Register

Peak Oil is You


Donate Bitcoins ;-) or Paypal :-)


Page added on October 26, 2014

Bookmark and Share

Proven reserves of failed predictions: The debate over peak oil

Geology

This year, a prediction that was posited 11 years ago was disproven.  It was not as though this were some random prediction either:  this was the International Energy Agency’s official prognostication for Peak Oil.  Set in 2003, it has been false ever since.  Each year the world’s proven oil reverses expanded and 2014 was no exception.  The IEA was wrong.  But they were not the first to suggest such a hypothesis.  John D. Rockefeller’s former business partner predicted that the oil fields found in Pennsylvania were a small discovery that could only last a few years.  He left the enterprise and it was Rockefeller alone who reaped the rewards of his gamble.  Peak oil is an elusive guess for the year that oil production will stop increasing and begin to decline.  Starting with predictions from the mid-19th century about running out of coal, well respected scientists, geologists, businessmen and economists have projected a possible date for the end of the oil boom.  It has yet to arrive.  Milton Friedman, in his lecture, The Energy Crisis:  A Humane Solution argues that peak oil is nowhere in sight.  Despite the fact that he presented this speech almost thirty years ago, his theory is no less true today.  First, he presents a measurement of peak oil, or how we can know when we have reached it.  Second, he points out that ever improving technology has benefitted the oil industry in the past and will continue to do so in the future.  Taken together, these demonstrate that we are nowhere near peak oil, and almost certainly will not be by the end of our lifetimes.

Before we can debunk a theory about slowing oil production, we need an objective criterion to find out whether or not we’re there, in much the same way as our inability to know for certain whether a particular train has arrived without actually seeing it pull into the station.  Friedman’s indicator is price.  Not just price at the pump– that fluctuates daily.  In order to truly see a long term trend we need real price, price, adjusted according to other prices and taking into account inflation.  His rationale is as follows:  if there were a known date oil supplies would be consumed, oil companies would be much less likely to sell oil today.  Likening the situation to the price of diamonds, Friedman notes that if the owner of a diamond thinks the price of diamonds is as good now as it’s going to get, he’ll begin extracting and selling diamonds.  But if, on the other hand, there’s an indication that those diamonds might be worth much more ten or twenty years from now due to increased scarcity, the owner will most likely leave them in the ground, to be removed at a later date.  Applied to the oil industry, if drilling companies believe that reserves are running low, a natural shortage will result.  Viewed from a supply and demand perspective, quantity supplied will drop, forcing prices up.  If this is the case, oil companies will conserve their oil, waiting for prices to rise sufficiently for them to make a better profit.  Of course, all prices must be adjusted for inflation.  And what Milton Friedman noted was truly amazing:  to the average consumer’s eyes, oil prices rose steadily between 1950 and 1970.  But he realized that the real price of oil, adjusted against the prices of other goods and inflation, had actually declined during that twenty year period.  Now we have an objective measure for the point of peak oil.

Unfortunately, one factor upsets the beautiful price criterion:  government influence.  It wasn’t necessarily the US government, although that did play a role.  More importantly, it was the Organization of Petroleum Exporting Countries (OPEC) established in 1973.  OPEC oil ministers can set artificial prices of oil by restricting oil sales creating a lack of quantity supplied which drives up prices of gas at the pump.  This enables them to make a much larger profit.  It also makes it hard to judge oil’s real price.  However, in spite of OPEC, real price gives us a way to determine an end to reserves.

According to Friedman, one branch of the oil industry has allowed us to continue increasing energy production:  technology.  Due to a long series of technological improvements, oil companies find more efficient ways to extract oil than ever before.  The latest of these advances is hydraulic fracturing, also known as fracking.  Just as Whitney’s cotton gin revolutionized the cotton industry, this new technique enables energy companies to remove more natural gas than ever.  Fracking hadn’t been invented when Friedman gave his speech.  But it’s one of a number of new technologies, like horizontal drilling, multilateral drilling, complex path drilling and enhanced oil recovery, which have enabled people to extract more fuel at a lower cost with less environmental impact than was previously believed possible.  Technology is the real catalyst behind our continuing fuel supply.

