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Since Hal just posted a follow-up on peak oil, it seems timely to post a
piece I just wrote for ManyWorlds. A slightly earlier and shorter version
(until 5pm EST today, when the version below will replace it) is here,
with links to related items:<br><br>
<a href="http://www.manyworlds.com/exploreCO.aspx?coid=CO51605116448" eudora="autourl">
http://www.manyworlds.com/exploreCO.aspx?coid=CO51605116448<br><br>
</a>Hal -- I especially want to thank you. I drew on your posts on this
topic.<br><br>
Comments welcome.<br><br>
Onward!<br><br>
Max<br><br>
<br>
Should You be Freaking About Oil Peaking?<br>
Max More<br>
ManyWorlds.com, May 20, 2005<br>
<br>
High gasoline and oil prices have renewed talk of “peak oil”, referring
to the concept of Hubbert’s peak. In 1956, Shell geologist, M. King
Hubbert, predicted that oil production in America would peak and begin to
decline in the early 1970s. These days, we’re more interested in when we
might reach a global “Hubbert’s peak.” The term is typically used by
those making the most pessimistic estimatespeople such as Colin Campbell
and Jean Laherrère who, in a 1998 <i>Scientific American</i> article,
predicted a global peak for right about now. Based on a comprehensive
study in 2000, the United States Geological Survey concluded that we
would not reach a peak for at least two decades. Where does the truth
lie, and how confident can we be of an answer?<br>
<br>
It’s commonly believed that oil is a non-renewable resource that must run
out at some point in the future. Both parts of that belief can be
challenged. Oil naturally renewsat an extremely slow ratebut technology
<i>might</i> eventually replenish some of the supply at an economic cost.
Even if this doesn’t happen, oil is highly unlikely to “run out.” As
shortages intensify, prices will rise (so long as they are not
controlled), and we will move away from this resource, despite the pain
of doing so.<br>
<br>
Even if oil is renewable (to some extent) and will not actually be
exhausted, a peak in oil production followed by a decline is likely to
rattle the global economy. How severely we will be rattled depends on how
well we anticipate the date of peak oil, and what we do about it. Oil
industry executives are far from the only ones who want to know the
precise shape of oil production’s trajectory and when it will peak. Any
such assessment will need to estimate remaining oil reserves, trends in
consumption, and changes in extraction technology. None of these things
is easy to do.<br>
<br>
The first obstacle to accurate forecasts and estimates comes in the form
of distorted perceptions. News headlines incessantly tell us of “record
oil prices” as we float around the $50 mark. In reality, if you will
forgive the metaphor, $50 oil can’t hold a candle to the
inflation-adjusted $80 oil of the late 1970s and early 1980s. Although
Americans gripe about the cost of gasoline, Europeans find the distress
amusing, being used to paying far more. Despite the complaining, high gas
prices may be of little consequence to the economy, the additional cost
still making up a small fraction of the total cost of automobile
ownership. Although today’s oil and gasoline costs are less dreadful than
often supposed, continued growth in demand accompanied by a peaking of
production would undoubtedly pose some major challenges. So how much do
we have left?<br>
<br>
To figure out the likely date of a peak, and the curve of the slope up
and down, the first tricky thing we need to estimate is the size of
remaining oil reserves. Sounds simple. The reality is complicated by
several factors, the first of which is a lack of transparency. As <i>The
Economist</i> pointed out in “The Incredible Shrinking Companies” (in the
April 30, 2005 issue), the information needed to know whether oil
reserves are running low simply isn’t being made available. One big
problem is resource nationalismmost of the oil industry consists of
national oil companies, which are not open with their reserve
information.<br>
<br>
We also have problems with private oil companies, though the blame lies
less in their court than in that of the SEC. The agency’s rules were
written in a different time. The restrictions on booking reserves are now
arbitrary and excessive, forcing massive write-offs simply because the
price of oil falls, not because the physical facts have changed. The oil
industry can’t entirely shrug off responsibility, however. As <i>The
Economist</i> notes, the industry could follow the example of the global
mining industry, which already voluntarily discloses reserves.<br>
<br>
Added to the transparency challenge, we have to beware of
