Monday, 8 December 2008

So much for “peak oil”

It seems a long time ago, now, but just prior to the recent recession the price of oil reached new heights and wild predictions of $200 a barrel and more were flying around. At the time, many energy- and environment-pundits, including some among the Liberal Democrats, believing that we had now reached “Peak Oil”, that mythical time when the increase in our rate of consumption outpaces the increase in our rate of discovery and so initiates an accelerating decline in supply until the oil runs out and civilisation as we know it ceases to exist.

Those who talk about it often have a slightly excited look upon their faces, as though they cannot wait for the final cataclysm to come so that they can say “I told you so” as the cities begin to go up in flames and people collect together in small bands to try to eke out some semblance of survival in the mountains.

They appear to have gone rather quiet recently, however. Once again, “peak oil” has turned out to be nothing more than a foothill in the great undulating range of energy prices. Oil prices have fallen by two thirds in the past six months to end up $100 a barrel below their Summer peak at just $50 a barrel.


Of course, peak oil is nonsense anyway. Firstly, it is based upon a deliberate obfuscation of known, economically viable reserves on the one hand, and what is in fact under the crust on the other: oil companies only list the reserves that they have so far identified, and they do not list reserves that are, at current prices, too expensive to be viable, while at a higher price they would be worth drilling for. As Russell Lewis explains,

Oil reserves are never remotely equivalent to all the oil in the earth’s crust.
The proven reserves are what the oil companies have decided to look for and
which are known to be exploitable under prevailing technical and economic
conditions. They are designed to provide the oil industry’s working inventory of
oil stocks. There is a limit to the amount of money the oil companies can spend
on searching for more or deeper wells because prospecting and drilling are
expensive, and there are other competing obligations which affect their
long-term profits, such as advertising, marketing, research, building refineries
and distribution. The best indicator of whether oil is getting scarcer is its
price, and though prices have risen sharply in the last two years [and bearing
in mind that this was written before the collapse in prices in the last six
months], that fact does not necessarily point to a long-term upward trend.
This does not mean that oil could never run out, however. That is left to the price mechanism. As the supply of oil diminishes, the price will inevitably rise. This will not, however, trigger a mad rush to capture ever shrinking reserves until the oil economy collapses; rather, it will lead to a steady rise in prices that will encourage greater efficiency, spur research into make alternatives more cost-effective. For example, if fossil fuels quadrupled in price, wind turbines would be able to generate electricity more cheaply and so they would become a viable alternative. The increase also pushes up the cost of high-energy products and services (such as flights) and so discourages consumption. And finally, as we have already seen, rising fuel costs encourage consumers to pay more attention to the miles-per-litre that their car can achieve and so encourage producers to invest in more efficient engines.

In fact, this last points to another flaw in the peak oil theory: it ignores human ingenuity. Even accepting that there is a set amount of oil, it is irrelevant to our ability to produce power from it. By inventing an engine that is twice as efficient, or a new means of producing plastics that requires half and many hydrocarbons, we have effectively doubled the amount of fuel available even if we have the same number of litres. If we invent alternative technologies, lakes of oil are made available for the remaining needs. In truth, we will never run out of oil, because before that ever happens human action and rising prices will have rendered oil surplus to requirements.

So the next time you see that fuel prices are rising and hear somebody mutter about peak oil, you can rest assured that new research is underway that will soon bring prices back down, and that there is plenty of oil left under the ground. More, in fact, than we will ever need.

14 comments:

Joe Otten said...

Hmm. So are you saying that oil production will never peak?

And yes, if an engine is, say, 30% efficient, it is theoretically possible to double that. But if it is 60% efficient then you are picking a fight with the laws of thermodynamics.

Tom Papworth said...

It won't peak in the sense that "peak oil" enthusiasts claim. It may very well peak in the same way that the production of steam engines peaked a long time ago, before they became obsolete.

As for efficiency, there is a theoretical limit but we are still far from it. And that assumes that we are not able to unlock energy in a more productive form than just burning it.

thedoomletter said...

I am sure you were hoping at least some peak oil nut posted a comment, and I would hate to let you down, so here goes.

Peak oil is not determined by price.

Peak oil is defined by oil production rates (barrels per day) reaching a high water mark. That is peak oil. You can talk about all of the billions and even trillions of barrels of oil equivalent in any number of deposits, but resources in the ground mean nothing.

The only thing that matters is production rates. And even though there are huge deposits of stuff that can be turned into oil with some determination, those deposits will never produce at the same rate that declining giant oil fields have in the past.

We will never run out of oil, not even close. It is too handy for a number of other reasons. If there are humans 5000 years from now on this planet, they will still be pumping it out of the ground.

