Peak Fear?

A weekend WSJ excerpt from Daniel Yergin’s highly anticipated new book (published later this week) takes direct aim at the peak oil argument.

The Quest: Energy, Security, and the Remaking of the Modern World

We’ve heard this song before, Yergin says:

This is actually the fifth time in modern history that we’ve seen widespread fear that the world was running out of oil. The first was in the 1880s, when production was concentrated in Pennsylvania and it was said that no oil would be found west of the Mississippi. Then oil was found in Texas and Oklahoma. Similar fears emerged after the two world wars. And in the 1970s, it was said that the world was going to fall off the “oil mountain.” But since 1978, world oil output has increased by 30%.

Yergin asserts that rising world demand will continue to spur technological advances:

One example is the “digital oil field,” which uses sensors throughout the field to improve the data and communication between the field and a company’s technology centers. If widely adopted, it could help to recover an enormous amount of additional oil worldwide””by one estimate, an extra 125 billion barrels, almost equivalent to the current estimate reserves of Iraq.

This is the sort of thing peak oilers conveniently ignore, Yergin contends:

As proof for peak oil, its advocates argue that the discovery rate for new oil fields is declining. But this obscures a crucial point: Most of the world’s supply is the result not of discoveries but of additions and extensions in existing fields.

When a field is first discovered, little is known about it, and initial estimates are conservative. As the field is developed, more wells are drilled, and with better knowledge, proven reserves very often increase substantially. A study by the U.S. Geological Survey found that 86 percent of oil reserves in the U.S. were the result not of what was estimated at the time of discovery but of revisions and additions from further development.

If I understand this debate correctly, peak oilers will retort that these “additions” and “extensions” merely delay the hard reckoning.

Yergin’s book (and the massive coverage it is sure to receive) will be lighting up the peak oil boards these next few days and weeks. Let the fireworks begin!

 

21 Responses to “Peak Fear?”

  1. Jarmo says:

    The interest in the unconventional oil sources will also add to the potential reserves.

    Yesterday I met a Russian guy who is involved in the shale oil business. He talked about new technologies and claimed that US shale oil reserves, if exploited, will yield twice the oil of Saudi Arabia.

    Seems more likely to happen than many renewable projects:

    http://www.guardian.co.uk/business/2011/sep/16/green-groups-biomass-plant-approved

  2. kdk33 says:

    Peak oil seems to be a fundamental un-understanding of hydrocarbon recovery economics.  I know some peakers; they have this notion that one day the oil will suddenly run out – like suddenly the spigot will close.  Of course, it won’t happen like that at all.

    Yergins WSJ article rightly discusses technologies role and how technology affects ‘known reserves’ (recoverable at todays prices).  (I wonder if I can download his book to Kindle?)

    BTW, Keith, the peakers are some of those bandwagoners that support decarbonization, but not ’cause of CAGW.

  3. harrywr2 says:

    @Kdk33,
    I will list myself as a ‘peak oiler’.
    I will also categorically state that the oil will never run out.
    Production won’t peak because of lack of extractable supply, production will peak because a substitute good will become economically attractive.
    On a BTU basis oil prices are currently running around 4x natural gas prices.
    If I lived in India I could buy a dual fuel Chevy Aveo today –
    http://gmauthority.com/blog/2010/05/chevrolet-aveo-cng-india/

  4. kdk33 says:

    I don’t think you are a ‘peaker’ in the sense I know others, but I will take your word for it.

    BTW, I agree, as prices rise proven reserves will also rise because technology becomes affordble; substitution will also occur.

    Funnily, I was reading an Indian newspaper this morning… India has about the highest petrol prices in the world.

  5. JN2 says:

    India has about the highest petrol prices in the world.
    No way. $5 something per US gallon in India. Over $8 per gallon here in the UK (US gallons).
     

  6. Ron Broberg says:

    In 2005 Yergin wrote …

    <blockquote>Yet this fear is not borne out by the fundamentals of supply. Our new, field-by-field analysis of production capacity, led by my colleagues Peter Jackson and Robert Esser, is quite at odds with the current view and leads to a strikingly different conclusion: There will be a large, unprecedented buildup of oil supply in the next few years. Between 2004 and 2010, capacity to produce oil (not actual production) could grow by 16 million barrels a day — from 85 million barrels per day to 101 million barrels a day — a 20 percent increase. Such growth over the next few years would relieve the current pressure on supply and demand.</em></blockquote>
    http://www.washingtonpost.com/wp-dyn/content/article/2005/07/29/AR2005072901672.html

    So what happened? From Dec 2010 …

    Monthly estimates of spare capacity are issued by the EIA and the Paris-based International Energy Agency, which has 28 member countries. Both agencies define spare capacity as the amount of extra supply that could be turned on within 30 days and kept on for 90 days. Both focus on members of the Organization of Petroleum Exporting Countries””excluding global hot spots such as Iraq and Nigeria””and assume there is no spare capacity elsewhere.

