Does the World Have a Peak Oil Problem?

I suggested Monday that recent changes in oil prices may indicate that supply is increasingly tight, and that oil prices will therefore act as a check on economic growth for the near future. This isn't exactly an embrace of the "peak oil" world view, but it's similar in nature; I believe limits on supply growth will lead to rationing by price.

In Monday's New York Times, Michael Lynch came out firing against peak oil believers, suggesting that most claims in support of the idea that supply is running low are a result of a misunderstand of geological and energy industry language and data. He concludes:

In the end, perhaps the most misleading claim of the peak-oil advocates is that the earth was endowed with only 2 trillion barrels of “recoverable” oil. Actually, the consensus among geologists is that there are some 10 trillion barrels out there. A century ago, only 10 percent of it was considered recoverable, but improvements in technology should allow us to recover some 35 percent — another 2.5 trillion barrels — in an economically viable way. And this doesn’t even include such potential sources as tar sands, which in time we may be able to efficiently tap.

Oil remains abundant, and the price will likely come down closer to the historical level of $30 a barrel as new supplies come forward in the deep waters off West Africa and Latin America, in East Africa, and perhaps in the Bakken oil shale fields of Montana and North Dakota. But that may not keep the Chicken Littles from convincing policymakers in Washington and elsewhere that oil, being finite, must increase in price. (That’s the logic that led the Carter administration to create the Synthetic Fuels Corporation, a $3 billion boondoggle that never produced a gallon of useable fuel.)

This is not to say that we shouldn’t keep looking for other cost-effective, low-pollution energy sources — why not broaden our options? But we can’t let the false threat of disappearing oil lead the government to throw money away on harebrained renewable energy schemes or impose unnecessary and expensive conservation measures on a public already struggling through tough economic times.

As an aside, any world in which an additional 2.5 trillion barrels of oil is burnt, along with fuels derived from tar sands, is going to be a very hot and unpleasant one. Even if started raining oil, we'd do well to limit consumption of the black stuff.

I'm not a geological expert, so I can't speak to the truth of Mr Lynch's assertions. Even so, there is reason to be sceptical of his conclusions. Relative to the real oil prices that have prevailed for most of the past 40 years, $30 per barrel is fairly cheap—cheap enough to allow people in rapidly developing nations like China, and India, and Brazil to take up driving. At present, the average American uses nearly 25 barrels of oil per year. The average Briton uses roughly 11, while in China the average is 1.9 and in India 0.8. As China and India grow richer, we can expect their per capita petroleum usage to increase, particularly if oil prices remain low. Given the populations involved, usage doesn't need to grow by very much at all to boost global oil consumption significantly.

Currently, there are about 6.7 billion people in the world, who use about 4.8 barrels of oil per year each, for about 32 billion barrels per year. By 2020 there will be nearly 8 billion people. If oil prices remain low, it's reasonable to expect per capita consumption globally to rise to perhaps 5.5 barrels of oil per year each by then. That would give us an increase in annual global petroleum consumption of nearly 40% in a decade's time. Does it seem reasonable that global production can expand at even half that pace using only supply that can profitably be withdrawn at $30 per barrel?

Perhaps so, but I have my doubts. The simple fact is, at cheap prices, the billions of people in emerging markets will consume a lot of oil, and billions of people can't consume a lot of oil without global production ramping up faster than it has at any time in the past half century. The only way to prevent large growth in petroleum use in rapidly developing nations is for prices to make such growth unattractive. But that implies prices that are high enough to bite in petroleum-thirsty countries like America.

original post

Comments

[chap08:]

The production cost of much of this oil will be over $30. That's not just because of the difficulty in getting it, but because pretty soon $30 will be worth a lot less than it is now. The only way to have "cheap" oil is to have ongoing global recession, or a technical breakthrough.

Aug 26 08:56 AM

[Disa Anja:]

The reason we will see $30 oil again has nothing to do with supply but the value of the USD.

