Home > energy, Uncategorized > Peak oil — the writing is on the wall

Peak oil — the writing is on the wall

From  Lewis L. Smith

There is no longer any doubt that world production of crude oil [however defined] is going to peak within everybody’s planning horizons, if it hasn’t done so already. The only argument is over when.

The turning point in discussions of this subject came in 2008 when the Saudis stopped talking about producing 10 to 25 million barrels per day for the next 50 years and admitted that their production was going to peak at 12 million barrels per day within a few years and then begin to decline, until all their wells are capped.

Today the forecasts range from 2004 [Dr. Rafael Sandrea  —  conventional crude] to 2032 [Exxon/Mobil  —  all crudes] , with a preferred range of 2010  —  2015.

Needless to say, for strategic and electric-utility planners, these dates are “just around the corner”. 

We call attention here to three news items re peak oil which we think to be of great importance.

[1]       Department of Energy [USA]  —

Traditionally an optimist which echoed the “party line” of “Big Oil”, at a recent but poorly publicized meeting in Paris, DOE admitted for the first time in its history that a peak is possible [though not probable] by 2011.

The implied best estimate for a peak, based on the latest long-term forecast of DOE’s Energy Information Administration, is soon after 2020. This puts EIA in line with the UK Energy Research Centre report of 2009 which says peak oil is highly probable by 2020 and almost certain by 2030.

[2]   Joint Forces Command, a logistical unit of the US armed forces  —

In a report, “Joint Operating Environment”, February 198, 2010, the JFC makes the following forecast [p. 29]   —

[a]   Peak oil by 2012.

[b]   A production shortfall of 10 million barrels of crude per day by 2015.

[c]       Political and military disturbances thereafter.

We believe that this forecast should be taken very seriously, for two reasons. First of all collectively, the US armed forces are the largest consumers of gasoline in the world. If they are worried about their supply, you should be too !  Secondly, by making this forecast public, the JFC is openly defying DOE in a country with a strong tradition of civilian supremacy over the military.

For the report itself, go to  —

http://www.jfcom.mil/newslink/storyarchive/2010/JOE_2010_o.pd

[3]       Lloyd’s of London  —

In a new report, “Sustainable energy security” [no date] , Lloyd’s, the insurance giant of London, gives a number of warnings to everyone concerned with energy. They include the  following  —

This report, jointly produced by Lloyd’s “360 Risk Insight” program and Chatham House, should cause all risk managers to pause.

“What it outlines, in stark detail, is that we have entered a period of deep uncertainty in how we will source energy for power, heat and mobility, and how much we will have to pay for it.

“Is this any different from the normal volatility of the oil or gas markets? Yes, it is.

“Today, a number of pressures are combining : constraints on ‘easy access’ to oil; the environmental and political urgency of reducing carbon dioxide emissions; and  a sharp rise in energy demand from the Asian economies, particularly China. [p. 3]

Over reliance on fossil fuels is driving companies to take unnecessary environmental risks as typified by the recent oil disaster in the Gulf Of Mexico.  [pp. 24+]

For a copy of the report, go to  —

http://www.chathamhouse.org.uk/files/16720_0610_froggatt_lan.pdf

Whether or not you agree with these forecasts and warnings, they should be taken very, very seriously, especially considering the source. At the very least, you should start working on your “Plan B”, if you haven’t done so already.

As a prophet said to a king, long, long ago, the writing is on the wall !

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Categories: energy, Uncategorized
  1. Podargus
    July 28, 2010 at 6:07 am | #1

    The peak was probably in 2005 but one wouldn’t guess just by observing the sanguine attitude of our “betters”.

  2. Peter T
    July 28, 2010 at 11:16 am | #2

    I agree peak oil is very near. Most comment on this I have seen takes it for granted that prices will rise steeply when the shortage becomes apparent, but for several reasons I don’t think this will be the case – oil has few substitutes, and is so central to many processes that too high a price forces recession rather than large changes in systems.

    Question – is there any economic theory on what happens when prices are constrained below a ceiling?

  3. July 28, 2010 at 9:25 pm | #3

    There are two papers which I’ve read recently that provide useful calculations concerning the relationship between oil production, price and GDP.

