written 6 Feb 2022
published 13 Feb 2022
Burning oil drives climate change, risking economic collapse and human extinction, but an equally pressing problem is that it is finite.
From 1850 until 1972, America dominated global oil production, because we had the technology and extensive domestic reserves. We controlled the price by pumping as much as needed, even as global demand increased steadily every year since 1920. But our resource was finite. Despite searching for new domestic reserves everywhere, in 1972, American oil production, and our economy, peaked. Within 2 years Russia, and then Saudi Arabia, produced more oil than the US. The Organization of Petroleum Exporting Countries (OPEC) began controlling the global price, and oil jumped from $22/barrel in July 1973 to $60/barrel 8 months later.
Oil was already essential to every aspect of our economy, and this extreme increase was a huge inflationary pressure. The prime rate rose from 4.75% in February 1972 to 11.75% two years later, and peaked at 21.5% in November 1980. It suddenly was no longer a felony to charge more than 10% interest, because the banks now needed this rate of return, not just loan sharks. The rapid and extreme interest rate change destabilized the Savings and Loan industry, which paid low long term interest rates to savers.
A new phase of capitalism began, shifting from production to digestion of existing companies. Hostile takeovers, using leveraged buyouts, became common, and asset strippers dismantled companies for parts, ruining local economies. Junk bonds became a fiscal product, as the attraction of very high yields, despite high risks, began to dominate "prudent" fiscal investing. Wages stagnated from 1980's on.
In 1979, the US made an agreement with Saudi Arabia to sell oil on the world market only in dollars, helping stabilize the US domestic price of oil, giving the US a measure of control in the world. Part of the bargain is that the US never comments of the Saudi financing of global Sunni Muslim terrorists organizations. From the middle 1980's the price of oil was relatively stable around $40/barrel, until 2000, when it began climbing to a peak of $178/barrel in June 2008, helping precipitate the economic crash of 2008. It wasn't clear at the time, but global conventional oil production peaked in 2005.
The oil industry has searched every corner of the planet looking for new oil reserves, but by the 1960's, new oil discoveries fell behind growing depletion rates. We have already discovered all the oil there is to find, for the most part. But some oil is not worth recovering.
Conventional oil is the easiest and cheapest to develop. Unconventional oil (deep water, shale oil, and tar sands) are more expensive to develop, both economically and energetically. Economically, oil may just cost too much to be affordable in the larger society. The energetic expense is called the "energy returned on energy invested" (EROEI). For example, early oil fields were relatively shallow, and under high pressure. Once a well was drilled, oil flowed for years. These fields had an EROEI over 100:1, meaning 100 barrels were returned for every barrel of oil invested. A technological economy requires an energy EROEI greater than 7:1. American domestic oil production EROEI declined from 30:1 in 1970 to 11:1 in 2007. The EROEI for tar sands is 4:1, and shale oil (fracking) EROEI can be as low as 1.5:1, which is why these are bankrupt industries.
The world economy has recovered from the 2008 crash, for the moment. However, global oil production peaked in 2018 at almost 100 million barrels per day. There is still a lot of oil left, but less will be produced every year, and the EROEI will continue to decline.
Our options are limited. We can ignore our situation, inviting inevitable economic disaster and a desperate race to the bottom, with insufficient energy and a collapsing environment. Or we can commit to shifting to another energy source while we still have the energy to accomplish that. But it will take energy to fabricate the new hardware, so there will be even less to run what we have come to call "normal".
The good news is that we now have the possibility to shift to renewable power, which wasn't true a few decades ago. This has to be global in scope, so the big question is whether we humans can cooperate.
