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So... How Do We Know Oil Is Peaking?

The redoubtable Stuart Staniford has posted another excellent piece over at The Oil Drum, this time explaining for people who are new to the concept just why reasonable people can assert that oil production is at or very near its peak, and we're headed to a world of gradually -- and potentially rapidly -- declining petroleum reserves. It comes, in part, in response to an article in the New York Times (subscription required) laying out for lay readers the peak oil argument. If you're still hazy about why anyone would believe that oil production has peaked or will do so soon, read the Oil Drum piece first.

Stuart's piece makes clear that there's no single piece of evidence saying definitively that oil has peaked, but rather a collection of circumstances that point, in total, to this conclusion. Less certain, however, is what happens afterwards. Implicit in some of the peak oil work (and notably absent in Stuart's essays) is an assumption that once oil production has peaked, the collapse of civilization is just around the corner. And while we're hardly ones to discount a good end of the world scenario, we should emphasize that while peak oil is a geophysical phenomenon, the social and economic responses are not -- and we have a lot more control over our societies than we often acknowledge.

Comments (9)

Joe Deely:

This "Peak Oil" thing is just ridiculous... So what if oil production peaks... it will definitely peak at some point. As we near this point prices will rise... we will come up with alternatives and hopefully these alternatives will create less CO2.

Having oil prices rise will be good.

BYW, even a basic understanding of Economics is not shown by most of these "Peak Oilers"

For instance in the Oil Drum piece Mr. Staniford says:

"As of right now, production has been flat-but-bumpy since late 2004. The peak month of production is presently May 2005. This is true despite high oil prices giving strong incentives to produce more oil."

According to him, we should be producing more oil now because the price is so high. What about demand?! If prices rise -demand falls and less production is needed. This is basic Econ 101 !!

There is currently plenty of oil in the supply-chain... we do not have a shortage.. and no more production is needed.

For what it's worth, demand for energy isn't as elastic as simple supply-demand curves would suggest. That is, increases in price don't always result in decreases in demand. Moreover, demand continues to grow in China and India in particular.

This isn't an issue of an immediate shortage, it's an issue of increasing competition for shrinking supplies over time.

The economics portend far more than demand elasticity. The entire idea of discounting future costs and earnings is predicated on growth, which is predicated on there being a future means of producing goods and services at least as cheap and easy as today's. With peak oil, that's in doubt, and it's time for Economics v2.0.


At today's prices Canada has enough confirmed oil reserves to provide for all of North America's projected needs for the next one hundred years minimum. All that's required is the decision to build the processing and distribution systems.

At today's prices Russia has enough confirmed oil reserves to provide for all of Europe's projected needs for the next one hundred years at a minimum. All that's required is for Russia's economy to be made efficient.

At today's prices the mideast has enough confirmed oil reserves to provide for all of Asia's needs for the next one hundred years at a minimum. All that's required is for the mideast to settle the issues producing its internecine strife.

At present cost rates there is an abundant supply of oil from confirmed reserves that will meet all present and projected increases in demand. There are no inherent financial or supply issues that justify concern over the availability of oil for society's needs.

There are obvious cultural, social, political, religious and legal obstacles to the reliable of supply of oil. Many of these impediments are substantial, increasing and completely independant of reason or the price of oil. But they do _not_ have anything to do with the amount of oil known to be available right now as measured against any reasonable projection of demand.

In the three areas mentioned above there are projected reserves at least as large as the confirmed reserves. There are additional areas that are regarded as promising but have not had any exploration whatsoever that are supected to be in excess in scope of both the confirmed and projected deposits.

Even at today's oil prices clean coal technology is being developed that will make coal at least as attractive an energy source as oil. There are known energy equivalent, highly marketable deposits of coal that are several orders of magnitude larger than all known oil reserves combined.

In the unlikely event that Canada reverses course and starts trying to conform to the terms of the Kyoto accord that it signed several years ago then North America may start to feel oil shortages.

In the likely event that Russia continues to employ intentionally inefficient oil policies for geo- and local political reasons then Europe may well start to experience shortages.

