Peak Oil

by CKR

Peak oil is a big issue. Google gave me 4,450,000 hits for those words. Kevin Drum and Majikthise have commented on it. There are numerous blogs and websites devoted entirely to the topic (metadirectory here). My old friend JLK and I have argued over it in another venue, and he is posting on the subject. As you can see if you click some of the links, there’s a lot that can be said about peak oil. I’d like to give an overview here of why I think peak oil is overhyped. I'll be glad to focus on specific points in future posts.

Peak oil refers to the idea that, because the oil in the earth is finite, its use will follow a bell-shaped curve. For oil, that curve is called the Hubbert Curve, after King Hubbert, who was the first to argue this case in this way. Peak oil advocates say that we are now at or near that peak.

This curve (from ASPO, via Kevin Drum) is a Hubbert Curve broken down into various sources. Each source has its approximately bell-shaped distribution, and they add up into an overall distribution of that shape. As new sources are discovered and brought into production, they push the peak of the curve further into the future. The politically-induced valley in the 1970s made some people think that we were past the peak.

Oil use may follow a curve like Hubbert’s, but we can’t predict the height of the peak or when it will arrive. Although it’s tempting to look at oil prices and conclude that we must be close to the peak, it’s not that simple. We’ve had high oil prices before, people have concluded that we were at or near the peak, and they’ve been wrong.

We could predict the peak if we knew the sum total of oil resources. But we don’t. Estimates of oil reserves both depend on and feed into the price of oil. If the estimates are too high, prices go down. Equity prices also influence the reserve numbers that companies are willing to publish.

Oil interpenetrates porous rocks underground. It’s not in big caverns. Sometimes it is pressurized by heat and gas, giving the gushers seen in old motion pictures. Modern drilling technology prevents gushers, because that pressure is valuable in lifting the oil. Further, the rapid depressurization of a gusher can deposit solid minerals that plug up the well. If there’s no natural pressure, pumping works for a while, and then water or gases may be pumped into the reservoir to push the oil out. It’s more expensive to pump than to allow a well to flow, and it’s more expensive to pump water in than to lift the oil.

At one extreme, the Saudi wells are cheap and easy to pump, and at the other, Canadian tar sands have to be dug out and treated with boiling water to remove the oil.

We also don’t know where all the oil is. A friend just sent me an article from Offshore magazine, “India: the next North Sea.” The subtitle says that 80% of India’s basins remain unexplored. The area around the Caspian Sea is at the beginning of its development, and more reserves can be expected to be added there.

Finally, there are political issues. Iraq famously was to have paid for the war with its oil revenues, but regular production depends on modernization of its facilities and the ability to keep the pipelines flowing. Countries with nationally controlled oil industries, like Saudi Arabia, are politically motivated to regulate the flow of oil and estimates of reserves.

For all these reasons, we don’t know how much oil there is, and even if we did, its production wouldn’t follow a smooth curve.

Currently rising oil prices seem to have to do with limited refinery capacity in the US and specialized requirements for gasoline in places like California (news article), along with increased demand by China and India as their economies expand, and a “terror premium.” Oil pipelines offer a tempting return on investment for terrorists. A small explosives charge will rip open the pipeline and set the oil on fire. Speculators and oil companies, along with those who hedge by buying oil futures, like the airlines, will pay more for promises of oil in the future because of these uncertainties.

These factors are outside the assumptions of peak oil and change its predictions. Refinery capacity may be raising the price by using petroleum more slowly. Actual attacks on the pipelines also slow down use, while the terror premium raises the price. Increased demand by China and India will use petroleum more rapidly.

Markets adjust to scarcity. If we are indeed at the peak of the Hubbert curve, prices for oil will go up, more hybrid cars will be made, rational governments will encourage conservation, and substitute sources of energy will come on line. But we have had oil scares about every twenty years, the peak oilers have pulled out their curves, and prices have gone down.

I’ll agree with the peak oilers, though, that it would be prudent to act as if we were at the curve’s peak. We need to develop safer nuclear power (which would also decrease global warming) and increase conservation. Oil will run out sometime, or the developing economies in the world’s two most populous countries will pinch the supplies. We need oil for transportation fuels. We must do what we can to make it available for its most efficient uses.

Thanks to JCR for the magazine article.

Update: More discussion at Majikthise and Searching for the Truth.

Comments

[John S. Williams]

Cheryl, in my reading of the material one peak oil, there is no agreement about when the peak will occur. Some say in 2005, some in about ten years, others in between. So you are accurate. What you fail to indicated, unless I'm mistaken, is that once the peak hits, and production gradually decrease, the demand will continue to rise exponentially because the entire world economy is addicted to fossil fuels, thus drastically increasing the cost as result of scarcity. At least that is how I understand the matter as a layperson.