Aug 26 09:11 AM

[koolsool:]

The increasing use of the world's oil supply by India & China is a tidal wave coming that will change our way of life and increase global warming. Our leaders need to establish an energy policy that switches to a cleaner, more abundant fuel for transportation & power generation. We have plenty of cheap natural gas here in North America. The technology is ready for the switch right now, it will be good for our economy. We just need some stronger leadership to do the right thing.

Aug 26 09:23 AM

[Tim Miles:]

Michael Lynch is entitled to his opinion. However, what he does not say is that all the oil he believes is available to the United States and the world (even if his estimates are correct) is more difficult and more expensive to extract despite improvements in technology. The other problems include: 1) the process of recovering oil from tar sands requires a lot of energy; and 2) many of the nations we rely on for our oil imports are not the greatest friends of the United States or are politically unstable. Those facts together with what Ryan notes about the oil consumption trends of emerging nations and the effect of oil-based economies on the environment don't exactly present us with a rosy scenario. One can debate the issue of whether or not we have reached the peak in global production ad nauseum. That really ignores the point that the United States needs to chart a different energy course now if it wants to protect national security and have greater economic stability in the future.

Aug 26 09:27 AM

[Ferdinand E...:]

Michael Lynch. Do you really mean that he is back?. Michael has been off the conference circuit and out of the literature, and now he is back. Welcome Mike, do you remember me - Fred Banks, the leading academic energy economist in the world?

Now let's see, how do we confront this latest work of genius of yours. I think that I'll put it this way: If reserves of oil were not 2.5 billion barrels as you say, but 5 billion, it wouldn't make the slightest bit of difference. You see, those reserves would not be where you think they are, but where I think they are - and I'm not going to tell you. Besides, when the oil price can zoom over $100/b, what possible difference can it make where or when the peaking of the oil supply takes place.

Aug 26 09:45 AM

[Graham and ...:]

No, it's the other way around. If the dollar goes down, the price of oil goes up (in dollar terms).

Unless you are saying that the dollar will go UP in value, so $60 (in recent prices) will be the same as $30 in the future.


On Aug 26 09:11 AM Disa Anja wrote:

> The reason we will see $30 oil again has nothing to do with supply
> but the value of the USD.

Aug 26 09:56 AM

[perceptions...:]

"I believe limits on supply growth will lead to rationing by price."

I am afraid the world is not a rational or rationing place!

Aug 26 10:14 AM

[kmi:]

I think one of the differences between peak oil folks and plenty supply folks is the fact that everyone is making assumptions about how much oil - just oil - the world will use in the future.

37% of US energy comes from oil, 71% of which is used for transportation and 23% of US oil consuption goes to industry according to the EIA (www.eia.doe.gov/neic/i...).

Here are my assumptions: I actually expect the US to hold steady or reduce oil consumption over the next decade. Not just because of new CAFE standards increasing min fuel reqs by 40% but I also see industry improving its % use of renewables.

I guess it's possible that emerging markets will somehow increase their own consumption of petroleum products by 40% but I'm not too worried about running out of oil.

Aug 26 10:23 AM

[Tony Petroski:]

Mr. Avent: "This isn't exactly an embrace of the "peak oil" world view, but it's similar in nature; I believe limits on supply growth will lead to rationing by price."

Yes, that's how things work in a free market, rationing by price. Why can't we continue this type of rationing?

Aug 26 11:25 AM

[kebu77:]

They're talking about this at The Oil Drum - - www.theoildrum.com/nod...
Open Thread for "Peak Oil is 'A Waste of Energy'" NYTimes Article

Many facts and much wisdom in the comments section...

Aug 26 11:30 AM

[bindlepete:]

The dollar will tank without unsubsidized exports. Inflation will start to surge and world consumption of oil will sustain it's steady growth even as out use of oil steadies and likely declines.

Lynch has no basis for optimism in the Enhance Oil Recovery Programs. They are expensive and marginal in impact. He seems to be shilling for someone as did his buddies over in Cambridge. Sorry, MIT is in Cambridge as well.

