CFR Presents

Energy, Security, and Climate

CFR experts examine the science and foreign policy surrounding climate change, energy, and nuclear security.

Print Print Email Email Share Share Cite Cite
Style: MLA APA Chicago Close

loading...

Peak Oil and Faith Based Energy Debates

by Michael Levi
September 21, 2011

Dan Yergin’s weekend essay on peak oil in the Wall Street Journal (summary: don’t worry) has certainly stirred up passions in the blogosphere. Lynne Kiesling and Michael Giberson, both at Knowledge Problem, are big fans: economic forces and human ingenuity, they agree, will stave off the feared peak indefinitely. Christopher Mims, writing at Grist, seems to have completely flipped out upon reading the article, accusing Yergin of being a “peak oil denier” akin to the frauds who claim that climate change is a hoax. (Note to Chris: you’re insulting climate science if you think it’s no more settled than the debate over oil futures.) Jim Hamilton at UCSD has a more measured and substantive but still highly critical take (which The Economist’s Free Exchange blogger mostly endorses):

 

“I submit that meeting the growing global demand for crude oil over the last five years has posed significant challenges for the world economy. And those who worry that the next 5-10 years might be like the last should not be dismissed as crackpots.”

 

As for me, I find these sorts of muddled, often faith based dustups utterly exasperating. Peak oil types tend to assume that stagnant global production over the past half decade is, in itself, evidence that oil production is headed for decline, when in reality, it doesn’t predict anything by itself. (They also tend to throw in some Hubbert peak theory, but that doesn’t really work once you pay attention to economics.) They also tend to assume that any decline will be economically disastrous, when there’s actually very little analysis of what it would really imply. On the other side, those who are convinced that peak oil is nonsense tend too often to resort to a similar sort of slippery logic: people predicted peaks in the past, but they were wrong; ergo, they are wrong this time too. Peak oil proponents didn’t realize that innovation would deliver more oil in the past; therefore, it will also deliver more oil in the future. Peak oil opponents also seem to claim that since the peak oilers have mangled their economics, the opposite of whatever they predict is what will actually happen. Not exactly sound logic.

 

Is there a way out of this morass? Let me try. There are three different debates being conflated here. The first is over whether geological limits are bringing the world to a point where global production must soon start to steadily decline. The second is over whether political decisions will lead global production to soon start steadily declining. The third is over what the consequences will be if either of these things actually happen.

 

On debate #1, there is little evidence that the world is short of oil in the ground. Without far more extensive access to the Middle East, we can’t really know for sure how much oil is there. That said, we can be pretty confident that there’s a ton of unconventional oil around elsewhere. In any case, the fact that production has been stagnant in recent years doesn’t by itself tell you anything one way or another about what the geological endowment is. Perhaps oil is becoming more scarce; perhaps governments are restricting its production, whether explicitly (as in OPEC) or through taxes and regulation (as in many other places).

 

On debate #2, well, that’s much more difficult – something that Yergin himself flags as a huge issue. Middle Eastern producers are pumping out a lot less oil than they were projected to a decade ago – indeed that’s pretty central to understanding why prices are so high today. Other producers have responded less robustly to high prices than some might have anticipated, in part because high prices tend to invite high taxes that blunt the economic impulse to produce more. It’s worth observing that political and geological limits are pretty much impossible to distinguish by simply looking at overall historical production data. They’re of very difference consequence for the future and for policy thinking, though, since policy shifts can move political limits but can’t do anything about geological ones.

 

As for the consequences of any decline or stagnation, whether driven by geological or political boundaries, there’s actually a dearth of analysis available. The IMF modeled a case this spring in which oil production basically flattened out over the next couple decades; the result was only a 3.5% decline in U.S. GDP (and a 3% fall in global GDP) relative to business as usual, spread out over two decades. (To be precise, the IMF economists modeled a 20% shortfall from BAU production; that works out to roughly flat production when juxtaposed with typical supply projections.) They also looked at a truly terrifying scenario in which production fell by about 40% over the next couple decades, and found U.S. GDP reduced by 15% below trend, ugly but still well short of some kind of Mad Max world. To be clear, I have no idea whether these IMF numbers are right – they’re extrapolating pretty far beyond past experience – but there isn’t much competing analysis out there. I’d love to see some more people tackle these sorts of questions. In particular, the IMF models doesn’t explore the impact of periodic shocks against a lower supply (and hence higher price) background. Some back of the envelope estimates suggests that it’s the mix of high and volatile prices, rather than one or the other alone, that could be a real problem.

