Friday, May 16, 2008

Oil production has peaked as demand soars

By Andy Welti

In 1998, oil cost $10 per barrel and experts said the price would return to $5 per barrel, but it never happened. Many people believed we had huge oil fields that would never run dry, and that new fields would meet our growing demands. Ten years later, the evidence is beginning to align to tell a much different story -- one that we are just beginning to read.

I serve as a member of the Minnesota House of Representatives Energy Committee. This year our committee held hearings on "peak oil."

Peak oil is the point where world oil companies produce a maximum output of oil, after which they will never be able to sustainably produce that same amount of oil again. Some people believe we have already reached that point, and many others believe we will reach that point in five to 10 years.

What does that mean for residents in district 30B? If China and India continue to purchase vehicles at the rate they are now, they will be consuming much greater amounts of oil at a time when world oil supply is either at its peak or beginning to decline. This is simple economics; a shortage in supply and increase in demand will lead to higher prices.

Consider these facts: According to Matthew R. Simmons, author of "Twilight in the Desert -- The Risk of Peak Oil," and one of the testifiers before our Energy Committee, oil accounts for 95 percent of our transportation energy and is increasingly being used to make consumer goods. In 1995, the world demanded 70 million barrels per day (mbd), and today we demand 88 mbd. World crude production was at about 69 mbd in 2003, 74 mbd in 2005, and is currently at about 73 mbd.

Did you know that the U.S. reached peak oil in 1970? Indonesia once exported oil and now imports it. Cantarell, the world's second-largest oil field in Mexico, peaked in May of 2005 and its production has since declined by 41 percent. Prudhoe Bay peaked around 1988 and produces less than one-third of its peak production. Several other oil fields have peaked and are declining.

Skeptics point to new discoveries to solve our supply shortage issue. There were 134 fields discovered in the 1940's, 743 in the 1970's, 510 in the 1990's, and so far 65 in the first decade of the twenty-first century. Production from those fields closely correlates with the number of fields discovered.

Oil companies are drilling in deeper waters and extracting oil from Canadian tar sands, which is very inefficient. Saudi Arabian production has been relatively constant, with a recent small decline. Hedge fund trading wasn't responsible for past price increases. High prices haven't squelched demand, yet.

Prices continued to climb after the first Iraq War, and technology hasn't had a great impact on consumption in automobiles. Mr. Simmons clearly proves the skeptics wrong.

If you are still skeptical, maybe this will change your mind... in an email sent to Shell Oil employees in January of 2008, Shell Oil's CEO, Jeron van der Veer stated that the company estimates that after 2015, supplies of easy-to-access oil will not keep up with demand.

Peak oil is real. If we're not seeing it now, we will be soon. People continue to ask me if I can do something about gas prices -- then they chuckle because they think it is too large of an issue to tackle. Well, the state is responding.

We passed a peak oil resolution to draw attention to this emerging issue; we funded research for hydrogen and algae being used to create biodiesel; we established renewable energy goals for transportation fuels and we held many discussions about biomass and renewable energy fuel potential.

We're trying to move forward on rail and transit initiatives and are asking tough questions of refiners, auto manufacturers and others involved in transportation to encourage them to be the catalyst for change.

If we continue to rely upon oil as our main source of transportation fuel, our economy will suffer. We have the ability to overcome the economic challenges of the near future by being leaders in finding ways to create alternative fuel sources and reduce consumption.

Mr. Simmons is a Harvard Business School Graduate and former energy investment banker of nearly 40 years. When I asked why he shared this information, he replied that during his career he began seeing indisputable evidence related to peaking oil supplies, and researching the issue became a passion. He said that he now feels a responsibility to share this information and to give something back to society.

Welti, DFL-Plainview, represents District 30B in the Minnesota House.


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