The Myth of Peak Oil

The Myth of Peak Oil

Peak Oil is often presented as one of the two major reasons provided for moving away from petroleum based economy; the second being concerns about anthropogenic emissions of greenhouse gases and its impacts on global climate. Sometimes mentioned are national and global economic and security concerns. Of these four reasons, I find it difficult to take any but climate change seriously, or at least seriously enough to warrant massive-scale, government-led efforts. While I am concerned about the economy and security both from a national and global perspective, I doubt that even the most successful efforts, which might realistically be undertaken by our own government, would result in anything more than a shift in trade balances and an increase in domestic jobs. On the security front, it is very possible that even a full decoupling of domestic energy needs from imported oil would not greatly affect the power dynamics which currently cause such significant concerns around the stability of the Middle East, nor would they significantly impact the range of policy options available to the U.S. in dealing with this region.

In returning to the topic of Peak Oil, I had previously mentioned that I am unconcerned about this particular prospect. I capitalize Peak Oil and refer to it as a myth to distinguish it from the physical phenomenon of peak oil production, which must as a physical necessity exist at some (I believe) distant event. The word myth, in this instance, refers to Peak Oil as a legendary and epic story, meant to describe some natural event in a manner which elicits a strong emotional response and extols the virtues or drawbacks of a particular set of behavior. In this sense Peak Oil differs from classical myths only that it refers to a future event rather than one from the past, but in all other senses the word myth seems appropriate.

It is instructive to clearly distinguish between the phenomenon of peak oil production and the myth of Peak Oil. It is undeniable that at some point in the future, petroleum extraction will peak, and at some point thereafter begin to decline. The exact shape of oil production will vary greatly depending upon many factors, including the availability of substitutes at various price points. This is the great missing piece from most of the hand-wringing which surrounds the Peak Oil myth: the absence of discussion of substitutes, or the certain belief that the market cannot possibly transition to those substitutes in a timely manner. While it is true that oil supply, in an absolute sense, continues to dwindle, the reality is that the actual amount of oil available for recovery and use is driven very strongly by economic factors. I find it useful to conceptualize the total amount of oil physically present on the globe as an iceberg, with the amount above the waterline being the amount which is “economically recoverable.” The amount above the water is in reality a small portion of the total amount of oil physically on the planet. More importantly, the water level does not remain at one level over time, but rises and falls. As technology improves, the water level falls, exposing more of the ice to the air. Also, as prices rise, the water again goes down, exposing still more ice for extraction. If prices fall, on the other hand, the water rises and ice which was previously exposed becomes submerged, and is no longer available (but is still physically present). This analogy might be somewhat crude, but I find it helpful in understanding the phenomenon.

As Hirsch points out, technically the constraint is not on energy sources per se, but on fuels appropriate for transportation and the rate at which we can extract/produce them. However any energy source, whether its coal, or natural gas, or solar energy, can be transformed into a transportation fuel, and the ease with which this might be accomplished should be viewed simply as a “cost” of using the alternative fuel. At any point that the costs of the oil exceed the costs of the alternative fuel (for the foreseeable future), including the conversion costs, costs of new capital investment, etc., then the alternative fuel will be used. In the United States today, there exists intense interest in using natural gas to fulfill a significant portion of our transportation needs in the future. This interest is driven simultaneously by a relatively high and sustained oil price, and by an unprecedented low natural gas price, both factors together creating an economically viable opportunity to jump to a new fuel “iceberg.”

Therefore, one should envision other icebergs floating around: call them “ethanol,” “natural gas” and “coal liquids.” Even though others are using these icebergs for other purposes and they might not be ideal for yours, if your iceberg gets low enough, and you are desperate for ice, you might start using those other icebergs for your needs. On the horizon are a few more icebergs which we can call “transportation electrification,” and a truly massive iceberg called “methane hydrates,” which hasn’t even been touched yet. The moral of this analogy is that if your situation on the oil iceberg gets desperate enough, you can start looking for alternative icebergs to fulfill your needs. Hirsch argues that production is not responsive to price and technological improvements, and as evidence points to U.S. production from 1980 through 2000, shown above.

While we cannot fault him overly much by not predicting the future, his primary argument is undermined somewhat by subsequent events, as since 2008 U.S. oil production has increased dramatically (at least 16% by 2011, with an upwards trajectory) largely due to technological advances in deep-water drilling and horizontal shale extraction techniques. Increases in Canadian production are also expected to significantly increase in the years to come. The below figure shows the change for just the U.S.:

But aside from the contradiction to Hirsch’s claim specifically, looking at U.S. production responses to price and technology in a vacuum is not an appropriate microcosm for global oil production. It is inappropriate for the simple reason that there are other regions of the world from which oil is also being extracted, and the aggregated behavior of global production does not necessarily behave in the same way as individual fields, countries or even regions.

Increases in global oil prices and technologies should see increases in global oil production, and this increase would not be seen uniformly in all regions but would instead be seen in those regions from which the incremental costs of these increases were least. Indeed, this is precisely the pattern which can be observed over this same time period when considering global oil production, shown below.

As can be seen, individual regions’ contributions may have diminished (with North America as a whole remaining relatively constant in absolute terms) but global production continued to increase. This is in contrast to Kunstler’s suggestion that global oil production had already peaked in 2007, to be inescapably surpassed by ever increasing demand (with similarly dire predictions regarding natural gas). Instead, the EIA now reports that global production exceeds 89 million barrels per day, and the world is experiencing a natural gas bonanza. Nor should we expect this increase in production to be unsustainable for at least the near term. Indeed, the deployment of horizontal drilling technologies have directly led to an increase in U.S. oil output, the country which out of nearly all countries should logically have the most difficulty in increasing production due to the already extremely high levels of current and historical exploitation. As horizontal drilling techniques are deployed abroad, it is expected that increases in both oil and gas production will follow.

At some point, oil production will necessarily peak and then fall. The EIA however, predicts that within the U.S. this peak production will not occur until 2027, and will remain above 2000 production levels until at least 2035. This again is based upon currently available technologies including deep-water, horizontal drilling and CO2 enhanced extraction techniques, techniques which have not yet been fully deployed domestically or abroad. EIA projects global liquid fuels production (including both the oil iceberg and several others) to increase through at least 2035, projecting over 112 million barrels per day being produced by that point. One might hazard a guess that “petroleum” production, in the strictest technical sense, might peak around 2050, but this would simply be throwing darts at the wall. Total liquid fuels production might peak significantly later.

More importantly, however, EIA indicates that over this time, the average price of oil will increase steadily until by a total of approximately 25% to approximately $125 per barrel in adjusted dollars. This is a good thing. A slow, steady increase in oil prices is an accurate reflection of a steady increase in the incremental costs of additional extraction, and sends strong signals to the market to constrain consumption and search for alternative energy sources. The phenomenon of peak oil will occur, but the mythical crash appears to be an unlikely scenario at best. Instead it appears likely that we will continue to see transition to alternative fuel sources, increases in efficiency and decreases in consumption, on a gradual pace.

Policy recommendations are difficult given the context of the question. Based upon national economic reasons, fuel efficiency mandates and effective mass transit, combined with encouragement for extraction, would move us closer to becoming a net exporter again. This would have some significant positive impacts on our domestic economy. Continued support for research and development and demonstration projects in alternative fueled vehicles is a worthy use of government funding, for a variety of reasons. Programs such as ARPA-E should continue to receive significant support, as they provide options and tools, revealing new icebergs or lifting them further above the surface of the water. Again, if the question was asked in the context of climate policy, my responses might be different, but these policies seem sufficient to assuage my fears of future production peaks, such as they are.