Saturday, September 17, 2011

What's Wrong with Peak Oil? It Ignores Economics

Daniel Yergin explains in today's WSJ why "peak oil" is "peak idiocy" (thank to Mike Munger for that one) - its originator completely ignored the important role economics, market forces, prices and technological change:

"The [peak oil] idea owes its inspiration, and indeed its articulation, to a geologist who, though long since passed from the scene, continues to shape the debate, M. King Hubbert. Indeed, his name is inextricably linked to that perspective—immortalized in "Hubbert's Peak."

Hubbert was imaginative and innovative," recalled Peter Rose, who was Hubbert's boss at the U.S. Geological Survey. But he had "no concept of technological change, economics or how new resource plays evolve. It was a very static view of the world." Hubbert also assumed that there could be an accurate estimate of ultimately recoverable resources, when in fact it is a constantly moving target.

Hubbert insisted that price didn't matter. Economics - the forces of supply and demand - were, he maintained, irrelevant to the finite physical cache of oil in the earth. But why would price—with all the messages that it sends to people about allocating resources and developing new technologies—apply in so many other realms but not in oil and gas production? Activity goes up when prices go up; activity goes down when prices go down. Higher prices stimulate innovation and encourage people to figure out ingenious new ways to increase supply.

The idea of "proved reserves" of oil isn't just a physical concept, accounting for a fixed amount in the "storehouse." It's also an economic concept: how much can be recovered at prevailing prices. And it's a technological concept, because advances in technology take resources that were not physically accessible and turn them into recoverable reserves.

In the oil and gas industry, technologies are constantly being developed to find new resources and to produce more—and more efficiently—from existing fields.  New technologies and approaches continue to unlock new resources. Ghana is on its way to significant oil production, and just a few days ago, a major new discovery was announced off the coast of French Guiana, north of Brazil. As proof for peak oil, its advocates argue that the discovery rate for new oil fields is declining. But this obscures a crucial point: Most of the world's supply is the result not of discoveries but of additions and extensions in existing fields.

Things don't stand still in the energy industry. With the passage of time, unconventional sources of oil, in all their variety, become a familiar part of the world's petroleum supply. They help to explain why the plateau continues to recede into the horizon—and why, on a global view, Hubbert's Peak is still not in sight."

41 Comments:

At 9/17/2011 10:14 PM, Blogger SMaley said...

Very true. Lots of the examples of peak oil are for states or countries whose supply was essentially exhausted in a constant-price environment.

We don't hear much about peak gas -- we've already produced more gas than the estimate of the ultimate resource back in the '70s.

One aspectmof oil and gas that makes the estimate of the resource base problematic is that unlike, say, gold or silver, they don't occupy anbox on the periodic table. Oil and gas don't have solid definitions; chemical engineering alchemy can near-oil into oil.

Economics has also driven the search for resources into Deepwater and the shale plays, which would have seemed absurd in Hubbert's day.

 
At 9/17/2011 11:12 PM, Blogger Benjamin said...

Excellent post.

Even more silly is the arbitrary nature of the lower 48---the geographic area that Hubbert's Peak is based upon. The lower 48 states of the USA.

Had the US also absorbed Canada and the United States, today it would be "Hubbert's Plateau."

Oddly enough, engineers often fail at basic economics, and supply and demand.

In that regard, global crude oil demand has been flatlining for years, and people forget it fell after the 1970 oil embargo, and did not recover for 10 years and then only when oil was very cheap.

We may hit Peak Demand well before Peak Oil, if oil stays in the $80 to $100 range.

 
At 9/18/2011 12:01 AM, OpenID American Delight said...

Yes, but good luck convincing the environmental Left. These are people who believe that paper has to be recycled because we're "running out of trees," disregarding the fact that trees grow back, and some trees were only grown to make paper in the first place.

 
At 9/18/2011 12:14 AM, Blogger Rufus II said...

The AAA average price of gasoline, today, was $3.59/gal. And, that's with Europe, and the U.S. sliding into recession. And, on the heels of the IEA releasing 60 Million Barrels of Light Sweet Crude, and products, out of our "Strategic" Reserves.

You don't want to call it "peak oil," don't call it peak oil. Call it whatever you will. But, Crude Production has been on a Plateau since 2005, and the All Important Exports are way down.

 
At 9/18/2011 12:22 AM, Blogger Rufus II said...

And, here's one you'd better think about: During the worst recession in 70 years, while the OECD Nations were cutting consumption by 4 Million Barrels/Day, China, and the other Emerging Economies were "Increasing" their Consumption 4 Million Barrels/Day.

