INTRODUCTION

The San Francisco Peak Oil Preparedness Task Force was created by the Board of Supervisors on October 5, 2008.  Its charge is to assess the impact of declining supplies and rising prices of fossil fuels, create a plan to mitigate the ill effects, and recommend actions to the Board.i  The Task Force consists of seven members, whose background is detailed in Appendix I.

A) What is Peak Oil?  Oil is a finite resource.  It is the linchpin of all modern economies.  In addition to serving as the fuel for 95% of all transportation, tractors, and other heavy equipment, it is used as a feedstock for plastics, chemicals, fabrics, cosmetics, and pesticides.  Like most commodities, its price is determined by market forces of supply and demand.  Demand for oil has been rising sharply, as developing economies of China and India grow.  

The future of oil is a classic case of too much demand chasing too little supply. Prior to its recent fall, the price of oil has been trending upward for more than five years. When the economy begins to right itself, it is virtually certain that oil’s price will resume its upward march. Another historical feature of the price of oil is its extreme variability.

“Current trends in energy supply and consumption are patently unsustainable -- environmentally, economically and socially -- and they can and must be altered.  One thing is certain.  While market imbalances will feed volatility, the era of cheap oil is over.”
				-- Nubuo Tanaka, Executive Director,		
	    				    International Energy Agency (OECD),
				    from World Energy Outlook 2008, November, 2008

There are still vast reserves of oil in the ground.  What matters to the world’s economy, however, is not the oil in the ground, but rather how much can be extracted in a given time, that is, oil production.  This is conventionally measured in millions of barrels per day.  Today, worldwide production of petroleum liquids is about 87 million barrels per day.ii  The production of oil is limited by both geological limits of physically how fast it can be pumped out of the ground, and by human constraints, such as political decisions and wars.

Although we are not running out of oil, many analysts believe that the world is at or near the physical limit to how fast oil can be produced.  Any given oil field produces oil at a flow rate that roughly follows a bell-shaped curve over time.  When you add up all those bell curves, total worldwide production forms a big global bell curve.

Though not all production curves are exactly bell-shaped, certain key features are present in the production curve for an oil reservoir:  Production increases over time, reaches a peak when approximately half the available oil has been pumped, and begins a steady and inexorable decline thereafter. The first half of the available production is the oil that is the easist and cheapest to extract. As a field matures, it costs more, in money and in energy expended, to bring the oil to market. Eventually, it takes more energy to extract the oil than the oil embodies, and then the field is abandoned.

Oil production in the United States peaked in 1970; the North Sea in 1999iii, Australia in 2000. (See list of countries and dates of peak in Appendix I.)iv Worldwide, the production of conventional crude reached a peak (to date) in 2005.v  Unconventional sources of oil have kept the total production of petroleum liquids at a plateau since then.  Global oil discoveries have been declining since 1964, with consumption exceeding discoveries since 1982.vi

But total production is not the most relevant statistic for San Francisco and the United States. For major importers, the salient issue is the amount of oil available to purchase on world markets. As time passes, oil producing nations gradually use more oil domestically, thus leaving less for export, even if their production is unchanged. They may also withhold production, believing that prices will be higher later on, or planning to ensure their own future supply of oil. Thus, even without a production decline, oil exports may fall. 

Today the US is bidding against China and other importing nations for a shrinking pool of oil available for export.  Worldwide, net oil exports reached a maximum in late 2005, and have been trending downward since then.  Exports are currently 3% below their peak.vii

And this is only the beginning.  Production from existing post-peak oil fields is falling 6-9% per year, according to the International Energy Agency of the OECD.viii  That means that each year the world will need to add new fields with annual production of at least 5 million barrels per day just to offset the decline of existing fields.  To put this in context, the Athabaskan tar sands in Canada are currently producing 1 million barrels per day and hoping to reach 3 million per day within a decade.ix

Getting back to price:  As the peak of production approaches, the world is not running out of oil, but it is running out of oil that is easy to get at and therefore affordable. Regardless of the quantity of oil existing in deep water or tar sands, it will be increasingly expensive to pump and process, resulting in a continuing trend of rising prices.

B)  Peak Natural Gas:  Historically, the United States has supplied its own natural gas, or purchased it from Canada.  However, natural gas production in North America is also close to peak.  Conventional production of natural gas is already in decline.  Unconventional natural gas production has surged.  No one knows how long this will last, but remember that unconventional natural gas is significantly more expensive to produce than conventional gas.

