Does ‘Peak Oil’ Make Sense?

by Don Boudreaux on August 25, 2009

in Complexity & Emergence, Energy, Entertainment

Writing in today’s New York Times, energy consultant Michael Lynch debunks the piece of nonsense popularly known as “peak oil.”

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Steve C. August 25, 2009 at 1:21 pm

Alarmists who scream about peak anything always get on the front page.

They miss the fundamental point, humans can innovate, improve and adapt.

Prices give signals to those folks who can innovate, improve and adapt.

History has not been kind to alarmists.

Anonymous August 25, 2009 at 2:21 pm

Exactly.

Geologically speaking, of course there has to be a “peak” somwhere. That’s what gives creedance to this kind of thinking. Practically speaking, that doesn’t mean human energy consumption is going to “peak”. Who knows – maybe technological development won’t always exactly keep pace with our use of reachable resources. It’s quite possible we’ll have rough spots where prices will spike. But spiking prices is THE WHOLE point of innovating around the problem. Geologically speaking, peak oil may make a modicum of sense. Practically speaking it makes very little.

Vangel September 6, 2009 at 8:26 pm

“Practically speaking, that doesn’t mean human energy consumption is going to “peak”.”

The Peak Oil theory has nothing to do with peak energy consumption. It is about oil production and is based on the sound methodology that was used to predict the peak in American production that nobody saw coming.

“Geologically speaking, peak oil may make a modicum of sense. Practically speaking it makes very little.”

It makes a lot of sense. Oil production will peak and prices will explode to ration demand until a substitute is found. The practical implications of this are obvious. Why do you refuse to see them?

Anonymous September 6, 2009 at 9:14 pm

“It makes a lot of sense. Oil production will peak and prices will explode to ration demand until a substitute is found. The practical implications of this are obvious. Why do you refuse to see them?”

On what basis do you believe that oil production “will peak”? Oil production will keep increasing, it may keep getting more expensive (or, given some technological developments, it may get cheaper), but you have no proof that the peak of production driven by a limited supply is what will lead to rationing. You have no way of knowing whether a substitute will come around before or after the amount of oil we can efficiently extract peaks or not.

And besides – any actual geological peak in production will also make oil that much more lucrative, which will spur more investment. There is absolutely no justification for a “peak” we may have many local peaks as we adjust from one energy source to the next.

I’m not arguing the fact that at some point oil production will decline for good. What I’m arguing is that you have absolutely no way of knowing whether that decline will come about as a result of a supply constraint or a demand constraint, and that such a “peak” date is likely to shift outward over time as technology changes. Saying that peak oil doesn’t make sense isn’t ignorance of the fact that oil is non-renewable. It’s recognition of the dynamic interplay of demand, the development of alternatives, technological development, and increased energy efficiency that should lead to major doubts that there will be a massive peak followed by an expensive crash.

Vangel September 7, 2009 at 5:30 pm

“On what basis do you believe that oil production “will peak”? Oil production will keep increasing, it may keep getting more expensive (or, given some technological developments, it may get cheaper), but you have no proof that the peak of production driven by a limited supply is what will lead to rationing.”

First, the production of light sweet crude has already peaked. The reported gains come from NGLs, refinery gains, biodiesel, coal to oil, and some unconventional sources that added supply at the margins. None of these can offset supply reductions due to natural depletion.

Second, the world’s largest and most productive fields are in decline and there is nothing of substance to replace their lost production. Daqing, Cantarell, Burgan and Ghawar will never produce as much oil as they were able to in the past. Cantarell has a huge decline. Its production peaked around 2.2 million barrels per day in 2003 and stands around 750,000 barrels per day today. The great Kuwaiti field, Burgan peaked in 2005. Daqing peaked in 2004 and the Chinese government is planning a 7% per year production decline to extend the life of the overstressed field. Ghawar was producing 5.7 mbpd in 1981. It is not capable of sustaining that level of production today.

Third, a huge increase in prices failed to cause the supply to grow as it did in the past. The depletion rates are too high and the services supply chain is too constrained to permit production to grow much higher than the levels reached in 2005.

