04 June 2010

Michael Levi on Peak Oil: What's the Problem?

Michael Levi at CFR has a great analysis of the peak oil issue:
EIA has been steadily reducing its projections for 2020, from 104 million barrels per day (mb/d) in its 2007 projection to 92 mb/d in its most recent projections (released last month). [SEE FIGURE ABOVE]

But why have the projections gone down? It’s possible to more than explain the whole difference through revised expectations for economic growth. The decreased projections for oil supply have almost nothing to do with changed beliefs about the prospects for oil supply development. They are pretty much entirely explained by external factors.

Levi explains that changes in economic growth forecasts more than account for the reduced projections of of oil consumption:
The 2010 EIA projections expect GDP in 2020 to be 97.5 trillion (2005) dollars, for a 17% reduction in expected GDP. Contrast that with a 13% reduction in expected oil production. If the GDP-elasticity of oil demand were 0.64, the reduced GDP expectations would fully explain the lower oil production estimates. As is stands, long-run income-elasticity of oil demand is almost certainly higher than that, so revised GDP estimates more than explain the lower supply projections. Indeed the interesting puzzle may be why oil supply is so high in the new estimate, rather than why it is so low.
Of course supply and demand matter, but as Levi says, if this is peak oil, then what is the problem? Regardless of where one stands on the peak oil issue, it should be clear that it is at best only a minor issue (and perhaps irrelevant) as a factor that will drive an accelerated decarbonization of the global economy -- at least insofar as meeting the pace needed to achieve low stabilization targets. Achieving that goal will depend on other forces.


  1. "Regardless of where one stands on the peak oil issue, it should be clear that it is at best only a minor issue (and perhaps irrelevant) as a factor that will drive an accelerated decarbonization of the global economy --

    Actually it is a major factor. Perhaps the major factor. Decarbonization will happen only after carbon based fuels become more costly than the alternatives.

    Rarity of supply and a growing demand are the only sure path.

    Good policy is therefore a high tax no low mileage cars, a CAFE standard that sets a maximum rather than a minimum average fuel economy standard, and opening low cost areas (on shore, shallow water) for drilling that current politics blocks to exhaust low cost supply as quickly as possible.

  2. The problem is that oil is only a part of the CO2 problem. Coal is a much more significant problem, as it is more plentiful.

  3. I totally agree. There is a history of this, from oil executive Colin Campbell through co-opted 9/11 conspiracy theorist (and ex LAPD cop) Michael Ruppert.

    A fabricated conspiracy. Shale oil has made a mockery of it.

  4. Remarkable. Where else are people routinely confronted with examples of their beliefs not fitting in with the actual data and yet continuing with their beliefs???

    No, oil isn't peaking. Know reserves keep increasing despite continued and expanded use.

    No, CO2 isn't a pollutant and countries and economies don't need to "decarbonize" to fix a non-problem. Countries-economies need to be freed of the idea of ridiculous taxes that are designed to solve non-problems. Countries need the resources that inexpensive energy provides in order to deal with REAL problems, both human and "environmental".


  5. The problem is the expected demand from the developing nations whose populations and aspirations are both still increasing apace. Coal use will be increasing for the same reason. Predictions are always flaky but the assumptions behind the concerns are fairly believable. A continued stall only means continued worldwide recession and hardship.

  6. This topic makes my head hurt. It's half-way between the Templars/Grail and SETI. I went to college with a girl who had a job in a home for schizophrenics. One of the guys liked to get into discussions about her anthropology classes, and would discuss the topic intelligently, but after a time he'd he'd gradually and almost unnoticeably veer into ragtime. That's how I feel when I read about peak oil - it starts out seeming rational, but invariably goes into nuttiness.

  7. @Bruce. You display a common misunderstanding about Peak Oil. It isn't a peak in reserves. It's a peak in production.

    Yes, we keep finding more sources of oil, but it is progressively more expensive, difficult and dangerous to extract (see Gulf Coast).

