The End of Peak Oil?

It would seem so if you believe the latest report by Leonado Maugeri, a prominent critic of the peakists, whose analysis claims that we could see a surge in liquid fuel production from its current level of 91 million barrels per day to an astonishing 110 mbd by 2020.

Maugeri sees new production coming mainly from the USA, Canada, Brazil and Iraq; while Mexico, Iran and the North Sea producers UK and Norway seeing net declines.

Maugeri’s analysis is hotly disputed on the Oil Drum here claiming “unsupportable assumptions”; and by Gail Tverberg, who aregues that a closer look at the realities of each region shows that oil production has not increased by much, and concludes that the more likely scenario is

at best oil production in the near future will be virtually flat, leading to more spiking of oil prices and greater world economic problems. Another possibility is that world production will begin to decline. The likelihood of decline would appear to be increased if more oil exporters encounter political disruptions, or if the world enters a major recession leading to an oil price decline.

It seems to me that Peak-oilers are somewhat playing down the fact that the world has indeed seen an increase in production last year, driven in part by new drilling technology in America, when peak-oilers have been claiming this is all but impossible. So the argument shifts- the “easy oil” has peaked; the era of cheap oil is gone; and, just in case this trend continues and Maugeri is shown to be even half-way correct, you can hedge your bets by saying, whatever about oil production rates, we just don’t want it- the real problem is climate change.

This is the tack taken by Heniberg in his response to Maugeri who carefully inserts into his piece the rhetorical question “What will be the climate impact as the world’s petroleum supply is increasingly derived from lower-grade resources?” But even Heinberg admits “some of the Peak Oil forecasts for world oil production declines starting in 2005 or 2008 have proven premature” – just as all of the last 100 years of predictions of doom have proved “premature”.

Monbiot on the other hand seems to fully accept Maugeri’s projections, but comes out even gloomier than before: energy abundance is not a blessing, allowing more human development and better lives for all, but a curse which will “fry us all”, concluding, bizarrely,

Humanity seems to be like the girl in Guillermo del Toro’s masterpiece Pan’s Labyrinth: she knows that if she eats the exquisite feast laid out in front of her, she too will be consumed, but she cannot help herself. I don’t like raising problems when I cannot see a solution. But right now I’m not sure how I can look my children in the eyes.

(“I find crouching down a bit usually does the job” quips one commentator.)

So what to think? Are we entering a new era of energy abundance, or is this just the start of a bumpy plateau which will see ever-increasing oil prices and marks the beginning of the end of industrial society?

One thing that seems for sure is that oil prices could go down as well as up: indeed,this is Maugeri’s conclusion, that we are seeing a surge in supply as a result of unparalleled investment and new technology since 2003, and that certain combinations of events- especially political events in Iraq and Iran- could result in a price collapse within the next few years. High prices have signaled investment, and more will flock to the table than the market can support, thus resulting in a glut a few years hence.

Increase efficiency, continuation of the Euro crisis and substitution with cheap gas could all play their role.
In addition, there have been a lot of new discoveries made in recent years around the world.

It is easy to point to rising prices and the “end of cheap oil” but the Peak Oil theory is not just about figures on a graph but the idea that this means the end of the modern world, the end of Progress even. But as one commentator on the Oil Drum points out,

If I told everyone here 3 years ago that North Dakota oil production would be pushing 600,000 bpd as soon as 2012, I would have been laughed at and my pronunciation would have been dismissed as a Cornucopian fantasy!

Even if Maugeri is only half right, this hypothesis is falsified; why then does it still persist? Why are predictions of doom always premature?

Julian Simon explains it best in his 1998 book “The Ultimate Resource II”.

According to Simon, Malthussians, Peak-oilers and doomsters of all kinds use simplistic engineering methods to predict the future: take the known reserves, divide by the annual rate of per-capita use, and bingo, you have the number of years the resource will last. This provides a very static view of the world in which it is assumed things will stay pretty much the same, and moreover, assumes that we can actually predict the future.

Instead, Simon advocates an economists’ approach: look at past data: predictions of the oil (and any other mineral resource) running out have been around for more than 100 years and, using an engineering approach, they were in their time accurate enough. But they were all wrong, and even as we have used more and more resources, the “known reserves” have continued to grow.

This completely counter-intuitive fact is what the data tells us. In the long run, things are getting better, and the doomsters have been proved wrong repeatedly, as market forces combine to create new technology that overcomes the short-term shortages. This is what the data tells us: relative to the average wage, the price of commodities has been falling through most of history.

But oil is finite! There is only so much of it and so it has always been running out, and will surely get harder to extract and more expensive.

Simon (and no doubt Maugeri) dispute this, though it may be true in an absolute sense: no-one really knows how much resources there are in the earth, because generally we don’t look for resources until we need to. It is impossible to obtain an accurate picture of what the ultimate recoverable resource in any given commodity will be.

This is why it is misleading to talk in terms of “the easy oil”- sure, if there is such a category, it will be gone sooner, and be of relatively smaller supplies; but in fact in the case of hydrocarbons there are many many different grades; $20/barrel oil may only have lasted 100 years, but the supply of lower-grade $70-80 oil could last thousands of years, and each year we learn to use it more effectively and more efficiently.

Simon then explains how we should indeed extrapolate from this past experience, and assume innovation will save the day again… and again, even if from the engineers’ accounting viewpoint it seems crazy to think so. Unless there is hugely compelling reasons to think otherwise, the fossil-fuel party will continue for a very long time, and we will only give up on oil and gas when eventually a cheaper alternative is developed- this is the meaning of the saying “the stone age didn’t end because we ran out of stones, and the oil age won’t end because we run out of oil.”

So this is how the “cornucopians” support the apparently absurd and counter-intuitive belief that “the more we find, the more there is to find” and that we will never run out (or “peak”) in resources, including energy.

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