Peak Oil is You
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Page added on June 15, 2015
The retreat of ‘peak oil’
The recent OPEC meeting provides an opportunity to understand the mysteries of the global oil market. As expected, OPEC decided not to cut its oil production. Barring unanticipated developments, prices will drop, says oil analyst Larry Goldstein. Potential oil supply, including drawdowns from bloated inventories, exceeds demand. Goldstein rightly cautions, however, that no one knows where prices will settle.
Oil’s dramatic price changes seem baffling. In mid-2014, crude prices averaged around $100 a barrel; now, they’re gyrating between $50 and $60. Over the same period, U.S. gasoline prices have dipped from more than $3.50 a gallon to around $2.50. With the world economy slowly recovering, why have prices collapsed?
The standard explanation comes in two parts.
First, oil demand is what economists call price inelastic. Slight changes in supply and demand can produce large price swings. People and businesses need fuel. If oil is scarce, they still need fuel and will pay dearly to get it. If oil is plentiful, they don’t need much more fuel and, therefore, require huge price discounts before buying more.
This is what’s happened. Supply and demand have unexpectedly expanded the global surplus, reducing prices. The increase in American shale-oil (U.S. oil production is up about 80 percent since 2006) unexpectedly boosted supply. Weaker than predicted global economic growth depressed demand. The world now uses about 93 million barrels daily (mbd) but can produce 95 mbd or a bit more.
Second, Saudi Arabia hasn’t absorbed the surplus. OPEC isn’t a cartel, says Goldstein, because most of its 12 members won’t cut production to prop up prices. In the past, the Saudis have done that. But now they are refusing to play. They’ve flooded the market with oil. Reportedly, they don’t want to lose sales to other producers. They are also said to worry that excessively high prices will blunt the future demand for oil.
All this is fine as far as it goes. It explains the mechanics of lower prices. But it misses a larger story: the retreat from “peak oil.”
Peak oil would occur when new oil discoveries no longer offset annual consumption and provided for future growth. This seems unavoidable. Oil is a finite natural resource. There’s only so much of it. When it’s gone, it’s gone. The trouble is that this compelling logic has yet to play out in the real world.
In 1950, global oil production was about 10 mbd. By 1970, it was nearly five times that, 48 mbd. Now, production and consumption are marching toward 100 mbd. Whenever peak oil seems to threaten, some combination of high prices, technological advances and happenstance expands global supplies.
The upshot is public confusion, as oil analyst Blake Clayton shows in a fascinating new book “Market Madness: A century of oil panics, crises, and crashes.” We repeatedly veer from the psychology and reality of scarcity to the psychology and reality of abundance.
The pattern dates to at least the 1920s, Clayton writes, when the explosion of car ownership inspired much talk of “oil exhaustion” and “gasoline famine.” Little wonder. From 1921 to 1929, the number of gasoline stations mushroomed from 12,000 to 143,000. In 1919, the average car traveled 4,500 miles a year; a decade later, the distance had nearly doubled. But gasoline scarcity was prevented by discoveries in Texas and Oklahoma, advances in drilling (deep wells went from 6,000 feet to 10,000 feet) and improved oil refining.
After World War II, the fear was that the United States, having supplied both its own and its allies’ oil needs, might soon drain its reserves. Never happened. Whenever prices are high, the notion that scarcity is permanent thrives. In 2008, 76 percent of Americans believed “the world is running out of oil.” Similarly, the fear of peak oil was one reason for thinking crude prices, until their recent collapse, would remain stuck in the $100 to $150 range.
The common error, Clayton writes, is that “no one at the time can see where more oil would come from.” There is a silent assumption that “if it has not been found yet, or cannot be extracted with today’s technology or at today’s prices” that it won’t ever exist. History has repeatedly refuted this premise.
All this suggests a deeper significance to the recent price collapse. Oil is not inexorably fading from the world stage. Peak oil remains distant. This, of course, has huge implications. To the extent that oil is a source of geopolitical and economic instability, the dangers remain. To the extent that it feeds global warming, the dangers remain. Unless history changes — and who knows, it might — the Age of Oil endures.
13 Comments on "The retreat of ‘peak oil’"
Nony on Mon, 15th Jun 2015 10:56 am
I remember the peak oilers of the 70s, 80s. They were pretty dramatically butt-kicked by the cheap oil of 1985-2005. Even the recent 2005 crew (Simmons, Staniford, Deffeyes, Campbell) has gotten their butts kicked pretty hard by our ability to find more resources at 100+ and even more recently to drive prices down to 60+ by new shale supply.
I think peakers are not really analysts…but more advocates.
Apneaman on Mon, 15th Jun 2015 11:00 am
I doubt you’re that old nony marm – more bullshit from a proven deceiver.
