Misunderstanding Peak Oil

 Daniel Yergin's book claims to "debunk" the theory of peak oil, and has thousands of misled people gleefully waving it in front of green energy advocates as vindication of their skepticism. The misunderstandings extend even to the Technology Review book review there. I would have expected something that bucked the trend of stupid from an MIT publication, but apparently it'll have to serve as the latest example of people that don't actually get what peak oil means.


For those of you who want a balanced critique of Yergin's book, I highly recommend this discussion on The Oil Drum, a very high quality energy-focused blog.

For the rest, I want to just go over what peak oil exactly means. The straw man's version of peak oil is the one postulated by a flawed application of the Hubbert curve of 1970. In that year, a USGS geologist postulated that American crude oil production would follow a finite resource depletion curve, given by a symmetric logistic distribution. The curve below shows the mathematical function, normalized on the x-axis to a standard distribution and on the y axis to cumulative production.

Hubbert was studying finite resource depletion in regional oil fields. Localized, his theory is correct: individual oil fields tend towards this behavior as their reserves are depleted. Unfortunately, generalization of this theory to the system formed by existing oil deposits, price mechanisms, and global demand is what most people think of as "Peak Oil," and that just isn't true and never was. 

Introducing the other variables at play here, the picture looks significantly different:

If I could use that graph to define peak oil in one statement, I would say:

Peak oil is an increase in the marginal increase of the price of oil required for the economical extraction of a marginal barrel of oil. Eventually, the price required to extract more oil will be too high for society to bear.

In economic terms, it's the price elasticity of supply of oil decreasing. That is, a change in price of a given magnitude will yield an increase in the production of oil much less than would have happened, in, say, 1970. We can see that this is the case from the graph above, since in real terms prices have increased over the past 8 years but the supply of oil has not responded in the same way - in fact, we seem to have reached a plateau.

So does peak oil mean that we will ever run out of oil? Yes and no. Technically speaking, we will run out of the oil we are used to getting - light sweet crude - in only a few years. But if your question is if we will run out of any kind of crude, then the answer is no, we won't. Yergin makes this point sound like a conceit, but in reality the intelligent peak oil camp has already known this. What will happen, however, is that the cost of finding and extracting reserves will go up as the fuels get heavier, more sour, dirtier and more expensive.

What I have to emphasize is that this is and will always be a dynamic process - again, something that Yergin and his stupider supporters think  is a conceit, but really isn't. People will still keep finding oil deposits, maybe even some light sweet crude. But that isn't an indication that these deposits will be available forever: the frequency of new discoveries has been decreasing as all the easy spots get found. New technologies will enable extracting newer, less economical oil types. But always the cost will increase (since nothing but a higher oil price will support it). Horizontal drilling and steam well stimulation are fantastic, ingenious technologies, but the fields they stimulate are lower producing and produce lower quality oil than historical wells. There are literally thousands of wells drilled in the Bakken shale that are producing as much as maybe a handful of gulf oil rigs like the Macondo one that spilled crap into the Gulf. And for all the fantastic effort to develop the tar sands of Alberta, they are relatively unproductive in terms of volume, even to the point where they haven't even been able to do more than offset the decline from other sources.

Ultimately, however, the price of oil will keep going up because the price will be less sensitive to the quantity demanded. No amount of new technology or new discovery is going to allow the price to go down to where it was before. Oil will not disappear, people will still find new supplies and develop new technology, but it will become uneconomical to use it like we will today. That is what peak oil is all about.

Under the peak oil paradigm, every time we start to exhaust a particular type of hydrocarbon resource, it brings about a (gradual) "step change" in prices until the next best quality hydrocarbon resource becomes economical. We saw it when light sweet crude started to run dry on land, so people started drilling offshore. We saw it when continental shelf oil was harder to get, so we drilled in deep water or the arctic. We saw it when all of that was more difficult to find, and so we began developing tar sands, which are economical only at prices of $60 a barrel or more. Think about that: the US is buying over 1/3 of its daily oil consumption that has a cost of production of $60 a barrel, when in 1990 gas was going for $20 a barrel. I think there's very strong evidence for the peak oil proposition.

This all brings me back to the Yergin book, and the TR review of it. The difference between what Yergin advocates and what the peak oil paradigm means is actually quite small. What he thinks is that new technology will allow us to avert any crisis caused by a shortage of hydrocarbon supplies in the short term - that is, that the rate of depletion is lower than most think - and that energy efficiency will allow society to shake off oil in the medium term. Essentially, Yergin is a "late peak oil" advocate while many others are a "now peak oil advocate." Yergin consistently criticizes a dinosaur from the late 1970s that has become fixated in the public mind, while the rest of the field moves on. We agree more than he knows, and the TR reviewer should be less retarded about it.


As a final note, reading the review and it comments, it disturbs me in particular that people are beginning to use the same rhetoric to describe peak oil as they are global warming - as in, do you believe in it? rather than do you see the preponderance of evidence for or against it? This is an indication to me that it is becoming possibly as much of a politicized issue as climate change, and the more people get involved and form beliefs based on straw men like the one attacked by Yergin, the lower the level of debate will be.

My sole comfort is that unlike AGW theories, the impact of being wrong about peak oil will be felt in the very short term.