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Page added on August 7, 2010
Peak Generation: Different takes on peak oil, same result – price spikes
Two must-read interviews with energy market investors both point to a coming demand-driven spike in oil prices, despite professing differing views on peak oil.
Rick Rule, founder of Global Resource Investments, Ltd., speaks of “sharply higher world oil prices in the next 5 years,” and Charles Maxwell, senior energy analyst for Weeden & Co. that “oil will reach at least $150 a barrel around 2015.” It’s interesting that, despite professing different takes on the concept of peak oil, they end up at remarkably similar conclusions about demand outstripping supply within the next few years.
Peak oil relates to the seemingly reasonable notion that output of a non-renewable resource will someday decline, with the ‘peak’ being the time of highest production that cannot subsequently be beaten. Shell geoscientist M. King Hubbert (left) beginning in the 1950s, showed that oil output can be plotted as a bell curve; this relates to individual wells, regions and the world as a whole. It becomes a political issue over the questions of when this will happen, and how the world’s remaining oil should be handled. Nevertheless it’s an economic argument as much as anything, as the notion of peak oil essentially relates to peak cheap oil, as there will be a great deal of hard-to-reach oil still underground for centuries to come.
Currently, the global demand for oil is approaching its 2008 high of 86.6 million barrels a day, with the International Energy Agency (IEA) predicting it will reach 90-92 million barrels per day by 2015. Meanwhile, output is falling outside of Opec, and the IEA speculates that Opec spare capacity – their ability to quickly bring extra oil onto the market – is also dwindling. According to the IEA, “Effective OPEC spare capacity in this scenario begins to decline again as soon as next year, reaching 3.6 mb/d by 2015.”
Both Rick Rule and Charles Maxwell see oil as unsustainable, even though Rule is looking more at lack of investment and geopolitical instability, and Maxwell more at the restricted oil supply. Ultimately, neither view opposes the other.
More, plus live links at Peak Generation.
2 Comments on "Peak Generation: Different takes on peak oil, same result – price spikes"
DMyers on Sun, 8th Aug 2010 7:30 am
These two views, taken together, portray the practical mechanics of peak oil. I’m going to step out on a limb here and posit that the phenomenology of peak oil implicitly assumes certain age-old economic principles, especially the primacy of rational self interest and its corollaries (e.g. free rider, tragedy of the commons, etc).
At the hypothetical point of peak oil, oil becomes more difficult (therefore more expensive) to extract. New technologies and energy inputs are necessary, and these interventions require investment. The rise in oil prices predicted by peak oil is related to this heightened cost of investment, as well as the cost of energy required for extraction.
Rule focuses on the political/economic factors which act to diminish investment, as observed in the text book examples of state-controlled oil companies. The same political/economic influences are also present in privately owned companies. Large investments in production infrastructure and new technology take a toll on company profits, just as in state-controlled companies they take a toll on money available for political payoffs. The inertia of a system based on cheap oil keeps pushing forward against the friction of new circumstances. The slashing of profits due to needed production investment is postponed to the final possible moment.
The two factors, therefore, may demonstrate a complementary, if not cumulative, affect on post-peak oil production. At the same time easy oil goes dry, there will be a shortage of ready capacity to force supply from depressurized fields, along with deterioration of existing infrastructure, which feed back to tighten supply. Under-investment in capacity relevant to new circumstances will abruptly steepen the diminishing supply and increasing price curves.
It is of interest to note that this likely sudden supply crisis could have been averted in two different ways. First, it could have been softened by conservation. Secondly, it would have been softened by investment in a ready energy/infrastructure matrix to push and suck the new hard to extract, post-peak oil. We have failed to apply either solution. These failures are both describable as a preference for short term gain (self-interest) over longer term considerations, the underlying foundation of rational economics.
Just as economics would predict, these failures of short term tendency have played out in the supply/ investment reality of peak oil which is under discussion. Peak oil assumes the short-term tendency and its sequal of overshoot. All the human failings identified by economics and psychology play into the phenomenon of the Hubbert curve. The tendency to squander rather than invest is surely one of these, and the Rule rule is a concrete instance of the concept.
KenZ300 on Sun, 8th Aug 2010 11:23 am
Biofuels need to fill the gap between demand and supply of oil. A local biofuel industry that produces local jobs and local fuel needs to be developed.
What if every landfill in the country could produce ethanol from the cellulose material that is collected each day? That would go a long way toward providing fuel for our country. The raw material is already being collected.