When I was in England this summer my brother asked me if I knew
anything about “peak oil.” I wasn’t too sure, to be honest. He is
inclined to accept the theory, and even gave me a book to study,
The Last Oil Shock (2007), by a journalist called David Strahan. I
read some of it and told my brother I would write an article about
it. So here goes.
Peak Oil is the theory that the production of oil, worldwide,
has reached a plateau and is now heading downward. Oil is the
(supposedly) fossilized residue of animal and vegetable life and a
“finite resource.” So it’s bound to run out sooner or later, as we
are often reminded. (I wonder, though, if oil isn’t abiotic, as
Thomas Gold thought. Maybe huge reservoirs exist at much greater
depths?)
As Peter Maass put it in a much-cited article in the New York
Times Magazine, “peaking is a term used in oil geology to define
the critical point at which reservoirs can no longer produce
increasing amounts of oil.” They say it happens when reservoirs are
about half-empty. But that is a guess and one that seems to have
been outdated by new technology. After this “peak” has been
reached, Maass continued, “no matter how many wells are drilled in
a country, production begins to decline.” Then:
The eventual and painful shift to different sources of
energy—the start of the post-oil age— does not begin when the last
drop of oil is sucked from under the Arabian desert. It begins when
producers are unable to continue increasing their output to meet
rising demand. Crunch time comes long before the last drop.
A key figure in the peak oil theory, almost its originator, was
M. King Hubbert (1903-89), a Shell Oil geologist who predicted in
1956 that U.S. oil production would go into decline 15 years later.
That turned out to be true. “Hubbert’s Peak” occurred in 1970. He
was elected to the National Academy of Sciences and became a
professor at Stanford and Berkeley. He was also an advocate of
nuclear power. Hubbert’s method was then applied to worldwide oil
production—a questionable extrapolation.
Anyway, Kenneth Deffeyes, Hubbert’s former assistant and an
emeritus geology professor at Princeton, then predicted that world
production would peak at the end of 2005. His book Beyond Oil was
published at about the same time. It is an article of faith among
peakists that when you know the total producible quantity of oil
worldwide, then the peak occurs “at the halfway point”; that is,
when half of that oil has already been extracted. In 2005 Deffeyes
said that total quantity was (close enough) two trillion barrels.
Half of that had by then already been produced. Hence, the peak had
just arrived.
Here’s a different estimate by Nansen G. Saleri, CEO of Quantum
Reservoir Impact and formerly the head of reservoir management for
Saudi Aramco. In a March article for the Wall Street Journal he
wrote:
What are the global resources in place? Estimates vary. But
approximately six to eight trillion barrels each for conventional
and unconventional oil resources (shale oil, tar sands, extra heavy
oil) represent probable figures—inclusive of future discoveries. As
a matter of context, the globe has consumed only one out of a grand
total of 12 to 16 trillion barrels underground. Big difference, and
obviously there’s a lot of uncertainty. No one really knows how
much oil is down there. The Saudis are secretive and oilmen who
have made a big find have little incentive to tell you the
details.
An old friend, William Tucker, who is often reliable on energy
issues, recently contrasted the optimistic view, summarized by
Steve Forbes as the belief that the oil price is “a bubble” (George
Soros has said the same thing), with the pessimistic Hubbert’s Peak
idea. I met both Tucker and Forbes at a conference in upstate New
York earlier this summer. Tucker had just written Terrestrial
Energy, a book about nuclear power which I highly recommend.
But he also surprised me by siding with the pessimists on the
oil issue. So much do I admire Tucker’s work that he almost made a
Hubbertian of me.
I used the word pessimistic, but for the Peakniks the idea that
oil production is on a downhill path is not gloomy at all. They
long for it. If oil really has peaked, its price will rise so high
that many of the social changes they have worked for all their
lives will become realities. (I am assuming that they will also
continue to block new nuclear power plants, as they have done for
35 years.) With peak oil a reality, and nuclear stymied, we will be
destined to live in their solar-paneled, wind-powered utopia of
bike paths and mass transit. The suburbs and SUVs will become
obsolete, and air travel will be unaffordable for the lower orders.
They want that to happen, but we in turn should be suspicious of
predictions that are better thought of as hopes.
The leading advocate of peak oil today is Matthew Simmons, the
president of Simmons & Co. International in Houston,
specializing in the energy industry. He too wrote a book, Twilight
in the Desert: The Coming Saudi Oil Shock and the World Economy.
Described in the Maass article as a “card-carrying member of the
global oil nomenclatura,” Simmons predicted that the oil price,
then $65 a barrel, would hit triple digits. And he “wasn’t talking
about low triple digits,” he stressed. John Tierney, then a
columnist for the New York Times, was one who read that prediction.
