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Page added on March 19, 2016
Peak Oil Revisited: Did I get anything right?
In 2014 I wrote on the arrival of peak oil. That now appears at best premature. So what did I get wrong, and what (if anything) did I get right?
In my initial post I made two key assumptions. The first was that fracking would not be that important, because it remained a high-cost method of extraction. The second was that Saudi Arabia still had market power, and that therefore would respond to rising costs by cutting output. The third that changes in demand would be modest. Finally, though not (then and now) relevant, I assumed that alternative energy sources would remain marginal and substitution away from petroleum small.
Let me begin with the last, irrelevant point: alternative energy. In fact there’s a lot of progress, progress that may be outstripping improvements in the (mature) thermal energy sector. Both wind and solar technologies see steady improvement, while thermal technology is changing less rapidly. (The key innovation of which I’m aware, but about which I know no details, is the ability to ramp up and down “base” generating capacity quickly. That improves the business case for intermittent power sources – solar and wind – because “base” capacity can be cut or boosted within a shorter time frame. As a result, as several papers at the 2015 Industry Studies Association conference in Kansas City argued, widespread windmill networks such as that in the Minnesota region can predict what the system as a whole can deliver 15 minutes in the future and hence bid into the short-term market. While in practice the marginal cost of solar isn’t zero, it is lower than that of coal or even natural gas. Hence “green” sources can in practice lower hydrocarbon demand. At present that is a modest slice of the overall market, and current low hydrocarbon prices impede investment in additional capacity. Public policy – will governments take action in the face of global warming – comes to the fore. I simply don’t know how much is now being invested in alternative sources, and the total quantities remain modest from a global perspective. With every passing year, the likelihood that incremental demand will be met through investment in renewable capacity improves, and hence my sense is that with each passing year the cost of such capacity lowers the ceiling on long-run energy prices. Now the devil lies in the details, which I don’t know, but at least conceptually I can make the case that the longer low prices persist, the more likely that they will persist even longer. [Is my prose confusing? Well, so in this case is the real world.]
…green energy’s not important today, but each year the impact on tomorrow’s prices becomes more significant…
Second, I overestimated the role of Saudi Arabia, in that I read what is happening to their marginal cost of extraction as reflecting such costs for the market as a whole. So while their costs of extraction are rising, their market power is falling. At the same time, the marginal costs of producing in the Bakken formations, once a well has been drilled, may be (for me surprisingly) low. When supply is in excess, so that market power considerations don’t matter, it’s the low cost (marginal) producer that matters. The Saudis are no longer that. As I argue in an August 2015 post (and have long argued to classes in my teaching at W&L), OPEC in practice is not a cartel, and the Saudis are by themselves too small to be able to swing the market in their favor.
I’ve not tried to spell this out in a careful model, “excess” is not a term that an economist uses because at some level supply always equals demand. What I have in mind is a oligopolistic price leadership model, where producers collectively find it easy to not cheat too much – not pump too aggressively – when demand is strong relative to potential output levels, but devolve into a price war when faced with negative demand shocks. But it may be simpler, and result in the same bottom line, to view the industry as having zero costs once a well is in production. At the wellhead there is then no incentive to reduce production, ever. Wells do gradually dry up, and so output from an individual location declines over time. In periods of low prices, oil drillers can’t cover the cost of new wells (or investing to boost production from existing ones), so eventually the supply curve shifts in and (for a given level of demand) prices rise. But in the short run the supply curve is fixed and steep – “price inelastic” in economics jargon. Demand is also steep, but can vary in the short run. The result is volatile prices.
Finally, there’s that fracking problem. It’s clear that there’s large heterogeneity from well to well. In some spots – the center of a field – a single well will produce a lot, but as you move further out the average falls, and the variance rises, you have the occasional well that does really well alongside onces that are dry. (I doubt that’s the actual geology, instead this is a variation on the standard diminishing returns story that economists employ.) So costs vary a lot, and some wells run dry quickly, but not all. Furthermore, once the core infrastructure is in place, transmission pipelines to the fields (if only to the nearest railroad), then it doesn’t take long to drill a new well, and there are a lot of drilling rigs. So while on average fracking is a high-cost operation, particularly at the front end, that hides a lot of variation. And there a lot of oil fields.