“You have no way of knowing whether a substitute will come around before or after the amount of oil we can efficiently extract peaks or not.”

I know that we will not be able to produce more oil in the future than we did at the peak reached in the 2005 to 2008 period. I know that there is no technology now that will provide a substitute for the cheap oil that we are used to.

“And besides – any actual geological peak in production will also make oil that much more lucrative, which will spur more investment. There is absolutely no justification for a “peak” we may have many local peaks as we adjust from one energy source to the next.”

You are wrong. After the peak becomes evident the incentive will be to do what the Chinese are doing with Daqing; reduce production from stressed fields to conserve their resources for as long as possible and to maximize total production. You also fail to do the math properly. When the wells in the grand old fields go into decline you need many wells in smaller fields to replace them. Sadly, the production from wells in smaller fields is not only lower but the depletion rate is higher. In addition, the service costs required to implement secondary or tertiary recovery methods are much more expensive because they are amortized over a lower reserve amount. And some of the promise of deep water is yet to be proven to be economic at the low prices that we have seen so far. It will take more than $150 per barrel to make lifting oil tens of thousands of feet from the sea floor economically viable. From what I can see Simmons’ crazy ammonia scheme seems to make much more sense than going after deep water oil. Sadly, such a scheme will take many years to meet our needs for liquid fuels.

“I’m not arguing the fact that at some point oil production will decline for good. What I’m arguing is that you have absolutely no way of knowing whether that decline will come about as a result of a supply constraint or a demand constraint, and that such a “peak” date is likely to shift outward over time as technology changes.”

I am saying that the data already shows that we have either reached that peak or are within a few years of it. Either way higher prices are a given unless you get some kind of massive collapse in global GDP that allows demand to fall much faster than the decline lowers supply.

You are also missing the obvious. The decline rates will be much steeper because technology permitted a greater extraction rate than we were able to achieve in the past. While horizontal wells and water drives allowed Ghawar to produce more than 4 mbpd even as it was ageing the use of that technology means that there is far less oil to extract now and in the future. If North Sea fields and Cantarell are declining at 20% per year and if the decline process post enhanced recovery is well established just where do you think you will get the production to replace those declines and add new barrels of product to the market?

“Saying that peak oil doesn’t make sense isn’t ignorance of the fact that oil is non-renewable. It’s recognition of the dynamic interplay of demand, the development of alternatives, technological development, and increased energy efficiency that should lead to major doubts that there will be a massive peak followed by an expensive crash.”

It isn’t renewable. That means that we will need a new supply once the data shows that we are near or past the peak. But the data is already showing that we are at that critical point of time but that we have no available substitutes to get us through the transition. A prudent individual would ensure that he had taken steps to survive and thrive through that transition, not deny it because he believes in economic theories that have not been properly applied to the situation because the ‘debunkers’ are ignorant of the facts.

Gil August 26, 2009 at 2:20 am

That bullcrap talk merely CONFIRMS Peak Oil. What so wrong about mentioning Peak Oil? Yes, there’s going to be a time in which oil is going to be too expensive to use the way we have been using it. So? That’s sound perfectly sensible to me. That’s not Peak Oil denial, this is:

http://www.amazon.com/Black-Gold-Stranglehold-Jerome-Corsi/dp/1581824890

Yes, Peak Whale came and gone so people HAD to change or else. Real Non-Peak Whale would have been to use whales in a sustainable manner such that whales were being born faster than they were being slaughtered. Instead people realised and accepted Peak Whale was occurring and moved past using whales for oil. Fortunately, laws against whaling have worked and whales are still with us. Unfortunately, Peak Passenger Pigeon led to the poor birds’ extinction.

Vangel September 6, 2009 at 8:28 pm

“That bullcrap talk merely CONFIRMS Peak Oil.”

I agree. The Op Ed piece was full of opinion and short of actual facts. It seems that Mr. Lynch is not even aware of Hubbert’s methodology or the implications of high water cuts in fields that use horizontal wells for most of their production. He is either not very bright or pushing an agenda of some kind.

