Oxford Energy Comment - The Peak Oil Theory

ODAC Comments

The Oxford Institute for Energy Studies (OIES) recently released a short report in September entitled The Peak Oil Theory (PDF, 0.47 Mb), a rather odd title given that the author, Robert Mabro, acknowledges Peak Oil as fact. In his comment, Robert is very critical of current attempts and methods to predict when Peak Oil may occur.

Here is a summary of ‘the problem’:

· The peaking in global oil production, Peak Oil, is a fact, not a theory

· It is expected to happen 2005 – 2012, but we will not know until at least a year after it has happened

· It is likely that before we even reach Peak, global oil demand will outstrip supply, leading to oil prices much higher than now

· Very few members of the general public, and arguably, media, are aware of the problem

· Whilst so few people are aware of the problem, they are not seeking solutions

· At the global level, we need to urgently develop what some have called ‘a new Marshall Plan to reduce energy consumption’, not just oil, but especially oil

· We use huge quantities of crude oil. Continuing our current levels of energy consumption using alternatives to oil is generally considered to be a pipedream, except most notably by many, but not all, economists who envision a smooth transition to as yet non-existent alternatives.

· There are policies that we can implement immediately to drastically reduce our oil consumption, bearing in mind that about two thirds of all oil is used as vehicle fuel e.g. reduce and strictly enforce speed limits.

What does The Peak Oil Theory have to say about this ? This paper makes many points that are either misleading or plain wrong.

Megaprojects summary: Many discussions around Peak Oil focus on reserves, how much oil is left in the ground that can be extracted economically using current technologies. Assumptions are then made about how fast we can extract the oil over the coming years/decades. The Oil Field MegaProjects analysis by Chris Skrebowski, editor of Petroleum Review and ODAC Board Trustee, avoids any discussion of reserves, and focuses on actual oil production, existing and planned. Current global production rates are known reasonably accurately, assumptions are made about the depletion rate from existing oil fields, and it is possible to calculate fairly accurately how much new oil is coming onstream for the next 5-6 years. This is because all major new oil projects are well documented in the public domain, and they typically take 5+ years to complete. We can therefore model oil production over the next five years, current production – oil lost to depletion + oil from new projects. Of course, the details are a bit more complicated, but well documented. The latest full version of Chris Skrebowski's Oil Field Megaprojects, Prices holding steady, despite massive planned capacity additions (PDF, 111 Kb), published in April's Petroleum Review looks at oil production projects that will produce a minimum of 50,000 barrels/day at their peak and are due to come onstream over the next few years.

ODAC Comments

OIES quotations in red, ODAC comments in black.

In short, it is not sufficient to say that an exhaustible resource will be eventually exhausted and that its production will decline until extinction after reaching a peak. These are not predictions. Such statements are of no interest whatsoever unless we are told the dates at which the peak will be reached, and the likely shape of the production curve before and after the peak.

That crude oil is an exhaustible resource might be obvious to Robert Mabro, but it isn’t to the general public. Indeed, some economists insist that there is so much oil remaining it is effectively an inexhaustible resource. As we are almost at Peak, we already have a good idea of the shape before Peak. The shape post-Peak is irrelevant as long as the general public and governments remain in denial that there is a problem - since we are not preparing for Post-Peak whatever the shape. Should Peak Oil get the publicity it merits, then post-Peak shape will make a big difference. A decline in oil production of 1% per annum will be difficult but manageable, 5% very difficult.

The authors and promoters of the peak oil theory clearly understand that a prediction must relate to the date at which the relevant event – the production peak – will occur. They did indeed stick their necks out and told us once that the peak will be reached in the late 1980s, then in 2000, then in 2005. They proved to be wrong on all occasions. World oil production is still rising year after year.

This is a common argument amongst economists and other sceptics – the forecast for Peak has always been wrong in the past, therefore it will always be wrong in the future. An odd position to take, given that Robert has stated Peak is certain. We should remember the lesson of the rise of Hitler and WW II. There were warnings throughout the 1930s that Hitler was intent on war, but of course no-one could give a precise date, and even if anyone had stated ‘September 1939’, would it have made any difference ? The point is, irrespective of the date, we should have been prepared.

