The Case For and Against “Peak Oil”

There is a remarkably detailed, thoughtful, and sober-minded article up on Bloomberg looking at peak oil advocates (“peaksters”) and critics, and their conflicting views on the future of energy. The article is too big to even begin to summarize, so I strongly recommend you read the whole thing.

What matters is that peak oil is coming, and soon. Almost a century and a half after the first U.S. wells were drilled in Titusville, Pennsylvania, production has begun to decline in more than a dozen countries, including the U.S., according to the BP Statistical Review of World Energy. Production at the giant Cantarell oil field in Mexico is likely to decline 8 percent this year, according to Mexican state oil monopoly Petroleos Mexicanos.

For some empirical context, you can then wander off to the following:

Just for fun, and with the above quote in mind, I played with the Excel worksheet for a little while tonight to see whether and where countries were in production decline. I looked at ten-year and one-year changes in oil production, measured in barrels, for all oil-producing countries shipping at least a million barrels a day.

The result? At a million barrels a day, only three countries worldwide had production declines over the last decade: Indonesia (-28%), the U.S. (-18%), and the U.K. (-34%). The nineteen other countries producing at that level all had production increases over the period. On a year-over-year basis the situation was worse, with eight countries reporting declines and 13 reporting increases. Either way, however, I don’t come to as gloomy a number as the author of the Bloomberg piece does above.

Now, does this mean I don’t believe in peak oil? Far from it. In a world of finite size, peak oil is inevitable. The real question, however, is what will happen to both oil supply and demand as prices increase. At sufficiently high a price there is much new supply out there, and there is almost certainly far less demand as well.

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Comments

  1. I can’t remember who said it — might have been T. Boone Pickens — but someone smart said: “We’re not running out of oil, we’re just running out of cheap oil.”

  2. Terry Foecke says:

    Demand destruction for energy, whether through efficiency (doing the same task with less energy) or conservation (doing less, and thereby using less energy), is probably still underrecognized in many supply-oriented discussions of energy use. While kWh/$ of GDP has declined in the US, that seems to be due mostly to a shift in the base away from energy intensive ways of creating GDP (although all those servers are definitely sucking up some juice).
    Motor systems are a great example of the potential for demand destruction, accounting for some 30% of industrial electricity use, which in turn accounts for about 30% of energy use. High-efficiency motors and variable-speed drives have been available for 20+ years, yet have achieved only about 15% market penetration. Just waiting for that energy price trigger to get pulled far enough.
    It maybe just flattens the curve of the growth rate, and maybe just enables profligate use elsewhere. But in this case, and many others, what saves energy is also categorically better, allowing more precise control, flexibility and other productivity-enhancing benefits.

  3. Okay, I’ll bite. Where’s the plentiful but not-so-cheap oil in a stable political environment?
    Oilsands ain’t cheap, yet they’re being developed. Various oil shale projects are being contemplated, and they’re expensive. So where’s the expensive stuff sitting on a shelf that we don’t want to reach for yet?
    Yes, it’s true that conventional oil wells only get one third or less of the oil out of the ground. Thus, two-thirds or more of the oil remain. But getting that other two thirds gets awfully expensive awful fast as vast quantities of water need to be removed to get just a little oil. It won’t be simply a question of more money to access the remaining oil. Rather it will be a question of how much energy (and costs) should be expended to recover the remaining oil. In other words, energy in will be greater than energy out

  4. Adam S. says:

    Paul, in your last sentence I think you might be making the same mistake that a lot of people do when they start digging into the peak oil issue. Namely, the assumption that supply will rise to meet demand as prices rise.
    So far as I understand it, peak isn’t so much a supply issue as a production issue. There’s lots of oil left in the ground, plenty more than we can use up anytime soon. But there’s a limit to how fast we can get it out of the ground, and those limits are more technical than they are economic. Even if you wanted it really, really badly, at some point you have to put more energy in to extract than you get from the oil itself.
    Of course, technology advances, but oil extraction isn’t software. The equation on production capacity hasn’t changed much lately, and certainly hasn’t changed nearly as fast as demand.
    But the other half of your statement is surely correct. Demand will be fairly responsive to price, which is why the armageddon scenarios that some peaksters spin are overblown.

  5. Franklin Stubbs says:

    Surprised he didn’t mention Richard Rainwater — another billionaire peak oil believer.
    Goofy title though… the only way oil sustains $200 is if the US dollar turns into confetti. North of $100 you’re talking $8 a gallon gasoline, full-blown global recession, consumers in traumatic shock, the implosion of export-led economies, etcetera etcetera.