Vangel September 6, 2009 at 8:20 pm

“They miss the fundamental point, humans can innovate, improve and adapt.”

Adaptation does not nullify the point made by the Peak Oil proponents. All they say is that the production of oil will peak (it already has) but that does not mean that other sources of energy can’t be found.

“Prices give signals to those folks who can innovate, improve and adapt.”

I agree. At $300 a barrel oil there will be a lot of incentive to look at investing energy sources that are not competitive at lower price levels. But even $300 oil will not get oil production to the previous levels because there aren’t enough new sources that can be brought on line quickly enough to offset depletion and the new oil that is required to raise production above the previous record level.

You are also missing the incentives. Once we are on the tail end of Hubbert’s Peak producers with reserves have every incentive to optimize their returns. That means that fields that are stressed by secondary and tertiary recovery techniques will need to see their production reduced so that less oil is trapped behind the various sweeps that are pushing oil towards the wells.

“History has not been kind to alarmists.”

It is also not kind to the naive.

roysmity August 25, 2009 at 1:42 pm

Not a bad debunking… but one big omission: when talking about oil price there’s two sides to the equation- oil demand/supply- but also money demand/supply.

obviously the second is rather more flexible and much faster-changing than car sales and deep sea exploration…

…in fact it is one of the big unsung factors in the ’70s oil shocks, even a larger factor than “evil sheiks” and OPEC.

Vangel September 6, 2009 at 8:29 pm

“Not a bad debunking…”

Really? What point did he make that ‘debunked’ the Peak Oil theory?

Anonymous August 25, 2009 at 2:20 pm

Of course peak oil exists, however we won’t know until 10-20 years after when it really happened. If oil stays above $60/bbl then massive oil sands in Alberta and South America become viable. If it stays under, then there’s obviously still plenty of traditional oil left.

By the time peak oil arrives, somebody will have figured something else out. Look on the streets of any decent sized city and see how many electric scooters zip around now. Those little things keep getting better and better. Their range goes up AND they get bigger. They also got no government subsidies to develop, though I suppose they may have been byproducts to subsidies on battery development.

Vangel September 6, 2009 at 8:33 pm

“If oil stays above $60/bbl then massive oil sands in Alberta and South America become viable.”

But that is not the problem. The problem is that the oil sands can only produce so much oil per day and that is not enough to offset the depletion of wells from conventional and off shore sources. While there is some promise in shale, the costs are high and the total production levels are limited even with the frac techniques that improve total flows.

“By the time peak oil arrives, somebody will have figured something else out.”

Light sweet production has already peaked and some of the most productive fields are depleting at very rapid rates but I do not see a suitable alternative at this point of time.

Anonymous August 25, 2009 at 3:29 pm

Julian Simon would be proud. Well done.

Pauld August 25, 2009 at 3:43 pm

For the past thirty years, I had heated debates with various people, all of whom claimed that we would be running out of oil sometime in the next ten to fifteen years. I expect to have similar debates for at least the next fifty years or until my life ends, whichever comes first.

sandre August 25, 2009 at 10:19 pm

running out of oil is not an argument of Peak Oil theory.

Vangel September 6, 2009 at 8:35 pm

The Peak Oil theory only claims that production will peak and decline, not that oil will run out. Sadly, few of the ‘debunkers’ seem to know much about the theory that they claim to have falsified. And for the record, production has already peaked and depletion is running north of 4% per year. Where will you find the new production to offset that 4%?

speedmaster August 25, 2009 at 4:10 pm

The peak oil nonsense is one of my pet-peeves.

sandre August 25, 2009 at 5:03 pm

“Peak oil” itself is not nonsense. It is the unnecessary extremism & alarmism surrounding that movement (die-off crowd ) is the nonsense. It is a fact that the peak in U.S oil production happened around 1970. Today, We produce about half as much oil as we did in 1970. It can happen globally at some point. But what these alarmists miss, is the fact that Earth is not a closed system. It receives several billion times the energy from the Sun on a daily basis that the human beings will ever use in the future. Even petroleum is nothing but stored solar energy.

