Heinberg: Is Peak Oil "A Misleading Concept?"

[depakid]

George Soros has just published an interesting article in the New York Review of Books for September 25, titled The Perilous Price of Oil. In the course of explaining the recent spike in the barrel price of petroleum he writes that "the cost of discovering and developing new reserves is increasing, and the depletion rate of aging oil fields is accelerating." The discussion of these worrisome facts, he notes, "goes under the rather misleading name of 'peak oil'," a phrase that implies that "we have approached or reached the maximum rate of world output."

Soros goes on to point out that "some of the most accessible and most prolific sources of oil in places like Saudi Arabia and Mexico were discovered forty or more years ago and their yield is now rapidly falling." But, tellingly, he reassures his readers that " is a misleading concept because higher prices make it economically feasible to develop more expensive sources of energy."

Soros is far from being alone in this opinion. There is a veritable cottage industry of economists and statisticians (including Daniel Yergin, Bjorn Lomborg, Peter Huber, and Michael Lynch) who tirelessly implore their readers not to panic over oil prices because The Market will always come to the rescue. As easy conventional oil depletes, tar sands, oil shale, and biofuels become more economic to produce. Even coal-to-liquids becomes feasible on a large scale. And, as everyone knows, there is an endless amount of coal.

Another cottage industry (this one much less prominent in the mainstream media) composed largely of physicists and geologists rebuts this argument. These writers point out that what may seem "economically feasible" on the basis of a few calculations may not be so in fact: physical barriers may prevent low-grade hydrocarbon resources such as tar sands from yielding the flow rates of regular oil, regardless of petroleum’s barrel price; and anyway, because production of these alternative fuels entails high energy costs, their break-even cost point is a moving target: as the price of oil goes up, the cost of producing a barrel of oil from tar sands goes up too.

Further, the energy profit from these alternatives is much lower than that from conventional oil from the old super-giant fields, and net energy really matters. It takes energy to get energy, and what society really needs is not energy per se, but usable energy left over after subtracting the energy expended in efforts to gather energy. If net energy is a proportionally large segment of the total energy being produced from a given source, this means that only a relatively small portion of effort must be dedicated to energy production, and so most of the gross energy yielded is available for other purposes.

In the early decades of the petroleum era, the quantity of both total and net energy liberated by efforts to drill for oil was unprecedented, and it was this abundance of cheap energy that enabled the growth of industrialization, urbanization, and globalization during the past century. It took only a trivial amount of effort in exploration and drilling to obtain an enormous energy return on energy invested. But industry tended first to find and extract the oil that was highest in quality and easiest to access; thus with every passing decade the net energy (as a percentage of total energy) derived from oil extraction has declined.

As the net energy available to society declines, increasing constraints will be felt on economic growth, and also on the adaptive strategies (which require new investment—example: the building of more public transport infrastructure) that society would otherwise deploy to deal with fuel shortages. More of society’s resources will have to be devoted directly to obtaining energy, and less will be available for all of the activities that energy makes possible.

These are matters of physics, not economics. Throwing more dollars at energy production solves nothing if the energy source has a low net payback—and the ones that Soros and the Yergin-Lomborg-Huber club point to are abysmal in this regard.

These latter commentators genuinely believe that conventional economic theory defines reality. Where there’s a buck to be made in doing what needs to be done, someone will do it, and resource depletion will never be a problem because of the principle of infinite substitutability.

But physical reality and economic theory part company in many instances, and Peak Oil defines one of the most important of these. Departing from reality sometimes has severe consequences.

I must return to that word "misleading." The economists are telling us we have nothing to worry about. Oil may get a bit more expensive, but there will always be plenty of liquid fuel to keep us going—to keep the planes flying, the tractors plowing, and the SUVs ferrying kids to soccer practice. If these people are wrong (and I strongly believe they are), they are not just "misleading" us conceptually; they are guiding us straight over a cliff.

http://postcarbon.org/peak_oil_misleading_concept

[Andy823]

1. "Peak oil" has been used for years

To scare people, and to raise prices. The oil companies can claim oil is running out, so supplies are down, then jack up prices.

If alternative fuels would have been pushed years ago, the price of oil would be half of what it is now. Competition has all but vanished in this country when it comes to oil companies. A handful run everything, and have bought out the small companies, and closed won refineries in the process. They and they alone control the "supply and demand", and the public paid through the nose for fuel since Bush and Cheney took office. Big oil can do what they want when they have no fear of being taken on by the government. Another reason why we can't afford McCain in the whithouse.

[depakid]

2. Physics tends to trump conspiracy theories, too

Though we'd certinly be in less of a world of hurt if we'd listened to Jimmy Carter 30 years ago.