When it comes to peak oil, determining the actual date is very difficult.  Many predictions are formed each year.  Each year many more are proven false.  However, we will know when we reach peak oil, thanks to Friedman’s criterion of real price, and we can assume that oil production is going to continue to expand for a long time yet, thanks to countless technological advances each year in addition to the discovery of new oil reserves. ESR

Peter Anderson is a high school Junior who lives outside of San Francisco, California.  This essay was written for an AP Macroeconomics class in October, 2014.  He can be reached at ptranderson1355@gmail.com

Enter Stage Right



27 Comments on "Proven reserves of failed predictions: The debate over peak oil"

  1. Dave Thompson on Sun, 26th Oct 2014 11:13 pm 

    Milton Friedman also thought that infinite grow on a finite planet was possible.

  2. mbnewtrain on Mon, 27th Oct 2014 12:01 am 

    Peak oil will be reached because the market cannot deliver oil cheap enough to keep demand climbing. The size of the world’s oil resource does not matter as much as the cost to drill and the cost produce that oil. Much of the world’s oil will never be produced because the potential consumers will shift to other energy sources as the oil price climbs, or simply decide not to pursue that oil consuming activity.

    I am an investor in one of these shale oil stocks and the recent oil price decline has sent the share price down 30%. The market foresees the financial performance of the shale players going in the toilet and the drilling activity declining subsequently. The world is reaching a wall of production increase due to price not due to limited resource. Likewise, technology is also reaching its limits of return as enhanced oil recovery is tried in deep water fields at very high cost for the marginal amount of new oil to be extracted.

  3. steve on Mon, 27th Oct 2014 1:29 am 

    Peter Anderson is a high school Junior….I wonder if he knows what plagiarism is…this is almost verbatim of some other writers

  4. yoananda on Mon, 27th Oct 2014 2:53 am 

    Peak coal has arrived : it’s called First World War. (1913 peak coal in UK first world economic power by then).

    We get through it with oil and an second world war.

    Peak oil is already here, it’s called Leman Brother ! And we have have only a few years to find an alternative, or face really hard problems.

  5. Cloud9 on Mon, 27th Oct 2014 5:49 am 

    Pete, a well written essay. I would have given you an A for effort in my economics class. Having said that, I would suggest that you look at the decline that is under way in places like the North Sea and the Gulf of Mexico. Then I would suggest that you look at the rate of discovery of new fields and what is required to replace aging fields just to keep the oil flow constant. Once you have considered these factors I would ask you to look at the teeming millions in both India and China who are desperately trying to reach western middle class living standards. Then look at the resource wars that are breaking out between the major powers. Get back to me on the overall trend once you have factored in these issues.

  6. Cloud9 on Mon, 27th Oct 2014 5:52 am 

    For further study on the subject, you might want to read this: http://www.permaculturenews.org/files/Peak%20Oil_Study%20EN.pdf

  7. Beery on Mon, 27th Oct 2014 5:53 am 

    The only predictions to show more failure than those of the Peakists are those of the Cornucopians. Why doesn’t the writer mention that fact I wonder.

  8. westexas on Mon, 27th Oct 2014 6:00 am 

    My usual comments about actual crude oil production (45 and lower API gravity) versus condensate, NGL & biofuels:

    Peak (Crude) Oil in 2005?

    In my opinion it is very likely that actual global crude oil production (45 or lower API gravity crude oil) peaked in 2005, while global natural gas production and associated liquids (condensates & natural gas liquids) have so far continued to increase.

    I’ve always thought it odd that when we ask for the price of oil, we get the price of 45 or lower API gravity crude oil, but when we ask for the volume of oil, we get some combination of crude oil + condensate + NGL (Natural Gas Liquids) + biofuels + refinery gains.

