Fleeing Vesuvius. Gillian Fallon

has continued in both cases. It should be noted that both countries are home to the world’s best universities, most dynamic financial markets, most technologically able exploration and production companies, and stable, pro-business political environments. Nevertheless, in neither case has decline been halted.

      As large old fields producing cheap oil decline, more and more effort must be made to maintain production with the discovery and production from smaller and more expensive fields. In financial terms, adding each new barrel of production (the marginal barrel) becomes more expensive. Sadad al-Huseini said in 2007 that the technical floor (the basic cost of producing oil) was about $70 per barrel on the margin, and that this would rise by $12 per annum (assuming demand was maintained by economic growth).¹⁵ This rapid escalation in the marginal cost of producing oil is recent. In early 2002, the marginal cost of a barrel was $20.

      It is sometimes argued that there is a huge amount of oil in deposits such as the Canadian tar sands. The questions this claim raises are “When will it be on-stream?”, “At what rate can oil be made available?”, “What is the net energy return?” and “Can society afford the cost of extraction?” If less available net energy from oil were to make us very much poorer, we could afford to pay even less. Eventually, production would no longer be viable as economies could no longer afford the marginal cost of a barrel. In a similar vein, our seas contain huge reserves of gold but it is so dispersed that the energetic and financial cost of refining it would far outweigh any benefits (Irish territorial waters contain about 30 tonnes).

      Some Misconceptions Regarding Peak Oil

      The Decline Curve Assumption

      The now familiar image of a modeled global oil production curve showing a decline in production of 2–3% per annum (E_Gross), has led commentators to assume that this is what will be available in future to the global economy. Intuitively this might seem an almost manageable constraint. The assumption on which this curve is based, the decline curve assumption, is incorrect for three reasons. Firstly, it does not account for the increasing energy cost of extracting oil; the net energy (E_Net) available to society will decline at a faster rate than the modeled decline.

      Secondly, oil exporters, for the moment at least, are growing consumers of oil, and will favor domestic consumption over exports. This will reduce the volume of internationally traded oil.

      The third reason lies at the heart of why we must take a whole-systems approach to peak oil. The decline curve assumption assumes there is no strong feedback between declining production, the economy, and oil production. The modeled assumptions for the declining production, even accounting for declining net energy and producer consumption, assume a stable economy and infrastructure. In most of the modeling, the production curve (E_Gross) is derived from “proven reserves” or “proven plus probable” ones. “Proven” reserves imply we can afford to pay current real prices and deploy existing technology, while “proven plus probable” reserves are estimated on the basis of assumptions about the growth in technology and the idea that increasing wealth might allow us to pay higher prices more comfortably. In other words, at a minimum, the future production curve assumes that current technology and real prices would allow new oil to be brought on-stream to counter some of the effects of declining established production, without which the so-called natural decline rate could be greater than 7% per annum.¹⁶

      Energy Supply Too Small to Permit Economic Growth

      FIGURE 1. In this projection of a possible future, the steadily-increasing amount of energy required for economic growth to continue is shown by the line E_Growth. While the gross amount of energy that might be available is indicated by the line E_Gross and the net amount of energy after the energy required to deliver that energy has been deducted is marked E_Net. In theory, the gap between the energy available and the energy required for growth (E_Gap) grows smoothly and steadily as the graph shows but this ignores powerful feedbacks caused by the gap itself. As a result, the gap is likely to grow far more rapidly and erratically.

      A decline in oil production undermines economic production, thus reducing society’s ability to pay for oil. A decline also, as we shall see, undermines the operational fabric, which in turn constrains the ability of society to produce, trade and use oil (and other energy carriers) in a reinforcing feedback loop. Energy flows through the economy are likely to be unpredictable, erratic and prone to sudden and severe collapse. The implication is that much of the oil (and other energy carriers) that are assumed to be available to the global economy will remain in the ground as the real purchasing power, productive demand, energy infrastructure and economic and financial systems will not be available to extract and use it.

      Energy Independence

      Another misconception is that the output from other energy sources — natural gas, coal, nuclear, and renewable energy — are largely independent of oil even though oil is part of the systemic fabric of the global economy. At the most direct level, oil is used to transport coal and re-supply the infrastructure of natural gas and coal. More broadly, while oil is predominantly a transport fuel, the demand for it is tied to production in the wider economy, which is dependent upon natural gas and coal. A forced reduction in oil use would reduce economic production, which would induce a system-wide reduction in electricity and heating demand. At a wider level, all energy sources interact to maintain the global economy. If there was a major failure in that economy, the continued production, processing, trade and distribution of all energy sources may be imperiled. There would only be energy source independence if there was perfect real-time substitutability and a real-time net energy surplus in one or more of the alternative sources.

      We Can Fill the Gap

      If the peak in global oil production is imminent, or occurs within the next decade, we have neither the time nor the resources to substitute for oil, or to invest in conservation and efficiency. This point has been made recently by the UK Energy Research Council¹⁷ and many others.^18,19

      We can outline the general reasons as follows. It is not merely that we are replacing high-quality energy sources with lower-quality ones, such as tar sands and renewables. It is not that the costs of such alternatives are generally greater than established historical sources. Nor is it that the productive base for deploying alternative energy infrastructure is small, with limited ramp-up rates, or that it competes with food. Nor even that as the global credit crisis continues with further risks ahead, ramping-up financing will remain difficult while many countries struggle with ballooning deficits and pressing immediate concerns. The main point is that once the effects of peak oil become apparent, we will lose much of what we have called the operational fabric of our civilization. For example, any degradation and collapse of the operational fabric in the near future may mean that we already have in place a significant fraction of the renewable energy infrastructure that will ever be in place globally.

      The Economics of Peak Oil

      The thermodynamic foundations of the global economy are expressed through energy prices. Although the price of oil depends upon many things, supply and demand are the most basic. Speculation can be a major factor in setting prices too, but it may only have short-term effects and, if the world was awash with oil, there would be little incentive to speculate. On the supply side, the price paid for oil must be greater than the marginal cost of a barrel of oil, otherwise it’s not worth producing. On the demand side, the price that users can afford to pay depends on the health of their economy, which can be undermined by high oil prices.

      The oscillating decline model is an attempt to describe the effect of peak oil on an economy. In this model, constrained or declining oil production leads to an escalation in oil and food prices relative to available income, which feeds through to the whole economy. But economies cannot pay this price for a number of reasons. Firstly the price rises leave people with less money to spend on discretionary items, causing job losses and business closures amongst suppliers. Secondly, for a country that is a net importer of energy, the money sent abroad to pay for energy is lost to the economy unless it stimulates the export of goods of equivalent value (highly unlikely