Home > energy > Two peaks for the price of one

Two peaks for the price of one

from Lewis L. Smith

Unlike some of the debates in the 20th Century, the debate over peak oil in the 21st  [2004-2008] was not at all theoretical. It was very practical. It turned on two questions  —  What is the condition and actual production of Saudi Arabia’s active oil reservoirs ?  How accurate are the projections of future production?

Despite recent op-ed articles in some of the principle media, the debate is over, and the pessimists won. In 2008, the King said that future confirmations and discoveries would be reserved “for our children” [not your SUV]. Subsequently managers at Saudi Aramco, the country’s oil company, stated  —  for the first time in history  —  that oil production would peak in a few years, plateau for a decade and then decline, until the wells were capped. 

In addition, we note that crude-oil production is declining in almost 70 of the 80+ countries which produce significant amounts, including Canada, Mexico, Norway, Russia, the UK and the USA. Moreover, among the large producers, only Iraq, Iran and Nigeria have possibilities for substantial growth. But these countries are so mired in political turmoil that a significant postponement of a peak in world production is unlikely.

As a result, an all-time peak in crude production is highly likely by 2020 and almost certain by 2030. For the details, see the report by the UK Energy Research Center [August, 2008] , perhaps the best  which I have read on the subject. [Copy available upon request.]

Needless to say, all of these dates are within the planning horizons of most electric utilities. [30 years or 2040] .  So if your neighborhood electric company doesn’t have a Plan B, you might suggest that they get one ASAP.

Now as if the foregoing were not enough, we have yet another peak to worry about. The Saudis believe that a peak in world demand is coming within their planning horizon, and this without forecasting a worldwide depression or the breakup of China. [Both of the latter two are unlikely, but they should be included in everybody’s scenario planning.]

For the Saudis, the possibility of a peak in world demand for crude oil constitutes an “alarm call” to diversify their country’s economy and reduce its dependence on oil, in particular by increasing its use of renewable energy !  >>

<  http://www.businessweek.com/news/2010-02-15/saudi-arabia-says-peak-demand-for-oil-is-an-alarm-update1-.html >

And this is a country where some oil managers boasted  —  as recently as 2004  —  that it was going to produce 25 million barrels per day for the next 50 years !

Unfortunately the possibility of a peak in demand does not “get us off the hook” with regard to the coming peak in supply. It only makes it more difficult to figure out what’s going to happen in the interim, until both supply and demand reach their respective peaks. The following points explain why  >>

First of all, both peaks are closely related and may influence each other. For example, supply could peak “early” because of pessimism about the growth of demand which in turn, could lead to further cutbacks in exploration and development. And the arrival of a peak in demand could accelerated by people switching to other sources of energy, in anticipation of a peak in supply !

[In markets, it’s not just a matter of what I think that I ought to do   —  assuming that that nobody can read my mind  —  but what I ought to do, given my perception of what you are going to do, based on your perception of what you think that I am going to!  That is one of the many reasons for which markets are often out of equilibrium and sometimes behave like an unruly pack of hound dogs, chasing each others tails.]

Secondly, if there are going to be two peaks, what oil and gas prices will do during the next decade is anybody’s guess. This is primarily because Chinese demand is “the biggest wild card in the oil deck”. But it is also due to uncertainties about factors such as the following  —  the previously mentioned relation between demand and supply, how OPEC  “will play this hand”, the actual increase in Iraqi production, the future of Iran and its exports to China.

Thirdly, there is the  one  certainty in this murky future, and it has some important implications. As soon as both peaks have been reached, supply will decline faster than demand.

[1]     Sooner or later, this difference in decline rates will open up a gap between actual supply and what consumers would like to buy [potential demand].

[2]     Anticipation of this “gap” will provoke a nasty oil-price increase which could last for several years and even provoke a worldwide depression. [Note that combustion infrastructure is “sticky”. It is hard for people to switch fuels quickly, even if the price of the fuel which one is using, goes “through the roof”. And refineries of course, have to refine crude oil period.]

[3]     If demand were to peak first, it would at best, postpone the peak in supply and the anticipatory price rise for a few years.

Given the above, a nasty price increase and an eventual peak in crude-oil supply are not the only bad news in our future. In the meantime,  we are going to get a lot more price volatility than we had bargained for. So there is nothing to be gained [and a good deal to be lost] by standing around and waiting to see what’s going to happen.

Under the circumstances, it is more urgent than ever to reduce our consumption of petroleum fuels. This calls for significant increases in our presently planned use of energy-conservation measures and renewable sources of energy. Let’s not be the “the first hound dog whose tail gets bitten”!   ###

  1. MaryAnne Coyle
    March 13, 2010 at 6:14 pm

    This argument about projections is a time and energy waster. Like the argument about the existence of climate change, it’s a speculative argument. The argument bespeaks a certain lack of imagination about the future.

    Why don’t you think in terms of ending the extractive economy? The one that looks as everything that time deposited (minerals in rocks and soils; and the legacy of the past, since as ancient life forms) as something to be conserved, or used less wastefully? Since economic thinks in terms of numbers, think about what might have been had there been a collective push to move technologies and industrial processes to ones which generated less waste.

    That waste includes the waste of the human resource of creativity and improved quality of life. Mind-stultifying and physically depleting jobs of jack-hammering roads or working in polluting factories; toxic chemicals at work and in our homes that leads to a treatment model of medical services instead of a self-care, prevention and maintenance health system.

    • Lewis L. Smith
      March 15, 2010 at 8:42 pm

      I am not sure Ms. Coyne and I live on the same planet. Or maybe its just that I didn’t explain myself well enough.

      For instance, arguments over projections are not speculative if you are an electric-utility planner trying to fulfill your obligation to meet the future needs of customers, possibly by installing a new turbo-generator or two by a certain date. [Note that these are pieces of equipment with useful lives of 30 years or so.] Besides the argument over peak oil production is over. As I noted, the pessimists one, and a king spoke. So long-range planners have to make some provision for this peak and for the anticipatory price rise, or they are liable to be ambushed by the evolution of history.

      Also by recommending an acceleration of our use of energy-efficiency measures and of renewable energy, I do believe that I am advocating the replacement of some extractive industries. In this regard, Ms. Coyne and I are on the same side. If that point wasn’t clear, let it be now.

  2. Pablo M. Podhorzer
    March 15, 2010 at 2:23 pm

    “the existence of climate change” is a certainty. The argument is about if the change is man-made or not. Which obviously is (I will be very surprised to find otherwise). Oil supply will peak and diminish, and an economic crisis of gigantic proportions is almost inevitable. Time has already run out. Think about a world without airplanes, air travel, tourism, etc.

  1. October 18, 2010 at 11:26 am

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