Anonymous August 25, 2009 at 9:55 pm

Sandre,

I basically agree with your post, so I’m curious to read your response to this:

How much of the decline in US oil production is due to dwindling reserves within the US, and how much is due to government intervention prohibiting access to domestic oil?

sandre August 25, 2009 at 10:21 pm

I’m sure that played a role, but I don’t think it would have done much to reverse the trend in decline – it sure might have slowed it down. Because peak in the discovery of U.S oil happened in mid-1930s. Since then, new discovery has been declining.

Vangel September 6, 2009 at 8:41 pm

It is clear that the US government is hurting production efforts. But geology is the determining factor and that tells us that the 1970 peak cannot ever be surpassed by using economic production methods.

Vangel September 6, 2009 at 8:39 pm

“But what these alarmists miss, is the fact that Earth is not a closed system.”

You don’t know much about the people you claim are ‘alarmists.’ Many of them are using their own money to look at alternatives such as using off shore wind power to create ammonia that can be used as liquid fuel, using wave energy to generate power for niche applications in many coastal areas, methane hydrate research etc. They are not crying wolf and taking a Malthusian line but are pointing out the reality and trying to solve the problems that it will create in the future.

Steve August 25, 2009 at 5:43 pm

The die-hard “innovation” crowd always amuses me. These people have no appreciation for scale. It’s eerily reminiscent of the mortgage lending spree, which was entirely based on one premise: that home prices always rise. So if telling yourself “we always figure out a way…” lets you rest easy, be my guest.

Steve C. August 25, 2009 at 6:24 pm

Innovate, improve or adapt.

We’ve been running out of food since Malthus.

We were running out of coal in the midst of the coal powered industrial revolution.

We were running out of whale oil at the end of the 19th century.

The first concerns about running out of oil caused the USG to explore and impound places like Elk Hills aka Teapot Dome in the 1920s.

I don’t pretend to have a crystal ball, only experience and history. Mankind has been innovating, improving for adapting for 50,000 years. I like those odds.

And, having lived through several real estate crashes, I know for a fact that home prices can go in either direction. Anyone who bases their projections on perpetually rising prices is not looking at history.

The financial engineers forgot the first rule of Wall Street: No tree grows to the skies.

Steve August 25, 2009 at 6:52 pm

Again, I dont think you have any appreciation for scale. This is the most wide-scale disruptive event in modern history and it’s scary how many people just shrug and say “we’ll figure something out” like teenager procrastinating studying for a final exam.

And what if the innovation doesnt neatly overlap with the oil production peak, what then? What if we only “figure out” solar energy 30 years after global production begins to decline? I mean, technically we can use other resources to replace oil now, but we’d destroy our economies in the process.

I’m getting tired of the “just cuz” argument.

Steve C. August 25, 2009 at 7:28 pm

It’s hard to address your concern about scale since I don’t know precisely what you mean. Rather than guess, could you be more specific?

Fortunately for the other 5 billion people in the world, the solutions (emphasis on the plural) are not all up to me. People, through markets will have an incentive to create a variety of answers to what are a variety of challenges.

There are a multiplicity of solutions currently available. Technologies that work today. And in most cases technologies that have worked many years. The present challenges are: efficiency, distribution and/or popular will.

Vangel September 6, 2009 at 9:26 pm

“It’s hard to address your concern about scale since I don’t know precisely what you mean. Rather than guess, could you be more specific?”

He means that our entire economy is based on access to plentiful and cheap oil. Once the peak becomes evident there will be incentive to cut production by those that have ample supplies and to use price increases as a way to increase personal and national wealth in producer nations relative to others. Once great assets, think of those massive open pit mines as one example, will become uneconomic and worthless while the products that they produce explode in price once the supply/demand adjustments are made. Financial systems that depend on some degree of stability and the naive belief that fiat currencies are the same as commodity money will collapse and new systems will have to take their place.

Of course, over the long run we will adapt. But between peak production and ample substitutes we will have difficult times and major adjustments that will ruin many individuals and families.

