional sources of oil fill the gaps for decades to come, that oil could well come at a much higher price.

Congress and the 2008 presidential candidates are talking a lot about energy. They're talking about how fossil fuels contribute to climate change. They're talking about "energy independence" as a means of extracting the country from hostile foreign entanglements. Some are talking about an Apollo-scale undertaking to transform our energy habits.

They might want to start talking about Peak Oil. About not only independence from foreign oil -- but independence from oil altogether. And now.

They might not have a choice.

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