It's Official: The Era of Cheap Oil Is Over

Every summer, the Energy Information Administration (EIA) of the U.S. Department of Energy issues its International Energy Outlook
(IEO) -- a jam-packed compendium of data and analysis on the evolving
world energy equation. For those with the background to interpret its
key statistical findings, the release of the IEO can provide a unique
opportunity to gauge important shifts in global energy trends, much as
reports of routine Communist Party functions in the party journal Pravda once provided America's Kremlin watchers with insights into changes in the Soviet Union's top leadership circle.

As it happens, the recent release of the 2009 IEO has provided energy
watchers with a feast of significant revelations. By far the most
significant disclosure: the IEO predicts a sharp drop in projected
future world oil output (compared to previous expectations) and a
corresponding increase in reliance on what are called "unconventional
fuels" -- oil sands, ultra-deep oil, shale oil, and biofuels.

So here's the headline for you: For the first time, the well-respected
Energy Information Administration appears to be joining with those
experts who have long argued that the era of cheap and plentiful oil is
drawing to a close. Almost as notable, when it comes to news, the 2009
report highlights Asia's insatiable demand for energy and suggests that
China is moving ever closer to the point at which it will overtake the
United States as the world's number one energy consumer. Clearly, a new
era of cutthroat energy competition is upon us.

Peak Oil Becomes the New Norm

As recently as 2007, the IEO projected that the global production of
conventional oil (the stuff that comes gushing out of the ground in
liquid form) would reach 107.2 million barrels per day in 2030, a
substantial increase from the 81.5 million barrels produced in 2006.
Now, in 2009, the latest edition of the report has grimly dropped that
projected 2030 figure to just 93.1 million barrels per day -- in
future-output terms, an eye-popping decline of 14.1 million expected
barrels per day.

Even when you add in the 2009 report's projection of a larger increase
than once expected in the output of unconventional fuels, you still end
up with a net projected decline of 11.1 million barrels per day in the
global supply of liquid fuels (when compared to the IEO's soaring 2007
projected figures). What does this decline signify -- other than
growing pessimism by energy experts when it comes to the international
supply of petroleum liquids?

Very simply, it indicates that the usually optimistic analysts at
the Department of Energy now believe global fuel supplies will simply
not be able to keep pace with rising world energy demands. For years
now, assorted petroleum geologists and other energy types have been warning
that world oil output is approaching a maximum sustainable daily level
-- a peak -- and will subsequently go into decline, possibly producing
global economic chaos. Whatever the timing of the arrival of peak oil's
actual peak, there is growing agreement that we have, at last, made it
into peak-oil territory, if not yet to the moment of irreversible
decline.

Until recently, Energy Information Administration officials scoffed at
the notion that a peak in global oil output was imminent or that we
should anticipate a contraction in the future availability of petroleum
any time soon. "[We] expect conventional oil to peak closer to the
middle than to the beginning of the 21st century," the 2004 IEO report
stated emphatically.

Consistent with this view, the EIA reported one year later that global
production would reach a staggering 122.2 million barrels per day in
2025, more than 50% above the 2002 level of 80.0 million barrels per
day. This was about as close to an explicit rejection of peak oil that
you could get from the EIA's experts.

Where Did All the Oil Go?

Now, let's turn back to the 2009 edition. In 2025, according to this
new report, world liquids output, conventional and unconventional, will
reach only a relatively dismal 101.1 million barrels per day. Worse
yet, conventional oil output will be just 89.6 million barrels per day.
In EIA terms, this is pure gloom and doom, about as deeply pessimistic
when it comes to the world's future oil output capacity as you're
likely to get.

The
agency's experts claim, however, that this will not prove quite the
challenge it might seem, because they have also revised downward their
projections of future energy demand. Back in 2005, they were
projecting world oil consumption in 2025 at 119.2 million barrels per
day, just below anticipated output at that time. This year -- and we
should all theoretically breathe a deep sigh of relief -- the report
projects that 2025 figure at only 101.1 million barrels per day,
conveniently just what the world is expected to produce at that time.
If this actually proves the case, then oil prices will presumably
remain within a manageable range.

In fact, however, the consumption part of this equation seems like the
less reliable calculation, especially if economic growth continues at
anything like its recent pace in China and India. Indeed, all evidence
suggests that growth in these countries will resume its pre-crisis pace
by the end of 2009 or early 2010. Under those circumstances, global oil
demand will eventually outpace supply, driving up prices again and
threatening recurring and potentially disastrous economic disorders --
possibly on the scale of the present global economic meltdown.

To have the slightest chance of averting such disasters means seeing
a sharp rise in unconventional fuel output. Such fuels include Canadian
oil sands, Venezuelan extra-heavy oil, deep-offshore oil, Arctic oil,
shale oil, liquids derived from coal (coal-to-liquids or CTL), and
biofuels. At present, these cumulatively constitute only about 4% of
the world's liquid fuel supply but are expected to reach nearly 13% by
2030. All told, according to estimates in the new IEO report,
unconventional liquid production will reach an estimated 13.4 million
barrels per day in 2030, up from a projected 9.7 million barrels in the
2008 edition.

But for an expansion on this scale to occur, whole new industries will
have to be created to manufacture such fuels at a cost of several
trillion dollars. This undertaking, in turn, is provoking a
wide-ranging debate over the environmental consequences of producing
such fuels.

For example, any significant increase in biofuels use -- assuming such
fuels were produced by chemical means rather than, as now, by cooking
-- could substantially reduce emissions of carbon dioxide and other
greenhouse gases, actually slowing the tempo of future climate change.
On the other hand, any increase in the production of Canadian oil
sands, Venezuelan extra-heavy oil, and Rocky Mountain shale oil will
entail energy-intensive activities at staggering levels, sure to emit
vast amounts of CO2, which might more than cancel out any gains from
the biofuels.