Anonymous August 25, 2009 at 7:51 pm

Steve, it seems like you’re just being argumentative without arguing any particular thesis. What is it, exactly, that you are advocating? If we can’t find some energy source to replace oil, then we’re hosed no matter what we do. If we can, then as oil resources begin to run out, prices will rise, and that will make alternative energy sources look more attractive. I suppose that if we expected oil resources to run dry abruptly (i.e., without a long period of rising prices), then we should start some sort of preemptive alternative energy development, but considering tar sands, oil shale, and the like I don’t see that scenario as too likely.

You’ve made it pretty clear that you don’t believe these arguments, but I’m at a loss to discern what you do believe.

sandre August 25, 2009 at 7:57 pm

Good thing is, it is a peak and not a vertical cliff. There will be plenty of time for developing alternatives. Just rising prices itself will cause a long plateau/slowly rising produciton before any precipitous decline, as more money is poured into exploration and production of oil.

Vangel September 6, 2009 at 9:42 pm

The way I read it, he is advocating that people wake up. The fact that readers on this blog took a fact free piece by Michael Lynch seriously and were naive enough to believe that it was enough to debunk the Peak Oil argument that they clearly do not seem to understand shows that Steve is on to something.

Let me be clear. Man will adapt and will find alternatives. But that will take time and between now and then prices are destined to rise unless demand collapses. The bottom line is that there is no supply side response that will allow us to avoid such a peak and until there is a price signal there is little incentive to look for viable alternatives. This is not to suggest that there won’t be rent seekers looking to exploit government programs that divert tax receipts or borrowing into the hands of private companies claiming to work on substitutes because that is already happening. But such diversions into technologies that clearly are not sufficiently developed to come close to providing the cheap energy that oil does in quantities that will allow us to offset the effects of depletion. What we need is a new cheap source of energy and until we get it prices will have to rise by enough to ration global demand.

Vangel September 6, 2009 at 9:18 pm

“We’ve been running out of food since Malthus.”

No we haven’t. There was always enough land to grow crops for the existing population and there was never any real constraint on global food production.

The Peak Oil argument is that around half of all of the oil that has been discovered has already been used up. What is let is harder and more expensive to get out of the ground.

“We were running out of whale oil at the end of the 19th century.”

But whale oil production peaked in the 19th century. If it wasn’t for John Rockefeller, whales would probably become extinct. He came up with kerosene, which allowed people to light their homes cheaply.

“I don’t pretend to have a crystal ball, only experience and history. Mankind has been innovating, improving for adapting for 50,000 years. I like those odds.”

We will adapt but the sheer scale will make the process very painful for most individuals. Suburbs that have no sources of work near them will become obsolete because people can no longer afford to commute great distances. Massive homes with sitting rooms and formal dining rooms that are never used will become too expensive to heat and will fall in price (in real terms). Oil importing nations that are not productive enough to produce goods and services that can be exchanged for that oil will see their currencies and their standard of living collapse. Oil rich states like Texas and Alaska might consider leaving the Union because they would not wish to see their natural resource holdings plundered by a broke federal government that wants to use them to buy votes in states that see their economies collapse.

Of course, there will be huge winners as people who invest in suitable technologies that will produce substitutes over time. Human beings will adapt as they always have but only after they admit that geological reality has put the end of cheap petroleum behind us.

sandre August 25, 2009 at 5:56 pm

BTW, I had seen a video of Michael Lynch debating Matt Simmons and Ken Deffeyes somewhere. That was a few years ago – debate itself was from 2004 or something when the price of oil had hit the mid-40s. Michael Lynch predicted that the price would go under 30 or 25 or 20 very soon – I don’t remember the exact number but it was around the figures I’m quoting. Instead, price of oil tripled from there over the next 3 years. Goes to show you that you shouldn’t put too much faith in these lies, damn lies and statistics.

Similarly, Matt Simmons had a bet with someone that Price oil will hit $200 a barrel before the end of the decade. He was on track until last year. Then the whole thing fell apart.

Department of energy does another silly gimmick with their statistical models – they project oil prices 30 years into the future. LOL. I wonder if they ever have been right. So much for empiricism. I am sure both sides have their empirical data. ROTFL.

