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Myth of Peak Oil

January 12, 2005, 10:25 am

Note:  I have posted a more recent article with updated data here.

Mises Blog has a good article on the "Peak Oil" meme.  You may have gotten investment solicitations urging you to invest in oil because production is supposedly going to peak in 2006.

Oil production will peak some day.  I do not know when.  I do know that when I was in high school debate in the late 1970's, the topic one year was on resource policies.  I read everything there was at the time on oil supply as well as other critical mineral supplies.  Most "experts" at the time were predicting that oil would "run out" in about 1985 or 1990.  As you can see below, folks who invested in oil in 1980, after a price run-up similar to the one we have seen lately, got slaughtered.

Usgasoilprices19181999_1

Think twice or maybe three times about this graph before you invest.  Notice that there is no long term trend in real oil prices, even over one hundred years!  To make money buying oil, you have to do it on timing, buying ahead of sharp temporary increases.  And given that we are at the top of one of those sharp increases, can now really be the time to buy?

You can never get all the oil out of a field, and the exact amount of oil you can recover is dependent on how much you want to spend to do it, which in turn is related to oil prices (or expectations of oil prices).  The first 20% of the oil in a field might just squirt out under its own pressure.  The next 20% might have to be pumped.  The next 20% might need high pressure water injection to help it.  The next 20% might need expensive CO2 injection to help it.  If you ask the field manager how much oil was left, he would give you different answers at $20 and $45 a barrel, because he would make different assumptions about how far along this investment curve he would go.

If you are still thinking about investing, do one more thing: Study the famous bet between Paul Ehrlich and Julian Simon:

In 1980, economist |Julian Simon| and biologist Paul Ehrlich decided to put their money where their predictions were. Ehrlich had been predicting massive shortages in various natural resources for decades, while Simon claimed natural resources were infinite.

Simon offered Ehrlich a bet centered on the market price of metals. Ehrlich would pick a quantity of any five metals he liked worth $1,000 in 1980. If the 1990 price of the metals, after adjusting for inflation, was more than $1,000 (i.e. the metals became more scarce), Ehrlich would win. If, however, the value of the metals after inflation was less than $1,000 (i.e. the metals became less scare), Simon would win. The loser would mail the winner a check for the change in price.

Ehrlich agreed to the bet, and chose copper, chrome, nickel, tin and tungsten.

By 1990, all five metal were below their inflation-adjusted price level in 1980. Ehrlich lost the bet and sent Simon a check for $576.07. Prices of the metals chosen by Ehrlich fell so much that Simon would have won the bet even if the prices hadn't been adjusted for inflation. (1) Here's how each of the metals performed from 1980-1990.

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Category: Economics
  • markm

    The oil industry either suffers from severe CRS (can't remember shit) syndrome or deliberately stirs up unjustified hysteria ever so often. We were once supposed to run out of gasoline in the 1920's. After a whole lot of public alarm sent the prices up, the industry invested a bit of their added earnings in better refineries and more wells, and the shortages vanished. And this has been repeated every decade or so since.

    If you drill deeper, you find more oil, but it costs a little more (except when better technology reduces costs even for drilling deeper). If you spend more on extracting oil, you get more. But the industry won't do sensible forecasting and gradually raise prices as they gradually increase the depth they'll drill new fields and what they'll do to keep an old field producting.

    In the 1970's, political interference in the market (both OPEC and the boneheaded things Nixon and Carter tried to do about it) resulted in an excessively wide swing of the cycle. So a whole lot of new and deeper wells were drilled, often at a fast and expensive pace, funded by bank loans - and by the mid-80's there was a gross oversupply, inflation-adjusted prices were at an all-time low, and so many oilmen went bankrupt that a lot of savings and loans went down with them. (I guess there's your evidence for CRS rather than a plot to raise the prices, eh?)

    And now we're in another cycle of this, once again aggravated by politics and foreign events. Why expect it to be any different than the last half-dozen or more cycles?

    That is, unless we've finally reached a point where deeper wells don't hit "new" sources of oil. I'm not sure I'd be able to evaluate evidence of that if it was in front of me - but I don't see the present crop of alarmists really claiming to have such evidence. Instead, it looks to me like they use production and discovery curves that are predicated on a fixed effort.

    It is true, and a matter for concern, that unless drilling and extraction technology rapidly improve, oil will have to get more expensive and this will become a drag on our economy. But "running out" isn't the problem.

  • George

    "That is, unless we've finally reached a point where deeper wells don't hit "new" sources of oil."

    There's no oil below 15000f because it's too hot down there. We can easily drill 30000f but won't find oil. It's called the "oil window".