The Bottom Line is, China is more Efficient in its use of oil than are we. As a result, they can pay more.

There is a price that will put the U.S., the U.K., and the Eurozone into Recession, and Allow China/India, et al to keep right on Growing.

And, that price Might be right about $112.00/bbl (today's global price of oil.)

 
At 9/18/2011 12:29 AM, Blogger Rufus II said...

Oh, and don't overlook one last thing: The Chinese Yuan is still greatly Undervalued.

As the price of oil rises they can let their currency appreciate - at their own will. Think about it.

We might be in a world of trouble, here.

 
At 9/18/2011 1:08 AM, Blogger PeakTrader said...

Production of depletable resources peak and decline.

Peak Gold: Yearly Gold Production Is Now On A Permanent Downwards Slope
November 14, 2009

The President of the largest gold mining and production company, Barrick Gold, noted that after ten years of declining production it is time to recognize that the world has seen the peak in gold production.

 
At 9/18/2011 1:41 AM, Blogger PeakTrader said...

Rufus says: "China is more efficient in its use of oil than are we. As a result, they can pay more."

China uses oil so inefficiently, it makes up for it through consumption. The U.S. uses oil, at least in production, more efficiently than any other country in the world.

"China’s consumption share of GDP has fallen fairly steadily since the era of economic reform in the late seventies...during the past decade, the decline has been precipitous — falling from 46.4% in 2000 to 35.1% in 2010."

 
At 9/18/2011 6:49 AM, Blogger tubaplayer said...

Not a mention of Energy Returned Over Energy Invested (EROEI)! Tut-tut.

The writer conveniently ignores the fact that the days of 100:1 EROEI are gone. Once EROEI reaches 1:1 at is game over - finished. There may well be trillions of barrels left in the earth. It will stay there. Economics can do nothing about this. It is a geological reality that is staring us in the face and getting closer every year. Check out the figures on EROEI for yourselves.

 
At 9/18/2011 7:19 AM, Blogger Rufus II said...

The point is, PT, that you get more of a "productivity increase" out of the First family car than you do the third.

A Chinese workman that buys a small truck to take himself, his tools, and a couple of helpers to the jobsite is getting much more productivity out of his small vehicle than your 16 yr old is getting by driving her Mustang to the Mall, or your wife is getting from driving the SUV to the nail salon.

If you were the "Median" Family that saw its income Decrease in the last 12 months you would be much more likely to cut back on your daughter's trip to the Mall than that workman is to not go to work.

 
At 9/18/2011 7:56 AM, Blogger sykes.1 said...

Of course, coal, natural gas, nuclear, hydro and solar are also "oil." All forms of energy can be converted into oil. SASOL is about to build a plant in the US to convert natural gas into oil.

Basically, Julian Simon was right, and his critics are wrong.

 
At 9/18/2011 8:37 AM, Blogger PeakTrader said...

Rufus, you're talking about diminishing marginal utility and diminishing marginal productivity.

Chinese consumers are willing to spend more for the first cup of tea than the 10th.

Chinese producers are willing or forced to spend or invest $10 for an additional unit of output worth less than $10.

 
At 9/18/2011 8:46 AM, Blogger Rufus II said...

10% of our Nat Gas is Imported from Canada, and was selling for $13.00/kcf just a couple of years ago.

Many (most?) of the Nat Gas wells being drilled, today, are not profitable at $4.00/kcf. I would be cautious betting on that finite fuel, also.

The "stock price driven model" of the large public oil and gas company is very complicated. "Reserves" drive Stock Prices, and leases must be drilled in order not to be "lost."

As a famous petroleum geologist puts it, "We ain't your Momma." Beware.

 
At 9/18/2011 8:50 AM, Blogger Rufus II said...

However you want to put it, PT. I'm just saying, "the fact is, the Chinese have proven an ability to pay more for oil than we can."

Ergo, at a certain oil price, they continue to prosper, and we go backward.

And, of course, I'm just using China as a metaphor for a whole group of emerging nations.

 
At 9/18/2011 8:59 AM, Blogger Rufus II said...

Now, the good news is, "Ricardo was right." This is causing them to let their currency appreciate at a faster rate than was true, before.

That is/and will continue to allow us to export more into their economy. This will take "some" of the sting, out; but, unfortunately, we'll still be on a negative track until we attack the basic problem - the inefficient use of a depleting resource.