Of even greater significance to my way of thinking are the implications of the U.S. military strategy to encircle and protect the world's sources of oil. I've just completed reading Andrew Bacevich's THE NEW AMERICAN MILITARISM, right after reading his AMERICAN EMPIRE, and although neither are narrowly about oil, that story plays a most significant role in both books. I consider the former of Bacevich's two books one of the most, if not the most, important book I've read in my seven years of retirement. I'm currently nearly through reading Michael Klare's BLOOD AND OIL, another must read in terms of the geopolitical significance of oil in terms of American foreign policy. In my opinion it is no longer either possible or relevant to discuss oil, peak production, conservation, etc. without discussing the American strategy of hegemony in attempting to secure the major share of fossil fuels in the world--all by the way in the name of freedom (a new code word for preserving the freedom of Americans to continue to induldge our standard of living based upon the over consumption of the rest of the world's material goods).

[CKR]

What you fail to indicated, unless I'm mistaken, is that once the peak hits, and production gradually decrease, the demand will continue to rise exponentially because the entire world economy is addicted to fossil fuels, thus drastically increasing the cost as result of scarcity.

If you've been reading some of the peak oil material, this is the impression you get. There are several things wrong with it in detail, but the probability is that the cost of oil can only go up. This is why I tend to agree with the prescriptions of the peak oil people, while feeling that a more accurate analysis of the problem is needed.

Demand is rising. I didn't go into detail on India and China, but I linked some articles that do. I can't do a detailed analysis right now, but we can expect demand from both of those countries to continue rising. In fact, if we want the less-developed world to develop, we can expect demand to keep rising in many countries. Everyone would like to live like people in the US and Europe.

This is not a result of the peak oil curve, but increasing demand (probably not "exponentially" though)against decreasing supply is not a good thing and will mean higher prices.

Whale oil became harder and harder to get in the late 19th century, as the demand for it rose. Some guys in Pennsylvania figured that the greasy stuff oozing from the ground was sort of like whale oil and just might substitute. They also figured that if they drilled in the area where the stuff was oozing from the ground, they just might find more of it. Now we're dealing with the possible (note!) waning of that resource.

When an addiction becomes too costly, some people will break it. There are alternatives to oil, except for transportation fuels. They are more expensive, though. As prices rise, they will become more practical, and as they become more available and better ways are found of distributing and using them, they may become cheaper.

People who don't break their addictions are courting trouble.

We can ask what the alliance between the US and Saudi Arabia has done to distort the pricing structure. The information needed to do that analysis is probably not available, and, in any case, it would be beyond my economic powers. But it's a question that should be asked of our politicians.

The New American Militarism sounds like a very good book, one I'd like to read. It seems like more than a coincidence that Iraq has the second-largest petroleum reserves in the world and sits like a keystone among other oil states. I'm not going to get into this issue right now, but I think one may adduce a great deal of evidence that oil has something to do with current American foreign policy.

[John S Williams]

Cheryl, you either fail to understand my point or I lacked clarity. Of course as demand increases prices will continue to go up. I agree! And I agree that adding China and India into the demand equation, will probably increase prices further. None of this has anything to do with Hubbard's Peak predictions. I further agree.

My point is that when the Peak is reached, this year, five years from now, ten years from now, twenty years from now, with a steadily increasing demand, and a steadily decreasing supply, the value is likely to increase even more rapidily if not exponentially.

Have you read Michael Klare's BLOOD AND OIL? It is not about Peak Oil or Hubbert's Curve. but about infrastructure, Saudi and other Islamic countries reluctance to allow foreign investment, U.S. military empire, lack of readiness through updating and building new facilities in the Middle East, and a great deal more. He doesn't spend much time on Hubbart's Curve and Peak theory which, though provocative is difficult to pin down because we are largely uncertain about actual available of supplies of oil world wide. All we can agree on is that the supply is not infinite. But, admitting I'm an amateur on these matters, Klare has a lot of what appears to me good hard data and makes a strong case for much of American foreign policy towards the Middle East, going back to Jimmy Carter and even to FDR, has been all about oil. And although Bacevich's books are about much more than oil, he makes a similiar point.

[CKR]

My point is that when the Peak is reached, this year, five years from now, ten years from now, twenty years from now, with a steadily increasing demand, and a steadily decreasing supply, the value is likely to increase even more rapidily if not exponentially.

This is true if oil is the only resource that can do what it does. My point about whale oil is that other resources can be substituted for petroleum in its current uses. We no longer worry about the price of whale oil, which would be horrendously expensive and would have kept us from developing cars and much of the rest of modern life if it had not been supplanted by petroleum.

In the same way, it is likely that petroleum will be supplanted by other resources. A rising oil price will encourage these substitutions. The price might have risen more gradually if the US and Saudi Arabia had not agreed to keep it down. As it rose more gradually, there would have been more time for other resources to be developed.

If other resources are available to compete with petroleum, this will also help to keep prices down.