  6. Responding to Adam S. above…
    Demand will be fairly responsive to price, which is why the armageddon scenarios that some peaksters spin are overblown.
    Yes, at some point, demand will be responsive to price. According to BP’s Statistical Review, about one-third of the oil is consumed by non-OECD countries. Most of these countries are not nearly as affluent as the OECD countries. At $70+ per barrel, many citizens are struggling. That’s in part why you see our friend Hugo Chavez, president of Venezuela, courting many countries in Latin America with its subsidized oil program.
    Even in oil rich Russia, the average citizen makes approximately US$400 per month. For many people, we are experiencing an Armageddon scenario–as Ukrainians can attest to having experienced a harsh winter with insufficient gas because they couldn’t afford the prices. Prices today are an issue for much of the world.
    If I recall correctly, our tiny planet presently produces and consumes about 86 million barrels per day. At what point does it reach its limit? Is it 100 million barrels per day? Maybe 125 million barrels per day? Or perhaps 150 million barrels per day? At what point do we reach the maximum? And at ever increasing production levels, how much environmental damage can we sustain?
    If we think that the limit is north of 150 million barrels per day, then my question is, where will that oil come from? And how long that level of production be sustained? Assuming a 2% growth in oil consumption, then in 35 years, we’ll need 150 million barrels per day production. Or put differently, we’ll consume about 55 billion barrels of oil per year.
    Remember too, that oil production declines each and every year. Because the daily production decreases from each well with time, we need to find more oil the following year just to remain at the prior level, let alone increase production. In other words, as the the daily production is increased, it becomes more difficult to maintain that level.
    If we assume a 5% decline rate, then using our prior example of 55 billion barrels consumed per year, we’ll need to find 2.75 billion barrels of production just to offset the decline, plus another 55 billion barrels just to keep the production steady, plus another 1.1 billion barrels to meet the 2% growth.
    If we look at the various oil provinces that have been depleted or have passed their peak production, I am not sure where and when we’ll find this newfound oil. And remember, there hasn’t been an elephant field discovered in a long, long time.

  7. Rob Lanphier says:

    I think prices would go up permanently if those who believe in peak oil knew the most effective ways of putting their money where their mouth is.
    What are the best ways of doing this? I’m assuming oil futures are, but it’s a lot more intimidating to invest in futures than it is in the stock market. The mass market investors who think nothing of dropping $400 on a share of Google have a more difficult time understanding the best way to invest in oil. I’ll confess to having this problem myself.
    One can invest in alternative energy, but that’s only an indirect way of investing, and probably already overpriced.

  8. george giles says:

    Oil is an internationally traded commodity priced in dollars by convention. The dollar has lost half its value under the Bush Administration’s expansionist money supply policies. So guess what, the price of oil doubles, that is the purchasing power of the dollar on the international market fell in half.
    Most money is no longer even printed just bits on a secure disk drive somewhere. Who is going to run out first? World oil suppliers or money printers (aka counterfeiters in the private sector, central bankers when backed by a political party in power)? The race to bankruptcy is on and all the leading nations are racing neck to neck …
    Economics 101. Peak Oil ain’t got nothing to do with it.

  9. Responding to George…
    That sounds good in theory but falls far short in practice.
    The U.S. consumes about one quarter of the world’s oil supply. It is the big pink elephant in the middle of the room. As America’s currency falls, it becomes more expensive to import. Imports then fall, so the theory goes. But we haven’t seen much slowing of America’s thirst for oil.
    While there might be a race to debase, no amount of paper is going to be able to magically create oil. Have a look at BP’s Statistical Review. It has an excellent graph that shows over the last 150 years or so, the price of oil has been roughly US$20 per barrel, until recently. That period spans wars, epidemics, booms, busts, good times, bad times, and everything else in between.
    The price of oil at $70 is more than double the long run historical trend. Moreover, if the U.S. has simply halved the value of the U.S. currency and thus the price of oil went up proportionally, then why are the rest of the world in such a panic to secure more oil? Surely, with their strong currencies, there is no problem? Why are China and India, for example, scouring the world for more oil supplies–after all, it is plentiful and cheap with their currencies?
    So my original question still stands, “Where’s the plentiful but not-so-cheap (or cheap) oil in a stable political environment?”

  10. Jim Letourneau says:

    New technology creates peaks in new energy forms. A good example from the natural gas world is production from coalbed methane wells. We are nowhere’s close to peaking in natural gas production from CBM wells but conventional gas production has probably peaked in North America.
    http://www.bigpicturespeculatorblog.com/2006/09/dont_feak_about.html
    New technologies are being developed that will squeeze more oil out of existing fields. That will increase reserves.
    http://www.onthewavefront.com/Files/Press/2006/Rogers%20County%20Production%20Increases_31-Aug-06.htm