    The good analogy is that while the swimming pool is getting larger, we're about to start sucking the water out of it with a shrinking hose.

    It's not the size of the pool that counts, it's the size of the tap.

  8. all oil fields and most mined resources for that matter exhibit the the same trait:

    the second half of the recoverable reserve is more difficult to extract and also comes out slower no matter what you do

    therefore once the world endowment of oil reaches the halfway point of what can be extracted world production will decrease no matter what is done........this is true for single fields and also for the world

    simply pointing to small reserve discoveries when compared to the actual scale of usage does nothing to make peak oil wrong, in fact its a symptom

    world oil discoveries of new reserves has lagged production for more than 30 years

    however this is not the only thing in play here, world oil exports is what matters......as exporting nations increase their own consumption against their declining domestic production their exports will fall off very rapidly thus decreasing the amount of exported oil on the world market very quickly, far quicker than the actual aggregate field decline rate....these is known as the land export model

    from a single field perspective it works like this:

    you drill into a new field, it has natural pressure or drive.....as that field is depleted when it reaches close to the halfway point of what can be extracted the field loses its pressure and the oil itself also naturally becomes far more dispersed amongst the strata or sand its trapped in. At this point it requires help to come out and even with help it starts coming out slower no matter what you do. The water cut rises and production falls off, it is irreversible and permanent.

    quite a bit of the oil is never extractable

    this is literally fundamental physics, math, and geology

    this has played out already in many countries and most have been burned by it, by their own refusal to acknowledge the data in front of them.......the US, UK, Mexico, Russia are amongst those

  9. carl said... 8

    "once the world endowment of oil reaches the halfway point of what can be extracted world production will decrease no matter what is done"

    There is no record of any mineral ever running out.

    We have changed behavior on some. When is the last time a dentist used gold fillings? Gold got too expensive and we figured something else out.

    There are a whole host of 'economically feasible' alternatives to oil if oil is priced at $200/barrel.

    In the US we stopped using oil for electricity production(except waste oil). Even the UAE is going to stop using oil for electricity production.

    We already have 'ready for production' vehicles that run on everything from Hydrogen to Coal Oil.

    Mazda already makes a 'dual fuel' Gasoline/Hydrogen car. Kenworth makes trucks that run on LNG.

    When the price of oil exceeds the price of the alternatives, we will use the alternatives. There will still be plenty of oil in the ground, just as there is plenty of gold left in the ground.

  10. @ Dean: Ummm.... I think I've got a pretty good understanding of the issues.

    For grins, let's look at your assumption... that the limit really is in production.

    So, why do Peak Oilers believe this is a problem???

    If production really is the rate limiting factor, then that doesn't seem like a major long term problem.

    Why? Well, throughout history, whenever humans have faced a limit in production of a resource, one of two things have happened.

    1. Humans figured out ways to INCREASE production. That initial period of scarcity lead to innovation. The result has been (usually dramatically) increased availability of the resource.

    2. That period of initial scarcity lead to alternative means of achieving the same goal, but by using different resources. Copper in telephone wire is a typical example... when copper got more expensive, and when it became clear that copper could only carry so much information, people changed from copper cable to fiber. Lower cost for telephone wire production, greater bandwidth AND it occurred in a smaller physical package... win, win, win.

    Please note that at no time in history have those solutions required massive taxation or massive government spending. Those solutions occurred because of market forces and because innovators were able to and had incentive to innovate.

    So, based on the experience to date, a production limitation doesn't seem like it's a terribly bad thing in the long term. Efforts to cripple the economy using massive taxes to combat non-problems are ultimately counter productive.


  11. I'm still worried about the "peak whale oil" problem. All those people using whale oil in their lamps. People increasing, whales declining ... what will we do when we run out of whales?!?!?!

    It's a crisis!

    Oops. Sorry. Just channeling the 1800s.