An opinion but then the children are permitted to speak in my family as well. They, however, do not publish.

Aug 26 11:31 AM

[Bruce Pile:]

Michael Lynch references the geological knowledge of 100 years ago saying only 10% of all oil was recoverable. That was in 1909. They didn't really know much about oil then. But by the 1950s, they knew a lot. A smart geophysicist figured out a method for projecting collective oil production from a large variety of fields in any large land mass.

His name was Hubbert and his method predicted a peak in the lower 48 U.S. oil production around 1971. Those who think that advancing technology plus big new finds will nullify all these gloomy geologists' peak calculations should consider that in 1971, we were at the beginning of the biggest technology boom in history. We have had nearly 40 years of this boom since Hubbert's predicted peak - and how far has it moved the peak? None !

To the world's amazement, our production peaked in 1971 as predicted. Neither 40 years of a tech boom nor the big new find of Alaskan oil immediately piped down to the lower 48 nor a price climb of over 2000% since 1971 could coax enough oil into the equation to move the Hubbert peak one bit. Except for a bump on the decline side of Hubbert's curve, it looks nearly identical to the one he drew in 1956.

In 2001, Deffeyes (and others in the late '90s) used Hubbert's method to put the peak of global conventional crude around 2005. It has been stagnant or dropping since 2005 despite oil going to over $100.

It's true that there is far more oil in our earth than the 2 trillion barrels the Hubbert method says is "recoverable" - maybe as much as 10 trillion. But what matters is not how much is there but at what NET ENERGY FLOW RATE it is recovered at. This is what energy planners and people like Daniel Yergin and Michael Lynch just don't understand and it is at the heart of Hubbert's science. Net usable energy for oil goes down dramatically the more you recover. See my blog post at goodstockinvesting.blo... for some charts on this.

Aug 26 07:56 PM

[Disa Anja:]

Really guys? 9 thumbs down? Do you guys know anything about investing? Oil is a comoddity traded in USD. What was the price of the dollar in 2000 when oil was $22 a barrel? What was the price of the dollar in March 2009 when oil was $50 a barrel?

What do you think the price of oil is going to be when we take out the March lows? Down US markets = Strong $ = lower oil prices.

It has nothing to do with supply and school is closed now. That is why it is so easy to take your money. I am trading against fools and a fool and his money are soon parted!


On Aug 26 09:11 AM Disa Anja wrote:

> The reason we will see $30 oil again has nothing to do with supply
> but the value of the USD.

Aug 26 09:13 PM

[A Barrel Full:]

That is the biggest problem we face. If major consumer nations are insulated from price signals, then the price will be more volatile.


On Aug 26 08:51 AM Chandragupta wrote:

> Retail prices of fuel, in both India and China, are Government controlled.
> Even in the event of a sharp spike in the price of oil, the Governments
> would not raise the prices for the man on the street, since it is
> politically inconvenient to do so. The oil price spike to $ 150 last
> year made no impact to the retail fuel prices in India last year,
> as most of the price rise was absorbed by the Government. Hence,
> a rise in Oil prices will not help curb demand in countries like
> India and China, the demand growth here will continue to happen at
> its own pace.

Aug 27 03:47 AM

[perceptions...:]

Things are seldom straight foward or simple, following is an article from the Oildrum, which looks at some of the issues raised in the Lynch article .
www.theoildrum.com/nod...

You goota like the cartoon -
Buffalo shoratges, What Buffalo shoratges?

Anyhow, like I said, things are seldom simple.

Let's take a 50% devaluation in the US$, that would mean it would take twice as many US$ to buy the same amount of Oil.

But, given that a 50% US$ devaluation would cause a massive economic slowdown and not so much oil would be actually used, what would oil actually cost?