As far as the price of oil goes, I think that there were a number of reasons the price skyrocketed then crashed. But I do not think a majority of oil traders believe in the peak oil theory, and it is therefore (obviously now) not included in price considerations.

Take a look at my site, http://www.thedoomletter.com if you want to read some more about it.

Thanks,
Mike

Anonymous said...

"We will never run out of oil, not even close. It is too handy for a number of other reasons. If there are humans 5000 years from now on this planet, they will still be pumping it out of the ground."

Just because it is 'handy' doesn't mean that we can't run out of it.

Given that it takes millions of years of the right conditions for oil to be formed in the first place and humans are using it up in hundreds of years, in theory there should come a time when we've used at least half of what is there in the ground to be used - at which point peak oil would have been reached.

The time when peak oil might be reached is difficult to determine since we don't know how much of the stuff there is in total - irrespective of whether or not it can be extracted economically and profitably at present.

We had a situation in which geologists had looked in most of the likely places where significant oil deposits might be found and were not making significant new finds - at which time the subject of peak oil came up.

Now we have a changing situation in that melting of ice in the Arctic region and imrovements in exploration technology are opening up the possibility of more places in which to look. But that doesn't change the fact that there is effectively a finite amount of the stuff in the ground.

Anonymous said...

...in theory there should come a time when we've used at least half of what is there in the ground to be used - at which point peak oil would have been reached.

Sorry, but isn't that misstating the definition of Peak Oil a bit? I thought rather than how much is left in the ground, it's about the rate at which oil can be extracted.

Here's how I've heard the situation presented:

Currently, July 2008 holds the production record for any month with 87.9 MBD, and that may turn out to have been the peak, as the combination of demand destruction due to the global recession and OPEC's announced plans to cut production due to low prices will reduce production in the short term. If OPEC countries do not pick up the production again fairly soon, the natural decline rate of the major oil fields will be very difficult to replace with new fields. The IEA recently announced likely decline rates for current fields to be 9.1%, which is much higher than previously expected, and the super giant fields that are currently providing the bulk of the production declined decades ago. Where is the new replacement production going to come from when they're shutting down exploration left right and centre since all the candidates seem to be in remote or hostile places or in really deep water (requiring special rigs that are in short supply and cost more than anyone's willing or able to fork out given the economic crisis, etc...).

From what I understand, it's all about the time delay. Oil's too cheap right now so they can't afford to go after the stuff that's hard to get. Meanwhile, the easily accessible stuff is in terminal decline and we're about to feel the pinch (especially when you consider that oil exporters are likely to keep enough for themselves first, so export rates will decline more steeply than actual production rates). Once supplies get so tight it becomes economical to drill again, there's a time lag of half a decade or more from when exploration leads to discovery to production and new supplies coming on board... Will the economy wait patiently for that long? Can it provide funding for all this activity if growth is pinched by limited oil supplies?

(I'm no expert on this personally - this is just the arguments as I understand them from following the writing of people smarter than myself).

Anonymous said...

Same anonymous as previous comment - sorry, I just noticed an unclear sentence in what I wrote:

IEA recently announced likely decline rates for current fields to be 9.1%, which is much higher than previously expected, and the super giant fields that are currently providing the bulk of the production declined decades ago.

I should have said that the few super giant fields that are currently providing the bulk of the global production when into decline decades ago.

In other words, while there are still many new discoveries, there is nothing to match these old giant fields, and nothing with equivalent low cost or EROEI (energy return on energy investment).

Anonymous said...

I think that this article is just about as optimistic / idealistic and the peak oil doomsayer's predictions are pesimistic. Don't fool yourselve's - Peak Oil is by no means mythical. It will eventually happen and it will have far reaching impact.

Will it be the immediate disintagration of society? No, I don't believe so. Will it mean crubing economic growth and restructuring much of our oil-depentant infrastructure? Most certianly.

Those who have said that we will be pumping oil forever - that it will not ever run out - are completely accurate. Please realize that Peak Oil is not oil running out. It is not based on speculation - that is merely a symptom. Peak Oil is when the global demand cannot be met by current production.

I'm not about to argure production numbers - anyone can research the rate of production vs the amount of new discovery and draw their own conclusions. I'm not arguing timelines. Things like advancements in technology and (gasp) recessions can greatly extend the time we have before peak. What cannot be denied (though some abiogenic idealists still will) is that oil is finite. Our ability to pump oil from the ground will eventually be out paced by demand. It's really very simple mathematics.

Dan Swanson said...

I hope that you are joking. Oil hit $142, crashed the economy and oil production is set to be much lower next year. Millions more people are poor and hungry than a year ago. What part don't you understand? I don't get it. Seriously if you are not joking you can't see the forest for the trees. Read my post about why oil is so cheap at http://energystrain.blogspot.com

Tim said...

