More than a year ago I posted here my ramblings on the possibility of world oil production being at, or close to, its peak. At the time, the topic of "Peak Oil" was still rather obscure, and there were still many advocating that the world's production capacity could continue to grow for decades to come. They were the ones saying that the price would soon drop down to $20 or $30 a barrel. Needless to say, since then events have precipitated, and just last week the price of oil jumped above the psychological barrier (for computer scientists, anyway!) of $127 a barrel (127 being of course the largest integer quantity that can be expressed with only 7 bits). It seems like a perfect time to revisit and update those predictions.

On the whole, I have nothing to detract from what I wrote 14 months ago. I may have been overly optimistic in some areas (more on that below) and events seem to be happening faster than what I expected, but I still expect the picture to remain more-or-less the same. While I may be now slightly less optimistic about our prospects for the coming couple of decades, overall I still think that the transition away from fossil fuels will occur without the catastrophic collapse of civilisation presaged by those with an inclination for doom.

Note, however, that these are far from being cornucopian predictions. If reality scares you, perhaps you should be visiting this site instead.

Is the peak real and happening now?

In other words, how can we be sure the rise in prices reflects a real constraint on the production side instead of just speculation and/or conscious throttling on the part of exporting nations in order to drive up revenue? Moreover, even if the constraints are real, couldn't this just be a temporary situation caused by a past underestimation of the current demand needs (bear in mind the huge rise in demand in the past few years by China and others), and that everything will be resolved as soon as production catches up?

Well, regardless of the actual numbers, we should reflect anyway on the utter and complete absurdity of having these crucial statistics about the wealth of the world economy be dependent on whims and state secrets of despotic regimes (Saudi Arabia, for one). This is a shortsightedness for which we could pay very dearly.

In any case, what leads me to believe we are now on the peak's "bumpy" plateau is the following:

• Discoveries peaked in the 60s and despite all technological advancements, have been declining ever since. Recent discoveries (despite all the media attention they get) are pathetic in comparison to the fields discovered decades ago, and are typically made off-shore in very deep waters (read expensive, dangerous, and desperate locations). This fact alone shows that oil production is bound to peak sooner or later, though of course does not prove it is actually occurring now.
• The number of countries past their peak keeps increasing. Three well-known recent examples are Mexico, Norway and the United Kingdom. The latter went in less than a decade from being a major exporter to a net importer of oil; as for Mexico, predictions are that in less than ten years it will cease exports altogether (bad news for the US, which imports a huge amount of oil from its southern neighbour).
• The two big exporters, Saudi Arabia and Russia, seem unable to increase their production. Many argue they may also be close to peaking.
• There are indeed a couple of oil megaprojects coming online in the next couple of years, but afterwards the situation seems dire. We seem to be now in what has been called a "Peak Lite" scenario. This means that even though the absolute peak may not yet have been reached, the oil industry is starting to show the symptoms of a post-peak situation. Namely, production is unable to keep up with demand, leading to a significant increase in prices.
• Currently, world production sits at about 87 million barrels per day. If you take into account the new projects coming online, and the rates of depletion in existing fields, it is possible that this number may yet increase slightly within the next couple of years. However, I very much doubt it will ever reach 90 mbpd. Couple this with the ongoing increase in demand and the Export Land Model (more on that below), and I would bet against oil ever going below $100 a barrel (barring a major global recession, of course).

