I talked to Nelder by phone this week. A lightly edited transcript follows.
Brad Plumer: Let's start with the basics. How would you define "peak oil"?
Chris Nelder: There has always been a lot of confusion about this point. Peak oil was never about "running out of oil." The only people who characterized it that way either didn't know what they were talking about or were trying to confuse the issue. Peak oil has always referred to the production rate of oil — it's about finding the point where that production rate peaks.
BP: So back in 2005, plenty of analysts were suggesting that the world would soon hit a ceiling in annual oil production. How has that panned out?
CN: The predictions weren't monolithic. But what everyone agreed on was that at some point in the near future, maybe five or 10 or 15 years away, the rate of oil production would stop growing. Some said we'd hit an absolute peak in a specific year. Others said we'd reach a "bumpy plateau" that might be five or 10 years long. But everyone agreed that sometime after 2005, within 10 or 15 years, global oil production would stop growing.
And that's exactly what happened. The growth in conventional oil production ended in 2004, and we've been on a bumpy plateau ever since.
BP: It looks to me like there was an uptick in 2012. Doesn't that mean we've finally broken the plateau?
CN: Not necessarily. In 2005, we reached 73 million barrels per day. Then, to increase production beyond that, the world had to double spending on oil production. In 2012, we're now spending $600 billion. The price of oil has tripled. And yet, for all that additional expenditure, we've only raised production 3 percent to 75 million barrels per day [since 2005].
BP: So what we're seeing is that the world can no longer increase its production of "easy" oil — many of those older fields are stagnant or declining. Instead, we're spending a lot of money to eke out additional production from hard, expensive sources like Alberta's tar sands or tight oil in North Dakota.
CN: Right, and that's entirely consistent with peak oil predictions, which said that extraction would plateau, that the decline in conventional oil fields would have to be made up by expensive unconventional oil. Right now, we're struggling to keep up with declines in mature oil fields — and that pace of decline is accelerating.
Mature OPEC fields are now declining at 5 to 6 percent per year, and non-OPEC fields are declining at 8 to 9 percent per year. Unconventional oil can't compensate for that decline rate for very long.
Even all the growth in U.S. tight oil from fracking, which has produced about 1 million barrels per day, hasn't been enough to overcome declines elsewhere outside of OPEC. Non-OPEC oil has been on a bumpy plateau since 2004:
BP: Now when you say "mature" oil fields are declining — these are older fields in places like Saudi Arabia or California that used to produce cheap, easy-to-extract oil. And we're replacing them with fields that decline more quickly and are difficult to produce?
CN: Look at Ghawar in Saudi Arabia [the largest conventional oil field in the world]. We know that its water cut has been increasing — they're getting more water with the oil that comes out, which is an indication that the field is in decline. That's a field with a high flow rate and cheap production costs.
And we're replacing it with tight oil wells in the U.S. that decline 40 percent in the first year, where the production cost is over $70 per barrel. Or deepwater wells, which deplete at 20 percent per year. Or tar sands, which is expensive. Anticipated production growth for tar sands has consistently failed to meet expectations, year after year after year. Ten years ago, tar sands production today was expected to be twice what it actually is.
These are just low-quality oil resources, and we're relying on them to compensate for the decline in cheap, high-quality stuff.
BP: One of the things peak-oil analysts often talk about is the "energy return on investment," or EROI. The idea seems to be that we're now spending more and more energy just to extract oil from difficult places like Alberta's tar sands. Why is this important?
CN: At some point, you wind up investing so much energy to produce more energy that you start losing the race. It becomes non-useful or ineffective to keep trying to produce more energy.
And there's a turning point on this — it's called the "net energy cliff." When the ratio of energy output to energy input gets down to about 6, then you fall off this cliff, and it's just not worth doing. In the early days of oil production, that ratio was about 100 to 1. Globally, right now, it's approaching 11 to 1. And it's even lower for some newer sources. The return on investment for heavy oil from the Kern River field in California is about 4 to 1.
The point is that the net energy available to society has been declining radically. Researchers have done a number of papers on this. If you want to run a society, your net energy for oil production has to be at least 5. And if you want to run a modern complex society, with televisions, iPads, highly advanced medicine, etc., then you probably need an EROI closer to 10. So it's reaching the point where we're in the danger zone.
