Is peak oil a myth? Part 2. (No but it may be delayed).

Background

Our very first post on this blog was aptly (in a way) a response to George Monbiot having decided on the basis of one report there was plenty of oil. (This can be seen here ). I was intending to follow this up with any new information at some point. However, over the summer and Autumn there have been a plethora of articles in the mainstream press and blogs suggesting there is no such thing as peak oil. This has turned into a torrent in November after the release of the latest International Energy Agency “World Energy Outlook” report, forcing a more detailed response. Before we get to that though there have been two reports published by the IMF on the future oil supply (which in itself is interesting) and a brand new one by Chatham house on general resource depletion and we need to consider the historical oil production data.

The IMF papers

Both the IMF papers are primarily economic rather than geological. However, the first paper “The Future of Oil: Geology versus Technology” by Benes et al., has an interesting premise, why not combine economic and geological views of the future oil supply. In the introduction they site a number of economists and what is astonishing is their view of the oil supply is merely governed by economics not geology. If the price is high enough then new sources of oil will be found with no apparent limits on production. The clear impression given in this paper is that the idea of looking at future oil supplies from both points of view is something new, which is very surprising. The paper then combines Hubbert linearisation and economics equations to make some forecasts but not before having a look at historical geological predications of the oil supply and how these have turned out. These historical inputs come from two extremes Colin Campbell (too pessimistic) and the US Energy agency (way too optimistic). The equations used in the forecasts are way too complicated for non-economists (including this blogger) to understand, but the implications are relatively straightforward. Historically oil supplies have risen at rate of 1.5-2% per annum. The authors predict a maximum growth rate of 0.9% in oil supplies up until 2021, well below the long term historical average. The lower limit they come up with is no growth on oil supply with a variety of predictions in between. The authors conclude by stating the future could be difficult because GDP growth appears to correlate linearly with oil supply and a doubling of the oil price in the next 10 years (which is what they predict) will have serious effects on economic growth. They do not regard much oil use to be easily substitutable. These are both something many of us with an interest in this field could have told them.

In the second paper “Oil and the World Economy: Some Possible Futures” Kumhof and Muir look at four possible oil supply scenarios and their effects on economics. In the first oil supply declines by 1% a year. This leads to a 200% price rise in the oil price over 20 years with much lower economic growth rates in oil importing countries. In the second scenario the world adapts better to a life without oil. Economic growth is better under this scenario in all countries. The authors decline to predict an oil price. In the third scenario a declining oil supply is not substitutable and the oil price rises 300% over 20 years. The last scenario is basically the first but with oil being much more necessary to our lifestyle. This is described by the marvellous economic jargon “elasticity of substitution” (see our book for a brief explanation). If this is the case the authors reckon the price increase could be 400% over 20 years with significant economic effects. The IMF are going to revisit this issue.

Chatham house

This report “Resources Futures” published in December 2012 considers a wide variety of resources (metal, oil, gas, water and food commodities). In this blog I’m going to concentrate on oil, although the whole report is worth a future blog entry. Chatham house* predict a supply crunch between 2025-2030 unless widespread carbon pricing and energy efficiency measures are put in place. In other words a peak in global oil production. After 2030 they predict a fall in oil price since demand drops (this seems naïve unless we really have kicked the oil habit).

Current situation

The recent situation is shown in the graph, despite the recent increase in prices from about 2002, production is generally accepted to have stagnated, this is particularly the case since 2005. This has led many to postulate we are at the top of the oil peak, especially as in the 1970’s, post the first oil crisis, Dr Hubbert predicted this was the approximate date of global oil production.

oil price and output since 2000

IEA view

I have to confess I have not read the entire IEA report. I cannot afford to. However, they do publish a short summary of its main conclusions. This is far more nuanced than the headlines have suggested. One finding the press picked up on was that the US would become the worlds largest oil producer. However, even if this is true, this is forecast as being for an extraordinarily short period of time, only for 5 years from 2020-2025. A related finding is that of the US becoming a net oil exporter in 2030. This is predicated on “new fuel-efficiency measures in transport”. As we mentioned in our book this takes no account of the the “Jevon’s paradox” or the “Khazzoom-Brookes postulate”. These economic theories of behaviour named after the economists who postulated them suggest that a bounce-back can occur from energy efficiency. The paradox is that people who buy a more fuel-efficient car, thus saving money, then use it more, thereby wiping out any efficiency gains made. If oil prices do fall due to US oil production then there is a chance that demand will bounce back (at least without peoples patterns of car use permanently changing). Despite any changes that occur in the US as the IEA summary says the oil price is global and US prices are going to reflect this. As the IEA predict

“Oil demand reaches 99.7 mb/d in 2035, up from 87.4 mb/d in 2011, and the average IEA crude oil import price rises to $125/barrel (in year-2011 dollars) in 2035 (over $215/barrel in nominal terms). The transport sector already accounts for over half of global oil consumption, and this share increases as the number of passenger cars doubles to 1.7 billion and demand for road freight rises quickly.”