Aug 27 04:53 AM

[chap08:]

Disa, I gave you the thumbs down because, to me, what the author is talking about is a long term situation. In the long term, the dollar is only going to devalue (against oil and a lot else). It seems from this comment that you are just looking at the short term. I've no idea what will happen in the short term and I don't trade oil, so good luck to you. Perhaps you think that the dollar will go up in the long term too, in which case, good luck to you again - you might need it.

And don't worry about all the thumbs down. As I think you know, contrarians make money too.


On Aug 26 09:13 PM Disa Anja wrote:

> Really guys? 9 thumbs down? Do you guys know anything about investing?
> Oil is a comoddity traded in USD. What was the price of the dollar
> in 2000 when oil was $22 a barrel? What was the price of the dollar
> in March 2009 when oil was $50 a barrel?
>
> What do you think the price of oil is going to be when we take out
> the March lows? Down US markets = Strong $ = lower oil prices.<br/>
>
> It has nothing to do with supply and school is closed now. That is
> why it is so easy to take your money. I am trading against fools
> and a fool and his money are soon parted!

Aug 27 06:05 AM

[chap08:]

Liked the cartoon. But think again about the devaluation of the $. Just like in any other country, a fall in the currency will stimulate growth. It will be inflationary sure, but it will be positive for growth. The driver is the impact on imports and exports.


On Aug 27 04:53 AM perceptions_now wrote:

> Things are seldom straight foward or simple, following is an article
> from the Oildrum, which looks at some of the issues raised in the
> Lynch article .
> www.theoildrum.com/nod...
>
> You goota like the cartoon -
> Buffalo shoratges, What Buffalo shoratges?
>
> Anyhow, like I said, things are seldom simple.
>
> Let's take a 50% devaluation in the US$, that would mean it would
> take twice as many US$ to buy the same amount of Oil.
>
> But, given that a 50% US$ devaluation would cause a massive economic
> slowdown and not so much oil would be actually used, what would oil
> actually cost?

Aug 27 06:14 AM

[Jimbo:]

I generally agree with Mr. Avent. I do believe the age of oil is coming to a close and, to be prudent, we should begin NOW to step away from oil dependency. But I am astonished at the POLITICAL science behind the AGW hypothesis. Weather forecasts beyond five DAYS are more unreliable, the further out in time you go. Some will counter by saying they are talking about CLIMATE, not weather. But the number of variables effecting climate are even larger and more complex than those effecting weather. Beware the Utopians who seek to control a society that we may all achieve nirvana. Mankind is too flawed for that to work. See the Soviet Union.

Aug 27 10:48 AM

[Road Runner:]

Do the people that write these stories understand macroeconomics?

If the price is $30, the demand will skyrocket from the emerging markets, and supply will drop off for expensive oil from the deep ocean, oil sands, etc. This will drive the price higher.

If the price is over $130, then demand will slip or stagnate from people finding alternates to oil, and driving less. And, supply will increase from expensive oil like oil sands and deep water.

The price of oil lies somewhere in the middle where the supply and demand curves cross – simple macroeconomics. Have we forgotten the basic “blocking and tackling” of macroeconomics?

Like politics, taking a middle of the road view is boring so the news media doesn't like covering it. Remember T. Boone Pickens and Goldman Sacks predicting $200 a barrel oil in 2008. The news media jumped all over those reports. It gets the “What?!” response from viewers that makes them stay tuned.

Aug 27 12:22 PM

[realold:]

Absolutely. The author seems to ignore the fact that all this new methodology costs money. Government greenie restrictions and roadblocks in the U.S cost money. Nationalization of resources and failure to drill (Mexico) limits actual recovery. IMHO, politics will drive the cost of oil for decades and it will not be low - buy oil companies - better than gold.


On Aug 26 08:56 AM chap08 wrote:

> The production cost of much of this oil will be over $30. That's
> not just because of the difficulty in getting it, but because pretty
> soon $30 will be worth a lot less than it is now. The only way to
> have "cheap" oil is to have ongoing global recession, or a technical
> breakthrough.

Aug 27 06:03 PM