The United States was hoping to make up for declining North American gas production with imports of liquefied natural gas (LNG). This strategy has been unsuccessful thus far because the world price of LNG is higher than the North American price  Over the past twenty years, natural gas prices have been 86% correlated with oil prices.x Natural gas is frequently sold under long term contracts in which the price is based on the price of oil. In many applications, such as heating and industrial processes, it has replaced oil.
 
C)  Electricity:  Electricity prices will follow the price of natural gas, especially in California.  In 2008, PG&E expects 44% of its electricity to be generated from natural gas.xi  In March, 2008, PG&E asked for a 6.8% increase in electric rates, specifically citing the rise in natural gas cost.xii

Looking ahead, many Americans expect the Usnited States to move to a society in which nearly all energy is in the form of electricity, with that electricity based on renewable sources.  The magnitude of the fossil fuel energy which must be replaced will make this goal virtually unattainable. Electricity peak reduction strategies and energy efficiency measures can help, but transportation will be a large hurdle to surmount.  A study by the Pacific Northwest Energy Center estimates that only 15% of California’s light vehicle fleet can be run off today’s electric grid.xiii Another example:  Imagine that San Francisco’s vehicle fleet were magically transformed to all-electric plug-in vehicles.  The electricity to power vehicles for current driving within the city limits alone would exceed all electricity now used for all purposes.xiv 

Meanwhile, despite our best efforts, the electricity generated from wind, solar, geothermal, and small hydroelectric combined adds up to only 1% of energy used in San Francisco.xv

D)  Climate Change:  There is a great confluence of interest between mitigation strategies for Peak Oil and Gas and Climate Change. The core concept for addressing both issues is the need to reduce and eventually eliminate the use of fossil fuels.

“Climate change makes moving off of oil necessary; peak oil makes it inevitable.”
						-- Richard Heinberg

E)  Looking Forward:  We are entering uncharted territory. Tightening supplies of oil and natural gas are part of a larger matrix of ecological overshoot that will pose a growing challenge.  Our entire civilization is built on not just energy, but cheap energy, and cheap commodities in general. That era is coming to an end. Our society is in a race against time, the time is required to make the transition to a lower energy society. In the medium term, there are likely to be serious economic and social dislocations, with the possibility of eventual catastrophe.

Wild gyrations in price will almost certainly continue, but the trend will be upward.  Until recently, energy has been extraordinarily cheap, cheap enough that we have been able to use it wastefully.  That is changing before our eyes, and we need to change our attitude to match the new reality.  This summer the world got a taste of how fast and how far oil prices can skyrocket, and the resulting economic and social pain. Try it: imagine gasoline at $10 a gallon.

F) Economic Impact:  The leading edge of peak oil will be its economic impact.  When the Federal Reserve Bank of Philadelphia did a comprehensive study of the effect of oil price changes on the economy, it found a profoundly negative relationship.  According to the Fed, the doubling of oil prices that we saw recently will reduce 2009 US economic output by  It didn’t even matter if the price spike was temporary; the damage to the economy was long-lasting.  We may not even recognize the connection, but oil constraints will hobble economic growth.  For more, see the section of this report on the economy.

G)  Transportation:  When we think of oil, we tend to think of gasoline, and cars.  Vehicle fuel will take a big hit, but cars won’t be the only victims.  Freight shipment and large equipment used in construction and agriculture are equally vital to the economy and more difficult to replace or conserve away.  Cheap air travel will be another casualty of peak oil, with a huge impact on San Francisco’s vital tourism sector.  For more, see the section of this report on transportation.

H)  Food:  Food production will be impacted both through rising costs of oil and gas based fertilizers and pesticides, and the increasing fuel costs of equipment and transporting to market.  For more, see the section of this report on food.

I)  City Services and Infrastructure:  Between the impact on the economy, food, and transportation, the number of people needing assistance will climb, just at the moment when city revenues will be adversely affected by the bad economy.  For more, see the sections of this report on water, wastewater, and waste disposal.

