Reports of ‘Peak Oil’ Have Always Been Exaggerated

M. King Hubbert, a geologist with Shell Oil Co., first proposed the idea of peak oil in 1956.

Hubbert was respected in his field. His outlook on oil production, now called the Hubbert curve, seemed prescient when U.S. domestic production began to decline in the 1960s and ’70s. Both the Hubbert curve and the concept of peak oil quickly gained wide, if not universal, acceptance that has hardened into conventional wisdom.

Yet there have been moments in the history of oil and gas exploration that should give pause before we declare that the world is about to hit a wall in the production of fossil fuels.

Consider, for example, what happened in Titusville, Pennsylvania, after the first commercial finds in the U.S. Within months of the discoveries, the “oil regions” of northwestern Pennsylvania gave birth to the first oil-boom towns. The area remained a major source of crude for decades. By some estimates, it accounted for as much as half the oil produced in the world until the gusher at Spindletop in 1901 brought the giant fields of east Texas into production.
Pennsylvania Boom

Yet even as oil production was rising in the early days of the first Pennsylvania boom, there were concerns that it might not last. And as oil production from individual wells, and then whole fields, began to decline, the concerns turned to worry.

True, by this time, fields had been discovered in Ohio and Indiana. But much of the Indiana oil was tainted with sulfur, giving it a foul odor that made it impossible to refine.

John Archbold, an executive at Standard Oil Co., expressed doubt that commercial quantities of oil could be found farther west. He famously scoffed, “I’ll drink every gallon of oil produced west of the Mississippi.”

The brains behind Standard Oil, John D. Rockefeller, thought otherwise, and he pushed the company to expand into these regions. When the Standard Oil board balked at buying the sulfur-laden crude being produced in Ohio and Indiana, or investing in sulfur-removal research, Rockefeller threatened to do so on his own nickel — and to keep the profit.

Shamed, the board relented. Ohio crude was bought and stored, and by 1889 Herman Frasch developed an effective and inexpensive way to remove sulfur.

Rockefeller was a shrewd capitalist, but not a chemist. He didn’t have any particular way of knowing if Frasch was on to something; rather it is likely he was confident that sound research backed by ample funding could solve any chemical or mechanical challenge. He was right: The Frasch process is still used for desulfurization. The first of many barriers to production had been overcome.

None of this suggests that “peak oil” was (or is) a complete fallacy: Hydrocarbons are a finite resource; it is theoretically possible to run out. But history suggests this is highly unlikely to happen anytime soon: Every barrier to production has eventually been surmounted by new technology, enabling companies to extract oil or gas that was previously undiscovered, or considered unrecoverable.

In fact, just as Hubbert’s concept of “peak oil” became conventional wisdom about 30 years ago, a company called Mitchell Energy & Development Corp. brought the C.W. Slay No. 1 well, in southeast Wise County, Texas, just north of Fort Worth, into production. This was at the heart of the Barnett Shale, a vast formation containing vast quantities of natural gas and oil. Like the oil fields of Ohio and Indiana, this region’s riches had been considered off-limits. Mitchell and other companies soon changed that, using unconventional methods ranging from directional drilling (steering the active drill bit off to an angle, even to the horizontal, rather than just straight down) to hydraulic fracturing.
New Discoveries

In recent years, wells have been sunk not only in the Barnett Shale, but in other so-called tight formations, places where oil and gas had been thought impossible to extract. These include the Monterey Shale in California; the Bakken in North Dakota; and the Marcellus in Pennsylvania. The result has been a boom in natural-gas production. Oil production has soared, too: U.S. oil supply grew almost 12 percent to 10.1 million barrels a day in 2011 from 9.1 million in 2009, according to the U.S. Energy Information Administration. That makes the U.S. the third-largest global producer, almost even with Russia, and not far behind Saudi Arabia’s 11.2 million barrels a day.

Much of this production is controversial for environmental reasons. But if history is any guide, the idea that the world will soon run out of oil and gas is as unrealistic as it was in Rockefeller’s time.

(Gregory Morris is a member of the editorial board of the Museum of American Finance, a Smithsonian affiliate, and a contributor to the Echoes blog. The opinions expressed are his own.)

Bloomberg