IS PEAK OIL REAL?

In this September 2010 study a German military think tank analyzes how “peak oil” could impact the world in the coming years.  They discuss the importance of oil to the global economy, its connection to global conflicts and why the world is almost certainly running out of this important resource:

It is a fact, however, that oil is finite and that there is a peak oil. Since this study is mainly focused on understanding cause-effect relations following such a peak oil situation, it is not necessary to specify a precise point in time. Some institutions claim that peak oil will occur as early as around 2010. Depending on the development of globally relevant factors, we cannot rule out that peak oil could have serious security policy implications within the review period of the 30-year investigation perspective chosen for the SFT series. The dimension of the potential effects in conjunction with the above-mentioned ambiguity regarding the existing data on the future availability of oil therefore underpins the necessity to look in more detail at
the potential security policy implications for Germany.

Apart from the above-mentioned uncertainty factors regarding exact peak oil occurrence, it is foreseeable that when global peak oil is actually reached – and if transformation towards post-fossil societies has not been extensive enough or has occurred too late – it will no longer be possible from a certain point to cover the global demand for oil. Against this background and regarding the long periods of time needed for adjustments in the energy sector aiming at a far-reaching energy transition, it is today’s necessity (1) to thoroughly analyse our extent of oil dependence, (2) to identify – based on this information and in time- potential risks , and (3) to discuss alternatives for using oil.

…The main objective of the study is to raise awareness about the systemic importance of oil and, in turn, the derivable significance to security policy if peak oil is exceeded. The findings and results are expressly not meant to imply that resources will necessarily have to be secured with military assets. Rather, the study is to be understood as an appeal to think things through at an early stage and to develop both preventive and responsive courses of action. It does not aim at anticipating political decisions.

#1 What Does Peak Oil Mean?
“Peak oil” denominates the maximum oil production. It is the point in time when the production rate of a single oil field or of an entire producing region has reached its absolute maximum. This is usually the case when approximately 50% of the recoverable oil has been extracted. In order to predict global peak oil, it is necessary amongst other things to estimate how much recoverable oil, including newly discovered deposits, is available and how much, over time, can be produced per day. Using his own calculations as a basis, the US geoscientist Marion King Hubbert claimed as far back as the 1950s that the total production of several oil sources would form a curve resembling the shape of a bell – the Hubbert curve.

Source: www.theoildrum.com

The grey area in Figure 8 shows the world-wide production of oil. The diagram shows a mean and a median prediction of 15 peak oil studies, all of which forecast that the peak will be reached before 2020. The variability of these predictions is shown by the yellow area. The magenta-coloured area represents a population-based model of the International Energy Agency (IEA), which assumes that oil production will grow in relation to the population. Peak oil critics, in particularly the IEA itself, assume that the grey curve will remain congruent with the magenta-coloured population-based predictions and that there will therefore be no unanticipated shortages. Peak oil advocates believe that the grey area will develop within the yellow zone.

The general explanation for the existence of peak oil is the fact that fossil resources are finite. Most of the oil produced today comes from conventional oil reserves.210 Conventional oil, however, is only available to a limited extent, because it is a finite natural resource. There is therefore no dispute that there will be a “depletion point” – at least when it comes to conventional oil. Nobody knows for certain how peak oil will take course, however. A possible initial scenario, for example, would be a prolonged plateau of oil production, a stagnant global production rate. It is suspected that increasing oil prices could result in more investments being made in recovery systems, new recovery techniques, oil substitutes and energy-saving technologies. Technical progress also has its limits, however, for example if there is not enough time available for research.”

This is something I certainly don’t discuss enough here on the site and as a macro theorist that is inexcusable.  Oil’s importance to the global economy has come to the forefront in the last few years and studies such as this one help to shed light on the potential problems that could result.  I highly recommend reading the entire study here.

* Thanks to Tom Hickey for posting this originally.

 

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. All these people on here are all so pessimistic and talking about the end of the world coming because of peak oil. How many of you would have ever thought of an ipod 20yrs ago? Nobody. How about all you chicken littles leave the thinking to the smarter people in this world and you guys can go stare at stock charts or something.

    • “Look at the data, is bad; but hey, it does not matter, the market is bullish!” Sounds like average Wall St. firm analysis.