I_am_a_lead_pencil August 25, 2009 at 7:21 pm

Again, I dont think you have any appreciation for scale.

I’m not sure you have any appreciation for substitutes.

Vangel September 6, 2009 at 9:54 pm

“I’m not sure you have any appreciation for substitutes.”

Not much of an argument, is it? Our whole economy is based on the cheap energy that is provided by petroleum. The economy was never based on whale oil. To substitute for one minor use is no big trick when supplies fall short. But to substitute for something that is the foundation of our entire economy requires something revolutionary and scalable.

Dallas Weaver August 25, 2009 at 7:45 pm

The normal concepts of economics only apply if there is a competitive supply situation and a peak would create a price increase that would in tern induce innovation and alternatives. However, the oil market is politically dominated and with high variability in production costs ranging from a few $/bbl in Saudi Arabia to 60$/bbl in Alberta for alternatives.

Effectively Saudi Arabia is taxing the rest of the world and then using the money to fund radicals around the world, which is in tern using up more of our assets and requiring more oil to combat. If we put on a 100$/BBL tax and decreased payroll taxes an equal amount, our dependence and willingness to pay the OPEC oil taxes would decrease. We would also get the technological tools and scale necessary to handle any peak problems that may show up.

Vangel September 6, 2009 at 9:58 pm

“Effectively Saudi Arabia is taxing the rest of the world and then using the money to fund radicals around the world, which is in tern using up more of our assets and requiring more oil to combat.”

Saudi Arabia is doing nothing of the kind. It is exchanging a valuable and scarce resource for pieces of paper that can be printed at no cost by the Fed. And for the record, SA is not forcing anyone to buy its oil. If the US government wished to it could suspend imports and reduce its standard of living to match its domestic production. (It does not because those actions would be far more damaging economically than anything that terrorists have done so far.)

deweaver September 7, 2009 at 3:49 pm

My proposed tax shrift to a carbon added tax (CAT) of $100/bbl and elimination of payroll taxes would be trading the economic damage of the oil tax against the economic damage of payroll taxes. Payroll taxes decrease employment — pure supply/demand problem — and decreased employment reduces the overall economy. A tax shift to CAT would drive innovation and energy savings while decreasing CO2 and our dependence upon SA oil. For SA to compete, they would have less money to fund fundamentalist around the world who are the source of terrorism. The CO2 problem would also be reduced as a byproduct.

A tax shift would also get us on the track to bypass the oil problem before the peak problem really peaks the price. Considering the delay time in innovation around this problem, starting today would help. The present approach of having the government decide the R&D winners and losers is a very low efficiency approach relative to an oil tax and venture capital. (I am in the algae oil game and do know some of the idiot decisions that are being make — especially by the government).

Vangel September 7, 2009 at 5:40 pm

“My proposed tax shrift to a carbon added tax (CAT) of $100/bbl and elimination of payroll taxes would be trading the economic damage of the oil tax against the economic damage of payroll taxes. Payroll taxes decrease employment — pure supply/demand problem — and decreased employment reduces the overall economy. A tax shift to CAT would drive innovation and energy savings while decreasing CO2 and our dependence upon SA oil. For SA to compete, they would have less money to fund fundamentalist around the world who are the source of terrorism. The CO2 problem would also be reduced as a byproduct.”

I like it. Let Americans pay more for scarce oil so that others can have more of it. Why should the Chinese and Indians cut back due to the inevitable price increases when Americans, who use so much oil per capita, are more capable of paying the price? Such a move would also make those of us who invested in the scarce materials that are required for the new ‘green economy’ much richer so we would be rewarded for our foresight and prudence.

“A tax shift would also get us on the track to bypass the oil problem before the peak problem really peaks the price. Considering the delay time in innovation around this problem, starting today would help. The present approach of having the government decide the R&D winners and losers is a very low efficiency approach relative to an oil tax and venture capital. (I am in the algae oil game and do know some of the idiot decisions that are being make — especially by the government).”