GregT on Mon, 15th Jun 2015 11:17 am
I remember the Peak of US conventional oil production in the US. The line ups for unavailable gasoline, the fist fights, the stabbings,, the shootings, the job losses, and the mass public panic. I remember the Chevy Vega (explode on impact), the Volkswagen Beetle, and the Honda Civic. I remember very well what that peak looked like, I will never forget it, for as long as I live.
The next Peak in 2005, saw the run up of oil from $25/bbl to $147/bbl, US congress saying “there will be blood”, and the Global Financial Crisis that still remains to this day. I remember $100/bbl oil, that allowed the dregs to be profitable, but that oil was still too expensive for the return to BAU and continued economic growth. Today, with oil at $60/bbl, much of those dregs will simply remain in the ground, as our economies continue to unwind.
The end of the oil age is already here.
Perk Earl on Mon, 15th Jun 2015 11:44 am
“Second, Saudi Arabia hasn’t absorbed the surplus. OPEC isn’t a cartel, says Goldstein, because most of its 12 members won’t cut production to prop up prices.”
So if a decision doesn’t appease a person’s best personal interest then a character assassination of the governing body must ensue?
Davy on Mon, 15th Jun 2015 12:13 pm
Wonder Boy NOo said : (referring to Peakers) has gotten their butts kicked pretty hard by our ability to find more resources at 100+ and even more recently to drive prices down to 60+ by new shale supply.
Wonder Boy, you are taking too much credit for something that is way more complex. The 100+ prices were also brought on by bubble economics of the central banks artificially inflating commodities with feverish mal-investment growth especially in China. Otherwise the demand destruction that is taking place now through global growth stalling would have been in full swing following the 2008 crisis IOW there would likely of never been a recovery. IMA a false debt induced short term recovery mainly predicated on wealth transfer. We just delayed the economic descent a few years by monetary easing and rate repression. Shale was just a small part of that bigger picture.
The 60+ down is proof global demand is faltering and many of the oil production sources or pseudo oil production sources brought to market were in effect mal-investment. This is most evident by shale sector rig count drop, huge employment drop in shale sector, and huge debt overhang in the shale sector. This is evident in other unconventional sectors. This debt in the shale sector will likely never be paid and will likely be yet another source of financial poison that is going to kill the patient. You just can’t take credit NOo for results without a story.
penury on Mon, 15th Jun 2015 1:16 pm
People will continue to believe in Peak oil or not right up to the day that the pumps run dry. Corns will also continue to argue their position. Peak oilers will eventually be correct. However far in the future that may be. Perhaps fusion, or other sources of energy will be developed and save us. I personally think that an
Nony on Mon, 15th Jun 2015 1:19 pm
I don’t remember Campbell and Deffeyes and Ace and Rune making these financing caveats when they made their predictions. That just came afterwards. When they were wrong. 🙂
Nony on Mon, 15th Jun 2015 1:22 pm
Davy, be positive. 😉
https://www.youtube.com/watch?v=0AEj3LA2vSo
Davy on Mon, 15th Jun 2015 1:39 pm
One of my favorites NOo but is that your story? Attitude? Well that works in prepping but it is just cheerleading with the subject of shale and oil price.
GregT on Mon, 15th Jun 2015 1:50 pm
Which brings us back to the grasshopper and the ant. It’s all fun and games, until it’s not.
Nony on Mon, 15th Jun 2015 2:05 pm
This is me, Davy. Trying to jump the peak oil fence.
https://www.youtube.com/watch?v=iBcC6X2FWsQ
Apneaman on Mon, 15th Jun 2015 6:25 pm
Petrol set for largest quarterly price rise in 25 years; analysts warn of further increase
http://www.abc.net.au/news/2015-06-15/petrol-prices-face-largest-quarterly-rise-in-25-years/6547448
Beery on Tue, 16th Jun 2015 1:16 pm
So despite the fact that the shale boom is over (and not forgetting that the shale boom singlehandedly prevented the global production peak in 2005) “peak oil remains distant”? I suggest the author’s financial security is riding on folks believing that peak oil ain’t coming anytime soon. Either that, or he just has his head in the sand.
As for the predictions of peak oil always falling flat, yup, that happened a few times. But when geologist M. King Hubbert predicted in the 1950s that US oil production would peak in 1970, guess what: it peaked in 1970. Sometimes oil production does peak. US oil production has never come close to reaching or exceeding that 1970 peak, despite all the predictions from the cornucopians that it would. Yes, anti-peakists make wrong predictions too.
The author’s assurances that “something” will come and save our gas-guzzling butts sounds great (unless you’re worried about global climate change), but sometimes things don’t go our way just because we desperately want them to. I think it’s time the author joined the real world, because this time there isn’t any untapped energy source waiting in the wings. We are going to have to face a future of power-down economics that doesn’t have any room for feel-good free market fantasy.
Sometimes the invisible hand of the free market doesn’t care what human beings desire, and I think we’re going to get taught that harsh lesson in the very near future.