At present fracking has been a U.S. thing. Some countries in Europe have banned it, others allow it in principle but local permits haven’t been forthcoming, the NIMBY thing. Some attractive formations are in places without a lot of water, and fracking needs a lot: environmental issues are real. But Europe is only a fraction of the earth’s surface, and there is the potential for using this comparative new set of technologies around the world. And set of technologies it is: it’s not just ability to fan out multiple pipes from a single hole, it’s not just the how-to of fracturing rock and then recovering oil from a wider variety of geologies, it’s also the ability to employ seismic data to know where and how to drill.
So what I underestimated is the potential for technical change in the industry. Implicitly I assumed it was a mature industry, that the exploration of the earth’s surface [but not necessarily the ocean bottom] for potential oil formations was largely complete. Similarly, within a known formation, I assumed that the ability to use seismic data to delve into local details – the ability to do a “CT scan” of rock layers 10,000 feet down – had reached its practical limit. Yet again, after a century and a half of experience, drilling itself was a static technology. Finally, the same was true for how you actually get the oil out once you’ve drilled.
…will “peak oil” remain forever sound in theory but irrelevant in practice?…
I was wrong in each instance. Capabilities are better; in economist-speak costs are lower. And at least in my mind the fracking revolution has really only begun. Without these technologies, no one paid attention to “tight” formations. There are likely a lot out there, in Iran and the Russian Republic and China, in Brazil and Venezuela and Mexico, some of which will have enough water and all that. Has the minimum price at which it makes sense to drill risen? Likely, but not by enough to mean “peak oil” is at hand. I do believe that we are in an era of diminishing returns, where the base price will trend up. If the economies of South Asia and Sub-Saharan Africa grow – which I pray is the case, that the next couple decades will see another billion or so people pulled out of poverty – then the demand side will encourage renewed exploration and recovery. The longer that takes, though, the greater the potential of non-petroleum energy sources, and the demand for petroleum (and natural gas) will be for chemical products and not for their energy content. In that case, “peak oil” may forever remain sound as a theory but irrelevant as a practical concern.
- WTRG Economics
- Nick Butler at the Financial Times
- James Hamilton at EconBrowser
24 Comments on "Peak Oil Revisited: Did I get anything right?"
Boat on Sat, 19th Mar 2016 1:47 pm
90 percent reading on the believability meter .
onlooker on Sat, 19th Mar 2016 2:06 pm
With every passing year, the likelihood that incremental demand will be met through investment in renewable capacity improves,—with each passing year investment in renewable becomes more problematic as excess energy to create a vast renewable infrastructure dries up.
Hence “green” sources can in practice lower hydrocarbon demand.– Hence, green sources increase hydrocarbon demand as they require it for production and maintenance.
it’s the low cost (marginal) producer that matters. — Precisely why the fracking and shale will never be a permanent solution the costs are too high even as societies needs for energy are at their highest and economies are straining for a myriad of reasons.
And there is the potential for using this comparative new set of technologies around the world.– Not going to happen the rest of the world is ill equipped to taken advantage of unconventional because of a lack of infrastructure, expertise and economic capabilities. So all in all, a most disingenuous article.
GregT on Sat, 19th Mar 2016 2:12 pm
e-CON-o speak for the human race is suicidal.
rockman on Sat, 19th Mar 2016 2:14 pm
And one more time: his mistake wasn’t getting the date of PO correct any emphasizing that it was of any meaningful importance.
The PO date isn’t going to determine the price of oil, the rig count, the economic condition of the US or any other country, the political stability of any ME country, approval of the Keystone border crossing permit, the price of LNG exports, the demand for autos in China, the etc, etc, etc.