He phoned Simmons and bet him that in 2010 the price of oil would
not be as high as $200 per barrel (in 2005 dollars). Tierney knew
little about oil production. He was simply taking the advice of a
friend, the late Julian Simon, who had told him it was worth
betting that the price of any natural resource would not go up over
time. Famously, Julian Simon had bet Stanford’s doom-saying
ecologist Paul Ehrlich that the price of certain metals, worth
$1,000 in 1980, would not have gone up 10 years later. Simon won
the bet. By 1990 the value of the metals had declined by more than
half.
In the new bet, Tierney and Simmons are each wagering $5,000,
which will be put into a pot and paid to the winner on January 1,
2011. The oil price will be averaged over the whole of 2010 to
minimize any sudden price swings. Julian Simon’s widow shared the
bet with Tierney.
Tierney must have been nervous this summer. Oil traded at its
record high of $147 a barrel on July 11. Thereafter it swiftly
dropped and as I write it is $33 below that peak. My guess is that
Tierney will win, but political matters unconnected with oil
reservoirs make things hazardous. Socialism, alas, is alive and
well where oil is concerned. Nationalization is an ever-growing
trend in the most promising oil regions, such as Russia, Algeria,
Angola, Nigeria, and Venezuela. A Goldman Sachs analyst said that
the alleged geological peak is really a geo political peak. Concern
that war will erupt over Iran’s nuclear ambitions is another worry.
Mexico’s oil production has steadily declined because the
government treats its loss-making state oil monopoly Pemex
primarily as an employment agency rather than an oil producer. That
is the tendency of all state monopolies.
In the U.S., the Greens have done their best to make “peak oil”
a reality, by stopping offshore and Alaskan drilling whenever
possible. Fortunately, $4 at the pump has focused some minds. It’s
dawning on more and more people, even in Congress, that allowing
the counter-productive drones called environmentalists to have so
much influence over policy is a lunacy that must be curtailed. In
my view, the great error of the peakists is their failure to
understand the price mechanism. They see a rising oil price as an
indicator that the “era of oil is over,” or as reducing demand, as
it has in the U.S. by 3.9 percent over the first six months of this
year compared to last, but they fail to see it as eliciting more
production. They don’t think on the supply side. In fact, peak oil
theory implicitly denies that price affects supply. (Nonetheless,
U.S. crude production was 2.1 percent higher this July than
last.)
Try Googling this: “Image: Oil Prices 1861–2007.” What this
dramatic chart shows is that the real price of oil fell almost
continuously until about 2001, except for a period from the early
1970s to the mid- 1980s. That bump up and down was brought about by
the Arab oil embargo, which lasted for six months beginning in
October 1973. Saudi production was cut by about 25 percent for long
enough to demonstrate that no one else had the spare capacity to
make up the difference. It was followed almost immediately by the
U.S. folly of price controls. Price regulations on oil continued
until President Reagan ended them on entering the Oval Office in
January 1981. The effect of these controls was to discourage
production at the moment when it was most needed, and true
shortages ensued—periods when demand exceeded supply. By law, gas
stations were not allowed to charge what motorists were happy to
pay. Instead, they had to wait in line. The issue is not widely
understood. One article I read online says that current oil prices
are “well above those that caused the 1973 and 1979 energy crises.”
Wrong. Those “crises” were caused by U.S. lawmakers, not by world
prices. Today, there are no price controls, no shortages, and no
crises. As they always do, free market prices equalize supply and
demand.
The key point is that the world oil price did not take off in an
unmistakable way until a few years ago, and only recently have
oilmen been confident enough to undertake expensive exploration
without fearing they will be left high and dry if the oil price
sinks back down again. The availability of that controversial thing
called recoverable reserves depends on the price. Some years back
there was a big oil find in North Dakota and Montana. It’s called
the Bakken Formation. Earlier this year the U.S. Geological Survey
said that four billion barrels could be recovered. That was not
what some had hoped, but it was 25 times larger than the estimate
given for the Bakken field in 1995.
Developing oil at ever-greater depths takes time and capital and
is at the mercy of the world oil price. Notice, by the way, that
the 15-year period when Hubbard’s peak came true was one of
continuous, inflation-adjusted oil-price declines. Why should
production increase when prices decrease? Two years ago Exxon Mobil
drilled almost five miles beneath the Gulf of Mexico, without
hitting oil. Now, in view of the much higher price, another company
is continuing to drill even deeper in the same location. Another
number worth watching is the U.S. rotary rig count, provided by
Baker Hughes, Inc., in Houston. The count peaked at 4530 in 1981
(when price controls were lifted) and had fallen to a low of 488 by
1999. By this August 15 there were 1990 rigs at work.
The one concession I will make to the peakists is to agree that
the “era of cheap oil” probably really is over. It does look as
though we now face a permanent and perhaps substantial oil price
increase. But that is not to say that production has peaked.
Meanwhile, let’s wait and see what the oil price is in 2010.
Politics, national and international, will surely be decisive.
Tom Bethell is a senior editor of The American
Spectator and a media fellow at the Hoover
Institution.