BP: Now what about prices? We've seen oil prices soar from around $40 per barrel in 2004 to $140 per barrel in 2008. And nowadays, prices in the $100 range are pretty much normal.
CN: One of the implications of peak oil is that as production starts to falter, we need much higher prices in order to sustain production. And that's exactly what's happened since 2005.
Another implication is that the economy would be unable to tolerate those high prices and would contract. That also seems to have happened. U.S. employment is still below 2008 levels. Europe is struggling. Now, it's difficult to sort out the effects of high oil prices on the global economy because we also had the financial crisis and everything else. But guys like James Hamilton have done some interesting research showing that when oil expenditures reach a certain percentage of GDP, that induces a recession. So there is some evidence.
BP: It seems like one of the implications of peak oil is that prices will bounce around a narrow window. They can't go too low, because then all those tight oil wells in North Dakota will be unprofitable. But they can't go too high, because that will crush the global economy.
CN: A number of analysts have argued that the floor on oil prices is now around $85 per barrel. It might vary from place to place. An existing well in the Bakken might be profitable when oil's at $70 or $75. For Arctic drilling, prices might have to rise to $110 per barrel. But the floor is around $85.
But there's also a price ceiling for what consumers are able to pay. I think that's probably around $105 for West Texas Intermediate and $125 for Brent. This is why world prices have been bouncing around this narrow ledge between floor and ceiling since 2007. We have to keep prices in that range, not too high to kill demand, but not too low to kill supply. Again, that's very consistent with the concept of what peak oil has always been.
BP: The other interesting dynamic you've noted is that once oil production stagnates, we're essentially in competition for oil with China and India.
CN: Right now, all of the new oil consumption in the world is coming from outside the OECD and the developed world. It's largely coming from in China and India. And that new oil demand is now being met, almost exactly, by declining demand in North American and Europe:
Another consequence of hitting that plateau is that net global oil exports will continue to fall. Oil-exporting nations will make a lot of money thanks to higher prices, and they'll grow as a result. But that means they'll also start consuming more of their own oil. And this is exactly what's happening worldwide — net global oil exports have declined since 2005. Countries like Saudi Arabia have seen enormous growth in oil consumption.
And what that means is that the United States will have to cut consumption in response. We are the most vulnerable oil importer: We consume about 18 million barrels per day and produce about 7 million. So as net global exports decline, our consumption will have to fall. And that's already happened.
BP: I'm not sure I quite follow. If there's only a limited amount of oil to go around in a growing world, why does that oil go to Saudi Arabia or China instead of the United States?
CN: The growing economies of Asia get so much more marginal economic utility out of a gallon of fuel than we do. In a poorer country, you might have a couple guys on a moped, burning one gallon of fuel to get to the market and back. They get so much more economic value out of doing that than a construction worker in the U.S. gets in his pickup truck burning 5 gallons per day.
In China you've now got cars that get 50 miles per gallon. And I've done the math on how many of these new vehicles they're building in China and how many new vehicles we're buying per year. And it turns out we will never catch up with China on fuel economy, because we still have 240 million vehicles out there with low fuel economy.
BP: I see. As long as production plateaus, they'll always be able to outbid us for oil — it's worth more to them. So what's the upshot of all this?
CN: The upshot is that we need to prepare for the day when oil is going to leave us. The sooner we commit to an energy transition, to renewable energy, the better off we'll be in every respect. You can make that argument just on the basis of production rates and price. And that's not even considering carbon emissions and climate change, which is another great reason. Let alone what oil is doing to the global economy.
And there are always going to be unforeseen developments. If you were a hard-core doomer 10 years ago, you might have said that when oil gets to $100 per barrel, our economy will simply shut down. But you would've missed the fact that a lot of Americans have quit driving and switched to public transportation. You would've missed a significant transition from 18-wheel trucking to rail over the past decade — a huge transformation of freight.
So you can't always predict things perfectly. But likewise, it's just not correct to say that because we've unlocked tight oil and we're drilling in shale that everything is great, that we're off to the races, that we can keep growing the global economy on this stuff.
--One of the most optimistic predictions about oil production has been a study (pdf) by Leonardo Maugeri of the Harvard Kennedy School. Here's Nelder's essay disputing Maugeri's optimism.