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 But that is a guess and one that seems to have been outdated by new technology.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.
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