An Updated Version of the “Peak Oil” Story

The Peak Oil story got some things right. Back in 1998, Colin Campbell and Jean Laherrère wrote an article published in Scientific American called, “The End of Cheap Oil.” In it they said:

Our analysis of the discovery and production of oil fields around the world suggests that within the next decade, the supply of conventional oil will be unable to keep up with demand.

There is no single definition for conventional oil. According to one view, conventional oil is oil that can be extracted by conventional methods. Another holds it to be oil that can be extracted inexpensively. Other authors list specific types of oil that require specialized techniques, such as very heavy oil and oil from shale formations, that are considered unconventional.

Figure 1 shows the growth in unconventional oil supply for three parts of the world:

  1. Oil from shale formations in the US.
  2. Oil from the Oil Sands in Canada.
  3. Oil characterized as unconventional in China, in a recent academic paper of which I was a co-author. (Temporarily available for free here.)
Figure 1. Approximate unconventional oil production in the United States, Canada, and China. US amounts estimated from EIA data; Canadian amounts from CAPP.

Figure 1. Approximate unconventional oil production in the United States, Canada, and China. US amounts estimated from EIA data; Canadian amounts from CAPP. Oil prices are yearly average Brent oil prices in $2015, from BP 2016 Statistical Review of World Energy.

Oil prices in 1998, which is when the above quote was written, were very low, averaging $12.72 per barrel in money of the day–equivalent to $18.49 per barrel in 2015 dollars. From the view of the authors, even today’s oil prices in the low $40s per barrel would be quite high. Since the above chart shows only yearly average prices, it doesn’t really show how high prices rose in 2008, or how low they fell that same year. But even when oil prices fell very low in December 2008, they remained well above $18.49 per barrel.

Clearly, if oil prices briefly exceeded six times 1998 prices in 2008, and remained in the range of six times 1998 prices in the 2011 to 2013 period, companies had an incentive to use techniques that were much higher-cost than those used in the 1998 time-period. If we subtract from total crude oil production only the production of the three types of unconventional oil shown in Figure 1, we find that a bumpy plateau of conventional oil started in 2005. In fact, conventional oil production in 2005 is slightly higher than the later values.

Figure 2. World conventional crude oil production, if our definition of unconventional is defined as in Figure 1.

Figure 2. World conventional crude oil production, if our definition of unconventional is defined as in Figure 1.

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Overly Simple Energy-Economy Models Give Misleading Answers

Does it make a difference if our models of energy and the economy are overly simple? I would argue that it depends on what we plan to use the models for. If all we want to do is determine approximately how many years in the future energy supplies will turn down, then a simple model is perfectly sufficient. But if we want to determine how we might change the current economy to make it hold up better against the forces it is facing, we need a more complex model that explains the economy’s real problems as we reach limits. We need a model that tells the correct shape of the curve, as well as the approximate timing. I suggest reading my recent post regarding complexity and its effects as background for this post.

The common lay interpretation of simple models is that running out of energy supplies can be expected to be our overwhelming problem in the future. A more complete model suggests that our problems as we approach limits are likely to be quite different: growing wealth disparity, inability to maintain complex infrastructure, and growing debt problems. Energy supplies that look easy to extract will not, in fact, be available because prices will not rise high enough. These problems can be expected to change the shape of the curve of future energy consumption to one with a fairly fast decline, such as the Seneca Cliff.

Figure 5. Seneca Cliff by Ugo Bardi

Figure 1. Seneca Cliff by Ugo Bardi. This curve is based on writings in the 1st century C.E. by Lucius Anneaus Seneca, “It would be of some consolation for the feebleness of our selves and our works if all things should perish as slowly as they come into being; but as it is, increases are of sluggish growth, but the way to ruin is rapid.”

It is not intuitive, but complexity-related issues create a situation in which economies need to grow, or they will collapse. See my post, The Physics of Energy and the Economy. The popular idea that we extract 50% of a resource before peak, and 50% after peak will be found not to be true–much of the second 50% will stay in the ground.

Some readers may be interested in a new article that I assisted in writing, relating to the role that price plays in the quantity of oil extracted. The article is called, “An oil production forecast for China considering economic limits.”  This article has been published by the academic journal Energy, and is available as a free download for 50 days.

A Simple Model Works If All We Are Trying to Do Is Make a Rough Estimate of the Date of the Downturn

Are we like the team that Dennis Meadows headed up in the early 1970s, simply trying to make a ballpark estimate of when natural resource limits are going to become a severe problem? (This analysis is the basis of the 1972 book, Limits to Growth.) Or are we like M. King Hubbert, back in 1956, trying to warn citizens about energy problems in the fairly distant future? In the case of Hubbert and Meadows, all that was needed was a fairly simple model, telling roughly when the problem might hit, but not necessarily in what way. Continue reading

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Energy limits: Why we see rising wealth disparity and low prices

Last week, I gave a fairly wide-ranging presentation at the 2016 Biophysical Economics Conference called Complexity: The Connection Between Fossil Fuel EROI, Human Energy EROI, and Debt (pdf). In this post, I discuss the portion of the talk that explains several key issues:

  1. Why we are right now seeing so many problems with respect to wealth disparity and low commodity prices (Answer: World per capita energy consumption is already falling, and the energy/economy system needs to reflect this problem somehow.)
  2. Why the quest for growing technology leads to growing wealth disparity (Answer: The economy must be configured in more of a hierarchical pattern to support growing “complexity.” Growing complexity is the precursor to growing technology.)
  3. Why rising debt is an integral part of the energy/economy system (Answer: We could not pay workers for making long-lasting goods and services without using debt to “pull forward” the hoped-for benefit of these goods and services to the present, using debt and other equivalent approaches.)
  4. Why commodity prices can suddenly fall below the cost of production for a wide range of products (Answer: Prices of commodities depend to a significant extent on debt levels. A major problem is that when commodity prices rise, wages do not rise in a corresponding manner. Rising debt levels can mask the growing lack of affordability for a while, but eventually, debt levels cannot be raised sufficiently, and commodity prices fall too low.)
  5. The Brexit vote may be related to falling energy per capita in the UK. Given that this problem occurs in many countries, it may be increasingly difficult to keep the Eurozone and other similar international organizations together.
  6. My talk also touches on the topic of why a steady state economy is not possible, unless we can live like chimpanzees.

My analysis has as its premise that the economy behaves like other physical systems. It needs energy–and, in fact, growing energy–to operate. If the system does not get the energy it needs, it “rebalances” in a way that may not be to our liking. See my article, “The Physics of Energy and the Economy.”

An outline of my talk is shown as Slide 2, below. I will omit the EROI and Hubbert model portions of the presentation.   Continue reading

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China: Is peak coal part of its problem?

The world’s coal resources are clearly huge. How could China, or the world in total, reach peak coal in a timeframe that makes a difference?

If we look at China’s coal production and consumption in BP’s 2016 Statistical Review of World Energy (SRWE), this is what we see:

Figure 1. China's production and consumption of coal based on BP 2016 SRWE.

Figure 1. China’s production and consumption of coal based on BP 2016 SRWE.

Figure 2 shows that the quantities of other fuels are increasing in a pattern similar to past patterns. None of them is large enough to make a real difference in offsetting the loss of coal consumption. Renewables (really “other renewables”) include wind, solar, geothermal, and wood burned to produce electricity. This category is still tiny in comparison to coal.

Figure 2. China's energy consumption by fuel, based on BP 2016 SRWE.

Figure 2. China’s energy consumption by fuel, based on BP 2016 SRWE.

Why would a country selectively decide to slow down the growth of the fuel that has made its current “boom” possible? Coal is generally cheaper than other fuels. The fact that China has a lot of low-cost coal, and can use it together with its cheap labor, has allowed China to manufacture goods very inexpensively, and thus be very competitive in world markets.

In my view, China really had no choice regarding the cutback in coal production–market forces were pushing for less production of goods, and this was playing out as lower commodity prices of many types, including coal, oil, and natural gas, plus many types of metals.

China is mostly self-sufficient in coal production, but it is a major importer of natural gas and oil. Lower oil and natural gas prices made imported fuels of these types more affordable, and thus encouraged more importing of these products. At the same time, lower coal prices made many of China’s mines unprofitable, leading to a need to cut back on production. Thus we see the rather bizarre result: consumption of the cheapest energy product (coal) is falling first. We will discuss this issue more later.

China’s Overall Historical Production of Energy Products Continue reading

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$50 Oil Doesn’t Work

$50 per barrel oil is clearly less impossible to live with than $30 per barrel oil, because most businesses cannot make a profit with $30 per barrel oil. But is $50 per barrel oil helpful?

I would argue that it really is not.

When oil was over $100 per barrel, human beings in many countries were getting the benefit of most of that high oil price:

  • Some of the $100 per barrel goes as wages to the employees of the oil company who extracted the oil.
  • Often, the oil company contracts with another company to do part of the oil extraction. Part of the $100 per barrel is paid as wages to employees of the subcontracting companies.
  • An oil company buys many goods, such as steel pipe, which are made by others. Part of the $100 per barrel goes to employees of the companies making the goods that the oil company buys.
  • An oil company pays taxes. These taxes are used to fund many programs, including new roads, schools, and transfer payments to the elderly and unemployed. Again, these funds go to actual people, as wages, or as transfer payments to people who cannot work.
  • An oil company pays dividends to stockholders. Some of the stockholders are individuals; others are pension funds, insurance companies, and other companies. Pension funds use the dividends to make pension payments to individuals. Insurance companies use the dividends to make insurance premiums affordable. One way or another, these dividends act to create benefits for individuals.
  • Interest payments on debt go to bondholders or to the bank making the loan. Pension plans and insurance companies often own the bonds. These interest payments go to pay pension payments of individuals or to help make insurance premiums more affordable.
  • A company may have accumulated profits that are not paid out in dividends and taxes. Typically, they are reinvested in the company, allowing more people to have jobs. In some cases, the value of the stock may rise as well.

When the price falls from $100 per barrel to $50 per barrel, the incomes of many people are adversely affected. This is a huge negative with respect to world economic growth.

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