Looking past the death of Peak Oil

Peak Oil is dead. The news that US output of liquid petroleum has regained its previous peak, reached in 1970, is enough to read the last rites over the idea that a region’s oil production will follow a shape like a bell curve, rising to a peak and then inexorably falling away.

Much of the theorising about Peak Oil failed to anticipate technological progress, or understand the power of economic incentives. The US boom in production from previously uncommercial shale reserves has been made possible by advances in horizontal drilling and hydraulic fracturing, and made a reality by oil prices that 15 years ago barely seemed possible.

Yet while the strong form of the Peakists’ argument can be consigned to the dustbin of history, they were not entirely wrong. Producing oil has become harder, for reasons of both geology and politics; a crude price stuck above $100 per barrel is evidence enough of that. It may become harder still over the next 15 years.

Talk about an “age of abundance” in oil is justified only from a North American perspective. There, it is true that production is rising strongly and has the potential to rise further. Elsewhere, though, it is a different story: one of decline in fading regions such as the North Sea, and political and security threats in countries from Iraq to Venezuela. It is a striking fact that since 2005, all of the increase in the world’s crude oil production has come from the US.

Looking out a few years, prospects do not seem very different. Global demand for oil will continue to increase because of rising prosperity in emerging economies, barring some shock such as a financial collapse in China. Supply, however, will be constrained. The International Energy Agency, the watchdog backed by rich countries’ governments, predicted last year that over 2012-18 the largest contributors of new supplies to world markets, after the US and Canada, would be Iraq and Brazil. But companies in Brazil are struggling with the technical challenges of its deepwater fields, and Iraq is in chaos. Neither country looks as though it can be relied upon.

Thanks to the US boom, world oil prices have been remarkably stable recently. However, Christof Rühl, chief economist at BP, observed on Monday that that was the result of the “sheer coincidence” that increased US production had matched the barrels lost in the disruption following the Arab uprisings of 2011.

The pick-up in Brent crude last week – the sharpest one-week rise in almost a year – has been a reminder that in any market, stability is a temporary rather than a permanent condition.

For consuming countries, recognising that fact means doing what they can to strengthen their own production and infrastructure. The US, for example, should approve the Keystone XL pipeline from Canada, and help its oil production industry by allowing exports of crude. Governments also need to be careful that they are not crippling their industries with excessive taxation.

It makes sense for the US to help the development of alternative sources of supply, including the shale reserves of countries such as China and Argentina.

At the same time, consumers should be made to be more careful with the oil that they use. Higher road fuel taxes are the best option, but where that is politically impossible – as in the US – regulations enforcing fuel efficiency are an acceptable second best.

Finally, governments should continue their support for alternatives to oil. Corn-based ethanol may be a gigantic boondoggle, but advanced biofuels and electric vehicles are important technologies for the future.

Mr Rühl describes the past few years as a period of “eerie quiet” in the oil market. As he rightly observes, that will not last forever.

FT