  12. @ Bruce and Harry

    as stated the oil never runs out, much of it is never extractable to begin with but that isn't the problem

    depleted fields have never been able to be revived, when the oil is gone the oil is gone as far as what can be extracted, again this is basic physics

    As far as alternatives and economics, you all might wanna consider what money really is and represents then consider the leverage energy provides........you are talking about substituting lower leverage sources for high leverage sources and when it comes to energy there must be a net gain as operating at a loss is simply not feasible. Can alternatives provide for some of the loss, sure they can absolutely, what they can't do is replace the leverage and volume. This fact has already been posted and shown on this very site.

    so far thu history we have stepped upward from lower density energy sources to higher density sources but rarely the other way and when it has gone the other way standard of living has contracted massively

  13. "Decarbonization will happen only after carbon based fuels become more costly than the alternatives. " -Abdul

    Decarbonization will happen only after non carbon based energy sources become more productive than carbon based ones.

    The biggest problem with the idea of Peak Oil being a major issue is that one has to completely ignore Peak Demand for it to be feasible. And we're no less likely to encounter Peak Demand than we are Peak Oil.

  14. carl said... 12

    "As far as alternatives and economics"

    Let start with a simple example, a passenger car that will last 100,000 miles that gets 20 MPG.

    If will consume 5,000 gallons of gasoline in it's lifetime. At $2/gallon that's $10,000 in gasoline.

    We can increase fuel efficiency today by 50% and make it a 30 MPG car for about $9,000.


    So our 5,000 gallons of gas goes down to 3,000 gallons of gas at $2/gallon. Spending $9,000 to save $4,000 doesn't sound like good economic to me.

    If we change the price of gas to $4/gallon. Our 20 MPG car costs us $20,000 in fuel. Our 30 MPG car costs us $12,000 in fuel. Almost break even.
    But we care about the environment pay the extra $1,000 in 'life cycle costs' so we can feel good about how eco-friendly we are.

    Then we have the weight issue in automobiles. In 1976 the weight of the average automobile in the US hit 4,000 pounds. By 1981 the weight had dropped to 3,200 pounds. By 2004 the weight was up over 4,000 pounds again.

    Until very recently, the inflation adjusted cost of oil has been fairly constant. There has been no economic reason to buy a more fuel efficient vehicle, and no motivation for manufacturers to produce a vehicle no one wanted to buy.

    The current inflation adjusted price of oil is right about where it was in 1979, the last time peak oil occurred.

  15. Harry: Why do YOU think you care more about "the environment" than others? Why do you believe that things will be better with more taxes?

    It's a silly proposition to think that if you ONLY increase the cost of the fuel that there will be improvements in "the environment". Please show examples in history when dramatically increased taxes on major goods lead to improvements in the the economy, human well being, or the environment.

    BTW, interesting that you actually posted the statement, "The current inflation adjusted price of oil is right about where it was in 1979, the last time peak oil occurred."

    Please take a moment to read what you just wrote and think about exactly what it means for your beliefs.


  16. Harry
    Some alternatives are here already at only slightly increased cost. eg How about "53 mpg" for a luxury car?

    And maybe the next generation will have microturbines:
    with "..up to 100% improvement in fuel economy over a traditional diesel..."

    Going back further than 1979, apparently the price of oil has always been related to the price of gold:
    ie "An average of 15.47 barrels per ounce of gold" since 1946.

    Clearly higher taxation did accelerate the development of the small Euro diesel engines. Development acceleration through taxation therefore has a history. The internet was accelerated by public funds too. Hydro-power has repaid it's investment many times over and allowed large-scale aluminium production. Classic carrot and stick management.

    The totally free market is imperfect too because it often gives us well-marketed mediocrity which holds up progress. Ninety-nine percent of your Wintel computer system is redundant bloat that slows the computer down. IMHO the classic piston engine is also standardised mediocrity - we should have been using microturbines with mag-drives long ago. And the qwerty keyboard was actually conceived to slow us down :).