    This is analogous to asking a butcher for the price of beef, and he gives you the price of steak, but if you ask him how much beef he has on hand, he gives you total pounds of steak + roast + ground beef. Shouldn’t the price of an item directly relate to the quantity of the item being priced, and not to the quantity of the item plus the quantity of (partial) substitutes?

    In any case, the closest measure of global crude oil production that we have is the EIA data base that tracts global Crude + Condensate (C+C). In regard to this data base, a key question is the ratio of global condensate to C+C production.

    Unfortunately, we don’t appear to have any global data on the Condensate/(C+C) Ratio. Note that when the EIA discusses “crude oil” they are talking about C+C.

    Insofar as I know, the only complete Condensate/(C+C) data base, from one agency, is the Texas RRC data base for Texas, which showed that the Texas Condensate/(C+C) ratio increased from 11.1% in 2005 to 15.4% in 2012. The 2013 ratio (more subject to revision than the 2012 data) shows that the 2013 ratio fell slightly, down to about 15%, which probably reflects more focus on the crude oil prone areas in the Eagle Ford. The EIA shows that Texas marketed gas production increased at 5%/year from 2005 to 2012, versus a 13%/year rate of increase in Condensate production. So, Texas condensate production increased 2.6 times faster than Texas marketed gas production increased, from 2005 to 2012.
    The EIA shows that global dry gas production increased at 2.8%/year from 2005 to 2012, a 22% increase in seven years.

    If the increase in global condensate production only matched the increase in global gas production, global condensate production would be up by 22% in seven years. If global condensate production matched the 2005 to 2013 Texas rates of change (relative to the global increase in gas production), global condensate production would be up by about 67% in seven years.

    In any case, we don’t know by what percentage that global condensate production increased from 2005 to 2013. What we do know is that global C+C production increased at only 0.3%/year from 2005 to 2013. In my opinion, the only reasonable conclusion is that rising condensate production accounted for virtually all of the increase in global C+C production from 2005 to 2012, which implies that actual global crude oil production was flat to down from 2005 to 2012, as annual Brent crude oil prices doubled from $55 in 2005 to $112 in 2012.

    The following chart shows normalized global gas, NGL and C+C production from 2002 to 2012 (2005 values = 100%).

    http://i1095.photobucket.com/albums/i475/westexas/Slide1_zps45f11d98.jpg

    The following chart shows estimated normalized global condensate and crude oil production from 2002 to 2012 (2005 values = 100%). I’m assuming that the global Condensate/(C+C) Ratio was about 10% for 2002 to 2005 (versus 11% for Texas in 2005), and then I (conservatively) assume that condensate increased at the same rate as global gas production from 2005 to 2012, which is a much lower rate of increase in condensate (relative to the increase in gas production) than what we saw in Texas from 2005 to 2012.

    http://i1095.photobucket.com/albums/i475/westexas/Slide2_zpse294f080.jpg

    Based on foregoing assumptions, I estimate that actual annual global crude oil production (45 or lower API gravity crude oil) increased from about 60 mbpd (million barrels per day) in 2002 to about 67 mbpd in 2005, as annual Brent crude oil prices doubled from $25 in 2002 to $55 in 2005. 


    At the (estimated) 2002 to 2005 rate of increase in global crude oil production, global crude oil production would have been up to about 90 mbpd in 2013. 


    As annual Brent crude oil prices doubled again, from $55 in 2005 to an average of about $110 for 2011 to 2013 inclusive, I estimate that annual global crude oil production did not materially exceed about 67 mbpd, and probably
    averaged about 66 mbpd for 2006 to 2013 inclusive.

  9. forbin on Mon, 27th Oct 2014 7:51 am 

    so

    “d thinks the price of diamonds is as good now as it’s going to get, he’ll begin extracting and selling diamonds. But if, on the other hand, there’s an indication that those diamonds might be worth much more ten or twenty years from now due to increased scarcity, the owner will most likely leave them in the ground, to be removed at a later date.”

    this statement is plainly false – it ignores net present value , a diamond mine owner with all the over head that involves would restrict supply not stop it. OPEC does a different calculation because they need the money now ! Duh!