Not all LibDems subscribe to peak oil: I went into print at the start of the year predicting that they would not be materially higher at the end of 2008 than at the beginning, and that they would be a third lower in 5 years time.

http://www.libdemvoice.org/what-will-happen-to-oil-prices-1923.html

I particularly like comment 12, but the discussion is quite sensible

Peter Jackson, Cambridge Energy Research said...

Them main flaw in 'peak oil' theory is that it fails to account for exploration, technology, rising estimates of the size of existing fields and geopolitical shifts.

The peak's been called on many occasions, and dates come and go without any scientific explanation.

Tom Papworth said...

Doomletter,

I would never call a reader a "nut"!

But peak oil is most definitely shaped by price. If the price is high enough, one can afford to invest in far more intensive and effective extraction and refinement methods.

Anonymous 13.40,

“Oil's too cheap right now so they can't afford to go after the stuff that's hard to get.”

Wow! It was $147/barrel earlier this year. How expensive does it have to get?

You make the point, however, that as oil becomes more expensive it becomes more worthwhile to utilise more marginal supply, so ameliorating the cliff-edge like decline in supply.

Anonymous 14.06 ,

I don't agree that shifting away from oil must "mean curbing economic growth..." Of course there will be transition costs, but – just as the shift from coal to oil was accompanied by new records in productivity – we may find the new discoveries spurred by the rising cost of oil unleash levels of clean energy previously unheard of.

As for “global demand cannot be met by current production", I’m afraid that shows a misunderstanding of economics. Demand and
supply are merely two sides of the same coin
; global demand will be tempered by rising prices resulting from supply constraints.

As I hope I made clear in my article, there is no doubt that oil would run out if we continued as we are, but because we will continue to innovate, we will never actually run out because long before then we will have moved beyond oil.

Dan,

No I’m not joking. I’m simply disagreeing with you (and, I guess, your single-issue blog).

“Oil hit $142, crashed the economy and oil production is set to be much lower next year.”

I’m afraid you are confusing cause with effect. “Oil hit $142” because of money-inflation that caused asset prices to rise, and persuaded entrepreneurs to invest in long-term projects that were not backed by demand. The subsequent recession – resulting from the inevitable deflationary counter-effect – has reduced demand and brought oil down to a more sustainable price of (as at time of writing) $43.

Here's another article on oil Prices and inflation.

“Millions more people are poor and hungry than a year ago. What part don't you understand?”

The resulting poverty is also a result of the recession. It is very easy to see two effects and assume one caused another, but it is a bit like thinking that thunder causes rain. A little more science is called for.

Tim,

Good article. I’m clearly way behind the curve on this one :o)

Charles Feathestone said...

The question is not "when will the crude oil run out?" but "how can we best use the petroleum we have until other economically viable alternatives present themselves?"

We cannot ignore the fact that this an industry interlaced with government from top to bottom, whether we are talking about the huge state-owned firms of the big producing nations or our own heavily regulated supermajors. That is the reality, lamentable and regrettable as it is, because that new fuel will probably not come as the result of government-sponsored research.

However, the fact that civilization as we know it will grind to a halt without the energy we derive today from crude oil is in and of itself is motivation enough to make sure that future energy is widely available at prices people can afford.

Dan Swanson said...
This comment has been removed by the author.
Dan Swanson said...

Tom,

The problem is that physics, as described by the 2nd law of thermodynamics is real and not an abstraction like human created economics, which is really nothing more than a method of trading, manipulating and fooling ourselves and each other. Money is a man made idea, it has nothing to do with physics and doesn't exist in the real world that physics and thermodynamics try to understand. It is nothing but a promise that some society of tomorrow will trade it for something. The study of energy physics and thermodynamics is more real and will be here and limiting the wealth of anything that is oxidizing carbohydrates or hydrocarbons long after all human money is worthless. (Close at hand for our US dollar)
The net energy extracted from the environment sets the wealth and therefore the value of the money. The reason that so many financial systems are collapsing is
that more money has been created out of thin air than can be backed with anything in the physical world.
I have been trying to teach this stuff to people with an economic education for years and have been a total failure at it. I really thought that once the collapse and starvation ensued that people would start to get it. Now I am afraid that even the history books with not "get it". I guess that I underestimated how fooled people could be by pieces of paper.
Actually, here in the US we don't even have to buy that expensive paper and print it, with our Central Bank, Federal Reserve and Congress, we can now "spend" $750 Billion with a few watt hours of energy. Too bad those same characters and computers can't "spend" a few Billion hamburgers into existence.

Dan