  17. Bruce
    Just how much of the very expensive military efforts to protect Arabian oil fields, which in turn protect the petrodollar, can be considered as effective taxation? I'd argue all of it. Even the Afghanistan effort came about from blowback - via mainly Saudi bombers whose main stated aim was to "expel Western influence from the Gulf". Now just imagine if a part of that money was redirected towards energy research instead. Just a thought.

  18. jgdes: Yeah, taxation lead to increased fuel prices which lead to development of small Euro diesel engines. Again, how does this development positively affect the environment? How does use of small diesel engines lead to improved lives for humans??? It's a workaround to a manufactured problem.

    RE: internet: The internet was initially funded by the defense department (DARPA). There wasn't a new tax enacted to deal with a specific problem. And, that development only went so far. Things REALLY took off once the government got out of the business of establishing the initial concept. Once it was privatized, use exploded.

    Wouldn't it be preferable to actually address REAL problems rather than use circular logic to enact taxes to address phantom problems?


  19. What is at an end is cheap oil. This is ultimately a good thing as more expensive supply spurs innovation. The fact is, as long as fossil fuels remain cheap, we'll never transition away. Economics will always be humanity's chief concern.

  20. Christopher: Ultimately a good thing to see increased energy prices? Really?!?!??

    Seems you have not had the opportunity to visit less developed parts of the world... the places where energy is relatively expensive are the same places where people and the environment do poorly.


  21. Bruce said... 15

    "Harry: Why do YOU think you care more about "the environment" than others?"

    I don't care about the environment any more then others. On a priority list of 10, environment comes dead last. Which is why I think getting off of 'fossil fuels' for environmental reasons will never happen.

    Case in point, Andrew Revkin, the environmentalist at the NY Times heats his home with oil. He obviously cares much more then I do about the environment but won't part with the 'cost of an alternative method' to heat his home.

    "BTW, interesting that you actually posted the statement, "The current inflation adjusted price of oil is right about where it was in 1979, the last time peak oil occurred.""

    Nothing complicated at all about this, the Saudi Oil minister passed Dope Dealing 101 with flying colors. History shows they keep the price of oil low until the average weight of a US car reaches 4,000 pounds. Then they bump the price of oil as high as they can while maintaining the rate of consumption.

    This is no secret, the Saudi Oil minister has publicly stated that a price over $80/barrel would encourage widespread adoption of fuel efficient hybrid vehicles, which is not in Saudi Arabia's financial interest.

    I personally don't find the concept of 'peak oil' plausible at the moment. The Saudi's clear $50/barrel profit at current prices. The contract Cinopec signed with Iraq for oil production services worked out to be Cinopec would get $2/barrel for every barrel extracted, the Iraqi treasury would get the balance.

    If one wants to understand why I have an interest in fossil fuels one should research King Khalid Military City.

    Fort Hood Texas is the largest military installation in the world. It houses a population of 65,000.

    King Khalid Military City has a 'design' population of 65,000.

    Hansen et al paint a pretty grim picture of what the world looks like 100 years from now if we don't find our way off of fossil fuels.

    What does the world look like 90 days after the Saudi Royal family is eventually overthrown by some nutcases?

    All governments are eventually overthrown, the different in democracies is that we do it with ballots not bullets.

    Please take a moment to read what you just wrote and think about exactly what it means for your beliefs.

  22. Bruce
    Of course it's better to get more useful work out of the same amount of fuel. How could it not be? If that worked on a larger scale it would be better for everyone.

    We know from 2007 just what happens with a sudden oil supply problem; it very quickly affects food production, imports, cooking and heating and hurts most especially those less-developed nations that you mention (who by the way will not be forced to pay any carbon taxes).

    It seems prudent to plan ahead to avert such a likely crisis. The alternative is to assume that something will just turn up like the good fairy.

  23. jgdes: Agreed that it makes sense to plan. It makes sense to investigate alternatives. What does any of this have to do with peak oil? What does any of this have to do with the belief that one needs to add additional taxes to carbon energy sources?