J)  Emergency Services:  Energy shortages and supply interruptions are likely.  The supply chains for oil and gas are long and complex. As demand outstrips supply, the possibility of disruptions becomes ever greater.  In the 1970s, we saw the havoc that can be wreaked by even brief interruptions.  And the American south experienced shortages and long queues after some refineries were temporarily closed by Hurricane Ike.  Planning for emergency situations should take the possibility of energy shortages into account.  For more, see the section of this report on emergency services.

K)  Strategies:  There is no road map for the bumpy future.  Though oil and natural gas availability will decline, that doesn’t mean we will go back in time to old-fashioned ways of living.  The challenge is to find a new way forward.  Whatever shape the low-carbon future will take, there are certain basic strategic concepts that will underlie the recommendations in this report.

1)  Start now. Many of the transitions take a long time, such as developing the transit system to be ready to handle an influx of riders.  If we wait, the most vulnerable people will be hurt.

2)  Be flexible. Peak Oil is an unprecedented situation, especially in combination with economic recession, climate change and general environmental overshoot. This task force has attempted to make broad-based recommendations, but given the complexity of the situation, the city will need to be prepared to adjust its response to changing circumstances.

3)  Focus on conservation. The scale of the energy that needs to be replaced is so huge that only large-scale conservation projects combined with alternative energy generation can prevent wrenching dislocations.

4)  Make alternatives available. Due to price volatility, price signals are likely to come too late to stimulate an adequate supply of alternatives for transportation, heating, cooking, and so on through the operation of the market. Governments at all levels need to intervene to ensure that when San Franciscans want to move away from fossil fuels, alternatives exist in sufficient quantity.

L)  Damage to social fabric:  The Task Force acknowledges the possibility of a scenario in which the impacts are so severe that society will deteriorate severely, leading to unemployment, hunger, and crime.  While such a collapse is not out of the realm of possibility, the Task Force felt it would not be constructive to focus on it because, by its very definition, such a situation implies that government is unable to respond in a meaningful way.  The strategies the Task Force chose to focus on are meant to reduce the likelihood of such an outcome.

Goal of the Peak Oil Preparedness Task Force: 

San Francisco cannot solve the problem of peak oil on its own, thought it can respond. Mitigation strategies must be pursued at every level: municipal, regional, state, federal and international. The evolving energy regime will pose a tremendous challenge to San Francisco. Finding policies to meet this challenge will be difficult, but will pay off. The Peak Oil Preparedness Task Force was created to identify these policies.i

This is a great opportunity for San Francisco to take the lead in building on more than a decade of motion toward a low-carbon future.  Aggressive action here can point the way for California and the United States.  San Francisco is uniquely suited to move ahead, by its aware and active residents, and by its progressive tradition in government.  

Moreover, with a challenge like peak oil and gas, requiring a major social and economic paradigm shift and long-term thinking, strictly market-based coping cannot be counted upon to arrive at the best course of action.  The city must step forward to set priorities and plan how to move toward the best resolution for all its citizens.  It is the mission of the Task Force to assist the City in making a such a plan.

Endnotes

i Resolution 268-07, establishing the Peak Oil Preparedness Task Force, http://www.sfgov.org/site/uploadedfiles/bdsupvrs/resolutions07/r0268-07.pdf

ii Energy Information Agency (EIA), US Department of Energy

iii Discussion of US and North Sea peak http://www.energybulletin.net/node/17009 
iv Energy Watch Group, Crude Oil: The Supply Outlook, October, 2007

v International Energy Agency, OECD, Energy Outlook, 2008

vi San Francisco Informatics, The Oil Age, http://www.oilposter.org

vii Compiled from EIA and British Petroleum data, http://netoilexports.blogspot.com/

viii International Energy Agency, World Energy Outlook, 2008, http://www.worldenergyoutlook.org/docs/weo2008/fact_sheets_08.pdf

ix  reported on CBS News, January, 2006   http://www.cbsnews.com/stories/2006/01/20/60minutes/main1225184_page2.shtml

x  IEA, Monthly Energy Review, quoted in Awerbuch, Shimon, and Souter, Raphael, Exploiting the Oil-GDP Effect to Support Renewables Deployment, October, 2004

xi Pacific Gas and Electric insert with energy bills, November, 2008

xii Pacific Gas and Electric, March, 2008  http://www.pge.com/mybusiness/myaccount/explanationofbill/billinserts/previous/index.shtml

xiii Pacific Northwest Energy Center (Get specifics from Ben)

xiv Department of Environment figures

xv See energy section of this report for more detail.