The Seneca Oil Company did not drill its Titusville well because government taxes on whale oil pointed it in the right direction.
Rockefeller and the oil industry did not need taxes on whale oil or candles to help steer them into finding alternatives. Investments will tke place if they make sense and using government power to tax tends to be a distortion that does not help individuals solve problems.

Anonymous August 25, 2009 at 8:16 pm

Peak oil like global warming and the ozone hole simply can not be true because they are incompatible with free market capitalism. I mean how could there be a hole in the ozone, industialized anthropogenic warming or an actual possibility of a limitied supply of oil if free markets exist and work so well?

Anonymous August 25, 2009 at 10:04 pm

Since there’s only a limited number of brain cells you can put to work at any one time, and that number can be counted on the average human hand, I can see why you fall for every Leftist scheme that comes along which allows the State to usurp ever more liberty from the citizenry.

Only Government can know how much liberty a man needs in order to be free couldn’t have been said better by Mussolini himself.

sandre August 26, 2009 at 5:30 pm

Muirgeo is hilarious. Here he is speaking out about his belief in peak oil. A few months ago, he was accusing oil companies of colluding to drive up prices. Precious.

Anonymous August 25, 2009 at 8:45 pm

Peak Oil is a well established theory of the depletion of petroleum liquids (excluding more costly tar sands, oil shale and similar sources), well established in the continental U.S. decades ago. Sure, there are alarmists and catastrophists, but Hubbert’s peak theory only predicts a production peak from an earlier peak in the discovery of reserves. It doesn’t imply a peak in overall energy production or even a peak in fossil fuel production in the near future, but just read the linked article.

“… along comes Fatih Birol, the top economist at the International Energy Agency, to insist that we’ll reach the peak moment in 10 years, a decade sooner than most previous predictions …”

So Lynch himself lends credence to a peak within two decades. Two decades is a long time? I’m nearly five decades old myself. Even before this peak, in a scant two decades by Lynch’s own account, ever rising energy demand will drive a search for alternatives.

Sure, early reserve estimates are revised upwards, but that’s irrelevant. The same was true when Hubbert’s logistic curve predicted the peak in continental U.S. production in the sixties, before it happened.

If Lynch really expects the light, sweet crude price to fall back to $30/barrel any time soon, he must be very short. I’d like to see his portfolio.

sandre August 25, 2009 at 8:50 pm

well said.

Vangel September 6, 2009 at 10:09 pm

“Sure, early reserve estimates are revised upwards, but that’s irrelevant. The same was true when Hubbert’s logistic curve predicted the peak in continental U.S. production in the sixties, before it happened.”

There is a big problem with reserve revisions. Most OPEC nations revised their reserve estimates after production limits were tied to stated reserves and have been producing oil without writing down those reserves. The revisions came from the pen, not the drill bit so they are not real. Neither are the discoveries that somehow managed to replace the exact amount of oil that was produced each of the past twenty years.

“If Lynch really expects the light, sweet crude price to fall back to $30/barrel any time soon, he must be very short. I’d like to see his portfolio.”

That could be one motive. Another could be accumulation. While I argue against the Hubbert attackers I am quite happy to see price declines that allow me to pick up cheap shares being sold off by panicked investors. What I find ironic is the faith put on technologies that depend on a ready supply of REEs, which are tightly controlled by China, which has about 90% of the world’s production.

Anonymous August 25, 2009 at 9:03 pm

http://www.eia.doe.gov/aer/txt/ptb1105.html

Global oil production:

1990 60.49
1991 60.19
1992 60.12
1993 60.17
1994 61.10
1995 62.38
1996 63.75
1997 65.74
1998 66.97
1999 65.92
2000 68.49
2001 68.10
2002 67.16
2003 69.43
2004 72.49
2005 73.74
2006 73.46
2007 73.01
2008 73.78

Maybe it’s not peaking, but it’s definitely growing more slowly, despite rising demand from China and other rapidly developing economies. Only time will tell, and it’s not unprecedented, but four years of no growth starts to look like a peak. Where is Lynch getting his figures?

sandre August 25, 2009 at 9:36 pm

Four years of no growth by itself is not surprising. if you look at the data, during the early 1990s, there was a similar period of no growth – which coincided with the recession here and a recession in Japan – two major economies back then. But that is not the case with the recent four years – global economy has been expanding since 2004, at almost an unprecendented rate, and yet oil production stagnated. The recent collapse in oil prices is likely to aggravate this situation as many major projects were put on the backburner.