If the mid-east persists in allowing religious, tribal and cultural perogatives to shape their oil policies then Asia definitely will suffer.

But if peak oil refers to the amount of physical supply of oil usable at today's cost, rather than the unwillingness to extract, process and deliver it at any cost, then advocates of peak oil are ignorant fools or willful liars. Every time the price of oil exceeds the cost of water the media is full of doomsters, hucksters and elected snake oil salesmen trying to sabotage modern democratic, capitalist society on the basis of supposed oil shortages. After every substantial long term price increase the amount of known oil reserves is substantially increased to the point where the price drops back down to background level. Yet with every temporary price increase there are hordes of people coming forth to tell us that they have no agenda but that we should abandon our economy, political system, legal system, values, and our entire way of life.

Spare me!!

Wow - I thought Julian Simon and Herman Kahn had passed away.

Northernguy - so, oil prices are high, and supplies are abundant. All that's constraining sufficient production for at least a century is dumb, kooky or evil people. Since this is all so easy, why don't you head out and "produce" some oil? How about right after lunch? Just head on out and rassle up some of that great gooey stuff. Should be easy, you being so virtuous and all. Heck, you don't have any of the character flaws or evil intentions that are the sole reason there are any constraints on supply. Attaboy.

Joe Deely:


Your point about the demand curve for oil is well taken... however, as prices for oil rise demand will eventually decrease. Peak oilers always seem to imply that demand is inexorable.

Also, the implication is that we MUST have oil. Oil is not like air or water... there are substitutes. If the economics make sense we will move towards these substitutes. Also, we continue to use less and less energy per $GDP and as oil prices rise this trend will accelerate.

Of course, there will be hiccups and economic growth may decrease in the years where we see large jumps in price... but over the long term oil will be a small bump on the road to increased wealth for all of the world. - wow sounds like Julian Simon !

Now, CO2 and global warming, that is a real problem and what we need to be concentrating on... Peak Oil is a joke.

Joe, thanks for your second post - you're helping me understand your views better. I agree with you - demand for oil is not inexorable, and we certainly have the wits to find substitutes if we choose to use them. I see hydrocarbon supplies and global climate disruption as 2 facets of the same problem (source and sink). The larger problem is energy intensity, or what I call "energy density". We've designed our economy around very concentrated energy sources. These sources result from storing, over eons, of some annual biological productivity from photosynthesis. It's a vast "bank account". But we're spending down the account, and pretty soon, we're going to have to learn to live on annual solar income instead of stored solar savings. (The only other presently-known source of "dense" energy is nuclear fission - what part that will play in our future energy mix is beyond my ability to guess, but I'm not hopeful about its prospects, for many reasons.)

Peak Oil may be happening now, or it may take 20 to 40 more years. As you point out, that's secondary, since we may run out of atmosphere before we run out of hydrocarbons. But we have to think in time scales beyond 20 to 40 years to transform our industrial infrastructure, our economics, and our cultural norms about "growth".

I believe that there's one powerful, relatively easy, obviously beneficial and completely necessary strategy we need in order to buy time - that's to vastly increase the efficiency with which we use energy. Right now, we actually need to find much more efficient ways to use oil than to find substitutes for oil. The 2 tasks operate in much different time scales, but we need the relatively quick and cheap efficiency if we're to have a prayer of pulling off the relatively slow and expensive transformation of our energy infrastructure.

Unlike many "Peak Oil" devotees, I think we can pull that off - if we don't let ourselves be blinded by ideology or hubris.


David Foley writes rather contemptuously that I should go and _rassle up_ some of that oil if it is so easy. Actually, I don't have to. It's already been done if he really does mean the supply of oil as he claims in his post. The supply part is easy as I claim. The fact that he doesn't know about it doesn't mean that it doesn't exist. It just means he doesn't know much about oil supplies or the oil industry in general.

If you want to find some for your self just go to the Canadian border and head into Alberta in a northerly direction for about five hundred miles, then get out of your car and there it is. More oil than Saudi Arabia. You don't have to drill for it. It's on the surface or at least a lot of it is. You can pick it up in your hand. It sticks to your shoes. It goes down for hundreds of feet in some places and extends as far as far as the eye can see. You don't have to drill for it to find it. You mine it. That's right. Giant earth movers dig it up and load it on to the largest trucks in the world which transport it to miles long conveyor belts for delivery to the separator.