BTW, of the $211 Billion the world spent on "green" energy in 2010, China was way, and above, the major investor.

 
At 9/18/2011 9:02 AM, Blogger Hydra said...

Economics changes when we run out, not if we run out.

 
At 9/18/2011 9:04 AM, Blogger PeakTrader said...

Rufus, the U.S. has a much greater capacity to overpay for oil than China.

Both the U.S. and China prosper.

Over the past decade, for every $10 of real value the U.S. gained, China may gained $2.

 
At 9/18/2011 9:10 AM, Blogger Rufus II said...

PT, we're running at sub 1% growth, and in the fourth qtr we'll "print negative." China is running at 8.5% Growth, and may drop to 7.5 to 8.0% Growth in the 4th qtr.

I consider that "quite worrisome."

 
At 9/18/2011 9:18 AM, Blogger PeakTrader said...

This comment has been removed by the author.

 
At 9/18/2011 9:19 AM, Blogger PeakTrader said...

This comment has been removed by the author.

 
At 9/18/2011 9:21 AM, Blogger PeakTrader said...

Rufus, the U.S. could spend or invest $10 for $1 worth of solar energy too.

Both U.S. producers and consumers can overpay for solar energy.

China's growth-at-any-cost policy is very inefficient. It's a waste.

However, it looks good on the production side and keeps people employed.

 
At 9/18/2011 9:34 AM, Blogger Rufus II said...

Maybe so, PT; but THEY have a couple of Trillion Dollars in OUR Debt sitting in Their vault.

All we have is one hellacious credit card bill (and, a very big house with a mortgage that's underwater, and a Declining Income Statement.

Money Talks, and Bullshit walks, PT. And, right now, they're talking pretty strong.

 
At 9/18/2011 9:39 AM, Blogger Rufus II said...

I would phrase it this way: The Trouble with "Economics," right now, is "It's Ignoring Peak Oil."

 
At 9/18/2011 9:44 AM, Blogger Rufus II said...

All Free Market Economic Theories are correct if given an infinite amount of time to "work out."

The problem is, human beings aren't interested in solutions that will come to pass in the year 2020, much less 2070, or 2120.

And, there lieth the rub.

 
At 9/18/2011 9:53 AM, Blogger PeakTrader said...

Rufus, overworked and underpaid people who save can have money too, while the government squanders money. What's your point?

 
At 9/18/2011 10:09 AM, Blogger Rufus II said...

My point is: Peak oil doesn't ignore economics; "economics" ignores peak oil.

The theory that demand will make supply appear (magically, it seems) Ignores Reality.

The simple reality that every 4 yr old may not like, but has learned to accept: to wit, "There Is No Bottomless Milkshake."

 
At 9/18/2011 12:48 PM, Blogger Che is dead said...

We've been here before:

That we have even got this far without exhausting the Earth's resources would have astonished the Victorians. In the mid-19th century, the outlook seemed bleak. Among the experts arguing that we were squandering our limited energy supply for short-term prosperity was William Stanley Jevons, Professor of Political Economy at University College London.

In his work of 1865, The Coal Question, the distinguished economist cautioned that we had become wholly dependent on the finite resource of coal. Indeed, some calculations - based on the increasing rate of extraction and the geological analysis of how much coal remained underground - suggested that Britain could run out by 1900.

At this point, Jevons maintained, the economy would literally run out of steam, reducing Britons to a medieval standard of living. The cost of shipping coal from elsewhere in the world would be prohibitive and, in any case, the leading geologists calculated that other countries would quickly exhaust their stocks as well.

Times of London

"Peak Oil" and "Global Warming" are just two parts of the same leftist con job designed to create a sense of urgency to adopt their policies which, of course, entail massive tax increases and wealth redistribution.

 
At 9/18/2011 1:06 PM, Blogger rjs said...

lets see what happened after oil hit $140/brl in 2008:

http://gregor.us/wp-content/uploads/2011/09/Global-Average-Annual-Crude-Oil-Production-2001-2011.png

 
At 9/18/2011 1:12 PM, Blogger Rufus II said...

Yep, Global Oil Exports keep falling, and gas prices keep rising as a result of a lefty plot.

The fact that our economy started sliding sideways toward the ditch at the exact time that gasoline prices blew through $3.25/gal is a lefty plot.

Them lefties - is there anything they can't do?

 
At 9/18/2011 1:22 PM, Blogger Che is dead said...

"Them lefties - is there anything they can't do?" -- Dufus

Yes, they seem absolutely incapable of making a rational argument.