    Does that stop or prevent peak diamonds? no it does not.

    Forbin

  10. Dredd on Mon, 27th Oct 2014 8:51 am 

    Another thing disproven is that Oil-Qaeda has no religion:

    So Elijah went to Zarephath, and as he came to the town gate, he saw a widow gathering firewood. “Please bring me a drink of water,” he said to her. And as she was going to get it, he called out, “And please bring me some bread, too.”

    She answered, “By the living LORD your God I swear that I don’t have any bread. All I have is a handful of flour in a bowl and a bit of live oil in a jar. I came here to gather some firewood to take back home an d prepare what little I have for my son and me. That will be our last meal, and then we will starve to death.”

    “Don’t worry, “Elijah said to her. “Go on and prepare your meal. But first make a small loaf from what you have and bring it to me, and then prepare the rest for you and your son. For this is what the LORD, the God of Israel, says; ‘The bowl will not run out of flour or the jar run out of oil before the day that I, the LORD, send rain.’”

    The widow went and did as Elijah had told her, and all of them had enough food for many days. As the LORD had promised through Elijah, the bowl did not run out of flour nor did the jar run out of oil.”

    (The Peak of The Oil Lies – 6, quoting 1 King 17:10-16).

    Big OIl-Lijah now emerges from Oil-Qaeda.

  11. JuanP on Mon, 27th Oct 2014 9:15 am 

    BS. I couldn’t finish the first paragraph! I don’t read shit written by fools who argue that because oil resources have been relabeled as oil reserves due to higher oil prices there is no PO. Talk about getting it backward. It was increased costs and diminishing returns caused by PO that caused oil prices to rise leading to increase reserves.
    Skip this one, it’s bad for your mind to read crap!

  12. JuanP on Mon, 27th Oct 2014 9:18 am 

    Read Westexas comment instead of the article!

  13. ghung on Mon, 27th Oct 2014 9:19 am 

    WTI below $80 this morning. Yeah, we’ll be back to $30 before you know it 😉

  14. rockman on Mon, 27th Oct 2014 9:23 am 

    “Each year the world’s proven oil reverses expanded and 2014 was no exception”. And just a reminder that the amount of proven undeveloped reserves depends not only upon geology but the price of oil: if a reservoir cannot be commercially produced, regardless of how much is in place, if oil prices are too low then they don’t qualify for that classification. Which means that in the last few weeks there has been a dramatic decrease in global proved undeveloped reserves. And with respect to US public companies they’ll eventually be forced to remove an amount of such reserves off their books (following SEC regs) if prices remain lower. Fortunately the SEC now requires a yearly average price for oil to be used. Previously it was based upon the closing price on the last day of the year. At the moment that looks as though it would have been considerably lower then the year’s average price.

  15. JuanP on Mon, 27th Oct 2014 9:36 am 

    I would have worded my comment differently if I had realized this was written by a high school junior. My criticism was addressed to an adult.

  16. Northwest Resident on Mon, 27th Oct 2014 9:50 am 

    Excellent writing for a high school Junior! But, I’m left wondering if maybe the same individual(s) who force-fed this poor kid all these stupid “facts” might have had a strong hand in the editing and rewriting of the article before it got published, and just attached junior’s name to the article to get more attention. But nobody would be dishonest or sinister enough to do that, would they?! Oh yes they would, especially when it comes to convincing the witless masses that “all is well”. No dirty trick will be left un-played, no lie will be left untold, no propaganda angle will be left untried as we wind down quickly toward collapse and “they” do everything they possibly can to hold that moment off. Next, we’ll be treated to a 10-year-old’s master thesis on the investment grade qualities of shale oil extraction. The sad part is, a lot of people will just suck it up, hook line and sinker.

  17. Mike999 on Mon, 27th Oct 2014 11:06 am 

    Incompetent Right Wing Drivel.