Of course it's got a lot of sand mixed in with it so you have to heat it up so as to separate the oil from the sand. Heating the oil sands sufficiently to separate the components without setting the oil on fire is rather complicated (actually, very complicated) but it can be done. Next step is to increase the quality of the oil results by mixing in natural gas to upgrade the value of the oil product thus creating what's known as synthetic oil. Again you have to make sure that you don't set the whole place on fire!
Since the greater the depth that it is extracted from the less sand is mixed in and the higher quality the product is, some companies focus on drilling. This trades one kind of overhead for another. But there is no mystery about where it is or how much can be retrieved for a given price.

It's that easy. Figure a few billion dollars for extraction, a few billion more for processing, another few billion for upgrading the value, top it off with another few billion for pipelines and there you have it. High quality oil delivered to the American border for approx. thirty dollars a barrel. As long as interest rate, taxes and inflation stay at their present rate everyone involved will make a very small profit at that price.

Of course there are some problems. There simply is not enough steel production capacity in North America to produce the steel needed for the pipelines scheduled to be built in Canada in the next ten years. There are not enough workers in Canada to build the pipelines, nor are there enough to build the processing and upgrading plants. Neither are there sufficient workers in Canda with the skills to operate the extraction, processing, upgrading and distribution systems once they are in place. Additionally, there is insufficient capital in Canada that is available for investment in such long term, high risk, low yield ventures.

Some real world constraints on delivery to consumer but completely unrelated to supply can be shown by the following example. Canada has increased its oil exports to the U.S. market by about a million barrels a day in the last few years. Most of this increase is oil from the oilsands which is put into the Canadian pipelines which mostly run east. From there a large spur pipeline has been built to run into Chicago. Because there are already large pipelines bringing oil into Chicago from Oklahoma this resulted in a surplus in Chicago which produced a ten dollar a barrel discount for Canadian oil. This means that a refinery located right in the Alberta oil sands was paying ten dollars a barrel more for the same oil than a refinery three thousand miles away. So a large Canadian oil products distributor bought the Oklahoma/Chicago pipeline, spent two hundred million dollars to equip it to reverse the flow and now sends approx. a half million barrels a day to Oklahoma. Unfortunately, this will produce a surplus in Oklahoma or at least until the hurricane season interferes with Louisiana and Texas production but that's a matter for another posting.

The point is many people feel that because they or their friends use a specific oil product every day they are singularly qualified to make all kinds of generalisations about the oil industry in particular and energy in general. Even worse they are quick to apply these generalisations to parts of the world where they would probably the first to admit they have absolutely no knowledge.

Canada has as much oil as Saudi Arabia. It is easy to find. Supply of oil is not and won't be an issue for North America for a hundred years. The Chinese government is starting a process that they have done in other countries very successfully before. They are slowly moving in to the oil sands buying small (by local standards) companies. Soon they will be offering the capital investment, the materials and the workers needed to build a processing and distibution system running west to the Pacific and then by ship to China. If that happens then there will be a shortage of oil in North America but that will have nothing to with the actual supply available.

I've been there and done that. I have seen the oil sands, felt them, mucked around in it, seen the projects built from scratch, seen the pipelines built, seen how little has been removed from the stupendous quantities available, seen the revenues that the oil companies are paying to the provincial government based on the assessment of much oil is in their lease. There is a couple of hundred billion dollars being invested in a small area in the next ten years. There are already tens of thousands of people working the oilsands in one way or another and tens of thousands more coming in the next ten years. It's already producing and delivering about fifteen percent of Americas oil supplies.

It is real. It is happening now. It is expanding at a geometric rate now. It can supply North America for a hundred years at the present rate of increase in consumption. It is physically limited only by capital, supplies and manpower.

Anyone who professes to have knowledge on the subject and says otherwise is an ignorant fool or a willful liar.

I rest my case.


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