Peak Oil: There's No 'There' There - Michael C. Lynch
World Energy Source: World Energy Monthly Review: Americas: October 2005: Opinions2
Nearly 10 years ago, several geologists revived the theory of M. King Hubbert that oil production could be modeled using a bell curve fit to historical production and the peak (and total volume) thus projected, or that discoveries could be modeled and extrapolated to estimate total resources. The work received moderate attention, becoming a favorite of many in the environmental community, for example, but suddenly seemed much more valid when oil prices rose in 2004. Continuing problems have meant that more and more attention has been paid to these arguments, with a much greater presumption of its reliability amongst casual observers.
The only problem is that there's no 'there' there. The majority of books and articles assume that peak oil is near, quoting the few actual research works (and each other) in a great circle of citations, while repeating a variety of myths and irrelevant facts. The work that does include original research is not consistent; indeed, it is often contradictory even to the point of embracing arguments made by their critics, arguments they had earlier derided.
The peak-oil theorists are simply wrong. They are using bad economics and bad geology while ignoring the historical boom-and-bust cycles of the business.
First, bad economics. Many peak-oil enthusiasts are pointing to the recent surge in prices as an indicator that peak oil is upon us. Wrong. The recent price surge results from the fact that demand, particularly from China and other developing countries, was outstripping supply last year.
Then comes the bad geology. The peak-oil crowd believes that field size is determined by geology and that trends in discoveries can be extrapolated to create 'creaming curves' showing the total resource in an area. In fact, this method has been used by statisticians and geologists for decades, but only for geologically homogenous basins – and even there, the results have been inconsistent.
Part of the problem lies in the difficulty of estimating field size. Not only do early estimates include significant uncertainty, but ongoing improvements in technology and geological knowledge mean that the amount recoverable from existing fields grows over time. As a result, a creaming curve will be inaccurate because the more recent fields will not have reached their 'mature' size compared to the older fields (which usually still have some growth left in them).
Field growth has been well established in theory and observations, but the Hubbert modelers deny its existence despite their own research, apparently because to acknowledge field growth would invalidate their entire approach. Of course, their failed predictions would seem to do that, including having predicted a peak as early as 1989, and having estimated ultimate recoverable resources by country in 1997, then, in a 2002 update, finding that over half the countries had already surpassed those levels. This is a classic error in statistical analysis: assuming correlation equals causality.
Discovery comes from a combination of decisions: geological, political and business. In response to the oil glut in the 1970s, the Middle Eastern nations dramatically reduced their exploration. Why look for fields that you won't produce for decades? Most of the world is actually at an early stage of petroleum resource exploitation, with drilling densities far below those of the United States when it peaked in 1970. Nearly every area that has not performed well recently has suffered from poor policy decisions (such as excessive taxation of oil producers) and poor to negligent reservoir management rather than poor geology.
This is not to say there are not elements of fact behind the peak-oil arguments. Oil is definitely finite, but then so are coal, copper and zinc. And it is true that, in general, the industry moves from 'better' to 'worse' to 'worst' resources. Geologists have seen fields peak and decline, and basins become mature and yield ever-smaller increments of reserves. Yet, on a grander scale, the industry (and its scientists and engineers) have repeatedly overcome these problems.
This is not to claim that the process is a smooth one or that supply will automatically appear. The 1998 price collapse caused a reduction in upstream investment, and the subsequent mega-mergers slowed activity. Recent political developments in Ecuador, Venezuela, Iraq and Russia have constrained upstream investment, partly out of expectations that future prices will only be higher.
Finally, peak-oil advocates ignore the economic cycles, insisting that this is the first commodity cycle with a boom but not bust. That belief is based almost entirely on assumptions that are unlikely to prove valid. Oil demand growth last year was an outlier, and is unlikely to be repeated; this year's demand growth is clearly sharply lower. In all likelihood, prices will respond within the next few months, and the Malthusian alarmists will once again fade away until another generation of researchers unlearns the lessons of its predecessors.
Michael C. Lynch is the president and director of global petroleum service at Strategic Energy & Economic Research, Inc., a Winchester, Massachusetts-based consulting firm.
