Archives December 2007

Peak oil has been a discussion for several decades after the theory developed by Dr. M. King Hubbert was put forth to alert the world of the impending decline in oil production. Recent data from the Energy Information Administration (EIA) oil production from the twelve members of OPEC has declined from its peak in 2005, despite increased global drilling activity.

Figure 1 OPEC Oil Production

Higher oil prices is driven demand for energy exploration and drilling is up significantly in the U.S. and the world according to Baker Hughes Worldwide Rig Count. Oil price continue to remain above $90/barrel and despite the increased oil drilling activity, oil production remains relatively flat.

Figure 1 demonstrates the tenuous nature of OPEC oil production with oil production declining almost 4% from the peak average production of 31.2 million barrels per day. One must remember that oil production is variable with up and down trends over time. However, with oil over $900 a barrel we are not seeing significant production increase despite the rise in oil drilling. Figure 2 illustrates world-drilling rigs in comparison to oil prices on a global basis. The U.S. accounts for over half the world oil drilling rigs yet our production is less than 10% of total global production.

Figure 2 Rig Count and Oil Production

What does all this mean? For one peak oil may be a reality or sooner then we like. Secondly, with concern over climate change and global warming, there is no real spending on alternative energy to help mitigate a potential shortage in oil. More spending on solar and hydrogen fuel cells is required to ameliorate the eminent disruption in oil flow. Without an orchestrated government mandate to develop alternative energies all nations face a national security issue that has the potential to cripple economic activity.

A brief review of history and in particular the industrial Revolution, it’s quite apparent that economic growth is inextricably linked to energy. As energy is tied to our economy, our future is dependent upon equitable access to energy. This in turn sets the framework of our dependence on oil and hence, why our national security is tied to securing the flow of oil.

Eighteenth-Century England gave birth to the Industrial Revolution. Four critical components provided the framework enabling the Industrial Revolution: Labor, Technology, Risk Capital, and Energy

Improving efficiencies in agriculture lead to an increase in the food supply while minimizing the amount of labor required to cultivating crops. The improving agriculture efficiencies lead to population growth and an available labor force that began to migrate to the cities.

Advances in science and technology gave way to improvements in manufacturing, mining, and transportation. It was the harnessing of steam power such as Thomas Newcomen’s steam, powered pump in 1712 for coal mining and James Watt’s steam engine in 1765 that lead to railroads and machinery.

Risk capital was also an important element for the development of the Industrial Revolution. Risk capital and the entrepreneurial spirit that allowed capital to be applied innovation helped transition England into the largest economy in the world.

And Energy. Access to an available source of energy was instrumental fueling the Industrial Revolution. With wood being used for just about everything in the early 1700’s from housing, wagons, tools, and fuel, deforestation lead to energy scarcity. It was coal that enabled the growth of Industrial Revolution by providing an accessible energy source.

With rapid growth in automobile production in the U.S., oil became the predominant form of fuel. According to the Energy Information Administration, in 2004 the U.S. spent over $468 billion on oil. Given that we import nearly 60% of the oil we consume, most of our wealth travels abroad. More emphasis on alternative energies could help ameliorate our dependence on oil.

Figure 1 U.S. Energy Consumption by Fuel

While solar and wind energy have seen some very strong growth, alternative energy still account for less then 2% of our global energy production.

We need to realize that our dependence on oil could cripple our economy. Supply constraints or disruption to oil flow could derail economic activity. It should be an imperative for our national security to develop alternative energies.