Anything that happens in the universe happens because energy is being converted from one form to another. The world economy is part of our universe and so it too requires energy for anything to happen.

By Dr Michael Lardelli   03 May, 2010   ABC Radio

Dr Michael Lardelli from the University of Adelaide looks at how the bulk of the world's oil production comes from a relatively small number of very large fields discovered decades ago. The rate of world oil production has been maintained at current levels only by finding and bringing on line an increasing number of smaller fields, but the financial cost and the energy required to find and develop these new fields is constantly increasing. According to Dr Lardelli the so-called peak of oil production was actually in 2008.

The peak of oil production is passed (transcript)

Robyn Williams: This week, Professor Peter Newman of Curtin University in Perth, said that Peak Oil has happened. It occurred in 2008 and was directly linked to the GFC. As oil and therefore petrol became more costly, so those stretched by mortgages that they couldn't pay, went broke. The Global Financial Crisis, says Professor Newman, had an oily origin.

Is he right? Well here's Michael Lardelli, senior lecturer in genetics at the University of Adelaide.

Michael Lardelli: For six years in the 1990s, I lived and did postdoctoral work in genetics in Sweden. For a time I worked at Uppsala University, Scandinavia's oldest university that was established in 1477. Uppsala is a beautiful small European city 50 kilometres north of Stockholm. The area around Uppsala is famous for its Viking heritage and, on back roads in the area, you can still stop to examine rune stones erected 1000 years ago. In 1997 I returned to Australia but I have re-established a connection to Uppsala in an unexpected way. Most nights once my young children are asleep, I sit down to translate into English the blog of a Swedish professor of Physics. His name is Professor Kjell Aleklett, and he works at Uppsala University, and he is president of the international arm of the Association for the Study of Peak Oil and Gas, otherwise known as 'ASPO'. This is a story about oil, his research, and our future.

Anything that happens in the universe happens because energy is being converted from one form to another. The world economy is part of our universe and so it too requires energy for anything to happen. Without energy there would be no food, no mining, no manufacturing, no commuting, nothing. For the world as a whole, 85% of the energy that drives the economy comes from converting the energy in the chemical bonds within fossil fuels into heat and motion energy. Of the fossil fuels, the most useful is oil because it is easy to transport and has the most concentrated energy. Indeed, burning one litre of oil releases energy equivalent to 20 days of hard human labour. A fully-tanked jumbo jet contains energy equivalent to around 13,000 years of human labour.

In July 2008 the price of a barrel of oil spiked up to a record $US147 per barrel. It had been only half that price one year earlier. The reasons for the price spike are complex. China, it seems, was willing to pay almost any price to expand its oil stockpile before hosting the Olympic Games in August of 2008. Speculators had also noticed the rapid rise in the price of oil and were bidding up the price. The spike in the oil price was followed in September by the crash of the investment bank Lehman Brothers that marked the start of the world financial crisis. Interestingly, an analysis by Professor James Hamilton of the University of California, suggests that it was the oil price spike of July 2008 that pricked the US debt bubble and hastened the inevitable financial crash. If you look at the history of economic recessions in the last 50 years you will see that most are preceded by a rise in the price of energy.

As economic activity around the world fell in late 2008 the price of oil fell too, from July's $146 down to as low as $32 per barrel five months later. Less consumption of manufactured goods means less energy is required for mining, manufacturing and distribution. People who lose their jobs don't need to drive to work. When the price of oil hit $US147 per barrel the world was using around 86 million barrels of oil every day. Today oil consumption is about 84 million barrels per day, a decrease of more than 2%.

There is a tendency to dismiss the high oil prices of 2008 as entirely due to speculation but that cannot be true. Throughout the 1990s oil had hovered around or below $20 a barrel but after 2002 it began to rise steadily. The price hit $50 in 2005 and doubled again to $100 by 2007. Why? Well, the world economy was growing rapidly during this period and more real economic activity can only occur if more energy is used. But the simple truth is that the world could not expand its use of energy as quickly as needed, and after 2005 it ran into real problems. If you look at the history of world oil production you can see that production was basically flat from 2005 until 2008 despite the tripling of oil prices in this period. According to economic theory, this should not have happened. The high oil prices should have stimulated oil production. They should have increased the supply and so reduced the price of oil. Instead the world economy ran into a brick wall. What went wrong?

The flat oil production plateau of 2005 to 2008 was a brilliant illustration of the fact that the predictive powers of economic theory are very limited. In spite of its technical jargon and its liberal use of mathematics, economics is more art and guesswork than a science. That's why the First Law of Economics states that for every economist there exists an equal and opposite economist.

On the 27th August last year the world celebrated 150 years since the first commercial oil well was drilled by Colonel Edwin Drake in Pennsylvania. The oil industry has now seen over a century of massive investment and astonishing technological development. The modern accomplishments of the oil industry sound more akin to science fiction than reality. The latest discoveries of oil off the coast of Brazil are a good example. Amid huge ocean swells a gargantuan exploratory oil rig costing nearly $1 million per day to lease, floats two kilometres above the seabed. Its drill-bit descends through the ocean depths, then grinds its way down through another five kilometres of seabed before finding oil trapped for millions of years under a two kilometre thick layer of ancient salt. This oilfield, named Tupi, is the biggest discovery in the past decade. One day its yield may total 8-billion barrels although extracting it will require a huge amount of investment and a great deal of time. The first well drilled into Tupi cost almost a quarter of a billion dollars. Subsequent wells have cost $60 million each.