  • speedbird

    Dude, you really want to read around the theory of 'Hubbert's peak'. There could well be an underlying trend to the data you present. It explains the price peak in the 70's in terms of particular characteristics of US domestic production, and suggests that there's another peak on the way, based on the same characteristics of global production. The idea is that the global scope of the next peak will make it an event not to be missed...

  • http://cleantechblog.com Neal

    Peak Oil Issues

    Keep in mind one major thing about Peak Oil - product substitution and fuel blending.

    As refined product price rises past a critical point, refiners and end users can and will substitute blended, for example, synfuels, biodiesels, and ethanol, substitutes into their fuel mix.

    e.g. instead of just blending ethanol for the emissions benefit, we will blend it for cost in selected markets as the economics slowly dictate.

    This will have the result of allowing the market to ease the transition through the Peak Oil problem, no matter when it occurs. Crude oil shortages are not an all or nothing issue. Fuel blending substitution will provide a safety valve.

    Neal Dikeman
    Cleantechblog.com

  • http://www.lcplum.com e.andrews

    Join the resistance!!!!
    I hear we are going to hit close to $4.00 a gallon by next summer and it might go higher!! Want gasoline prices to come down? We need to take some intelligent, united action. Phillip Hollsworth offered this good idea.

    This makes MUCH MORE SENSE than the "don't buy gas on a certain day" campaign that was going around last April or May! The oil companies just laughed at that because they knew we wouldn't continue to "hurt" ourselves by refusing to buy gas. It was more of an inconvenience to us than it was a problem for them.

    BUT, whoever thought of this idea, has come up with a plan that can really work. Please read on and join with us! By now you're probably thinking gasoline priced at about $1.50 is super cheap. Me too! It is currently $2.79 for regular unleaded in my town. Now that the oil companies and the OPEC nations have conditioned us to think that the cost of a gallon of gas is CHEAP at $1.50 - $1.75, we need to take aggressive action to teach them that BUYERS control the
    marketplace..... not sellers. With the price of gasoline going up more each day, we consumers need to take action. The only way we are going to see the price of gas come down is if we hit someone in the pocketbook by not purchasing their gas! And, we can do that WITHOUT hurting ourselves. How? Since we all rely on our cars, we can't just stop buying gas. But we CAN have an impact on gas prices if we all act together to force a price war.

    Here's the idea:

    For the rest of this year, DON'T purchase ANY gasoline from the two biggest companies EXXON/MOBIL and Chevron. If they are not selling any gas, they will be inclined to reduce their prices. If they reduce their prices, the other companies will have to follow suit.

    But to have an impact, we need to reach literally millions of Exxon/Mobil and Chevron gas buyers. It's really simple to do! Now, don't wimp out at this point.... keep reading and I'll explain how simple it is to reach millions of people.

    I am sending this note to 30 people. If each of us sends it to at least ten more (30 x 10 =3D 300) ... and those 300 send it to at least ten more (300 x 10 =3D 3,000)...and so on, by the time the message reaches the sixth group of people, we will have reached over THREE MILLION consumers. If those three million get excited and pass this on to ten friends each, then 30 million people will have been contacted! If it goes one level further, you guessed it..... THREE
    >>>>HUNDRED MILLION >>>>PEOPLE!!!

    Again, all you have to do is send this to 10 people. That's all. (If you don't understand how we can reach 300 million and all you have to do is send this to 10 people.... Well, let's face it, you just aren't a mathematician. But I am, so trust me on this one.)

    How long would all that take? If each of us sends this e-mail out to ten more people within one day of receipt, all 300 MILLION people could conceivably be contacted within the next 8 days!!!

    I'll bet you didn't think you and I had that much potential, did you?

    Acting together we can make a difference. If this makes sense to you, please pass this message on. I suggest that we not buy from EXXON/MOBIL or CHEVRON UNTIL THEY LOWER THEIR PRICES TO THE $1.30 RANGE AND KEEP THEM DOWN.

    THIS CAN REALLY WORK.

  • cassandra

    "given that we are now at the top of one of those
    sharp increases"

    okay so I have the benefit of having a few months since your post but i don't really think that statement reflects what's been happening with oil prives over the last two years.

    This hasn't been s sharp increase like the 79 that was purely political in cause. This appears more systemic. i don't but into this whole unrest+ an extra dollars on the price. If that were the case oil prices would have risen sharply in 2003.

  • Hothan

    guys

    the planet will need another 10 million years to replace the oil we burned in the last 100. and synthetic and bio fuels are close to a negitive energy balance, now what?