 

It’s also worth observing that while most people identify peak oil with problematically high prices and continually increasing supplies with a much more benign world, there’s nothing that says that things need to be that way. It’s possible to have a peak alongside pretty benign prices (assuming that alternatives are coming in), and it’s possible to have modest supply increases alongside high, volatile, and economically problematic prices.

 

So where does this leave us? With considerable uncertainty, no doubt. Rather than trying to fight holy wars over whose theology is right, we might do better to think about an energy policy that manages all the risks that are getting mixed up in this debate. Geological risks in places like the Middle East are basically impossible to deal with directly, so a policy that takes them seriously would maximize the odds that well known resources elsewhere are available to development if necessary. Political risks can be ameliorated in part through smart diplomacy, but also through efforts to ensure that oil supply bets are spread widely. The risk that supply constraints of any kind could have ugly economic consequences can be lessened by serious efforts to cut demand, increase the availability of alternatives (which is basically the same thing), and help society cope with shocks. The nice thing about this sort of strategy is that you don’t need to settle any peak oil debates to agree on it. I have an odd suspicion, though, that a lot of people would rather fight over the fundamentals than figure out a common way of dealing with the often irreducible uncertainty we face.

Post a Comment 13 Comments

  • Posted by Duncan Kinney

    Perhaps you should have just led with “cut demand, make society more resilient and forget the peak oil debate”. Since cutting demand will probably be the hardest thing the US has ever done why not pump out a couple think pieces on how something as monumental as that could be achieved.

  • Posted by Bjorn

    Thank you for another thoughtful treatment of a complex set of issues. Thanks also for staying above the fray on this one, not that I expected anything less! I have nothing substantive to add to today’s discussion, only to express my appreciation. Keep up the great work!

  • Posted by Tim Sakach

    The peak oil debate is centered around a shortage of investment needed to extract oil from tar sands, shale, deep water drilling platforms, engineers and refining capacity.

    There is no shortage of oil in the ground, but rather, a shortage of cheap oil.

  • Posted by Mason Inman

    There is undoubtedly a lot of uncertainty about oil, and will continue to be. But there are a lot of facts we can draw on, beyond the overall production numbers—such as the sizes of fields being discovered, the energy required to get the oil (or to turn things like tar sands into fuel we can use).

    Yergin seems to me to have profoundly misunderstood the peak oil arguments he is trying to shoot down. I have a post on Energy Bulletin about this, and have more to come about his book. Here are the first two parts:

    http://energybulletin.net/stories/2011-09-20/%E2%80%9C-quest%E2%80%9D-questioned-yergin-wrong-on-peak-oil

  • Posted by Phil

    Duncan Kinney’s hit the nail on the head.

    Instead of submissively rolling onto our backs, playing victim, and asking when peak oil will happen, we should be demanding that it happens now.

  • Posted by David B. Benson

    Maybe plateau oil for awhile. As it is a finite resource humans will have to stop using it in any case.

    Go the way of whale oil lamps.

  • Posted by BL

    Huge decline rates is the issue:

    “Oil output from fields in production declines by 5 per cent a year as reserves are depleted, so the world needed to add the equivalent of four Saudi Arabias or 10 North Seas over the next 10 years just to keep supply level, even before much of an increase in demand, Mr Voser said.” (in the FT today)

    “10 North Seas over the next 10 years just to keep supply level, even” Good luck with that…

  • Posted by Pops

    The mere fact Yergin finally admitted that oil is finite and will peak & decline in a foreseeable timeframe should be enough to scare anyone familiar with his arguments.

  • Posted by Harquebus

    Energy makes money, not the other way around. “pay attention to economics”. Yeah, right.
    “The thinking it took to get us into this mess is not the same thinking that is going to get us out of it.” – Albert Einstein

    The result of oil depletion will be mass starvation. It has already started. When it becomes serious, that is when something will be done but, it is already too late. The days of the thousand kilometer salad are over.

    Depopulate, consume less using quotas and plant lots and lots of trees. These are the only things we can and must do.

  • Posted by David Lewis

    How do you keep your supposed awareness of climate change so separated from your thoughts on peak oil?