Aggravating circumstances

• I didn't factor in the so-called "Export Land Model" (ELM), but in retrospect I should have. In short, because the internal demand for oil in the big exporting countries is increasing at a fast pace, the amount of oil available for export decreases at a much faster rate than what could be expected from depletion alone. This means that once past the peak, the decline in oil available for export may be much steeper than anticipated. In other words, the transition away from fossil fuels could feel more like shock therapy than a smooth ride.
• Society is still by and large in denial. Moreover, most people (including politicians and journalists) are completely clueless about basic principles of thermodynamics and the orders of magnitude involved in energy discussions. To give you a concrete example that illustrates most people's complete detachment from the workings of the physical world, some weeks ago a leading Portuguese news magazine published a vision of society in 15 years time; they talked of "cars running on wind power", and showed a picture of a tiny wind turbine on top of a futuristic-looking car! It would almost be funny if the consequences of this kind of thinking were not so tragic.
• Energy Return on Energy Invested (EROEI) is a problem that goes beyond oil. Not only do fossil fuels offer relatively cheap and very dense energy, but you get a huge return for each unit of energy you invest in extracting them. In the early days of the oil industry, when extraction was as simple as digging a hole in the backyard, EROEI was as high as 100:1. Today, because drilling at huge depths and off-shore is quite energy-intensive, the EROEI for oil has decreased to 20:1 or 15:1. And note that for renewables and nuclear, the EROEI is even much lower than that. (As a side note, take heed that scholars have pointed out that a decrease in EROEI was a contributing factor in the decline of the Roman empire. One of the most interesting interviews I've listened to recently addresses this issue: it features Thomas Homer-Dixon discussing his latest book, "The Upside of Down"; I very strongly recommend listening to it).

Consequences for industry, commerce, and tourism

• Locality will become much more important. With transportation costs rising significantly, many current assumptions will no longer be valid. This will have impacts on industry (suddenly it won't make as much sense to produce cheap plastic toys in China), agriculture (such as importing out-of-season fruit half-way across the globe), and of course, tourism. I think you can find countless other examples where the assumption that transportation costs are near zero have shaped our economy.
• The airline industry as we know it is seriously screwed. Note however that "screwed" is not the same as "doomed to extinction" like many are quick to predict. Fares are still ludicrously cheap by historical standards, and even if five years from now they are 3-4 times higher, there will still be a sizable amount of air travel going on. Nevertheless, air travel will take a serious hit from the effects of Peak Oil, and I reiterate that current plans for expanding and building new airports will look very foolish in less than ten years time.

  In addition, the travel industry will undoubtedly adapt and many of its facets will look fairly different in 10 or 15 years from now. Part of the adaptations will be purely technological (as an example, consider that turboprop planes are more fuel efficient than jets), others will come from purely a business choice (the "no frills" concept will go away, because in a context of much higher fares due to fuel costs, the cost of frills will be proportionally tiny, thus giving an advantage to companies that do provide them), and others may stem from a rethinking of the very concept of travel. Consider for example the possibilities offered by the eventual return of the airship (as in the "Hindenburg", hopefully minus the fire and oh-the-humanity). Presently, the "getting there" part of air travelling consists of just the ordeal of having to sit in a confined space for hours on end. What if instead the holiday trip were to start the moment you stepped on a comfortable and spacious airship? It wouldn't matter so much if a trip took a couple of days instead of a few hours.

• I doubt that economy will fare well during the first 5-10 years of the transition. The scenario I find most likely is a return of the stagflation that plagued the 1970s. However, note that the economy doing badly for an extended period of time is not the same as catastrophic economic collapse. Last time I checked, there were no zombie hordes roaming the streets during the 1970s (though they would explain the whole Disco phenomenon).

Winners and losers

In the grand scope of things we'll all be losers. Even if somehow an energy-rich country were able to isolate itself from the events on the rest of the world, it would still lose simply because the misfortune of any single country reflects the moral collective failure of all humanity.

With the above caveat in mind, some countries are without a doubt better prepared than others to face an energy crisis. Here's my take on some noteworthy examples:

