Part 1

Evidence that we’ve reached Peak Oil, the limits of how much petroleum can be produced is everywhere if you know where to look. Any peak is followed by a fall and there’s evidence the decline has started. That’s why we need a new energy paradigm, a way to replace the fossil energy we use today with sources that won’t pollute or run out.

There’s a fundamental question in business and economics about when you cut over from an old paradigm to a new one and it involves more than energy. For instance, at some point we converted from mainframe computers to PC networks and today we use handheld devices and Wi-Fi quite a bit. Older paradigms are still with us but in greatly diminished form. It’s easy to note those changes in retrospect but how many of us can say we called the moment or recall when we changed over personally?

Today we’re watching the first deployments of electric cars, charging stations and renewable energy. They’re still curiosities for many of us but at some future point when we’re all driving electrics, we’ll probably look back trying to figure out when the conversion happened. We’ll also want to ask what the driving factors were. With technology and electric devices now available and becoming better and less expensive we’ve arrived at a tipping point. What might that point be? Perhaps the decline of petroleum and rising costs will provide a hint.

Watching the end of petroleum

abandoned oil pump jack in field

One of the telltale signs that we are indeed running out of petroleum is the effort we put into extracting it. When oil was plentiful it was common to extract what could be easily recovered before moving on to the next find. As a result, there are many oil fields where there’s still oil in the ground but the cost of extracting it exceeds the price you can sell it for. When an oil field becomes unprofitable that’s what’s often meant.

For example, such a field might only be profitable with oil prices above $100 per barrel. When prices decline below that level, operators simply turn off the pumps. When prices return to profitable levels more operators pump producing a temporary glut which has the effect of driving down prices and the cycle renews. So, operators have an interest in keeping production costs as low as possible, that’s why they look for economic ways to recover more oil from existing fields after their flow rates have slowed.

The industry uses a variety of techniques to improve oil flow so that it can be recovered including,

Solvents and detergents that are injected into an oil well to loosen crude oil from oil bearing rock improving the flow thus making it easier to be pumped out.

Steam does much the same thing.

In fields where the rock is especially porous and that are close enough to the ocean, some producers pump vast quantities of sea water into the wells.

These are often called secondary recovery techniques because they are literally the second approach to recovering oil from a well in decline. Different fields have greater or lesser success with different types of secondary recovery. There’s no one solution for all circumstances.

Fracking is often referred to as a tertiary technique, though it can be used whenever a driller decides it’s needed. Fracking has taken many forms since the 1860’s we first began using petroleum in quantity, mostly for illumination purposes. Early fracking used explosives lowered into the well, and one inventor even introduced the idea of using torpedoes. The explosives worked but they were sometimes difficult to control.

Today fracking is mostly done using hydraulics to introduce high pressure into a well. The pressure cracks the petroleum bearing rock making the crude oil flow better. Of course, secondary techniques can also be used in fracked rock.

Today, according to the EIA (Energy Information Administration) part of the Department of Energy or DoE, hydraulic fracturing accounts for more than half of current US crude oil production.

Fracking has made a big difference in production too. In 2005 before hydraulic fracturing got going, US oil production fell to less than 4 million barrels per day from a peak of nearly 10 million barrels in the late 1960’s. Today the US is one of the largest producers in the world pumping 12 million barrels per daythanks to fracking.

That’s good news for consumers and oil producers if not for the environment. But we can’t ignore the fact that the current boom in production is due to secondaryand tertiaryproduction. We’ve found ways to extract oil from known deposits faster, but we haven’t discovered any new oil in the process. Think of a kitchen sponge. You can soak it with water and squeeze it out and you will get a lot of water out. You can then wring out the sponge and get more but it won’t equal what you got the first time.

Also, fossil fuels are literally the remains of once living things, hence the name. The amount of fossil fuels in the earth’s crust was indeed quite large but it takes millions of years to produce it and we’ve used most of our legacy in the last 150 or so years.

Life after petroleum

So the question of what life looks like after petroleum isn’t idle curiosity. We need solutions that fit the times. If petroleum is running out, we might want to consider how to stretch it out as long as possible. We might be able to make electric cars that don’t use petroleum, which would certainly help. But we also need to preserve petroleum for the things we make from it.

It’s not well known but petroleum, natural gas, and even coal, are the starting points for a variety of synthetic materials. Nylon, polyester and other fibers start with natural gas. Rubber for car tires and many other materials begins as petroleum. Even coal has multiple uses like coke for producing steel, and chemicals like dyes and even pharmaceuticals start with coal. So, the fossil fuels we have in the ground right now are becoming too valuable to burn.

Transitioning the fossil fuel infrastructure

There’s a huge investment by fossil fuel companies as well as the public at large that would have to be written off at some point. For instance, if you can’t get gas for your car or if supply and demand makes the price too high, you’ll need a new car that doesn’t burn fossil fuels.

Now imagine if that happens on a global scale. Not only will consumers feel a significant pinch, but suppliers with pipelines, drilling rigs, tankers, off-shore platforms, and refineries will find most of their infrastructure, worth trillions of dollars, worthless. It will also take decades to satisfy the demand for new products that don’t rely on fossil fuels.

It’s doubtful this would happen all at once and that’s why the free market is so important in what happens next. At the beginning of this article we noted that it’s hard to remember the moment when we converted from one style of computing to another. That’s because the conversion was governed by millions of individual consumer decisions. There was a gradual transition. The same thing is happening right now with our transportation and energy paradigms.

Some people already own electric cars, others would if it was easier to recharge half way through a trip without risking being stranded. We’re building solar and wind farms, and in many countries including the US entrepreneurs are accessing heat from the earth to generate electric power.

Market signals

At this point it’s important to provide unmistakable market signals to induce consumers and industry to act in mutually beneficial ways. Tax credits for the purchase of an electric car is one such signal, so is making grants and low-cost loans to parking lot operators who want to install charging stations. At some point we’ll need to consider doing the same for the fossil fuel industry. It might seem counter intuitive to support that industry as it goes out of business but it’s really smart business. Taking an active role in winding down fossil fuels, to the extent that they can be wound down, would protect some jobs as well as industries like petrochemicals for products we can’t live without.

My two bits

It might be time to engage industry and the public in a dialog about the future of our energy paradigm. We have time right now to plan a smooth landing that will transition the planet from polluting fuels to clean energy while preserving the petrochemical industry. Without that dialog the free market will perform as it always has with the possibility that some people and sectors of the economy become net losers in the changeover. There’s a lot at stake and we shouldn’t leave all this to chance.