Opinions vary as to when oil production will peak. But a series of big finds, along with increased efficiency following the recession, may buy us some time. Simon Wilson investigates.
What is peak oil?
Supporters of ‘peak oil theory’ believe that global oil production will peak within the next decade or two, if it hasn’t already. They warn that production will then enter a rapid terminal decline phase that will usher in massive price spikes and deal a massive blow to the world economy.
When will the peak have passed?
The US Geological Survey estimates that there are still about three trillion barrels of conventional crude oil buried beneath the earth’s surface. The problem is getting it out. Much of it is inaccessible, or would only be economic to extract were oil prices to surge. But there is little agreement on exactly how much could be extracted and by when. For example, Matthew Simmons, the chairman of energy investment firm Simmons & Co International, thinks the peak came five years ago. Richard Miller, an ex-BP geologist, thinks it will come within five years if we haven’t passed it already. Meanwhile, Leo Drollas, chief economist of the Centre for Global Energy Studies in London, thinks the peak will come in 2025.
How new are peak oil concerns?
Peak oil theory originated with a geoscientist in Shell Oil’s Houston lab called Marion King Hubbert. In 1956 he predicted that US oil production would peak between 1965 and 1970. He was proved right: it peaked in 1970. Then in 1974, he predicted that global peak oil would come in 1995 “if current trends continue”. But they didn’t. This is the most common critique of peak oil: it assumes that demand will keep rising, while big new discoveries are highly unlikely. But in fact, global demand for oil dipped during the recent recession, just as it did in the late 1970s and early 1980s. Some analysts now expect demand in the developed world to fall steadily as rich countries focus more on energy efficiency. Moreover, big new finds happen regularly.
Any recent examples?
Petrobras found a field off the Brazilian coast in 2007 containing up to eight billion barrels of light crude. And last September, BG found another thought to hold two billion. Supply is increasing in the Caspian Basin and Canada. Last autumn, Iran announced a find of nearly nine billion barrels and BP announced a new discovery in the Gulf of Mexico containing up to four billion. The fall-out from the Deepwater Horizon disaster is likely to slow deepwater extraction, especially from US waters, in the short term. But overall, the outlook for supply is fairly benign – at least according to the International Energy Agency (IEA). Last week the IEA forecast “comfortable spare capacity” in both oil and natural gas supply over the next five years. In the gas market that’s partly due to the discovery of vast accessible shale gas deposits.
Is this a one-off?
No. The market in exploration for oil and gas is driven strongly by price incentives. When prices are high, firms explore riskier options and drive forward technological innovation. New discoveries ultimately lead to lower prices and profits, lowering incentives for new exploration until subsequent shortages restore them again. A paper last year from University of Calgary economist John R Boyce shows that crude oil discoveries do indeed track price incentives, resulting in a “multiplicity of peaks”. Other economists have pointed to similarities between today’s crude oil market and the 19th-century whale oil market.
What can we learn from whale oil?
Whale-oil saw similar price volatility, as rising prices spurred new technology to open up new fishing grounds. It doesn’t undermine the case for peak oil: whale oil production did indeed peak, then decline rapidly. Nor did innovations such as better ships and harpoons reverse its decline, just as better drilling techniques have not increased overall oil production in the US (ex-Alaska) since 1970. But in both cases price spikes gave an incentive to hunt for substitutes. Even if global oil production is peaking now, the same is likely to happen this time around.
Do we face an energy crunch?
YES
• Oil companies and Opec have been overstating their reserves for years, according to some peak oil analysts.
• The Deepwater Horizon disaster will inflate the costs and risks of offshore drilling, decimating oil exploration (just as the Three Mile Island accident put back the nuclear industry by 30 years).
• Developing world demand is set to explode: much of Asia, Latin America and the Middle East are on the cusp of the $3,000-$4,000 income bracket – the point where demand for energy surges.
NO
• The world’s proven oil reserves have doubled roughly every 15 years since 1850, and we now have more than ever before – over 1.4 trillion barrels.
• High prices will continue to drive new technologies and oil discoveries, while the surge in liquefied natural gas and shale gas will take some of the heat off oil.
• Slower economic growth in rich countries has moderated demand in the past, and is likely to do so now.