I'm being very general here. There are lots of specific points that can be made. For instance, petroleum is much better for transportation (cars, airplanes) than any of the alternatives. But nuclear power can substitute for electrical generating plants. President Bush hasn't told us that his idea of using hydrogen for transportation will ultimately depend on using nuclear power, but it will.

After that first well was drilled in Pennsylvania, it wasn't at all clear that petroleum was more than a curiosity, much more expensive than whale oil, no infrastructure, all the objections we now hear to resources that might displace petroleum.

If petroleum were the only thing available, and if oil supply were to peak, then the increasing demand would meet decreasing supply in a price train wreck. But none of this is necessarily the case.

That's my objection to the arguments of the peak oilers. But having additional resources available can extend the date of the peak, lower prices, and keep the world running smoothly, even if they're not right. So I agree that it's prudent to act as if oil were running out.

No, I haven't read Blood and Oil. Sounds like a good book.

[heading out]

Actually Ken Deffeyes books are a better explanation of the situation and a lot easier to read than some others. There are also some mathematical models which seem to have worked in a number of countries that do allow you to have a reasonable shot at predicting overall world production of oil. Some of these suggest that the peak is a lot closer than others. The discussion that we have over at http://theoildrum.blogspot.com/ for example is trying (among other things) to put up some real numbers that allow folk to understand why we think it is a lot closer than ten years away. Obviously we don't think it is overhyped.

HO

[Njorl]

"Currently rising oil prices seem to have to do with limited refinery capacity in the US and specialized requirements for gasoline in places like California (news article), "

This is illogical. The fact that the US is at refining capacity acts as a limitation to crude oil demand and gasoline supply. This acts to increase the cost of gas, but decrease the cost of oil.

[Njorl]

"We also don’t know where all the oil is. "

True, but we do know where the cheap oil is. Nobody thinks oil will run out. The problem is that it will be too expensive to be worth extracting.

There is a reason no refinery capacity has been added in the US, and it isn't NIMBY. The same people who build refineries do the exploration for oil. They have a very good idea of how much oil to expect. It is their belief, even with the high price of gas today, that the next big oil refinery will not recover its capitalization costs. As the supply dwindles, there will be an oversupply of refining capacity.

[CKR]

Thanks, Njorl. You're right about prices and refining capacity. I was trying to keep the post simple and didn't clearly distinguish between oil and gasoline prices. There is some correlation between US gasoline specifications and oil price, though. More exacting specifications are more easily met by using the higher grades of crude, which are more expensive, and increasing the specs for gasoline in more parts of the country increases the demand for the higher grades.

We know where some of the cheap oil is. As I pointed out, there are still some places on earth to be explored. And some fields far outrun their projections.

Recovery technologies have become cheaper to apply as they become more developed. So today's "too expensive to extract" oil may be tomorrow's resource.

The same people who build refineries do the exploration for oil. They have a very good idea of how much oil to expect. It is their belief, even with the high price of gas today, that the next big oil refinery will not recover its capitalization costs. As the supply dwindles, there will be an oversupply of refining capacity.

The economics of the oil companies probably have had an effect on the building of refineries, but I don't think that this is it. What's your evidence for this?

[Evanel L.]

I believe we are definitely at or past peak. Saudi Arabia & OPEC have been saying for years that they can and will increase production - but what happens? Nothing. Now they say, there's "enough" production. If you look at the past 5 years, oil production has essentially plateaued at around 85 mbpd. Demand, however, has been climbing an average 2% a year. That's what's been causing higher prices over the past 5 years. Katrina, pipelines, terrorist attacks, only have short-term impacts on prices - long-term, the trend is up.

And they're climbing WORLDWIDE - not just in the US, so our gas prices are not due merely to US refinery capacity.

Around 75% of all countries are past peak. The 4 largest supergiant oilfields in the world are also in decline - and they make up +10% of all global output. Saudi Arabia's Ghawar field which accounts for 60% of its output and 5% of global output requires water injection rates of 30% just to pressure up the remaining oil.

New discoveries? An estimated 95% of all oil has already been discovered - which is oil majors are spending less each year on exploration, and more on tech extraction, stock buybacks, and M&A. Discoveries have been extremely few, and when they come online and reach peak production, they're not going to be able to stall prices. They are certainly not enough to replace old production.

If ANWR were to be drilled now, the EIA estimates peak production at 780,000 mbpd in 2024. Current US consumption is 20.8 mpbd, so ANWR could only make up less than 5%.

Alternative fuels make up 1% of current oil use. The US GAO recently published a peak oil report (google it), which stated that optimistic projections would see alternatives taking up 4% by 2015. Too many technological/investment/infrastructure/cost hurdles to overcome, which is why they need +10 years of development to scale up.

When the US Govt. Accountability Office says Peak Oil & its consequences are inevitable and will likely be "severe" and can only be "mitigated", and it may be happening Right Now & the government should do something about it....

...then perhaps we should do something about it.