    The two estimates can diverge significantly. In July 2008, when oil prices settled at a record $145.29 per barrel, the EIA said there was less than one million barrels a day of spare capacity, while the IEA put that figure at close to 1.5 million.

    But often the two organizations reach broadly similar conclusions. Both pegged spare capacity at near multiyear highs in November, with the EIA putting it at 4.85 million barrels a day, and the IEA at 5.56 million barrels. 
    http://online.wsj.com/article/SB10001424052748703296604576005320269265998.html

    Instead of 16 mbpd spare capacity, we have 5 mbpd. 

    Yergin has a track record of overestimating growth in production and capacity and underestimating oil prices.

  7. EdG says:

    It is not ‘peak oil.’

    It is simply ‘peak CHEAP oil.’

    The oil sands of Canada and Venezuela are vast and good for a few more centuries but that oil is more expensive. 

  8. kdk33 says:

    from the Bangalore Sunday Times: “For petrol, you shell out the most in the world”.  Front Page

    price per litre ($)
    petrol UK  1.85
    petrolIndia  3.95

    diesel UK  1.91
    diesel India  2.46

    Maybe they lied. 

    OTOH, they even out the difference in purchasing power, and I don’t know how they do that.

  9. harrywr2 says:

    @kdk,
     
    The petrolIndia $3.95 price is based on PPP.
     
    The petrol price in New Delhi is 66 Rupees per Liter. About $1.39 using the actual exchange rate.
    http://www.mypetrolprice.com/2/Petrol-price-in-Delhi
     
    Indian per capita GDP
    http://www.tradingeconomics.com/india/gdp-per-capita
    http://www.tradingeconomics.com/india/gdp-per-capita-ppp
    So if I assume a rupee is actually worth 3-4 times the actual exchange rate then petrol is very expensive in India.
     
     
     

  10. Bill says:

    Oil sands are easily economic at current prices. Alberta has been producing oil for a decade or more and until about 5 yrs ago the price was probably averaging around $30.
    At $80-$100 oil sands are extremely profitable, they do not require higher prices.
     

  11. kdk33 says:

    Harry,
    Please.

    ppp is purchasig power parity (I just learned) it is not an assumption, as you so blithely put it.
    http://en.wikipedia.org/wiki/Purchasing_power_parity
    If you would like to quibble about methodology – ppp versus straight exchaqnge rate – fine.  ppp sounds like a reasonable approach.

    But an assumption – nahhhh, that’s anti -science.

  12. Dean says:

    EdG captured the main point. Peak Oil is really about the end of cheap oil. It doesn’t matter how much can be produced if it is at a price that is above what contemporary mass consumption can pay. If people who use vast quantities of oil to drive themselves to work can’t afford it en masse, then it won’t be produced, and the peakers will be right.
     
    If the alternative production technologies like tar sands, combined with greater efficiency in vehicles, means that tar sands can be produced cheaply enough for people to still drive themselves to work (as seems fairly likely), then the peakers will mostly be wrong.
     
    As will whose who think that technology is the central solution to AGW. It may end up that electric cars and hybrids are what make tar sands cost effective for current uses.

  13. Jarmo says:

    Referring to some earlier posts about fuel prices in India (and China, Indonesia, Bangladesh, Venezuela, Saudi-Arabia, Egypt etc., etc.).

    Fuel prices are subsidized by the government in these countries. The prices are lower than international market prices. Some statistics:

    http://www.ft.com/intl/cms/s/0/81a781a0-69d7-11e0-89db-00144feab49a.html#axzz1YNm1OSPS

    In this light, the growing consumption in developing world is easy to understand.   
         

  14. Ron Broberg says:

    Just a quickie …

    … peak oil is about the peak of production rates.

    It is not about the amount of oil in the ground.
    It is not about the amount of oil ultimately recovered.
    It is not about the price of oil.
    It is not about spare capacity.

    By definition, peak oil is about the rate of extraction.

    If oil is finite, eventually the production rate will decrease at some future time. Peak oil is an inevitable outcome. What we are arguing about is the timing of the peak. Some believe that it lies immediately behind us. Some, like Yergin, believe that it lies a few decades in the future. But it is inevitable.