Interestingly this year on year % increase is roughly that Benes et al., suggest and is below the long term trend. Non-OPEC unconventional oil is seen as a temporary phenomenon and OPEC production is seen as vital. Therefore according to IEA a lot hinges on what happens on what happens in Iraq as “Iraq makes the largest contribution by far to global oil supply growth”.  There is little doubt that there is lot of oil in the ground in Iraq. There is also no doubt that like the rest of the middle east OPEC producers Iraq overstated its reserves. Since the 2003 Western invasion Iraq has not been a model of stability although its production has increased in recent years. The IEA predict production over doubling by 2020 and nearly tripling by 2035. If it doesn’t then as the IEA states

“Without this supply growth from Iraq, oil markets would be set for difficult times, characterised by prices that are almost $15/barrel higher than the level in the New Policies Scenario by 2035″.

The IEA are surprisingly (but rightly) cautious about unconventional gas

“… the unconventional gas business is still in its formative years, with uncertainty in many countries about the extent and quality of the resource base.”

The IEA see a huge increase in renewables (especially electricity production), with renewables as the second largest generator behind coal by 2015 and ahead of coal by 2035. Most of this growth comes from solar. The report also takes in a big push on energy efficiency which as it says

“These gains are not based on achieving any major or unexpected technological breakthroughs, but just on taking actions to remove the barriers obstructing the implementation of energy efficiency measures that are economically viable. Successful action to this effect would have a major impact on global energy and climate trends, compared with the New Policies Scenario. The growth in global primary energy demand to 2035 would be halved. Oil demand would peak just before 2020 and would be almost 13 mb/d lower by 2035, a reduction equal to the current production of Russia and combined, easing the pressure for new discoveries and development.”

The last very surprising factor the IEA raise is water. Its obvious though when you think about it. Water is vital for production of biofuels, which as covered on this blog are now unfortunately a “necessary” part of the transport fuel mix. But water is also required for unconventional oil and gas extraction and Iraqi oil production. Could it be that water shortages limit fossil fuel production? How ironic.

Conclusion

All the reports agree on one thing, the days of cheap energy are behind us. Even the IEA sees a doubling of the oil price over the next 20 years or so. Peak oil is not just about the end of oil, but the end of cheap oil. This rising oil price will obviously have severe knock on effects on the world economy through the costs of oil dependent goods and services, such as food and transport etc. Its surprising that with rising oil price since the year 2002 the level of production (especially since 2005) has been minimal. This does suggest we are at the top of the oil peak. How wide the top of the peak will be depends on how much unconventional oil and gas can be extracted. The IMF reports do take into account unconventional oil and gas and indeed all the reports cited here are cautious on this point. One factor no one seems to take into account is the energy return on energy invested. For all the unconventional energy sources its very low indeed. You are therefore using more and more conventional fossil fuel sources to extract unconventional sources hence speeding up depletion. Which brings us to the final point. How secure are these conventional resources? We know OPEC has overstated their reserves. If the Saudi fields go into decline by 2015 as has been suggested by amount others Wikileaks then no amount of unconventional oil is going to make up the shortfall.

I don’t see anything to alter my view we are at the top of the peak. Oil production may rise a bit buts its hard to see it increasing like the IEA suggest, there are too many imponderables. It just that the top of the peak maybe wider and longer than we had thought. There is a clear danger here that hype sets policy making. This has just happened in the UK over energy policy regarding natural gas. Fracking is unbanned and a new dash for gas will take place locking us into a declining and expensive resource. The same could happen with oil and airport expansion. It makes those who set policy make the wrong decisions. It is vital that proponents of peak oil and climate change combine arguments to combat the hype, as encouragingly is happening over fracking in the UK.

* its a think tank in London.

Neil

This entry was posted in Peak oil. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>