    What really needs to happen is NOT additional taxation to increase costs for everything for everyone. All products use energy. All products require energy to transport goods or services to their customers. All commerce REQUIRES energy. Increasing costs for everything will lead to people being less well off. That's bad for everyone.

    BTW: You are extremely naive if you believe that increasing costs WON'T be applied to those in less developed nations. How could it not be?

    Already there is pressure on less developed countries to not develop. There is immense pressure to not use less expensive carbon based energy (see the row in South Africa's proposed coal power plant as a recent example). South Africa has frequent brown outs. How can the economy of the country develop without energy? Why do you think China is building energy production capacity at such a tremendous rate? Because energy IS the economy. Artificially handcuffing the economy makes no sense at all. Or, put another way, perhaps you could provide support for your beliefs by listing the many examples in history when increasing taxes lead to increased innovation and improvement in the economy, the environment and improvement in the lives of people?


  24. Bruce - the vast majority of energy for global transportation is supplied by oil, a resource prone to major disruptions and all too often in areas run by despots or that are unstable. It is also a rather inelastic supply and it can be difficult to bring sufficient supplies online quickly to meet growing demand. While there is considerable disagreement of when it will run out, we can (almost) all agree it is finite.

    Global economic growth would be far more resilient if our transportation energy sources were more diverse or based on a more stable supply. The only thing that can spur diversification is higher oil prices.

  25. So, you are suggesting that in order to prevent possible problems in the future, we should actually work to cause problems now?


  26. Oil shocks have happened and will happen again ($140/bbl oil was only two years ago). Oil is already getting more expensive due to increased demand and more expensive sources. Since almost everything involves oil somewhere in their processes today, all prices go up hurting the poor significantly. This is true whether you or I want it to be.

    Personally, I view transportation's dependence on oil as our civilization's Achilles heel. Having a resilient global transportation sector would do far more for the poor in the long run than praying that oil remains cheap. So yes, I view the recent rise in oil prices to be a good thing. No deliberate problem creation required.

  27. Just for grins, let's say that you are correct... that it really does make sense to seek so actively seek alternatives to oil for transportation purposes. You suggest that adding taxes is the way to go, so that money can be provided to support investigation of alternative energy. Is that about it?

    Now, lets look what ACTUALLY happens when taxes are collected.

    They don't go to where they were necessarily intended.

    Specific example: US Social Security taxes were collected to deal with a specific program. Over time, as politicians looked to pay for other programs, social security taxes were diverted to pay for things other than social security. Now, there isn't enough money to pay for social security commitments.

    The other issue: can we REALLY afford to pay for a new tax?

    US GDP: ~ 14.4 trillion
    Total US Debt: ~ 55 trillion

    IF a new tax were implemented on carbon, not only would it crush the US economy, itwould likely get diverted to help pay for the rest of the US debt, just like social security taxes were re-purposed.

    How are things in the UK? Mmmm... no money.

    What about the rest of the EU? Mmmm... no money.

    So, while I think your approach (taxing the stuffing out of energy in order to solve what is a non problem), is directly analogous to giving chemotherapy to someone with a history of cancer but no actual disease, I think going through the practical issues means that there isn't a way to PAY for those new taxes and have any reasonably expectation that they will achieve the stated goal.


  28. heh this is almost comical

    a permanent decline in oil production and its looking like it will be quite steep especially from a world oil export standpoint means declining energy resources worldwide which is a pretty destructive and deflationary force

    now what do you think that does to our ponzi economic system which is predicated on non stop infinite growth on a finite planet?

    having said all that isn't worrying about taxes kind of like avoiding what is really important here? as it stands now our govt can't even come close to affording the spending its doing, would it not make some sense to possibly actually consider what it can afford and what can be saved and used in an energy constrained environment?

    might be prudent to deal with all the things like our banking system that cannot survive a declining energy environment too, fractional reserve fails miserably under a long term deflation situation

    just some food for thought