  15. harrywr2 says:

    @kdk33,
     
    As a former ‘world traveler’ as part of my job PPP is indeed one way to measure the ‘true’ exchange rate.
     I use the price of a Big Mac in the local currency as my ‘laymen’s PPP index.
    At one time a Big Mac was priced the same in dollars, Euro’s and UK Pounds. If I toss away the concept of exchange rates and use Big Mac’s as my global currency then Fuel Prices in the UK are roughly the same as Fuel Prices in the US.
    In my Laymen’s PPP 1 dollar = 1 UK pound. Almost everything I bought in the UK cost about the same in pounds as what I would pay in the US in dollars. I.E. About 60% more then what I would pay in the US.
    Having had friends that traveled to India a  meal they would expect to pay $20 for in a restaurant in the US only costs about $5 in India.
    Hence, my ‘assumed’ PPP exchange rate is about 3 to 4 to 1.
    A liter of gasoline in India costs more then a decent meal at a nice restaurant in India.(Laymen’s PPP, insanely expensive). A liter of gasoline in India costs about the same as in the UK(exchange rate).
     
    @Jarmo.
    Yes, some developing countries subsidize fuel. This is because the official exchange rates are hopelessly distorted. Developing countries like distorted exchange rates as it encourages exports and discourages imports.
    In terms of how much fuel costs in China and Bangladesh as a percentage of income or compared to how much other goods cost it is still very expensive.
     
     

  16. Jonathan Gilligan says:

    Once again, I’ll post a link to John Quiggin’s comments on peak oil: Quiggin emphasizes that peak oil doesn’t mean that we suddenly stop producing oil. It doesn’t even mean that production falls. What it does mean is that the price to continue extracting the same amount of oil starts to rise significantly.
     
    He asserts that over the past seven years, we’ve seen peak oil predictions borne out as extraction rates remained constant but prices rose significantly.  This happens because conventional methods can’t sustain current extraction rates, so satisfying demand relies increasingly on newer, more expensive extraction methods and prices rise.
     
    So, contra Yergin, Quiggin argues that the signature of peak oil is not the decline in new discoveries, but the rising price of maintaining a baseline rate of extraction.  Yergin’s argument that we’re not seeing peak oil because we’re able to extract a larger fraction of what’s underground would only persuade if this enhanced recovery were achieved at constant, or declining, price.
     
    Quiggin also asserts that peak oil production is not the crucial thing. Because even while production has been strained, on the demand side, per-capita consumption in the industrialized world peaked around 1980 and has been dropping since. Thus, just as Julian Simon predicted, as oil becomes scarce we’re moving away from it, toward other energy sources.
     
    “Peak Oil looks like good news rather than bad. … Energy is important, but it is no more “˜essential’ or “˜special’ than many other goods and services in a modern economy. If the supply is reduced, the market will respond to bring demand into line, especially if this response is facilitated by sensible government policy. No single source or technology, such as oil, nuclear or solar is essential, although none should be dismissed out of hand.”

  17. lou says:

    Yeah, this’ll show them peakers!  

    You could frame it this way but you would not be making the future of our dependence on oil any brighter.  

  18. AMac says:

    The best favor an essayist can do for his or her readers is to focus on the strongest variants of the thesis being disputed. In Saturday’s WSJ, Yergin did not do that.  At least, not consistently.

    He wrote (behind paywall): “[Peak Oil founder MK] Hubbert used a statistical approach to project the kind of decline curve that one might encounter in some””but not all””oil fields, and he assumed that the U.S. was one giant oil field. His followers have adopted the same approach to assess global supplies.”

    Kenneth Deffeyes’ 200f book Beyond Oil: The View from Hubbert’s Peak is the primer I used to learn about Peak Oil.  I am sure there are others as good, or better. 

    Whether or not Hubbert “assumed that the US was one giant oil field,” Deffeyes did not.  Much of his analysis involves discussing the different types and sizes of oil fields, US and ex-US.  Further, an assertion of “giant oil field” would only earn only scorn in the comments section of  “The Oil Drum,” a serious Peak Oil website.

    This isn’t a good start by Yergin.  IMO, he has an uphill fight to show that his arguments should be taken seriously.

  19. Ron Broberg says:

    JG: Quiggin emphasizes that peak oil doesn’t mean that we suddenly stop producing oil. It doesn’t even mean that production falls.

    You misrepresent his views. He accepts the definition of peak oil as the point of maximum production. He just dismisses it as unimportant.

    Quiggin: “what matters is not production but consumption

    By definition, peak oil is the point of maximum production. Oil in the ground, rates of discovery, rates of depletion, enhanced oil recovery techniques, crude oil prices, speculation, and political incentives and disincentives are all interesting components that will change the shape and timing of the peak. Substitution (biofuels, electric transportation, increased efficiencies) will change the impacts. But the definition is what it is.

  20. MikeN says:

    If 86% are due to later estimates, doesn’t that mean we can just multiply the first report by 7 to get a better idea?

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