Oil Production Peak

If you google “peak oil” you might become quite disconcerted by what you find. (Do it yourself!) Your second search result will read as follows: “Life After the Oil Crash: Civilization as we know it is coming to an end soon.” Websites such as this one join the ranks of the many journalists, authors and scientists who assert that world oil production has reached its maximum. According to their scenario, oil production will decline sharply in a few years so human civilization will enter a new “dark age,” resulting from a severe energy shortage. The picture will become even more tragic if you agree with some journalists in their anticipation of international conflicts and world wars over energy resources that will destroy civilization in its entirety. In considering current international crises and wars, you might even be persuaded to agree with these dire predictions.
Peak oil theory was first proposed by M.K. Hubbert, a geoscientist working for Shell research lab.  In 1956 he presented a paper to the American Petroleum Institute, predicting that the United States oil production would reach its peak in the early 1970s and the global oil production would also peak five decades later in the beginning of the 21st century. Hubbert’s forecast was proven correct in 1971 when U.S. oil production in fact reached its maximum and started to decline thereafter. To many journalists, this was a satisfactory reason to believe that if Hubbert was right about U.S. peak oil, it is likely that he would be right on global peak oil too. Will there be any reason to suppose Hubbert was not right about global peak oil? The answer is in fact mixed: both yes and no.
Hubbert was right about what happened in the United States, but before making global predictions it is important to notice the fundamental economic structure involved in the oil market. Since the United States is only one of many oil producers, a decline in its production will be offset by other producers. A single producer alone cannot influence global oil prices significantly. In contrast, if global oil production declines, the resulting shortage would affect prices significantly. These high prices would play a major role in postponing peak oil for a long time.
If people anticipate that global oil production will peak at a certain time, they also understand that at some point the monetary value of oil will be significant. This awareness makes oil even more valuable today. An investment in oil now may have great monetary returns later once the product becomes scarce. This buying of oil will raise the current oil demand and consequently drive its price higher. This increase in price and its major effect is what peak oil theories ignore.
If the price increases, extraction of many abandoned high cost oil wells (such as deep wells or low pressure ones) will become profitable, hence motivating oil companies to extract from high cost oil wells.  High prices will also stimulate new exploration activities leading to discovery of new reserves. Moreover, as oil price goes up, more scientific effort is directed towards oil-related research hence improving extraction technology which also increases the available resources. For instance, it is worth noticing that total proved reserves in 1980 has been 667 billion barrels while after 25 years of production, the proved reserves not only did not decrease but almost doubled in 2005!   According to a recent report from U.S. Department of Energy, based on updated information about proved oil reserves and without any significant change in oil price, global oil production is likely to reach its peak in 2050.
Furthermore, if the high oil price decreases its demand, the peak time predicted by Department of Energy could even be delayed by a few decades. Many people tend to believe that oil price does not affect its demand. This might be true in the short run because it is hard to find a substitute for it quickly (You cannot get rid of your huge American SUV right away nor can electricity producers turn off fuel inefficient power plants!) However, in the long term high prices will lower demand (making you buy a Toyota next time you plan to buy a car, or making electricity producers build more efficient power plants or switch to alternative energy sources). Unless the price of oil goes up and stays high enough, it is not profitable for people and firms to invest in reducing their demand for oil or switching to alternative sources of energy. Once people and firms invest in efficiency and alternative sources of energy, there is no reason to switch back even if the energy prices drop significantly.
Oil is a non-renewable resource and for several reasons, including its exhaustibility, we should reduce our dependence on it. Hubbert’s prediction about peak oil was based on assuming fixed available resources and a fixed consumption trend. It was true for U.S. oil production but it will not be true on a global scale. If we do get close to peak oil, the price of oil will increase significantly, resulting in increased production and decreased consumption, thereby smoothing the peak effect. Thus, peak oil is not within the lifespan of the current generation of human beings.

Copyright Les Chatfield