Nearly 10 years ago, several geologists revived the theory of M. King Hubbert that oil production could be modeled using a bell curve fit to historical production and the peak (and total volume) thus projected, or that discoveries could be modeled and extrapolated to estimate total resources. The work received moderate attention, becoming a favorite of many in the environmental community, for example, but suddenly seemed much more valid when oil prices rose in 2004. Continuing problems have meant that more and more attention has been paid to these arguments, with a much greater presumption of its reliability amongst casual observers.
The only problem is that there's no 'there' there. The majority of books and articles assume that peak oil is near, quoting the few actual research works (and each other) in a great circle of citations, while repeating a variety of myths and irrelevant facts. The work that does include original research is not consistent; indeed, it is often contradictory even to the point of embracing arguments made by their critics, arguments they had earlier derided.
The peak-oil theorists are simply wrong. They are using bad economics and bad geology while ignoring the historical boom-and-bust cycles of the business.
First, bad economics. Many peak-oil enthusiasts are pointing to the recent surge in prices as an indicator that peak oil is upon us. Wrong. The recent price surge results from the fact that demand, particularly from China and other developing countries, was outstripping supply last year.
Then comes the bad geology. The peak-oil crowd believes that field size is determined by geology and that trends in discoveries can be extrapolated to create 'creaming curves' showing the total resource in an area. In fact, this method has been used by statisticians and geologists for decades, but only for geologically homogenous basins – and even there, the results have been inconsistent.
Part of the problem lies in the difficulty of estimating field size. Not only do early estimates include significant uncertainty, but ongoing improvements in technology and geological knowledge mean that the amount recoverable from existing fields grows over time. As a result, a creaming curve will be inaccurate because the more recent fields will not have reached their 'mature' size compared to the older fields (which usually still have some growth left in them).
Field growth has been well established in theory and observations, but the Hubbert modelers deny its existence despite their own research, apparently because to acknowledge field growth would invalidate their entire approach. Of course, their failed predictions would seem to do that, including having predicted a peak as early as 1989, and having estimated ultimate recoverable resources by country in 1997, then, in a 2002 update, finding that over half the countries had already surpassed those levels. This is a classic error in statistical analysis: assuming correlation equals causality.
Discovery comes from a combination of decisions: geological, political and business. In response to the oil glut in the 1970s, the Middle Eastern nations dramatically reduced their exploration. Why look for fields that you won't produce for decades? Most of the world is actually at an early stage of petroleum resource exploitation, with drilling densities far below those of the United States when it peaked in 1970. Nearly every area that has not performed well recently has suffered from poor policy decisions (such as excessive taxation of oil producers) and poor to negligent reservoir management rather than poor geology.
This is not to say there are not elements of fact behind the peak-oil arguments. Oil is definitely finite, but then so are coal, copper and zinc. And it is true that, in general, the industry moves from 'better' to 'worse' to 'worst' resources. Geologists have seen fields peak and decline, and basins become mature and yield ever-smaller increments of reserves. Yet, on a grander scale, the industry (and its scientists and engineers) have repeatedly overcome these problems.
This is not to claim that the process is a smooth one or that supply will automatically appear. The 1998 price collapse caused a reduction in upstream investment, and the subsequent mega-mergers slowed activity. Recent political developments in Ecuador, Venezuela, Iraq and Russia have constrained upstream investment, partly out of expectations that future prices will only be higher.
Finally, peak-oil advocates ignore the economic cycles, insisting that this is the first commodity cycle with a boom but not bust. That belief is based almost entirely on assumptions that are unlikely to prove valid. Oil demand growth last year was an outlier, and is unlikely to be repeated; this year's demand growth is clearly sharply lower. In all likelihood, prices will respond within the next few months, and the Malthusian alarmists will once again fade away until another generation of researchers unlearns the lessons of its predecessors.
Michael C. Lynch is the president and director of global petroleum service at Strategic Energy & Economic Research, Inc., a Winchester, Massachusetts-based consulting firm.
posted by Marcel at 5:27 AM
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