The POD…POD…POD…POD
geopressure on Sat, 19th Mar 2016 2:47 pm
I concur with the rockman’s analysis…
tahoe1780 on Sat, 19th Mar 2016 3:40 pm
I guess we all saw this? http://www.greentechmedia.com/articles/read/Tesla-Discontinues-10kWh-Powerwall-Home-Battery
Go Speed Racer on Sat, 19th Mar 2016 3:58 pm
My thumb hurts. So much work to scroll thru all that. At least I did not actually read it.
eugene on Sat, 19th Mar 2016 4:24 pm
So a few points were missed which, of course, signifies nothing. In the scope of things renewables remain a very minor source of power. Something called physics just keeps getting in the way. To me renewables are faith based ie I believe there’s a god out there. I haven’t any proof but I believe. Such thinking helps when one is scared shitless.
makati1 on Sat, 19th Mar 2016 7:26 pm
We passed peak NET energy. When it happened is of no importance for the future. Only preparing for that future is important now.
penury on Sun, 20th Mar 2016 11:55 am
Yes we have passed peak oil,coal,nuclear, water,wind and other sources of energy, the world eco-system cannot tolerate our continued use of this energy so we have passed peak. Individually we may try to reduce our dependence on one source by changing to another, however destruction of the planet continues. To prepare for the future call NASA and locate a new planet. Humans are leaving this one.
onlooker on Sun, 20th Mar 2016 12:09 pm
Exactly, as Penury frames it no matter if one can point to some little success in one area or another, the juggernaut of human overpopulation and the concomitant needs and yes wants of that population means no viable universal solutions are available. As others have said we face a monumental predicament called overshoot. No solutions exist. Only adapting as best as we can and that should be not comforting to any person currently alive or who has children.
Boat on Sun, 20th Mar 2016 12:34 pm
Penury is wrong. Oil hasn’t peaked. Has any energy peaked? Oh yea, whale oil. Penury, who do you credit with the excellent job of your brain being washed.
Apneaman on Sun, 20th Mar 2016 12:49 pm
Boat, coal looks to be close, but there is always the very real possibility of government intervention to the rescue. A bail out or loosening of regulations or something. It’s not like we practice real capitalism or now is it? It makes it harder to judge if a resource is peaking since we live in a time of universal corruption, unfair subsidies, combined with all the central bank and government interventions and massaged stats. Fuck if I had all that backing me I could make billions selling dog shit to cat owners.
Australian takeover drags Peabody near bankruptcy
“Peabody admitted last week that it skipped $US71 million ($93 million) in interest payments and was on the verge of becoming the latest coal producer to file for Chapter 11 bankruptcy protection in the United States.”
Read more: http://www.afr.com/business/australian-takeover-drags-peabody-near-bankruptcy-20160318-gnm7z1#ixzz43SxZN39v
Follow us: @FinancialReview on Twitter | financialreview on Facebook”
Apneaman on Sun, 20th Mar 2016 1:16 pm
Boat, how about peak civilization? It’s only a matter of time before the enormous repair and rebuilding costs of these ever increasing weather disasters, breaks the bank. We can’t handle rebuilding every year.
Here’s What the Southern Floods Looked Like From Space
“The storm system was responsible for dumping as much as two feet of rainfall in some areas, forcing thousands to evacuate as entire towns were flooded. At least seven rivers reported record crests, and the Sabine River in Texas peaked at a record level in three separate locations. Six people died in the floods.”
https://weather.com/news/news/southern-flooding-space-photo
http://floodlist.com/america
They will be adding up the damage for months to come. These disasters do damage to energy infrastructure too.
Hey at the rate it’s going everyone will be employed full time rescuing people and repairing the damage and rebuilding infrastructure. A disaster economy. We will need to bring old folks out of retirement to chip in – put grandma on “face down floater watch” and grandpa on “rescue boat repair” or some other light duty. All the basement dwellers getting sub prime NINJ auto loans – put em to work in the national disaster rescue army.
Boat on Sun, 20th Mar 2016 1:38 pm
apeman,
” It’s only a matter of time before the enormous repair and rebuilding costs of these ever increasing weather disasters, breaks the bank. We can’t handle rebuilding every year”.
I agree with that. As the years roll by the costs will mount and the speed of damage easier to calculate.
Apneaman on Sun, 20th Mar 2016 2:18 pm
Boat, Crop damage/losses, infrastructure damage and resettlment/climate refugees. It’s already costing big and will soon break entire states and countries. It’s already destroyed many individual without insurance or those who don’t make the cut for a gov bail out. How long can it go on for? The estimate for the 2013 Southern Alberta flood that nailed Calgary is between 6-8 Billion. That’s one fucking flood.