• I stick to my previous observation that China will suffer serious growing pains. I realise that the consensus among many is that this will be "the century of China", but I beg to differ. On the short term, the rise in oil prices will impact its status as the "world's factory" (note that its export-based economy is dependent on the assumption that transport costs are negligible). On the longer term, China faces a serious sustainability crisis. The challenges of the energy crisis will combine with the effects of climate change, soil erosion, and aquifer depletion. Bear in mind that this a country that needs to feed 1.3 billion people.
• The picture for India is similar to that of China, though India's environmental problems are not yet quite as severe. On the other hand, there is the further complication that India's population time bomb is far from being under control.
• Most of the developing world is in serious trouble. Note, however, that the energy crisis is only one small part of the problems faced: climate change, environmental degradation, and — the elephant in the room — overpopulation. Many countries are indeed just disasters waiting to happen (Haiti comes immediately to mind; it's just one hurricane away from catastrophe). Also, I wouldn't be surprised to see Somalia-style collapses of individual states.
• Countries rich in resources and with fairly low population densities are likely to fare relatively well. Brazil and Canada come to mind. Note, however, that I would not include Australia in that list. Though rich in energy resources, Australia is bound to face problems stemming mainly from the degradation of its very fragile environment and the effects of climate change.
• Europe as a whole should fare relatively well, though there are of course stark differences in the degree of preparedness of different countries. France, thanks to its reliance on nuclear power, extensive train network, and ongoing projects to build and expand tram and light rail lines is an example to follow. The United Kingdom, on the other hand, will be a victim of years of neglect in its public transit system (particularly railways), and its electric power production capacity. In short, problems stemming from what has been termed "The Anglo Disease".
• As it currently stands, the United States is very badly prepared for an energy crisis. I would really, really, like to think that Americans will soon wake up and put their ingenuity to work. They would embark on a "Manhattan plan" for fuel alternatives, abandon the suburbia experiment, and redesign their cities in a public-transit and walk-friendly manner. A friend of mine likes to remind me of a quote by Churchill, who said that "You can always count on Americans to do the right thing — after they've tried everything else".

  Unfortunately, recent history does not bode well for the type of reaction we can expect from the US. And note that I'm not just referring to the invasion of Iraq (is there still anyone who maintains the illusion that its purpose was not to take control of the sizable Iraqi reserves?). No, that is simply a reflection of the path Americans chose to take in the 1980 election. Back then, they were given the choice between a candidate aware of the future energy crisis and who advocated some near-term sacrifices to move their economy away from fossil fuels (that candidate was Jimmy Carter), and a candidate who instead told the Americans to screw conservation, that it was "morning in America", and that it felt much better to simply bury their heads in the sand and not to worry about the future. The latter candidate was Ronald Reagan, who has you might recall won by a landslide victory. (On a related note, it is disheartening to see Hillary Clinton — otherwise the most intellectually capable of all three major candidates — follow the short-sighted and populist gimmick proposed by McCain of dropping the gas tax for the holidays).

  Note, however, that I wouldn't be so quick to dismiss the US entirely. It's a huge country, rich in resources (one can sometimes forget that even though it is well past its peak, the US is still the third largest producer of oil in the world), a major agricultural exporter, and with a population density that is sufficiently low to make the country sustainable in the long term.

  In a sense, the biggest challenges the US faces are a crooked political system, and a blind faith on capitalism and the invisible hand of the markets. The biggest danger for the US (and the rest of the world) is that the energy crisis is successfully exploited by the usual ensemble of populist and extremist politicians. Despite this, I reckon that Americans will eventually do the right thing — they've been trying everything else up till now, after all.

  (A brief note on populism: the energy crisis we're facing is in large part a consequence of past populist and short-sighted policies; it is somewhat ironic and definitely discouraging to note that the very same populism that got us into trouble in the first place is the one that typically profits the most from situations of crisis).

In the short term

Though there may be indeed a speculative component to the current price and therefore some ease up won't be surprising, I very much doubt oil ever again get below $100 (again, barring a major recession).

OPEC will have their annual meeting in September. If any, the increases in production announced will be small and insufficient to meet the rise in demand. A couple of months later, the International Energy Agency (the watchdog organisation over matters of energy) is scheduled to issue a report concerning oil reserves. I expect their current rosy predictions that production could grow all the way to 2030 to be revised. This is likely to be the moment that "Peak Oil" and "Energy Crisis" enter the mainstream media. Hopefully not to long afterwards, the true nature of the problem — that these are just aspects of a much broader "Sustainability Crisis" — will become the focus of society's concerns.