Peak Oil for Dummies

Over at Kiwiblog, one of the themes of resident freak commenter, Roger Gnome (a Political Science honours student at Otago who normally runs the theory that New Zealand would be much better off if all employers were exterminated, and everybody was unionised), is peak oil. Along with the apparently looming global warming crisis, the world as we know it is reaching the end of “cheap oil”. According to the theory, new oil discoveries are in decline; production from currently exploited oil fields is at its highest point, and as demand for oil increases as the global economy grows, the price of oil will massively skyrocket.

There are two general theories around peak oil: the first that an imminent crisis is upon us, that by 2010 oil demand will outstrip production and prices will increase to a point that will cause global recession. The second, less gloomy theory, is that oil production will plateau, prices will increase gradually over time, and oil and energy uses will change to divert the gloomy outlook that the peak oil theorists advance.

The major problem with the peak oil theory is that the economic assumptions that they have been stunning in their flaws. In 1974, Marion Hubbert developed the “Hubbert Peak Theory", and applied it to a range of mineral resources: natural gas, coal, and metals. His predictions have had a mixed reception: he suggested coal reserves would last another couple of centuries. His natural gas claims relied on what was initially fairly scant knowledge of natural gas reserves.

Initially the alarmists claimed oil production would peak in 1989. Hubbert calculated that oil production would reach its peak in 1995. Later, he revised his predictions to 2005. The current consensus from peak oil alarmists is that 2010 is the year when oil prices will rise so dramatically as to cause global crisis.

The reasons for the changing predictions are much more broad than the environmentalists who advocate the theory want you to know. To make accurate forecasts about oil production on the one hand, and oil consumption on the other, you need to have a clear picture of the variables. The variables include the use of technology (which determines how easily you can drill the oil out of the ground), the accuracy of estimates of oil reserves, the alternative uses of oil and its substitutes in energy production, and geopolitical factors, in both OPEC and non-OPEC countries, which have major effects on the production of oil.

Suffice to say, for the last twenty years, peak oil enthusiasts have systematically taken a pessimistic view of oil production in their estimates, for both OPEC and non-OPEC countries. While proven middle eastern reserves are generally overestimated to gain better production rights within OPEC, knowledge of existing reserves in non-OPEC countries is fairly well documented. Yet peak oil proponents using the hubbert forecasting theory have monumentally failed to accurately estimate production and reserve levels even where there is good knowledge about oil reserve levels.

The reality is that oil production is determined by demand for oil, and geopolitical factors, rather than the status of reserves. Proven oil reserves are not running out anytime soon. Production technology is improving, making it less expensive to exploit existing proven reserves. Relatively high levels of oil now have nothing to do with oil supply, but everything to do with geopolitical tensions, and OPEC’s ability to exploit those tensions to maximise their oil returns
And, as we have seen in New Zealand’s Great South Basin this week, as oil prices increase, it becomes more economically viable to exploit other oil resources at current prices. This is consistent with a global trend of additional oil supplies coming onstream, outstripping demand for oil.

So here we have a pattern over the last twenty years: peak oil enthusiasts denying the data, making henny penny predictions about oil production which never eventuate, and continuing to extend the crisis date outwards to suit their analysis. Recent peak oil alarmists have claimed variously that “peak oil” will result in energy wars, recession, starvation, and worldwide devastation.

The predictions just don’t stack up with the facts. Existing oil reserves are in a very slow decline. That goes without saying. But existing oil reserves do not equate to total reserves, particularly as prices encourage new reserves to come onstream.

There is a common theme among those who advance peak oil theory. They are almost invariably from the environmental lobby. They are not in the business of making accurate economic forecasts. If they were, their predictions of peak oil prices would have led them to invest in oil companies, and made them very wealthy if their theory panned out.

The environmentalists' solutions for this supposed peak oil cataclysm aren't based in reality, either. As with the Kyoto Protocol, the rising demand for oil isn't coming from the Western society that the green lobbies want to punish in their great leap backwards, but from China and India. The US, and the OECD generally, is consistently investing in less oil-dependent technologies anyway. Meanwhile, as the ever-choking smog clouds rise over Mumbai and Shanghai, their increasing consumption of oil been an even greater contributor to rising prices than instability in Iraq and Iran.

There is no need for panic. The environmentalists’ will to transform people’s views through scare-mongering has little to do with oil production and supply, and everything to do with their desire to punish oil companies and reducing human dependency on oil. It’s an environmental argument, and trying to produce fringe pseudo-economic petrification theories as an excuse is as dishonest as their data.