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Michael Lynch: What Ever Happened To Peak Oil?

Production

A decade ago, the media was filled with stories about peak oil, numerous books were published on the subject (such as Half Gone and $20 a Gallon!), and even the Simpsons mentioned it in an episode about doomsday preppers.  Now, the topic is largely forgotten and the flavor of the month is peak oil demand.  Anyone concerned about the quality of research that works its way into the public debate should be curious about how so many were so wrong for so long.  (Buy my book for the full story.)

First and foremost, realize that in the 1970s, numerous analysts and institutions made similar arguments, arguing that geological scarcity was responsible for higher prices not the two disruptions of production in 1973 and 1979.  Indeed, in the months before oil prices collapsed in 1986, the consensus was that prices were too low and had to rise to make upstream investment profitable, despite the fact that OPEC production was collapsing (down from 30 mb/d in 1980 to 15 in 1985).  You would think that this would make people more skeptical about claims that geological scarcity was responsible when the shutdown of Venezuelan production and the second Gulf War cut off Iraqi supplies sent prices higher starting in 2003.

Such was not the case.  In fact, on September 21, 2004 the Wall Street Journal published a front-page story “As Prices Soar, Doomsayers Provoke Debate on Oil’s Future,” quoting the founder of the Association for the Study of Peak oil as saying “Holy Mother!  The good ol’ moment’s arrived!”  Oddly, the article didn’t mention the alternative explanation for high prices, namely the loss of production from Venezuela and Iraq, about 1 billion barrels up to the article’s publication.

The current era of peak oil warnings started twenty years ago, when Scientific American published an article by two retired geologists called “The End of Cheap Oil,” which presented the idea that world oil production would soon peak while demand kept rising, creating economic shock waves and even ‘the end of civilization’ as one co-author said subsequently.  Since the oil price collapsed to $12 a barrel that year, most paid little heed at first, but as oil prices began to rise five years later, attention soared.

Few realize the debate began a year earlier, in the pages of the Oil & Gas Journal, where members of the opposing camps put forth their views.  Colin Campbell, who later became founder of the Association for the Study of Peak Oil (and coauthored the 1998 Scientific American article), wrote an article titled “Better Understanding Urged for Rapidly Depleting Reserves” in which he warned “there is comparatively little left to find” and “the world’s political, economic, and political stability, which relies on an abundant supply of cheap oil, is in serious jeopardy.”  His core argument was that the amount of recoverable crude oil, which he put at 1.8 trillion barrels, was smaller than most

The contrary view was put forth in the same journal in an article by M. A. Adelman and this author, noting past pessimism:  “For many years now, nearly every forecast has been: an early peak, then in 3-5 years decline in virtually every place but the Persian Gulf.”  And “The oil industry has always been in a tug-of-war between depletion and knowledge. It takes endless effort and investment to renew and expand reserves. But resource limits are a phantom….Repeatedly, the forecasts are revised with a higher and later peak….These estimates of declining reserves and production are incurably wrong because they treat as a quantity what is really a dynamic process driven by growing knowledge.”

Since then, the peak oil advocates have repeatedly increased their estimates of recoverable resources (Campbell’s went from 1.575 to 1.9 trillion) and pushed the date of the peak further out, exactly as Adelman and Lynch argued, while trying to argue that the increase in oil supply was ‘unconventional’ oil which they were not analyzing.  Of course, they tend not to mention that their 1998 article claimed “But the industry will be hard-pressed for the time and money needed to ramp up production of unconventional oil quickly enough.”  Similarly, many argue that the growth has been from NGLs or shale, not conventional oil, but the figure below refutes that.

 The author; data from BP and EIA.

World Petroleum Supply

The general view of the issue is that shale oil saved us from peak oil, and the issue has largely disappeared from the media, to be replaced by warnings of peak oil demand, but there are still articles about peak cobalt, peak cocoa and similar scares.  Rather the way your local news station constantly reports on some new threat to the public (germs in airplane bathroom sink water, dangers from household cleaning products, etc. ad infinitum).