    1) “Oil reserves” are no longer oil reserves, now with shale reserves being renamed.
    2) Yes, you got more oil with higher prices, with BP drilling 2 MILES under Gulf waves to get it. But, that Precisely is PEAK OIL.
    3) You also got Alternative Sources: Tar Sands coming online with $100 oil.
    4) You got monopoly RESPONSE to alternatives, with a lower oil price to DRIVE OUT Tar sand and Marginal Shale gas plays.
    5) You got Exxon cutting back on CAPEX spending, because it’s expensive, but also to REDUCE Future Supply.

    None of which Disprove Peak Oil. If oil were at $20 a barrel, That would disprove Peak oil. Oil at $80 – $110 a barrel PROVES Peak Oil.

  18. Mike999 on Mon, 27th Oct 2014 11:11 am 

    The incompetent look at only 1 variable ( Oil Reserves ), and are therefore Always Wrong.

  19. Mike999 on Mon, 27th Oct 2014 11:14 am 

    And then there’s demand: World Hybrid sales: 1.3 Million.

    Users have responded to high gas prices by cutting their demand by 60%. A 60% Gas Sale ALL The Time.

  20. rockman on Mon, 27th Oct 2014 12:42 pm 

    According to the EIA US gasoline consumption peaked in 2007 and decreased 5.9% through 2013.

  21. nemteck on Mon, 27th Oct 2014 1:18 pm 

    “And then there’s demand: World Hybrid sales: 1.3 Million.” Demand??? There are 1.55 BILLION vehicle in the world, 200 Million alone in the US.

  22. louis wu on Mon, 27th Oct 2014 1:49 pm 

    “Likening the situation to the price of diamonds, Friedman notes that if the owner of a diamond thinks the price of diamonds is as good now as it’s going to get, he’ll begin extracting and selling diamonds. But if, on the other hand, there’s an indication that those diamonds might be worth much more ten or twenty years from now due to increased scarcity, the owner will most likely leave them in the ground, to be removed at a later date.”
    There is one very big difference that the young author doesn’t seem to be aware of with this comparison.In order to keep the global industrial paradigm going the use of diamonds is optional, oil not so much.

  23. Perk Earl on Mon, 27th Oct 2014 3:40 pm 

    “if a reservoir cannot be commercially produced, regardless of how much is in place, if oil prices are too low then they don’t qualify for that classification. Which means that in the last few weeks there has been a dramatic decrease in global proved undeveloped reserves.”

    You nailed it Rockman. With declining EROEI, a reduction in net energy per barrel is going to translate into declining affordability, in turn reducing total reserves economical to produce.

    Those with blinders on want to fantasize that just because it’s there in the ground somewhere, it’s usable. “Ah, we found more. See there’s no peak oil!”

    “If only it was that simple.”

  24. Nony on Mon, 27th Oct 2014 4:01 pm 

    It will be interesting to see what happens with the PV-10 filings within the 10Ks of large public shale-cos like CLR, next spring (assuming prices close the year low).

  25. dashster on Mon, 27th Oct 2014 7:12 pm 

    What prediction by the IEA was disproven? The IEA never predicted Peak Oil by 2014. The author talks about reserves – did IEA predict in 2003 that reserves would stop growing by 2014?

  26. BillC on Mon, 27th Oct 2014 9:18 pm 

    Anyone who debunks peak oil will get hammered. I have studied peak oil since you were probably 11. At 16 I drove a ’69 Mustang 302.
    If cotton was not relabel it would have disappeared soon after the invention of the gin. When you price oil you must throw in the trillions the US spends on oil wars. Brings up the cost considerably. You and your unfortunate generation are living during the last few years of the oil age. I’ve watched our society decline you have not. We are slowly killing ourselves. I predict that our society will be worse off in ten years from now due to peak oil.
    P.S. I hope you got an ‘A+’

  27. Keith_McClary on Tue, 28th Oct 2014 12:26 am 

    I emailed
    ptranderson1355@gmail.com
    pointing him to this page.

Leave a Reply

Your email address will not be published. Required fields are marked *