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.