Unfortunately, very few people realize that the entire concerns about peak oil were based on misinformation or junk science.  Specifically, the research was not scientific at all but statistical analysis so badly done that it wouldn’t pass a first-year college course.  The work by Campbell and Laherrere relied on the basic idea that geology determined production trends, and thus trends could be safely extrapolated based on the bell curve model.  If production was declining, that is.  Economics didn’t matter because ‘you have to find oil before you can produce it’ and if it’s there, it will be produced.  Technology could not improve recovery because “Technology cannot change the geology of the reservoir, but technology (in particular horizontal drilling) can help to produce faster, but no more…”  (Jean Laherrere)

The majority of this is nonsense.  Production usually doesn’t follow a bell curve, and when it does, it is the result of the effects of exponential growth and decline.  (Many repeated the claim that geology meant oil production in a region had to follow a bell curve without actually checking the data.)  Instead, changes in oil prices, fiscal terms, and access to resource basins cause production to fluctuate all the time—and often surpass the supposed ‘peak’ level that peak oil advocates identify.

Many of the arguments reflected their authors’ ignorance of either the industry or forecasting.  Simmons claimed that hearing the Saudi oil company used ‘fuzzy logic’ to model reservoirs convinced him they had problems, since he’d never heard of it.  (It’s just a decades-old programming method.)  Joe Romm said “Steep falls in oil production means the world now needed to replace an amount of oil output equivalent to Saudi Arabia’s production every two years, Merrill Lynch said in a research report.”

Apparently, he didn’t know that Jimmy Carter, in his 1977 speech on the energy crisis, said, “…just to stay even we need the production of a new Texas every year, an Alaskan North Slope every nine months, or a new Saudi Arabia every three years. Obviously, this cannot continue.”

Thus, the publications and predictions have by and large not come true—often rather spectacularly.  Russia was said to be unable to surpass 8 mb/d, and when they did, 9 mb/d, and when they reached 10 mb/d, a quick collapse was predicted.  Production there is over 11 mb/d and still increasing.  And a 2005 book describing the imminent collapse of Saudi production, presaging world production collapse, was not only riddled with errors but has proven wholly invalid.  The Saudis have experienced no production difficulties, indeed had to cut back to support prices; and world production has grown by about 15 mb/d since the 2005 peak prediction by that author and others.

Arguments made by knowledgeable resource economists have explained the historical pattern, such as the 1997 article by Adelman and Lynch.  The petroleum resource base is huge, at least ten times what is described by peak oil advocates, and price spikes reflect temporary supply disruptions or the removal of some of the ‘cheap’ resource from the accessible portion of supply by resource nationalism.  Peak oil advocates were following the long-standing neo-Malthusian practice of interpreting short-term problems as permanent and insoluble, just as was done in the 1970s.

Tellingly, those believing in peak oil often displayed a certainty that was totally unwarranted, given the complexity of the issue.  The 1998 Scientific American article stated bluntly, “Predicting when oil production will stop rising is relatively straightforward once one has a good estimate of how much oil there is left to produce.”  (They predicted the peak within ten years; that was 20 years ago.)

Ken Deffeyes went further, actually predicting a peak in global oil production on Thanksgiving Day, 2005.    The incredible precision of such a prediction did not seem to him to be unlikely.  Other comments:

Greenpeace official Rex Weyler made the confident statement, “Oil company cheerleaders proclaiming huge supplies of oil are dead wrong. Peak oil is as real as rain, and it is here now. Not 2050. Not 2020. Now.”  (That was in 2012)

“I wasn’t going to post on this since I have blogged endlessly on the painfully obvious reality that we are at or near the peak (see “Peak Oil? Bring it on!“).”  Joe Romm 2009

“But others held it up as convincing proof of the notion that the world’s oil production would soon reach a pinnacle, never to be exceeded.”   The Economist in 2008, discussing the Simmons book Twilight in the Desert.

“This is not a controversial statement. It is just a question of when.”   Jeremy Leggett in 2006

And those who disagreed were treated with derision.

“In a world where fact-checked information were valued over mere argumentation, where intelligent inquiry and dialogue were preferred to invective-laden diatribes and declarations of fact-free faith, the voices of Lynch, Yergin and Learsy would never be heard, let alone paid large sums of money for “proprietary” information about their foolish dreams.”  Chris Nelder 2009

“At a 2005 conference on oil in Italy, I listened to the former US Secretary of Energy, James Schlesinger, liken denial about peak oil—in the face of all the emerging evidence—to Pompei’s citizens ignoring the rumblings below Vesuvius.”  Leggett in Half Gone p. 277  Others have compared those who didn’t agree with peak oil arguments to Neville Chamberlain at Munich, ignoring looming disaster.