      Ok, now seriously, maybe there are a couple of comments which are too much gloom & doom, but there are real concerns about it. And you better leave emotions behind and try to think rationally about it and the effects it will have.

      For starters less consumption per capita and higher cost-push inflation, which means decreasing economic activity and output in the OECD, specially in USA and western Europe. All this will cause problems with employment and social/political trouble.

      And that’s being conservative and only for a start, there sure is going to be a challenge. Oil past $110 barrier in current dollars have always caused recessions in countries that suffered that.

  2. This post and related comments should be put in the best of section, not that it is a state of the art post (no blame here, this topic requires a huge amount of time) but thanks to some comments it allows one to obtain some important keys concerning this (not so) long term critical issue.

  3. Peak Oil – most definitely – is very real. And the upcoming collapse (=demand destruction) of the US (and Europe) won’t solve that problem. It very well could exacerbate the problems.

  4. Jeff Rubin’s perspective on peak oil can be read as somewhat positive. He predicts that manufacturing will return to domestic economies because the shipping costs dominate low global wages. The remainder of his forecast are evident like the death of suburbs and the re-population of city centers, the rise of small cars and cycling due to peak oil.

  5. From what I can tell peak oil is based on current conditions without considering possible economic and technical change. With the current economic slowdown accelerating oil consumption will fall significantly which will extend the date of “peak oil”. We buy much of our oil from Canadian tar sands which run into the United States. My understanding is we have larger reserves than they do. If they can produce oil at the current price so could we. The problem we have is that we are restricted by the federal government which is massively influenced by the green movement. Remove the greenies and there will be plenty of oil. As a side note I know someone who has a Tesla which has phenomenal acceleration and performance. He spent a lot of money to put solar on his house and runs his automobile basically at no cost for fuel. People adjust their style of living to what they can afford. Change is inevitable.

  6. Ultimately the debate centers not on whether peak oil is an ongoing reality but more on, will we avoid the effects of peak oil. I’m in the camp that we will avoid the gloom and doom as we have throughout our history. Transitional plateaus are not without their difficulties but they are necessary. The same happens in the stock market as technological gains of a previous secular bull market are digested. While markets are not perfect, pricing comes very close. Higher crude prices will seed their own destruction.

    Now if peak oil has not occurred than this is all a moot point.

  7. Can you invest on Peak Oil theory?
    How have you been doing in a non-Peak-Oil environment?
    Look at oil stocks as oil retraced to >$100. Look at oil sands stocks, during the Arab spring. Look at XOM annual report … can you even figure out their *oil* reserve life?
    For now, I’ll park Peak Oil, with world pandemic, Baptist’s “invasion of the yellow hoards” and Mayan 2012 (ok at least the last one is looking credible!).

  8. Can anyone tell me of any resources that “world kind” has depleted?

    Anthropologists, have theorized that the caveman was also fearful of peak fire…

    The winner of this question, will receive a replica of the Passenger Pigeon..

    • Can you tell me of one instance where humans went from a higher to a lower grade energy source? We went from wood/whale oil to coal and from there to oil/NG. Especially oil holds some really exceptional characteristics (liquid in room temperature, tremendous energy density, extremely low energy investment to extract it until now).

      There’s really no other energy source with that high a score. Even if we found an abundant energy source (nuclear fusion) we ‘d probably use it to synthesize oil from CO2 and water. Transportation (car, airplane, ship) more or less requires a liquid, high density energy source.

      • KK, you make a very valid point, with the answer of no…

        Could you please answer my question, at the behest of Col. Drake..

        • Dodos. I would like to eat one. Where did that resource go?

          Can I have my carrier pigeon replica please?

          Thousands of other species representing potential or realized resources wiped out by human over-exploitation or habitat competition.

          One could argue that this is irrelevant in many cases as the generic resource lost (eg food) was replaced with an equivalent resource (generically). For example, claiming plains for farmland and wiping out native grazing animals to be replaced with cows. The problem with this argument is that, by the same logic, I should be able to swap a fellow’s Ferrari with my Fiat and he should be fine with it because a car’s a car.

          Genericity is the defense used when it comes to energy resources. For example, moving from whale oil to crude oil. In these examples, a Fiat is being replaced by a Ferrari which is great! Extrapolation of this is used to justify claims that peaking oil is not a problem as we’ll find a generic equivalent and it too will be better than what preceded it qualitatively.