One major reason for their propensity to bring forward the dreaded event seems to be an eschatological inclination. Consciously or sub-consciously they are inclined to predict the end of a world economy that was fuelled by cheap oil over several decades. They also want to catch the headlines. For these reasons they need to predict an early peak. To tell us, for example, that oil production will peak in 2030 and oil resources be fully exhausted by 2080 would have little impact. The prediction has to be about an imminent event.

ODAC would love to catch the headlines. We would very much appreciate it if the media would listen to what we are saying. Alas, the media is not listening. And to predict, for example, that global oil production will peak in 2030 when we believe all the evidence points to the period 2005 – 2012 would be unwise. The implications of such a close Peak are dire, we are not prepared, and various vested interests find it more convenient to predict a later Peak. Denial is also a powerful force.

We need to examine the methodologies underlying current predictions about the imminent peak in order to assess their plausibility.

This is an excellent idea. Unfortunately, Robert avoids out any discussion of what for many is the most important methodology – the MegaProjects analysis by Chris Skrebowski.

One may think that the term ‘crude oil’ is defined with great precision. It is not. The reason is that the substance referred to as ‘crude oil’ occurs under a wide variety of physical, chemical and geological circumstances. Thus the physical nature of that substance varies along a continuum from very viscous (e.g. bitumen) to liquid, to condensates (gases that are liquid such as dew at certain temperatures). But where are the border lines between viscous and liquid, viscous and solid, liquid and gas? These questions are subject of much disagreement and controversies. The issue is important because the world holds huge reserves of tar sands, especially in Canada, and in the Orinoco belt bitumen in Venezuela.

“These questions are subject of much disagreement and controversies” – The important point is missed by Robert, it is not the size of reserves, or whether any particular oil type is liquid, solid, gas, it is the rate at which oil can be produced. Although Canadian and Venezuelan oil sands hold vast quantities of bitumen, it will be very difficult to build up production to high levels any time soon - not enough natural gas, not enough water, not enough skilled workers, not enough homes for the workers, and very high costs. This last point is important – liquid from oil sands is expensive to produce. When there is a glut of oil in the market which forces down oil prices, production from oil sands may have to stop, if it can only be produced at a loss. Indeed, some large Canadian oil sands projects have already been postponed.

“The issue is important because the world holds huge reserves of tar sands, especially in Canada, and in the Orinoco belt bitumen in Venezuela… Yet unconventional oil is being currently produced albeit in small quantities. These volumes will undoubtedly rise over time in response to an eventual tightening of conventional oil supplies. ”

The issue is not relevant using the MegaProjects methodology because it focuses on production rates (flows). High flow rates from oil sands can only be gained over long lengths of time, with huge investments of money, manpower and resources, if at all.

In assessing the work and results of the proponents of the peak oil theory (by which I mean those who are predicting an imminent production peak) the following initial questions should be asked.

First, is the crude oil concept used the narrow one (liquids plus condensates) or the broader definition that includes tar sands and bituminous deposits?

Secondly, proven reserves estimates may be understated by oil companies that are negotiating production agreement with a host country, or overstated in discourses addressed to equity analysts or fund managers. OPEC countries may have overstated their reserves estimates in the 1980s when they engaged in major revisions in the context of intra-OPEC negotiations over production quotas.

Thirdly, as proven reserves are estimated on the basis of what can be produced under current operational/technical and economic conditions the potential is understated if long run changes in oil prices and technology are not taken into account.

The MegaProjects methodology includes all types of oil. Therefore the assessment of reserves is irrelevant except in the longer term, it is flows that count – how fast can we get oil out of the ground. The huge reserves in Canada are often compared with the huge reserves of Saudi Arabia, they are similar in size, except that Saudi oil is liquid and flows at about nine million barrels/day, Canadian oil sands are solid and produce about one million barrels/day.

A failure to allow for the effects of technology on the recovery rate results in a significant understatement of the volumes that can be ultimately produced. To illustrate the point: an increase in the recovery rate from the historical 25-30 per cent to 50-55 per cent that recent technology enables is equivalent to a 66-100 per cent increase in reserves from existing oil provinces even if no new discoveries are made.

Global recovery rates are about 35%, up from 30% over the last 20 years. For some fields the rate is much less, others well over 60%. Recovery rates have always ranged from 5 – 95% for individual fields. But “an increase in the recovery rate from the historical 25-30 per cent to 50-55 per cent”, we need more information on what exactly this means, and to see evidence to support this statement.