Every time a so-called 'giant' oilfield is discovered - and 'giant' means anything over half a billion barrels of oil - our media trumpet it as the solution to any concerns we may have over future oil supplies. But what most people don't appreciate is that the rate at which humanity is using oil almost beggars belief - we consume 1,000 barrels of oil per second, which amounts to almost 30-billion barrels per year. So half a billion barrels from a 'giant' field could supply the world for about one week, and the Tupi field might eventually yield enough oil to supply the world for less than four months at current consumption rates.

Herein lies the problem. For the world economy to grow current consumption rates are not enough. To grow the economy we need to increase the rate at which we use energy. Economic growth simply cannot be separated from energy growth. Even the world's highest advisory body on energy, the International Energy Agency, acknowledges this. Indeed, for most of its history the economists at the IEA have actually predicted future increases in the rate of oil production based on the rates of economic growth they were expecting. This 'economy-based' method of predicting future oil production worked fairly well until, in 2005, our finite planet Earth stopped co-operating. After 2005 it refused to yield ever increasing flow rates of oil to power the economic growth. In response to growing scepticism about its predictions the IEA then changed its methodology, and in 2008, it published a so-called 'bottom up study'. It no longer used anticipated economic growth to predict oil production growth. Instead, it predicted future production based on an oilfield-by-oilfield analysis of what it thought individual oilfields could produce.

The bulk of the world's oil production comes from a relatively small number of very large fields discovered decades go. Most of these very large fields now show declining production. The total rate of world oil production has only been maintained at current levels by finding and bringing online, an increasing number of smaller fields. The financial cost, and the energy required to find and develop these new, smaller fields is constantly increasing. In 2008 the IEA looked at the production from all current fields and how rapidly it would decline. They also predicted how much oil would be produced in future years from as yet undeveloped fields and fields that might yet be discovered. The result? They saw less future oil production than their previous estimates but, nevertheless, oil production in 2030 would be higher than today, so there was a little room for economic growth.

But was the IEA correct? This is where the story gets very interesting and Professor Aleklett in Uppsala re-enters the picture. Professor Aleklett heads a group of research scientists called the Global Energy Systems group at the Angstrom Laboratory of Uppsala University. In recent years these scientists have been developing mathematical models of oil production from individual oil fields. They re-analysed the numbers in the IEA's field-by-field bottom-up analysis. They found that they could agree with most of what the IEA predicted - namely the decline rate of existing fields and the volumes of accessible oil in known but undeveloped fields and in fields that might yet be discovered. However, they found a glaring error. The IEA had predicted future rates of oil production from undeveloped and yet-to-be-discovered fields that were far, far too high. When they took the IEA's data and imposed rational but nevertheless extremely optimistic limits on future production rates, they saw to their astonishment, that the maximum rate of oil production that the world would ever achieve was in 2008. That's right - the so-called 'peak' of oil production was actually two years ago and we have now begun the long downward trend in oil production that will characterise the second half of humanity's oil era.

The re-analysis of the IEA's own data by the Global Energy Systems group showing that we have passed the peak of oil production is the scientific equivalent of a 'slam dunk'. It is a beautiful piece of work and I have been privileged to help them prepare it for publication. I find it fascinating to see other analyses are also giving similar results. Indeed, an analysis by Australia's own Macquarie Bank, not of actual oil production but of oil production capacity, predicted declining capacity after last year, 2009.

Since the IEA produced its bottom-up analysis the financial crisis has hit the oil industry hard. Much oil exploration and oilfield development has been cancelled and this will accelerate the decline in world oil production. The implication is that, when or if the world economy tries to grow out of its current slump, we will see demand exceed supply and oil prices will spike to a level that will, once again, cause an economic fall. Unfortunately, unless alternative sources of energy are found and developed, and quickly, the importance of oil to the world economy means that economic growth will follow the declining production of oil downwards for many years and probably decades. From a scientific point of view, there can be no return to the long and heady days of economic growth seen earlier this decade, no matter what leading economists of heads of reserve banks may think to the contrary. As a scientist, and with my two young children in mind, I think we need to be looking urgently at the implications of energy decline for the most important things in life. This is especially true for food production which, in industrialised nations, is highly dependent upon abundant supplies of oil.

We can no longer afford to sit around discussing whether or not we have passed the peak of oil production. We cannot wait, complacently, for price signals to stimulate the development of alternative sources of energy since oil prices will fluctuate wildly. Every time the economy tries to grow, oil demand will exceed supply, causing the oil price to spike up. This will strangle the economy, reduce oil demand and cause the price to fall. Oil companies cannot invest in the face of these wild fluctuations in price. Most importantly, we must remember that to do anything at all requires energy. So, while oil is still relatively abundant, we must invest as much as we can to develop the energy sources of the future. Once the oil supply starts to decrease significantly, we will be too busy just trying to keep food production and essential services running to have any energy left over for building expensive high-tech alternative energy infrastructure.

The peak of oil production was two years ago. For the sake of my children, and your children, we need to just accept that fact and deal with it. When it comes to investing in energy alternatives, do it now, because it will not be possible later.

Robyn Williams: And you might like to listen to this week's Science Show in which two potentially huge new sources of energy are featured: Geothermal in Victoria and Craig Venter's newly created organisms, as a basis for algal oil. That was Michael Lardelli, Senior Lecturer at the University of Adelaide.