          The argument being made by Kostas, which I agree with, is that there doesn’t appear to be a higher quality replacement on the radar. (Fusion would cut it, but where is it?). Instead, we are actively pursuing technologies such as wind power and solar power, which are lower quality than fossil fuels. The era of getting Ferraris in place of Fiats is over, and we are now entering a period where we have to take Fiats in place of Ferraris.

          Suddenly, genericity doesn’t seem so attractive. We’re going to have big problems as the quality of our core energy resources degrades. There is no technology that enables solar energy to directly power a jet aircraft. It doesn’t matter if, generically, the joules available are the same, it’s energy quality that matters.

          • Globalization is build on top of two things:
            1) Globalization of financial capital (flows).
            2) Globalization of production thanks to cheap transports.

            The biggest problem end of cheap oil will cause in the short term is expensive transportation and an end to our current model of production AND logistics, this is globalization will be done as we currently know it.

            Not only that but ‘transporting energy’ will be equally difficult and way more expensive than now, for anyone who knows, oil is very convenient as an energy vector due to its concentrated energy which no other source can right now substitute in a massive and competitive way. Not that it can’t happen, but right now there is no way it would happen.

            A change to the infrastructures, logistics and transportation networks, even current urban development in places like USA (totally inefficient, and USA is already paying it big time in its balance of trade, SO you are already feeling the pain of increasing oil prices) would take decades and a lot of cheap energy readily transportable.

            A lot of low value goods will not be cost effective to produce abroad, shortening supply lines and eliminating redundant transportation will be of most utter importance. The reliance on electrified transport (rail) will increase a lot.

            The impact of all this will be huge on the economic outlook of different world areas, competitiveness will decrease and there may be some stagnation on different corporate sectors (as well as increasing intervention of states). This in the end will affect zombi-financiers and global financial capitalism as well.

            • It’s going to be very difficult for nations that were laid out according to the car. At least in Europe, villages were laid down before fossil fuel transport existed. In my wife’s home village, for example, people live not so far away from how they lived hundreds of years ago. A high number of small farms, cooperative farming practices, field rotation, horses still the primary form of transport in very steep terrain, water direct from the mountain stream, etc.

              But in nations like America and my own (Australia), with sprawling suburbs punctuated by huge, widely spaced malls, shelves filled by long-haul road freight, huge mechanized farms with few workers, costs are going to get very high and the quality of living will decline uncomfortably.

              A transition is surely possible, but politicians operating on a 2-4 year horizon lack the will or courage to engage multi-decade programs that must take us backwards before we can go forwards. The required transition therefore won’t start to occur until problems have already arrived, a time where there won’t be any surplus capacity to empower transition without subtracting from existing applications. People will not be happy about this, governments will be replaced, economies will contract, old aggressions will resurface, it is already happening.

              Capitalism doesn’t look 20 years ahead. It looks to the next quarter.

          • Mediocritas, despite your noble retort, you failed to answer the question and as such, are not eligible for the Passenger Pigeon Depletion Award…

            The fact is, no one will answer the question because it is a rejoinder to the “peak oil” question…

            Ever since, Col Drake, successfully drill the first well in 1861, there have been repeated concerns of oil depletion…It is a simple cycle of expansion and decline of production and each and every generation comes
            forthwith, with the empirical knowledge to forecast future events…

            What is beyond dispute, is that each succeeding generation produces superior skills and it is those byproducts that reshape the world in terms of efficiency and production…

            In order to believe in “peak oil” one must disavow man’s ability to answer future problems…

            Furthermore, I believe God Almighty has provided the ways and means for man to address future challenges, after all why would he design his planet any other way…!

  9. A Prius for everyone and the U.S. reduces it’s oil needs by 20%. A Nissan leaf for everyone and we reduce by 40+%. I realize that is a simplistic argument but it just seems to me that the problems of peak oil can be pushed out over and over again.

    • Hangemhi, excellent demonstration of reducing an argument to a simple, single element…

      A market change to compressed natural gas, would also do the trick…

      But in doing so, we would risk damaging the membership to The Club of Rome…

      Be rest assured, that one of these days the Peakers will peak out…