[tom_paine]

4. I remember this concept resurfacing in my head in the late 90s with all the SUVs

I didn't give it much thought during the Last days of the Old Republic, the times were too good.

But I remember idling in traffic one morning going to work, stuck in a traffic jam surrounded by SUVS and just musing, "Say, didn't we just have a massive energy crisis not 20 years ago?"

We upright-walking monkeys have about zero foresight, myself included.

[hunter]

3. Everything is physics.

I'm of the economic school that you don't really have to pay much attention to people's motivations. Prices and other rules of the artifice don't matter, a human activity is either sustainable for some period of time, or it is not.

Much of the "first world" lifestyle we enjoy now is not sustainable, not even on a fifty year timescale. Our grandkids won't care about the price of gasoline in 2008, or the voodoo dances the economists did to explain these prices. Nor will they be building very high technology ultra deep or Arctic ocean oil platforms because a society with more restricted energy resources than ours simply won't be able to build them, and a society with less restricted energy resources than ours simply won't bother.

[joshcryer]

5. For people trumpeting physics people sure do not know much about the state of the art.

Physics states, undeniably, that humanities energy usage is pithy compared to other species on the planet.

Algae use more energy than us: http://news.mongabay.com/2006/1013-fsu.html

Human energy usage? 500+- exajoules.

Usable energy from the sun? 5 million exajoules.

It's such a joke really, scare mongering, apocalyptic visions of the future.

[kristopher]

6. Another peak oil pinhead that can't see the forest for the trees.

Soros is describing an economic reality that is not at all intended to address the "physics" (?? as if using that word that somehow adds to the legitimacy of pure speculation) of oil supply.

"...First, the cost of discovering and developing new reserves is increasing, and the depletion rate of aging oil fields is accelerating. This goes under the rather misleading name of "peak oil"—namely that we have approached or reached the maximum rate of world output. It is a misleading concept because higher prices make it economically feasible to develop more expensive sources of energy. But it contains an important element of truth: some of the most accessible and most prolific sources of oil in places like Saudi Arabia and Mexico were discovered forty or more years ago and their yield is now rapidly falling.

Second, there is a "reflexive" tendency for the supply of oil to fall as the price rises, reversing the normal shape of the supply curve. Typically, as the price of a product rises, producers will supply more. For oil producers who expect the oil price to rise further, however, there is less incentive to convert oil reserves underground into dollar reserves aboveground. Oil producers may calculate that they will be better off if they exploit their reserves more slowly. This has led to what may be described as a backward-sloping supply curve. In addition, the high price of oil has enabled political regimes that are both inefficient and hostile to the West to maintain themselves in power, notably Iran, Venezuela, and Russia. Oil production in these countries is declining.

Third, the countries with the fastest-growing demand—notably the major oil producers, together with China and other Asian exporters—keep domestic energy prices artificially low by providing subsidies. Therefore, rises in prices do not reduce demand as they would under normal conditions. This may be considered one of the fundamentals, although, under budgetary pressures, government policies are gradually changing.

Finally, demand is reinforced by speculation that tends to reinforce market trends.<*> This is a quintessentially reflexive phenomenon. In addition to hedge funds and individual speculators, institutional investors like pension funds and endowment funds have become heavily involved in commodity indexes, which include not only oil but also gold and other raw materials. Indeed, such institutional investors have become the "elephant in the room" in the futures market. Commodities have become an asset class for institutional investors and they are increasing their allocations to that asset class by following a strategy of investing in commodity indexes. In the spring and early summer of 2008, spot prices of oil and other commodities rose far above the marginal cost of production and far-out, forward contracts rose much faster than spot prices. Price charts have taken on the shape of a parabolic curve, which is characteristic of bubbles in the making.

So, is this a bubble? The answer is that there is a bubble superimposed on an upward trend in oil prices, a trend that has a strong foundation in reality. It is a fact that, absent a recession, demand is growing faster than the supply of available reserves, and this would persist even if speculation and commodity index buying were eliminated. In discussing the bubble element I shall focus on institutional buying of commodity indexes as an asset class because it fits so perfectly my theory about bubbles..."

This is what the article is about. That the author of the "peak oil" piece finds more meaning in Soros' comment about "peak oil" says a lot more about that idiot and other people claiming to "know" about the amount of remaining oil than it does about Soros.

The Soros article is a very worthwhile piece.

http://www.nybooks.com/articles/21792

Edited to add: http://www.iht.com/articles/ap/2008/09/10/business/EU-OPEC-Meeting.php - 'OPEC decides to cut output'