Peak Oil

Ever since commercial production of oil began, it has been accompanied by a fear of running out of oil.  Today, that fear goes by the name of “peak oil’.   Concerns about peak oil reached their own peak around 2007-8, with surging oil prices, but continue to garner attention, especially when prices are high.

In The Quest: Energy, Security, and the Remaking of the Modern World, Daniel Yergin explores the recurrent fear about running out of oil, what drives it, and reasons for apprehension about oil shortages.  He observes that the contemporary discussion of “peak oil” represents the fifth time that the world seemed destined to run out of oil.

The first episode that Yergin identifies in The Quest was in the 1880s, when Pennsylvania was still the center of world oil production.  The second occurred at the end and just after War I, when the director of the U.S. Bureau of Mines declared, “Within the next two to five years, the oil fields of this country will reach their maximum production, and from that time on we will face an ever-increasing decline”   That was not long before the discovery of new giant oil fields in Oklahoma and Texas.  The third period of fear was toward the end and just after World War II, just before the tapping of the vast Arabian oil fields.  And then, once again, during the oil crises of the 1970s, it was thought that the world would fall off the “oil mountain”. As it turned out, within a decade a global glut of oil caused oil prices to collapse.

The contemporary idea of “peak oil” draws its inspiration from a brilliant but controversial geologist, M. King Hubbert, whom Yergin sketches in The Quest.  In 1956, Hubbert accurately predicted that the United States would reach the “peak” – or top point of production – around 1970.  On that he was very right.   But Hubbert’s predictive powers stumbled when he went on to declare that the world was entering upon “a period of non-growth”.

This explanation for what would happen after the peaking of U.S. oil has not been borne out.  According to his theory, the United States would have produced about 1.5 million barrels per day of oil in 2012.  In fact, it produced 6.4 million barrels per day – more than four times as much as Hubbert had predicted.  Indeed, the country that has registered the largest growth in oil production in the last few years is none other than the United States.  In retrospect, it has been pointed out that Hubbert worked on the assumption that technology was static and would not change much and that price also did not much matter as an incentive to innovation.

Each period of potential shortage, Yergin comments in The Quest, has been abrogated by a combination of new technologies and new areas.  And that is exactly what is happening in the United States with the adaption to oil of hydraulic fracturing and horizontal drilling technologies, developed for shale gas. These technologies are being applied to areas that were considered marginal, such as the Bakken formation in North Dakota and the Eagle Ford in South Texas.  The impact has been enough to turn North Dakota into the second-largest oil-producing state in the United States, ahead of California and Alaska, and behind only Texas.    Moreover, these same techniques are now being applied to areas that were considered in major decline, such as the vast Permian Basin in West Texas and New Mexico.

Yergin takes a balanced approach in The Quest.  He argues that the global oil industry faces a major challenge in meeting the supply needs of a growing world economy, and especially in the emerging markets like China and India.  He also expresses concern about the aboveground risks – civil wars, revolutions, terrorism, government policies, rapidly-rising costs – that could hinder, threaten, or disrupt oil production around the world.

While disagreeing with the peak oil theory, Yergin believes that the peak oil community is playing an important in questioning if the petroleum industry will be able to meet growing global demand.  Recognizing the significance of the questions and clarification of data and arguments, he also welcomes dialogue.

The Quest has generally been very well received.  The Economist described it as “a masterly piece of work”, and Fortune called Yergin “one of the planet’s foremost thinkers about energy and its implications.”

For now at least,  the big challenge to peak oil theory is what is happening in the home country of M. King Hubbert:  U.S. oil production at the beginning of 2013 was 40 percent higher than in 2008 – an incremental growth  that is equivalent to the entire oil output of Nigeria, a major oil exporter.  So strong is the surge in U.S. output that, at the end of 2012, the International Energy Agency predicted that the United States would overtake Saudi Arabia as the world’s largest oil producer by 2020.  One big open question is whether the technologies that are revolutionizing U.S. oil will be adopted elsewhere in the world – and when.  Another is what is going to unfold above ground in the oil producing world.

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