Canadian disaster relief to cost $900M a year over next 5 years, new PBO report says
Disaster fund reimburses provinces, individuals after natural and man-made disasters
http://www.cbc.ca/news/canada/ottawa/canada-extreme-weather-costs-pbo-report-1.3465264
The First U.S. Climate Refugees
“In January, the U.S. Department of Housing and Urban Development said it would give Louisiana $48 million to resettle Isle de Jean Charles.”
http://www.bloombergview.com/articles/2016-03-20/the-first-u-s-climate-refugees
Wait until south Florida goes. Once the real estate panic starts it will be a nightmare. Few years at the most. Those climate denying republicans aren’t gonna last much longer.
Warmer Winters Will Mean Catastrophic Effects For The Environment And Human Life
“Dangers for humans and the environment
A warming climate will likely lead to more early springs and “false’’ springs, the latter prompted by unusual temperature spikes followed by cold snaps. “In some regions, living things get fooled into think spring has arrived, trees sprout, eggs hatch, etc., only to suffer another winter-like cold outbreak, potentially damaging or killing the ‘fooled’ organisms,’’ Mann said.
In one study, for example, a false spring in 2012 caused $500 million in damages to fruit and vegetables in Michigan. And in the Washington, D.C. region, where cherry blossoms are an annual tourist draw, a predicted drop to freezing temperatures and snow this weekend — soon after an exceptionally early burst of warm temperatures — threatens the vulnerable blossoms as they enter a delicate growth stage.”
http://thinkprogress.org/climate/2016/03/19/3761760/warmer-winters-impacts/
and on and on all over the world in every country. Not some far off future long after you’re dead boat – right here right now and getting worse every year. Peak disasters? Not even close. Trump will fix it up.
meld on Sun, 20th Mar 2016 4:11 pm
Peak oil or not the world is going down hill fast and energy and climate is playing HUGE role in that decline. It’s like arguing about which moment the titanic hit the iceberg while you’re still on the boat and it’s sinking 🙂
onlooker on Sun, 20th Mar 2016 4:39 pm
Great comment Meld. 🙂
oracle on Mon, 21st Mar 2016 7:18 am
Just one look at the oil price chart shows that something significant happened around 2005. There have been consequences from that event, consequences that have become feedback into the system (e.g. rapidly rising oil prices made investment in fracking seem appealing). Green energy has been nibbling, and making steady progress. Although Saudi Arabia is not longer the 800 lb gorilla, the price war still makes SA significant. Lastly technology has allowed the petroleum industry to squeeze more hydrocarbons out of a stone, but it does not invalidate Hubbert’s principle. If anything, it just superimposes another (probably somewhat short-lived) Hubbert curve on top of the original one. Overall Hubbert’s concept is sound.
Revi on Mon, 21st Mar 2016 12:23 pm
Ron Patterson thinks we peaked last year, which would make the peak date 2015, not far off of what he predicted.
A little further down the road and we’ll see if we peaked.
onlooker on Mon, 21st Mar 2016 12:29 pm
Let me repeat the manta of Rockman, peak does not matter it is the process that does.
Boat on Mon, 21st Mar 2016 12:42 pm
During this process it is likely Iran and Iran will add enough production to help conventional oil set new peaks, let alone unconventional oil added in. Peak, Peak, nothing but peak. Unless of course there an asteroid, volcano or some other bothersome detail.
onlooker on Mon, 21st Mar 2016 12:52 pm
Peak a boo I see you haha
Boat on Mon, 21st Mar 2016 1:08 pm
onlooker,
meld on Sun, 20th Mar 2016 4:11 pm
Peak oil or not the world is going down hill fast and energy and climate is playing HUGE role in that decline. It’s like arguing about which moment the titanic hit the iceberg while you’re still on the boat and it’s sinking 🙂
Now that is a default position for doomers. But it is also a different discussion.
The world going downhill for whatever reason and at what rate is what we debate.
For all I know the ocean may get so hot and humans evolve so quickly that plastic with salt water will make great soup. 20 billion of us skinny dipping for dinner.