 
At 9/18/2011 2:22 PM, Blogger rjs said...

speaking of being wrong again and again:

The Sad Record of Daniel Yergin and Cambridge Energy Research

http://home.entouch.net/dmd/cera.htm

 
At 9/18/2011 5:36 PM, Blogger PeakTrader said...

In 1956, American geophysicist M. King Hubbert correctly predicted that production of oil from conventional sources would peak in the continental United States around 1965-1970.

Hubbert further predicted a worldwide peak in "about half a century."...Hubbert added that the actions of OPEC might flatten the global production curve but this would only delay the peak for perhaps 10 years.

 
At 9/18/2011 5:44 PM, Blogger Craig said...

And, here's one you'd better think about: During the worst recession in 70 years, while the OECD Nations were cutting consumption by 4 Million Barrels/Day, China, and the other Emerging Economies were "Increasing" their Consumption 4 Million Barrels/Day.

The Bottom Line is, China is more Efficient in its use of oil than are we. As a result, they can pay more.


There is nothing in those two paragraphs which suggests that China is more efficient in its use of oil. Nothing.

And given China's lack of capital when compared to the West, how could it be?

China is in an inflation-induced bubble, nothing more. Think about it.

 
At 9/18/2011 8:15 PM, Blogger Innovation rules said...

The hubris and irrationality of the peak oil argument does not end there.

The irrationality also extends to the conclusion that since we will run out, we must pay double or quadruple now rather than deal with it later and allow adapation and innovation to find its own solutions.

This is the same silly argument of global warming. It is malthusian and stupid and ruinous. And yes, I understand the Internet rules for respectful discourse. But there are no other words to describe it.

 
At 9/18/2011 8:20 PM, Blogger Innovation rules said...

The basic assumption upon which all redistributive and malthusian arguments are made is that the pie can not get bigger.

And they are always wrong.

 
At 9/19/2011 12:04 AM, Blogger Gabe said...

Hmmm. Imagine if there had been a resource - say a rare mineral - that had been curing cancer for the last 100 years. And imagine that this resource was now running low and the price was spiraling.

According to most classic economic models, the market would kick into high gear, 'innovation' would result, and we would simply replace that cancer cure with something new.

The problem is, there is no cure for cancer. Markets and 'demand' can't conjure one up no matter how dire the need, because the basic science and technology isn't there yet, though most scientists believe that one day it will be.

So the idea that as cheap oil declines, the market and 'demand' and innovation will somehow take care of things is magical thinking.

Sure, there might be great advances that will mitigate the current decline in cheap oil and concurrent steep prices, replacing cheap oil with something equally cheap and effective.

But it certainly isn't happening at the moment. No one sees it on the horizon. And there's no law that says that it must happen - except in the ahistorial minds of economists who have honed their models in the past two centuries of abundance.

If there were such a law - if markets and demand always called suceeded at filling dire needs - where's the cure for cancer?

 
At 9/20/2011 3:53 AM, Blogger Ron H. said...

"The Bottom Line is, China is more Efficient in its use of oil than are we. As a result, they can pay more. "

Wait. Do you mean that the more efficient something is, the higher the price will be?

Is this anything like a rising minimum wage causing more employment?

How, pray tell, is China - and I assume you mean people in China - more efficient in it's use of oil?

 
At 9/20/2011 3:56 AM, Blogger Ron H. said...

"A Chinese workman that buys a small truck to take himself, his tools, and a couple of helpers to the jobsite is getting much more productivity out of his small vehicle than your 16 yr old is getting by driving her Mustang to the Mall, or your wife is getting from driving the SUV to the nail salon."

Why do you have such a low opinion of Peak's family?

 
At 9/20/2011 3:58 AM, Blogger Ron H. said...

"Rufus, the U.S. could spend or invest $10 for $1 worth of solar energy too.

Both U.S. producers and consumers can overpay for solar energy.
"

And, in fact, they do.

 
At 9/20/2011 4:03 AM, Blogger Ron H. said...

"PT, we're running at sub 1% growth, and in the fourth qtr we'll "print negative." China is running at 8.5% Growth, and may drop to 7.5 to 8.0% Growth in the 4th qtr.

I consider that "quite worrisome."
"

If you had a better grasp of basic economics, it wouldn't bother you.

 
At 9/20/2011 1:27 PM, Blogger rjs said...

here's economist jim hamilton on the yergin article:

http://www.econbrowser.com/archives/2011/09/more_thoughts_o_4.html

 

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