“They are cornucopians who cannot fathom the possibility of limits to growth.”  Kurt Cobb 2005

Not surprisingly, few of those who were so certain about peak oil have admitted to being wrong, or simply commented, as Joe Romm did, “The idea of peak oil supply — the notion that our reach (demand) for oil would exceed our grasp (global supply) — is dead.”

Richard Heinberg, a one man apocalyptic industrial complex, falls back on the idea that peak oil occurred in 2005—peak conventional oil.    Thus, the peak oil theor(ies) were not disproven, but the event delayed, primarily because fiscal policies led to a flood of capital into, for example, U.S. shale production, but, he says, “Like all debt bubbles, the fracking bubble is going to burst at some point. No one knows whether that will happen later this year, next year, or five years from now. But burst it will.” Apparently, he thinks the 2008 oil price surge was not a bubble, but shale oil production is.

Many others have simply ceased to discuss the subject.  Theoildrum.com has closed down, the Association for the Study of Peak Oil no longer holds conventions (or does very much at all), and one reporter found it hard to locate most of the original theorists or get them to respond.   Some sites, like peakoil.net, are now more focused on environmental questions, although theoilage.org is still active.

The question of why remains paramount.  As Financial Times’ Ed Crooks correctly noted, “It’s worth noting, incidentally, that although the Peak Oil supply pessimists may have been fundamentally wrong, they were more useful for predicting the market of 1999-2013 than many people who were fundamentally right.”

So, whereas the Ptolemaic model of the solar system outperformed the initial Copernican model, that was not evidence of its scientific validity.  As I noted many times, there’s a big difference between being smart and lucky.  If you predict a stock market crash for your entire career, you will occasionally be right, but that doesn’t mean you understand the market.  In a 2001 Oil & Gas Journal article, entitled “A New Era of Oil Price Volatility” I described market factors that I expected would make prices more volatile and higher.  How much higher?  Well, $26 as the new mean.  (Embarrassed cough)

So, the peak oil theorists got lucky in that the industry experienced a large number of supply disruptions that raised prices, which seemed to confirm their arguments—just as the Iranian Oil Crisis of 1979 incorrectly convinced many that ever-higher crude prices were unavoidable and resource optimists naive.  But by understanding that supply disruptions in Iraq, Libya, Venezuela and so on were responsible for higher prices, it is possible to recognize that political trends in oil exporting countries will determine prices, not resource scarcity.  Recognizing the former means coping with cyclical prices, believing in the latter means getting blindsided by every major price decline.

Now, with production problems in Libya and Venezuela (and maybe Iran) pushing prices towards $80 a barrel, the industry is warning against irrational exuberance and urging capital discipline—just like it did in the early 2000s, only to give into the siren call of high prices.  Let’s hope the next price crash doesn’t bring similar pain.

Forbes



66 Comments on "Michael Lynch: What Ever Happened To Peak Oil?"

  1. MASTERMIND on Sun, 1st Jul 2018 10:53 am 

    Lynch

    Sorry you neckbeared freak..This is peakoil.com..Your “fake news” and logical fallacies have no power here!

    LMFAO!

  2. spike on Tue, 3rd Jul 2018 8:06 am 

    Several people have commented on the ‘change’ in the resource being exploited, from conventional to unconventional, but this is not very relevant. If your veggies come from a hydroponic farm or a local organic producer instead of a mega-farm, does it matter? If the 2005 peak in conventional oil were relevant, then how to you explain the sharp inventory rise in 2013/14 and the need for OPEC+ to cut production? Consumers get the same thing after processing–products–regardless of whether it is shale oil, oil sands, or Brent that goes into the refinery. If people can produce shale oil at $25 or $40, it doesn’t matter that it’s shale, if the price is above that level.

