RUNNING ON EMPTY
Oil supplies are so tight that the world consumes just
about all it can pump. Nobody is ready for what comes next

By Andrew Nikiforuk

Photographs by Brodylo/Morrow

WHENEVER DAVE HUGHES gives his detailed one-hour-long power point on the end of cheap oil and natural gas, audiences generally sit transfixed, frozen by a combination of awe, disbelief and despair. At the end of one talk, which he gave at the Clean Coal Conference in Toronto, a moderator gloomily thanked Hughes by announcing that “cyanide tablets are on the table at the back of the room.” Hughes, an unflappable fellow who just presents the facts, freely admits that reactions to his global energy analysis can be as volatile as energy prices. “Either people want more information or they want to drink a beer and forget everything I just said. There is still lot of denial out there.”

Now Hughes, a Calgary-born geologist who works for Natural Resources Canada, is not a despairing guy or even an Armageddon preacher. The 54-year-old drives old vehicles (“it takes a lot of oil to make a new car”) and owns a cabin in the Gulf Islands, which, by the way, he heats with wood. But in the last couple of years, he has earned a reputation as something of an energy visionary in Canada from enviros and industry alike.

“Canadians owe Dave Hughes a huge debt even though most don’t know it,” says Julian Darley, Vancouver author of High Noon for Natural Gas. “He’s one of the few people to identify a potentially catastrophic problem bearing down on us and shouldn’t be a quixotic figure in the press.” Even the president of Dow Chemical Canada Inc., Dr. Ramesh Ramachandran, recently compared Hughes to Marion King Hubbert, the famous Shell geologist who warned years ago that every oil field sooner or later comes up dry. “That’s pretty good company,” quips Hughes.

Unlike most economists who promise cheerful energy futures (one government forecast incredibly puts oil at $27 a barrel oil for the next decade!), Hughes understands the finite nature of hydrocarbons. As such, he doesn’t buy the “don’t worry, markets and technology will save us” speeches. He knows that energy consumption can’t exceed supply and, yes, he is worried.

According to Hughes, the statistical trends clearly show that the world is running out of cheap and easy oil and that no one is really preparing for the day after. “Ninety-three percent of the oil used by the human race has been consumed since I was born in 1951,” he notes. “I was a hydrocarbon baby.” He doesn’t think our grandchildren will be.

After devoting his career to coal, Hughes got intensely interested in the big energy picture in the 1990s. When an industry forecaster alerted him to a natural gas supply problem in the first decade of this century, he checked the data and arrived at the same alarming conclusion. In 2002 he started his open file (now 75 pages long) on global oil, coal, electricity and natural gas trends at his home as a sort of weekend hobby. He filled his house with reports from the U.S. Energy Information Administration, the National Energy Board and dozens of other forecasters. And he started sharing the results. In the last two years alone, more than 80 different groups including municipalities, Bay Street investors, Environment Canada and the Canadian Chemical Producers have sought out his analysis and all have gone home realizing that some kind of forward planning might not be such a bad idea after all.

When Hughes first warned that energy prices were about to explode due to future production shortfalls nearly three years ago, he was considered a maverick. At the time, the price of oil was $26 a barrel, natural gas was $3 a thousand cubic feet, uranium was $10 a pound, and export thermal coal sat at $35 a tonne. “Now oil is over $60, gas is more than $10 a thousand cubic feet, uranium is $30 a pound, export thermal coal is $70 a tonne, and my talk is mainstream. A lot of investors who listened to me made a lot of money.” He still believes that short-term investments in gas, coal and uranium will yield comfortable returns but says that he is no analyst. In the long term, he cautions that “the economic impact of a global oil peak could be very severe.” When people can’t afford to fill up at the pumps, an economic depression could easily turn an energy shortage into an energy surplus.

So what does oil peak really mean? According to Hughes it simply means that half of the oil that ever will be recovered (the cheap stuff, in other words) has been guzzled by humans. The last half, which might be one or two trillion barrels, won’t be easy or cheap to refine. It will require more money, more rigs, more energy and more environmental degradation than ever before. (Some high-density drilling plays along the U.S. Rockies are already being called “national sacrifice zones.”) Peak is what happens when declining supply meets rising demand: price shocks, volatility and angst at the pump. Oil production peaking also signals that “we can no longer increase deliverability to meet rising demand,” says Hughes.

In fact, supplies are now so tight that the world consumes just about everything it pumps out of the ground: an 84-million-barrels-a-day addiction. Just three years ago the world boasted a six-million-barrels-a-day surplus production capacity, but the Chinese and Indian economy ate that up, leaving only a one-million-barrel buffer zone. This tiny insurance policy is located in friendly Saudi Arabia where reliable oil and reserve production figures are about as hard to find as Osama bin Laden. Consequently, any extreme weather event (think Katrina here) or political shenanigans, warns Hughes, can and will send gasoline prices soaring. “Anything can upset the apple cart.”