    Eg, you write: “we might do better to think about an energy policy that manages all the risks that are getting mixed up in this debate”, but you leave out any awareness you might have that continuing to use oil and the other fossil fuels even at present rates might cost civilization far more than any possible benefit.

    The Stern Report, for instance, compared what a politically constrained fossil fuel supply, i.e. one affected by a price on carbon aimed at stabilizing the composition of the atmosphere at 550 CO2e, would do to GDP projections compared to a business as usual approach where as much oil and other fossil fuel was allowed to be used as geology, market, and more normal political forces permitted.

    Stern found a dramatic increased net cost to civilization if it did not voluntarily curtail its emissions of CO2 from the use of fossil fuels.

  • Posted by rosco

    A smart energy policy would recognize that the timing of peak oil is trivial. Renewable energy options are available now, are not subject to price-shocks (in fact RE is getting comparatively cheaper year-on-year)and obviously will not be exhausted as fossil fuels ultimately will.
    All of the economic advantages lie with those riding the crest of the wave.

  • Posted by Vangel

    Without far more extensive access to the Middle East, we can’t really know for sure how much oil is there.

    But let us look at what we do know. We know that the OPEC countries nearly doubled their reported reserves over a very short period of time. This was not done by the drill bit but by the pen. Iraq and Iran managed to claim that they ‘doubled’ their known reserves even though they were in a middle of a war. And what is even more miraculous is the claim that OPEC countries are so good that they can find just enough oil each year to offset their annual production.

    History of OPEC claimed proved reserves. Source: BP Statistical Review of World Energy, via Oil Drum.

    Now I do not know about others but I am willing to bet that if we lift the covers of secrecy and look at the actual in the field reality we are more likely to find significant production problems that imply a production decline in the near future than the promise of oil deposits that are not very difficult (or very expensive) to produce.

    It’s worth observing that political and geological limits are pretty much impossible to distinguish by simply looking at overall historical production data. They’re of very difference consequence for the future and for policy thinking, though, since policy shifts can move political limits but can’t do anything about geological ones.

    But what is not difficult to look at is the depletion rate. Yergin admits that we are looking at a depletion rate of more than 5%, which means that we have to replace 4 mbpd of lost production with new investment. That is a huge number that will take massive amounts of capital at a time when OPEC producers are running deficits and are trying to bribe their citizens with subsidies and credits.

    And let us not forget to fully account for the substitution effect. What matters are not the total barrels produced but the net distillates produced. In a world that demands more gasoline and kerosine you need to replace each barrel of lost light sweet production with more than a barrel of heavy crude that produces less of the high value products and more low value bunker oil and asphalt. And producing an extra barrel of bio-fuel is not all that helpful when you are not counting the barrel of oil it took to produce that bio-fuel.

    The fact that Yergin keeps ignoring these factors shows us just how weak his position really is.

    Rather than trying to fight holy wars over whose theology is right, we might do better to think about an energy policy that manages all the risks that are getting mixed up in this debate.

    But that is the point. It is not ‘theology’. The facts in the case are very clear. After years of denial the IEA, EIA, BP, and CERA finally admitted that the depletion rate was much higher than they had estimated. And after a 300% increase in price and hundreds of billions in new investment the production of light sweet crude is still lower than it was half a decade ago.

    With the widespread use of horizontal drilling and water drives we know that the decline rates will be much steeper in the future. And with the political stability issues acting as headwinds not only in the Middle East but in the US and elsewhere the energy sector cannot respond as rapidly. Calling the skeptic position ‘theology’ does not help any and signals that there is no urgency in looking at viable new supplies or substitutes.

    I am sorry but I cannot see how we can avoid price explosions in any way but a decline in economic activity that brings down demand to the falling production curve. But that way lies in political ruin because such a process is not very stable over the long term. Will we have to wait until production in Ghawar is down 25% from current production or for people to start rioting in the streets of Riyadh, Tehran, or Mexico City before we figure out the dangers? And how many 10-K reports and conference calls do we have to go through before we see that the shale scam will not help us bring much in the way of economic production to markets starved for cheap energy?

  • Posted by Dizzy Ringo

    And no-one has even mentioned abiotic formation of oil!

Post a Comment

CFR seeks to foster civil and informed discussion of foreign policy issues. Opinions expressed on CFR blogs are solely those of the author or commenter, not of CFR, which takes no institutional positions. All comments must abide by CFR's guidelines and will be moderated prior to posting.

* Required

Pingbacks