Saturday, September 17, the WSJ ran an essay by Daniel Yergin called, “There Will Be Oil.” In the essay, Yergin argues that the advocates of “peak oil” theory are wrong. He says, “Meeting future demand will require innovation, investment and the development of more challenging resources,” but he doesn’t make this sound like a huge problem. Most of the big challenges would be above ground issues, like politics, mismanagement of resources, and wars.
Should we believe this story? It sounds strangely dissonant, compared to what we have been hearing from other sources. In 2007, the National Petroleum Council (NPC) issued a report called, “Facing Hard Truths about Energy.” In fact, Daniel Yergin was one of the authors of the report. The cover letter to this report said,
“To meet the accumulating risks, all recommendations of the 2007 report require implementation with increased urgency and commitment. As stated in the 2007 report, there is no single, easy solution to the global challenges ahead. Given the massive scale of the global energy system and the long lead-times necessary to make material changes, all actions must be initiated now and sustained over the long term. We need all economic, environmentally-responsible energy sources to assure adequate, reliable supply.”
Daniel Yergin has recently been an author of another, recently released NPC report called, “Prudent Development—Realizing the Potential of North America’s Abundant Natural Gas and Oil Reserves.” As the title implies, this study relates only to North America. It in no way indicates a fix to world energy problems. In fact, even the North America part of the analysis is disputed, as indicated by articles such as “Behind Veneer, Doubt on Future of Natural Gas,” from the New York Times suggest.
Yergin points out that the world has produced about one trillion barrels of oil to date, and that there are at least five trillion barrels in the ground, of which 1.4 trillion are deemed technically and economically accessible enough to count as reserves. Of the 1.4 trillion counted as reserves, less than 0.1 trillion are from OECD countries. (The 1.4 trillion excludes Canada’s oil sands, which are very slow to extract.)
Nearly 1.1 trillion of the 1.4 trillion in reserves are from OPEC countries. These reserves have not been audited, and there is little reason to believe that they are set in the way OECD countries would set their reserves. Saudi Arabia reports the largest reserves, amounting to 265 billion barrels. Saudi Arabia also claims to have huge spare capacity. Yet, when Libya lost 1.4 million barrels a day of crude oil supply in February, Saudi Arabia and the other OPEC countries were not able to make up this relatively small shortfall. The International Energy Agency was forced to ask for a release of oil from OECD strategic petroleum reserves to meet the world’s oil needs.
The Wall Street Journal published an article on May 24, 2011, titled, “Facing Up to End of ‘Easy Oil’“. The article talks about the Saudis turning to tougher sources of oil, such as billions of barrels of heavy oil trapped beneath the desert that need to be steamed out. A current project is described as costing billions of dollars and taking decades to complete. If Saudi Arabia really has 265 billion barrels of reserves comparable to those of OECD countries, why would they feel a need to pay Chevron to help them with this project, which is described by the Journal as a “gamble”?
The big issues with world oil supply now are (1) it is not clear that it can rise fast enough to meet the world’s needs and (2) the price is already so high that it is causing economic distress to oil importers. With the ‘easy oil’ already being exploited and oil exporting nations needing high revenues fund government programs, the cost of oil can only rise higher.
What happens if oil is in such short supply that it needs to be rationed by high price? We know in agriculture what happens when a crop is short of a vital nutrient. Liebig’s Law of the Minimum says that crop output will be reduced, and in fact, will be proportional to the limiting nutrient. We know that a similar relationship holds with chemistry experiments. If a laboratory can afford only a small amount of a high-priced reagent, then the size of the “batch” that can be created will need to be scaled back by the limiting reagent.
Economists tell us that substitution can be expected if oil is in short supply. In the short term, though, how likely is this to actually happen? We have millions of cars and trucks in operation that use oil products and thousands of factories using oil products as inputs to manufacturing processes. Many years of research and huge investment will be required to create substitutes in adequate quantities. In the meantime, the expected reaction to limited oil supply (expressed as high-priced oil supply) would seem to be economic contraction. If the economy is thought of a system which depends on inputs of various types, this outcome would be analogous to what happens when crops have an inadequate amount of a particular type of nutrient.
Yergin tells us, “. . . the world has decades of further growth in production before flattening out into a plateau—perhaps sometime around midcentury—at which time a more gradual decline will begin. And that decline may well come not from a scarcity of resources but from greater efficiency, which will slacken global demand.”
Greater efficiency in the use of a resource has historically resulted in a lower price per unit (1,000 miles of auto travel, for example) for the purchaser. If the cost is lower, the product becomes more affordable to more purchasers, and use tends to increase, not decrease. This is why low-priced (and high gas mileage) automobiles by companies such as Tata motors of India and by various Chinese companies are so important in world oil demand.
An alternative view, held by an increasing number of “peak oilers” and economists, is that high price is what is likely to lead to reduced oil consumption. High oil prices ration demand, and in fact, is what is rationing it right now. These high oil prices can lead to economic contraction, and this economic contraction is what brings about lower demand and lower prices. Eventually, because of increasingly recessionary responses, an equilibrium price point will be reached which is too low to keep production at its current level, and oil supply will fall.
Yergin characterizes the nature of peak oil discussion today by a rather inadequate reading of the earliest writings for M. King Hubbert on the subject. For example, if Yergin had read Hubbert’s 1956 paper more closely, he would have discovered that Hubbert talked about the likelihood of reduced decline rates in later years because of improved recovery methods. Furthermore, Hubbert gave his forecast for world oil supply in the context of some other resource—nuclear energy in his 1956 paper—rising to fill with shortfall in energy production. The shape of the world oil extraction curve is likely to be quite different (much steeper after peak), in the absence of this assumption, as I have explained in a post on The Oil Drum.
Today’s peak oilers have a range of beliefs. This is to be expected, in any new field. Not all of them can be correct. But it seems to me that the field has a great deal to offer to expand the thinking of economists, whose models to date have assumed that economic growth can continue indefinitely and that technological advances and substitution can fix world oil supply problems. Perhaps the situation is more complex than current models assume. A more refined view of the world situation is possible if the understandings that come from geological knowledge can also be brought to bear on the subject.
By. Gail Tverberg
Gail Tverberg is a writer and speaker about energy issues. She is especially known for her work with financial issues associated with peak oil. Prior to getting involved with energy issues, Ms. Tverberg worked as an actuarial consultant. This work involved performing insurance-related analyses and forecasts. Her personal blog is ourfiniteworld.com. She is also an editor of The Oil Drum.