    Hirsch, Robert L., 2008. “Mitigation of maximum world oil production: Shortage scenarios,” Energy Policy, Volume 36, Issue 2, Pages 881-889

    Hirsch calculates that we can work on the assumption that global GDP will decline at about the same rate as global oil production, which is anticipated to be around %2-5/yr.

    Nick A. Owen, Oliver R. Inderwildia and David A. King, “The status of conventional world oil reserves—Hype or cause for concern?” Energy Policy Volume 38, Issue 8, August 2010, Pages 4743-4749

    The authors state that world average oil price-GDP elasticity is estimated at -0.055 (+/-0.005). “This would mean a 10% rise in oil price would translate to 0.55% GDP loss.”

    What can economists do with these figures for price/GDP and production/GDP relationships?

  4. Lewis L. Smith
    July 29, 2010 at 1:19 am | #4

    The year of the peak depends in part on what definition of “crude oil” which one uses. Dr. Senabria, for example, restricts his definition to reservoirs exploited by vertical or directional drilling. Others include crude from tar sands and shale oil, which involve more complicated processses. Still others like the writer, include refinery products extracted from natural gas, such as ethane, ethylene, propane, propylene, butane, butylene and natural gasoline. And so on.

    If a price spike occurs in anticipation of peak oil and provokes only a depression, then the spike might not last very long. However, if the price spike provokes regional energy wars, with or without a depression, then it might last longer.

    I do not understand what Peter T means by “when pries are constrained below a ceiling”.

    However, I do agree that demand is inelastic in the short run. There are an awful lot of facilities which have to run on petroleum of some kind or other, and they will either run or shut down.

    ###

  5. Lewis L. Smith
    July 29, 2010 at 1:22 am | #5

    Further comment on comments.

    There is no economic theory which deals with a situation like the approach of peak oil. This is a threshold effect which is common in physics but which economics ignores.

    ###

  6. Peter T
    July 30, 2010 at 12:55 am | #6

    Lewis

    By “prices constrained below a ceiling” I mean situations where the price cannot rise above a certain level without reducing demand to near zero. In the case of oil, there are not only an awful lot of facilities which either run or shut down, but they shut down not when oil cannot be supplied (a situation which, even past peak, is many decades away), but when oil cannot be supplied at a price that makes their operation economic.

    I do not know how economic theory deals with these cases, but they are common enough. In my personal experience, supply constraints in these cases lead to informal rationing rather than to price rises.

    • Lewis L. Smith
      July 30, 2010 at 8:01 pm | #7

      Note that petroleum and its derivatives are intermediate products in both production and consumption of a vast list of products and services. Hence the shutting down of equipment, facilities and vehicles which use these products would not occur everywhere all at once. Indeed some activities would be considered so essential that they would be subsidized to as to keep operating, even though the price of oil had “gone through the roof”. For example — busses and ambulances would keep running long after most SUV’s had been garaged. So demand might decline severely but I don’t think that it would ever get to zero.

      In any case, I don’t recall any theory for this. Economists like to deal with phenomena whose “tracks in the sands of time” can be represented by smooth, twice differentiable curves, not by fractal lines or lines with breaks, discontinuities, kinks, steps and/or threshold effects.

      ###

  7. Scott
    October 10, 2010 at 2:53 am | #8

    Hubbert of “Peak Oil” fame in his famous paper advocated nuclear power as a long term replacement for oil and coal. In fact, the actual title of the paper is “Nuclear Energy and the Fossil Fuels“. In this paper he predicted exponential growth in nuclear power production. In fact, his 1956 paper is as much an advocacy for nuclear power as it is an analysis of oil production projections.

    This begs the question “If Hubbert was a prophet of doom regarding oil; why not a prophet of energy salvation regarding nuclear power?”

    Put another way, Hubbert is lionized for a prediction that turned out to be correct so far regarding oil; while his prediction that was wrong concerning nuclear power is conveniently ignored.

  8. david glover
    February 13, 2011 at 11:41 pm | #9

    scott

    +1

    M K Hubbert was correct on oil so you would wonder why he thought nuclear was the answer when uranium is also finite in supply

    perhaps in the context of the optimistic 1950′s he could be excused

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