misunderstanding the concept of “reserves.” Oil pessimist Campbell has
said: “Understanding depletion is simple. Think of an Irish pub. The
glass starts full and ends empty. There are only so many more drinks to
closing time. It's the same with oil. We have to find the bar before we
can drink what's in it.” This is mistaken. Oil reserves are <i>not</i>
fixed in any very meaningful sense. Reserves are an estimate of the
amount of oil in reservoirs that can be extracted at an assumed cost,
given the current level of technology. From a long-term historical
perspective, you could say (as does Peter Odell of Rotterdam’s Erasmus
University) that the world has been ‘running into oil’ rather than ‘out
of it’.<br>
<br>
Even as the world has used more and more oil over the past few decades,
expert estimates of the recoverable resource base have consistently
grown, driven by both economic forces and the effects of technological
innovation. According to Odell, while the world has consumed less than
800 billion barrels of oil since 1971, during the same period we have
added over 1,500 billion barrels to reserves. How much oil is ultimately
recoverable depends to a great extent on how much we will spend to get
it, and on how good is our extraction technology. In other words,
reserves are dynamic, not static. Of course, it also depends on the
quality of unexploited, or minimally exploited, frontiers. As <i>The
Economist</i> article shows, no shortage of frontiers remain, although
some of them are currently blocked by political factors.<br>
<br>
On top of challenges in estimating the dynamically changing size of
reserves, forecasts have to accommodate a changing oil recovery rate. A
few decades ago, oil companies could extract about 20 percent of what
they found. Today, with superior technology, the figure is around 35
percent. 25 years ago, the success rate for exploration wells was about
one in six. Today, about two-thirds hit pay-dirt. While oil pessimists
simply write off oil in locations already tapped, we should remember that
two-thirds of the oil proven to exist in identified reservoirs remains
available for future technologies to extract. New advances could move the
global Hubbert’s peak quite a way further into the stratosphere. <br>
<br>
Finally, we need to factor in various possible changes in energy
consumption and efficiency. This also depends heavily on economic factors
and on technological innovation. Back in 1973, looking ahead ten years
and thirty years, few would have predicted what actually happened to oil
consumption as economic growth continued: The United States used 35
quadrillion barrels (quads) of oil in 1973. That number declined to 30
quads in 1980. In 2003, after two decades of economic growth, the number
had reached only 39 quads. How much more efficient could we become in the
face of genuinely high prices and accompanying government policies?<br>
<br>
All these considerations, and others, make it look impossibly hard to
accurately forecast a peak. However, we should consider that markets are
usually correct over the long run, and the still fairly modest prices in
the oil market suggest that a peak is not terribly near. If the smart
money expected a great rise in oil prices a few years in the future, they
would have bid up the price now. This hasn’t happened. Either the market
is strongly and persistently irrational, or warnings of imminent Peak Oil
are wrong.<br>
<br>
If we’re not satisfied to rely on oil futures markets, some international
institution could set up a decision market that allows people to make
bids on forecasts of oil prices or reserves at various points in the
future. Such a market could be valuable, especially if bids were also
allowed on various proposed regulations or policies aimed at improving
energy efficiency or encouraging alternative sources. Governments should
be careful to avoid premature, poorly targeted, very expensive actions.
Doing <i>something</i> can be every bit as bad as doing nothing. Decision
markets which have been under-utilized to date, could be the perfect
vehicle for harnessing globally distributed knowledge to improve our
accuracy in forecasting oil prices, reserves, consumption, and possible
peak.<br>
<br><br>
<x-sigsep><p></x-sigsep>
<font size=2>_______________________________________________________<br>
Max More, Ph.D.<br>
max@maxmore.com or max@extropy.org<br>
<a href="http://www.maxmore.com/" eudora="autourl">
http://www.maxmore.com<br>
</a>Strategic Philosopher<br>
Chairman, Extropy Institute.
<a href="http://www.extropy.org/" eudora="autourl">
http://www.extropy.org<br>
</a>_______________________________________________________</font>
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