The authors of the peak oil theory ignore one or several of the points made here above. This results in predictions of a more imminent production peak and an earlier exhaustion than will actually happen.

“The authors of the peak oil theory ignore one or several of the points made here above” - No wonder.

Nevertheless the peak oil theorists are right on two issues: the significant decline in discoveries which peaked as long ago as in 1961 and the recent failure of discoveries to replace the full amount of oil produced. This tells us that oil is being depleted and that exhaustibility is a real issue. It does not answer, however, the when question.

Of course it does not answer the question ‘when’. But if these two issues were universally known and understood by everyone, we would be in a much better position to start tackling the problem and find solutions.

Exhaustibility is not a problem if there is time available to develop substitutes, and for technological progress to proceed further and delay the peak outcome. There is no doubt that the adjustments to scarcer and scarcer (which means more and more expensive) oil will occur. The critical question, once again, is ‘when?’ Once again one should emphasise that time is of the essence. The gestation lags of R&D and energy investments are long, sometime very long indeed.

One of the most respected oil depletion researchers, Robert Hirsch, along with his colleagues, published a report in 2005 entitled Peaking of World Oil Production: Impacts, Mitigation & Risk Management (PDF, 1.61 Mb). The two most important aspects of the report were, firstly that the report was accepted as excellent by both the pro and anti-Peak Oil camps, and secondly that it would take minimum 20 years to prepare for a smooth transition to a society using alternatives to crude oil. Robert Hirsch was recently quoted in a Houston Chronicle editorial as saying he thought “peak oil production could come in five years, almost certainly by 2020”. So exhaustibility is a problem, no ifs.

The peak oil theory, as defined above, has a harmful impact because it focuses on the wrong problem and in doing so it shifts attention away from more vital issues.

What is more vital than educating the general public / governments about Peak Oil ? This may be the wrong problem for economists, but not for ODAC.

Oil is of critical importance for the transport sector given the current technology of car, truck, plane and ship engines. But what matters is not oil as such but a liquid fuel. Alcohol, esters, vegetable oils are liquids which are indeed used to fuel motor engines. And there are technologies which yield petroleum products from natural gas (GTL) and coal (CTL). And the reserves of unconventional oil in Canada and Venezuela in particular are immense.

“But what matters is not oil as such but a liquid fuel” – We do not agree. As stated above, the reserves of oil in Canada and Venezuela are indeed immense, but they are near solid, especially in Canada, not liquid, and therefore of a quality that it will be difficult to contribute more than a few percent to daily oil production. GTL (Gas to Liquids) is technically possible, but very few countries are pursuing this because producing LNG (Liquefied Natural Gas) is much more profitable and less wasteful of the natural gas – producing GTL is a lot more energy consuming than LNG (about 40% of the original resource, gas, is used producing GTL). Moreover, there is an emerging global shortage of LNG. There are only three countries currently pursuing CTL (coal to liquid) seriously, South Africa, China and the USA. It is very energy inefficient, and most countries consider it unacceptable on grounds of increased carbon dioxide emissions. Biofuels (fuels from crops) will not produce more than a few percent of global liquid fuels without causing mass starvation, a topic hotly discussed at the moment.

There is no ‘physical’ problem in the long run.

This is clearly not the case.

And what we need to worry about now, and seek solutions to, are the investment and technical progress issues. Governments of OECD countries and private energy companies are not yet addressing these problems, worrying instead about the imminence of peak oil (a falsely alarming issue) for the security of energy supplies (a grossly misunderstood concept) and climate change (the most important about which the most significant polluters are unwilling to tackle.)

The imminence of Peak Oil is a falsely alarming issue ? Unfortunately, ODAC believes we do not have long to wait and find out.

Re-focusing the debate away from the peak oil paranoia and towards the need to invest in the production of liquid fuels at the right time will put us on the road to a solution.

Why would knowledge and understanding of Peak Oil (so-called paranoia) prevent investment – on the contrary would this not encourage investment ? However, before the global community / governments / businesses start investing in solutions, they have to be aware that there is a Peak Oil problem. But many appear oblivious and some are simply afraid to recognise it. Believing that we can continue to produce as much liquid fuels from alternatives as we are now from oil is a pipedream. But one that is pleasing and finds many supporters.