Monday, September 19, 2011

Plateau Not Peak

You hear a lot these days about the theory of “peak oil.” How we’re on—or soon will be--the down slope of global oil reserves and how it’s only a matter of time before our seemingly insatiable demand will eat up all our reserves and we’ll be looking at the end of the oil era. Marion King Hubbert was the forefather of the peak oil movement and created some of the models that are still used today to estimate oil reserves. In Saturday’s WSJ, Daniel Yergin had an article called What’s Wrong With Peak Oil (sub req) that examined some problems with Hubberts’ approach:

Hubbert used a statistical approach to project the kind of decline curve that one might encounter in some—but not all—oil fields, and he assumed that the U.S. was one giant oil field. His followers have adopted the same approach to assess global supplies.

Hubbert's original projection for U.S. production was bold and, at least superficially, accurate. His modern-day adherents insist that U.S. output has "continued to follow Hubbert's curve with only minor deviations."

But it all comes down to how one defines "minor." Hubbert got the date exactly right, but his projection on supply was far off. He greatly underestimated the amount of oil that would be found—and produced— in the U.S.

By 2010, U.S. oil production was 3½ times higher than Hubbert had estimated: 5.5 million barrels per day versus Hubbert's 1971 estimate of no more than 1.5 million barrels per day. Hardly a "minor deviation."

"Hubbert was imaginative and innovative," recalled Peter Rose, who was Hubbert's boss at the U.S. Geological Survey. But he had "no concept of technological change, economics or how new resource plays evolve. It was a very static view of the world." Hubbert also assumed that there could be an accurate estimate of ultimately recoverable resources, when in fact it is a constantly moving target.

Hubbert insisted that price didn't matter. Economics—the forces of supply and demand—were, he maintained, irrelevant to the finite physical cache of oil in the earth. But why would price—with all the messages that it sends to people about allocating resources and developing new technologies—apply in so many other realms but not in oil and gas production? Activity goes up when prices go up; activity goes down when prices go down. Higher prices stimulate innovation and encourage people to figure out ingenious new ways to increase supply.

Hubbert’s flawed view of oil reserves as being static and not related to economic factors is one that you often find with those who predict decline and doom in various areas. If nothing changes and we keep heading in this direction then ____. But of course things always change and the direction we’re headed tomorrow may be completely unimaginable today.

Instead of viewing global oil reserves reaching a “peak,” Yergin says we should consider it more as a plateau.

But there is another way to visualize the future availability of oil: as a "plateau."

In this view, the world has decades of further growth in production before flattening out into a plateau—perhaps sometime around midcentury—at which time a more gradual decline will begin. And that decline may well come not from a scarcity of resources but from greater efficiency, which will slacken global demand.

One of the false choices often presented in energy discussions is between supply and efficiency. But there’s not necessarily any reason that we have to choose one and exclude the other. We can continue to explore for and recover new oil reserves in areas previously ignored using new technology and new methods. At the same time, we can become increasingly efficient in how we use the oil so that the same amount will yield greater energy output in the future. Oil is going to be part of our energy future for a long time to come as we settle into a plateau instead of tumbling off a peak.