Anonymous August 25, 2009 at 9:58 pm

Right. The latest production plateau doesn’t look cyclical. The price of oil was falling in the early nineties. I’m a “show me” guy, not a prophet of doom, but oil was very dear by 2005. Why didn’t production rise to meet the rising demand?

Vangel September 6, 2009 at 10:12 pm

It didn’t rise because it couldn’t rise. When you are using water sweeps and nitrogen injections to get oil to the pipe and you are getting a 35% water cut it is hard to increase production without doing severe damage that will trap oil behind the sweeps.

Anonymous August 25, 2009 at 10:50 pm

I thought Julian Simon debunked this myth years ago.

Anonymous August 26, 2009 at 2:18 am

Julian Simon expected human ingenuity to find substitute forms of energy and thus to prevent the price of oil from rising very much over the long term, but this expectation doesn’t make light crude oil an inexhaustible resource. Simon and Hubbert can both be right at the same time. Expecting global oil production to peak is not equivalent to expecting the price to rise without limit.

Patricia August 26, 2009 at 9:50 pm

Well, just weeks after destroying T. Boone Pickens’ credibility, the good folks in the Man-Bunny Matrix have done a number on Michael Lynch.

http://manbunnymatrix.net/

These muck-raking rabbits always make me realize how little I actually know.

Anonymous August 26, 2009 at 10:21 pm

And, if they are even a teeeeeeny bit of your input of reality, then I’d agree with your summary.

Thank you very much.

Mark Michael Lewis September 6, 2009 at 12:05 am

Here is a longer piece on this. here is the question I asked. Am I missing something? What else would y’all add? Anyone wwant to join in that discussion? It has some momentum and some pretty smart people.
http://www.chrismartenson.com/comment/reply/26876

Vangel September 6, 2009 at 11:23 pm

I think that several issues are being missed.

First, as prices increase many of the older fields will not be able to come on in a reasonable period of time. To get older wells restarted requires quite a bit of work from specialized companies but those companies have a limited number of people and equipment on hand. To get the marginal fields on line will require that these companies grow their operations and that requires capital and specialized skills sets that are in short supply. That means that the input costs will be rising substantially and that prices will have to rise to a higher level than you expect and to stay there for a while before the risk can be justified.

Second, the production rates will be tiny. A decent well in an old field might be able to produce 100 barrels per day but that may be a fraction of the monthly decline rate suffered by a well in a productive field like Cantarell, Burgan, Daqing or Ghawar. This means that even as marginal wells come on stream the continual decline of existing wells will work against the new production.

Then we have the optimization issue. It may make far more sense to keep production flat or trending down with the natural decline curve than to spend capital on enhanced recovery techniques that get oil out faster but leave more behind. Some field owners will choose this route.

And we can’t forget the incentive to cut back on production even though the fields can handle higher rates. Once we are at the back end of the production curve many producers will choose to cut back on production and ration their supply because such moves will add to the price pressures and will lead to more earnings out of lower production levels even as what is left in reserves becomes even more valuable. Of course, given the decline curves it would not be long before the spare capacity would disappear but that would be a subject for another post.

Vangel September 6, 2009 at 9:47 pm

I agree with the first part but not the second. Yes, rising prices will limit demand but it will not change the back end of the production curve into a plateau. It is clear that we will see a decline. The hope is that other sources will allow us to offset that decline. But given the idiotic aversion to cheap coal power generation or to nuclear there isn’t much on the horizon that will allow substitution at a large scale.

And pouring more money into oil is not enough because the fields being found are tiny and cannot be brought to production rapidly enough to offset demand. Even if we could, there are shortages all the way up the production line that we cannot react quickly enough to do much about depletion.

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