So the end of cheap oil is not a temporary inconvenience but a new, long-term global reality. Of the world’s 54 oil-producing nations and regions tracked in the BP Statistical Review of World Energy 2005, 33 have now peaked, says Hughes. The U.S. and Venezuela peaked in 1970. Production in Iran is 32 percent below its 1974 peak. Indonesia, once an OPEC exporter, must now import the stuff. Since 1995, more than 16 countries including Norway and the U.K. have all peaked. Most of the Middle East could peak in 2006. With the exception of the U.S. Energy Information Administration, many forecasters predict the world’s oil production will reach its halfway mark between 2007 and 2012 and thereafter will experience terminal decline.
In Alberta, even if the troubled oil sands (Fort McMurray already suffers from a $1-billion infrastructure deficit and critical shortages in manpower and leadership) ramp up production by 300 percent, the province’s much-over-hyped nest egg will still only represent a small fraction of the world’s forecast for demand in 2025: 3.1%. With luck, it will keep Canadian cars on the road with high-priced gas until 2050, but it won’t solve any global shortages, says Hughes. Albertans may get very rich, he adds, while “the economy goes into the tank.”

Even the U.S. Department of Energy, which optimistically assigns 2037 as the year for world oil production to peak, warned in a recent report that the event will “result in dramatically higher prices, which will cause protracted economic hardship.” Forestalling social and economic chaos “intervention by governments” will be necessary because the problem of the peaking of conventional oil production is “unlike any yet faced by modern industrial society.” The report called for a “mitigation crash program” 10 years before world oil production peaks. But, as Hughes notes, many forecasters believe we are near peak.

The situation for natural gas, the fuel of choice for home heating and electricity generation, is equally dire. (Hughes is a member of the Canadian Gas Potential Committee, an independent group of 40 engineers and geologists that reports on the health of Canada’s natural gas resources.) North America is home to only four percent of the world’s supplies, and production probably peaked in 2001. Even with record drilling, natural gas production has sunk three percent since then. “How long can we sustain that treadmill?” asks Hughes. Much-hyped replacements such as unconventional gas in coal seams generally produce at much lower rates than conventional wells—100 mdf/day versus 350 mdf/day—and disturb larger land bases. In fact, coal-bed methane gas, which accounts for nine percent of U.S. supply, appears to have peaked in 2002. Without demand-side management, the U.S. could require as many as 40 new re-gasification terminals to receive liquefied natural gas (LNG) on giant tankers from overseas. This would require a global infrastructure investment of more than $100 billion and would represent more than double the world’s present LNG infrastructure. Yet only one terminal has been built in the last 20 years, and it was located in the paths of hurricanes in the Gulf of Mexico. The comfort zone for natural gas, in other words, is rapidly disappearing. “Even if everything goes right with unconventional gas reserves,” says Hughes, “we are going to need a pile of LNG terminals to meet demand.”

Canadians are particularly vulnerable for a number of reasons. Due to our cold winters and long transport distances, we burn more hydrocarbons per capita than any other global economy. The average Canadian consumes nine times more energy than the average resident of China and 30 times more than a citizen of India. So, according to Hughes, peak oil “will very likely affect us and certainly impact our children unless global proactive mitigation measures are taken soon.” He continues: “It may even trump global warming and environmental degradation in terms of short-term economic impact.”

So what’s the solution? Unfortunately, there is no magic bullet, says Hughes. Hydrogen-fuel cells, for example, are not a viable alternative without major improvements in cost, energy efficiency and life span. If Canada wants to avoid China-long lineups at its gas stations due to shortages and high prices, it needs to act immediately. In addition to supporting solar, wind and other alternative energies (and none of these has the versatility of fossil fuels), the country needs a plan that welcomes mass transit, promotes a fuel-saving rail service, subsidizes efficient appliances and mandates better building codes. Fuel conservation as well as using fuels for their smartest applications is also critical and will help the global-warming fight. In fact, Hughes argues that resource depletion is just the flip side of wacky warming weather trends. “If you mitigate one, you help the other.... At the end of the day, we might not have enough hydrocarbons to reach the forecast maximum levels of atmospheric carbon dioxide concentration.”

The alternative, of course, can be found in the daily media pronouncements of happy economists who chant, “Don’t worry, the market or technology will take care of things—when the price of one commodity gets high enough, there will always be a magic substitute.” Hughes notes that there is no real evidence to support such views. The hard historical data on oil and gas depletion all point to disturbing unsustainable consumption trends.

Then again, Mother Nature might have the last word on a finite resource. But we may not like the solution or the bumpy transition, as hydrocarbons simply run out. In a business-as-usual scenario, oil will peak, prices will go up, cutting some demand, production will plateau, “and the world will bump along with a shaky balance between supply and demand until we go into terminal decline.” In a recent article in The New York Times, Sadad al-Husseini, a retired senior executive at Saudi Aramco and one of Saudi Arabia’s top oil men, issued a similar warning. He called current global rates of oil consumption unsustainable and unrealistic. “Everybody is looking at the producers to pull the chestnuts out of the fire, as if it’s our job to fix everybody’s problems. It’s not our problem to tell a democratically elected government that you have to do something about your runaway consumers.”

Hughes freely admits that there is a lot of noise and different views out there about oil and gas depletion. “The only way to get a balanced view is to look at as much information as you can and in depth.” It seems that more and more Canadians are doing just that. Demand for Hughes’ talks is already exceeding his supply of time this fall.