Who Moved My Peak Oil?

The buzz about peak oil has peaked, and for a good reason: the peak remains MIA. That doesn’t mean that the global supply of crude oil is a non-issue. Far from it. But for the moment, at least, statistical evidence in favor of arguing that the world’s output of crude has hit a ceiling, or is in imminent danger of doing so, looks thin.

Global production of crude (defined as crude including lease condensate) hit an all-time high this past April: 75.872 million barrels per day, according to data from the U.S. Energy Information Administration. That wasn’t supposed to happen, a number of peak-oil theorists warned over the past decade. In 2001, for example, geologist Ken Deffeyes wrote a widely cited book (Hubbert’s Peak: The Impending World Oil Shortage) that predicted that “global oil production will probably reach a peak sometime during this decade.” Deffeyes wasn’t alone in seeing trouble on the production horizon. But as the chart below reminds, higher peaks keep coming.

The peak-oil theorists haven’t given up. Instead, they keep revising their peak forecasts, pushing the dates for production crests further out in time. Two years ago, for instance, Charles Maxwell—the “dean of oil analysts”—predicted that the peak will come sometime between 2015 and 2020.

Perhaps, but some observers of the oil scene argue that the peak-oil warnings must be labeled flat-out wrong. George Monbiot, a visiting professor of planning at Oxford Brookes University and author of Heat: How to Stop the Planet From Burning, recently wrote: “The facts have changed, now we must change too.”

For the past 10 years an unlikely coalition of geologists, oil drillers, bankers, military strategists and environmentalists has been warning that peak oil – the decline of global supplies – is just around the corner. We had some strong reasons for doing so: production had slowed, the price had risen sharply, depletion was widespread and appeared to be escalating. The first of the great resource crunches seemed about to strike….

Some of us made vague predictions, others were more specific. In all cases we were wrong. In 1975 MK Hubbert, a geoscientist working for Shell who had correctly predicted the decline in US oil production, suggested that global supplies could peak in 1995. In 1997 the petroleum geologist Colin Campbell estimated that it would happen before 2010. In 2003 the geophysicist Kenneth Deffeyes said he was “99% confident” that peak oil would occur in 2004. In 2004, the Texas tycoon T Boone Pickens predicted that “never again will we pump more than 82m barrels” per day of liquid fuels. (Average daily supply in May 2012 was 91m.) In 2005 the investment banker Matthew Simmons maintained that “Saudi Arabia … cannot materially grow its oil production“. (Since then its output has risen from 9m barrels a day to 10m, and it has another 1.5m in spare capacity.)

Peak oil hasn’t happened, and it’s unlikely to happen for a very long time.

It certainly hasn’t happened over the last decade. As the next chart reminds, production is up in several of the key oil-producing nations, including Saudi Arabia. According to the EIA, Saudi output is higher by nearly one-third over the past 10 years through June 2012.

As always in the oil game, there are key details behind the numbers. Oil, as they say, isn’t just another commodity. Geopolitics, in other words, intrudes big time on what otherwise would be a fairly straightforward supply/demand analysis. In the chart above, for instance, Iraq’s big gain is less about new discoveries and more about the country’s resumption of production after years of war. Meantime, Iran’s retreating production reflects the combined burden of international sanctions and domestic difficulties with aging technology.

Despite the various issues, global production managed to increase 12% over that past decade. That doesn’t mean that we should expect oil output to effortlessly rise, year after year. The one forecast that some of the peak-oil theorists got right is that finding and producing oil is getting tougher. But technology is improving too, and so far the net result is that the oil industry has been able to squeeze out more supply from what ultimately is a finite resource.

The idea of peak oil isn’t dead, not by any means. At some point, production will top out, plateau, and then fall. Exactly when that occurs is wide open for debate. Even what was considered accepted fact—that U.S. production had peaked and was destined to suffer a long, slow decline—no longer looks true. Domestic output is up 6% over the past decade, and most of the gain has come over the last year or so. A few years ago, almost no one expected a revival. Now we’re reading reports of U.S. production at 15-year highs.

The lesson in all of this? Predicting is still hard—especially about the future, and particularly for relatively long time horizons.

About James Picerno 900 Articles

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.

Visit: The Capital Spectator

3 Comments on Who Moved My Peak Oil?

  1. With all due respect, your talking about oil fracking coming to the rescue, I think you might want to do some more research. If you think sucking the last/worst of the oil out is an oil boon, then I’d have to say your not looking at the big picture. Tar sands, anyone? Tar sands are pretty much a mining operation! When your digging up tar-sand and then boiling water to extract oil out of it, I’d say supply’s getting a little tight. One question nobody seems to be able to answer me is, what’s the life expectancy of the concrete fracking cores. They hold back all these toxic chemicals, as to not pollute the soil, water etc. What’s the life expectancy of that concrete? Who’s going to do up keep and/or remove them from the ground when the oils been all fracked out? I see a major environmental disaster in the not too distant future.

  2. Increase in oil supply does not equal an increase in energy supply.

    Even as oil production increases, we have less available energy from that oil, and higher prices. Why? The remaining half of the oil on the planet has a much lower net energy than the first half.

    It used to be easy. Stick a straight pipe a few hundred feed into the ground. It didn’t take much energy to get. We were getting net energies of 100:1 back in West Texas in the 60s. Fast forward to the present. A net return of 10:1 is not uncommon, and outside of the Saudi fields, considered good. Oil sands, in contrast, have a dismal 4:1 return.

    So we’re adding oil to the world’s market, but much of that oil is, for lack of a better word, crud. The price is much higher and the net energy return is much lower. Both trends look certain to continue. Invest accordingly.

  3. One thing we have to understand about this issue is that given the importance of this commodity, there will always be hype on both sides of the argument. The optimists will tell you that we are looking at endless suplies, and peak oil will never happen, unless it oil will one day be replaced. The alarmists can only grab the headline, if they pull the alarm, so people pay atention. No one will ever get worked up over a prediction of a plateau (withing a 3% range of the start of it), which might last untill 2040. That is why for instance, few people will ever read someone like Zoltan Ban, whose prediction so far holds true, but so does his other prediction that the current situation is bad enough to be a dampener on global growth. The late Mathew Simmons and Kenneth Defeyes on the other hand always managed to grab media atention. But then again, so does mr. Yergin with his rosy counterpredictions.

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