In addition, increased biofuels production risks
the diversion of vast tracts of arable land from the crucial
cultivation of basic food staples to the manufacture of transportation
fuel. If, as is likely, oil prices continue to rise, expect it to be
ever more attractive for farmers to grow more corn and other crops for
eventual conversion to transportation fuels, which means rises in food
costs that could price basics out of the range of the very poor, while
stretching working families to the limit. As in May and June of 2008,
when food riots spread across the planet in response to high food
prices -- caused, in part, by the diversion of vast amounts of corn
acreage to biofuel production -- this could well lead to mass unrest
and mass starvation.

A Heavy Energy Footprint on the Planet

The geopolitical implications of this transformation could well be
striking. Among other developments, the global clout of Canada,
Venezuela, and Brazil -- all key producers of unconventional fuels --
is bound to be strengthened.

Canada is becoming increasingly important as the world's leading producer of oil sands,
or bitumen -- a thick, gooey, viscous material that must be dug out of
the ground and treated in various energy-intensive ways before it can
be converted into synthetic petroleum fuel (synfuel). According to the
IEO report, oil sands production, now at 1.3 million barrels a day and
barely profitable, could hit the 4.4 million barrel mark (or even,
according to the most optimistic scenarios, 6.5 million barrels) by
2030.

Given the IEA's new projections, this would represent an extraordinary
addition to global energy supplies just when key sources of
conventional oil in places like Mexico and the North Sea are expected
to suffer severe declines. The extraction of oil sands, however, could
prove a pollution disaster of the first order. For one thing,
remarkable infusions of old-style energy are needed to extract this new
energy, huge forest tracts would have to be cleared, and vast
quantities of water used for the steam necessary to dislodge the buried
goo (just as the equivalent of "peak water" may be arriving).

What this means is that the accelerated production of oil sands is sure
to be linked to environmental despoliation, pollution, and global
warming. There is considerable doubt that Canadian officials and the
general public will, in the end, be willing to pay the economic and
environmental price involved. In other words, whatever the IEA may
project now, no one can know whether synfuels will really be available
in the necessary quantities 15 or 20 years down the road.

Venezuela has long been an important source
of crude oil for the United States, generating much of the revenue used
by President Hugo Chavez to sustain his social experiments at home and
an ambitious anti-American political agenda abroad. In the coming
years, however, its production of conventional petroleum is expected to
fall, leaving the country increasingly reliant
on the exploitation of large deposits of bitumen in the eastern Orinoco
River basin. Just to develop these "extra-heavy oil" deposits will
require significant financial and energy investments and, as with
Canadian oil sands, the environmental impact could be devastating.
Nevertheless, successful development of these deposits could prove an
economic bonanza for Venezuela.

The big winner in these grim energy sweepstakes, however, is likely to be Brazil.
Already a major producer of ethanol, it is expected to see a huge
increase in unconventional oil output once its new ultra-deep fields in
the "subsalt" Campos and Santos basins come on-line. These are massive
offshore oil deposits buried beneath thick layers of salt some 100
miles off the coast of Rio de Janeiro and several miles beneath the
ocean's surface.

When the substantial technical challenges to exploiting these undersea
fields are overcome, Brazil's output could soar by as much as three
million barrels per day. By 2030, Brazil should be a major player in
the world energy equation, having succeeded Venezuela as South
America's leading petroleum producer.

New Powers, New Problems

The IEO report hints at other geopolitical changes occurring in the
global energy landscape, especially an expected stunning increase in
the share of the global energy supply consumed in Asia and a
corresponding decline by the United States, Japan, and other "First
World" powers. In 1990, the developing nations of Asia and the Middle
East accounted for only 17% of world energy consumption; by 2030, that
number, the report suggests, should reach 41%, matching that of the
major First World powers.

All recent editions of the report have predicted that China
would eventually overtake the United States as number one energy
consumer. What's notable is how quickly the 2009 edition expects that
to happen. The 2006 report had China assuming the leadership position
in a 2026-2030 timeframe; in 2007, it was 2021-2024; in 2008, it was
2016-2020. This year, the EIA is projecting that China will overtake
the United States between 2010 and 2014.

It's easy enough to overlook these shifting estimates, since the
reports don't emphasize how they have changed from year to year. What
they suggest, however, is that the United States will face ever fiercer
competition from China in the global struggle to secure adequate
supplies of energy to meet national needs.

Given what we have learned about the dwindling prospects for adequate
future oil supplies, we are sure to face increased geopolitical
competition and strife between the two countries in those few areas
that are capable of producing additional quantities of oil (and
undoubtedly genuine desperation among many other countries with far
less resources and power).

And much else follows: As the world's leading energy consumer, Beijing
will undoubtedly play a far more critical role in setting international
energy policies and prices, undercutting the pivotal role long played
by Washington. It is not hard to imagine, then, that major oil
producers in the Middle East and Africa will see it as in their
interest to deepen political and economic ties with China at the
expense of the United States. China can also be expected to maintain
close ties with oil providers like Iran and Sudan, no matter how this
clashes with American foreign policy objectives.

At first glance, the International Energy Outlook for 2009
hardly looks different from previous editions: a tedious compendium of
tables and text on global energy trends. Looked at another way,
however, it trumpets the headlines of the future -- and their news is
not comforting.

The global energy equation is changing rapidly, and with it is likely
to come great power competition, economic peril, rising starvation, growing unrest,
environmental disaster, and shrinking energy supplies, no matter what
steps are taken. No doubt the 2010 edition of the report and those that
follow will reveal far more, but the new trends in energy on the planet
are already increasingly evident -- and unsettling.