  3. Antius on Tue, 3rd Jul 2018 9:13 am 

    ” Several people have commented on the ‘change’ in the resource being exploited, from conventional to unconventional, but this is not very relevant. If your veggies come from a hydroponic farm or a local organic producer instead of a mega-farm, does it matter? If the 2005 peak in conventional oil were relevant, then how to you explain the sharp inventory rise in 2013/14 and the need for OPEC+ to cut production? Consumers get the same thing after processing–products–regardless of whether it is shale oil, oil sands, or Brent that goes into the refinery. If people can produce shale oil at $25 or $40, it doesn’t matter that it’s shale, if the price is above that level”

    The weakness of unconventional oil lays in its much higher production costs, due either to a difficult operating environment (arctic or deep offshore), high depletion rates (shale) or high direct labour and energy inputs (Canadian tar). Since the financial crisis, interest rates have dropped to almost zero and trillions of dollars of new funds have flowed into bond and equity markets, hugely inflating asset values. Much of this money has found its way into unconventional oil and gas production. The weak profitability of these ventures does not impede them so long as money is available at low cost. Even though the profitability of shale is weak, new funds have been available thus far, because the cost of borrowing is almost zero. In absolute terms, debt has ballooned. This is problematic because interest rates are rising and the US money supply is rapidly contracting, which not only raises borrowing costs for new investments, but could make it difficult to service existing debt.

    As Rockman has noted before, the price of oil is driven by what refineries are prepared to pay for feedstock, based upon what they can sell their products for. It does not, in the short term, reflect the real costs of production or investment in new capacity. The fact that oil prices have been unsustainably low since 2014 is borne out by the low level of investment in new capacity over the past few years, making a supply crisis all but inevitable in the next few years. We are living on borrowed money and borrowed time.

  4. Permavillage on Tue, 3rd Jul 2018 9:29 pm 

    Peak oil is a fact, as it happens to a well, and as it has happened to numerous countries and regions, e.g. UK, Indonesia, EU, etc.

    All that is scientifically demonstrated was not proven until it was…

    Now the alarming last one is SOuth-Pacific region, according to the last BP energy report.

    But this region includes China and India, so we are getting closer to the Export Land Model from geologist Jeffrey Brown.

  5. Boat on Tue, 3rd Jul 2018 9:41 pm 

    Permavillage

    Peakoil is global production. Production continues to rise globably. Untill the world hits a final peak the discussion on when that will happen and why will spark debate. Welcome to peakoil.com

  6. MASTERMIND on Tue, 3rd Jul 2018 9:42 pm 

    Lynch

    IEA Chief warns of world oil shortages by 2020 as discoveries fall to record lows
    https://www.wsj.com/articles/iea-says-global-oil-discoveries-at-record-low-in-2016-1493244000

    HSBC Global Bank: 81% of world liquids production already in decline and world oil shortages ahead
    https://www.scribd.com/document/367688629/HSBC-Peak-Oil-Report-2017

    Saudi Arabia’s Energy Minister Warns of World Oil Shortages Ahead
    https://www.wsj.com/articles/saudi-minister-sees-end-of-oil-price-slump-1476870790

    Saudi Aramco chief warns of looming oil shortage
    https://www.ft.com/content/ed1e8102-212f-11e7-b7d3-163f5a7f229c

    Peak oil vindicated by the IEA, Saudi Arabia, HSBC Global Bank..

  7. MASTERMIND on Tue, 3rd Jul 2018 9:44 pm 

    Lynch’s fake news and screams of denial sound like the squealing of a pig beginning delivered to the butchers shop. The volume of their protestations being directly proportional to the proximity of their inevitable fate….

  8. MASTERMIND on Tue, 3rd Jul 2018 9:46 pm 

    World Oil Shortages To Lead To Oil Price Spike By 2020s, warns Goldman Sachs
    http://oilprice.com/Latest-Energy-News/World-News/Supply-Crunch-To-Lead-To-Oil-Price-Spike-By-2020s-Expert-Says.html

    UAE warns of world oil shortages ahead by 2020 due to industry spending cuts
    http://www.arabianindustry.com/oil-gas/news/2016/nov/6/more-spending-cuts-as-uae-predicts-oil-shortages-5531344/

    Halliburton CEO says oil will spike due to oil shortages by 2020 after Industry Cuts
    https://www.bloomberg.com/news/articles/2017-07-12/halliburton-sees-2020-oil-spike-after-industry-cuts-2-trillion

    Total CEO warns we are going to have oil shortages around 2020 due to lack of investment & new discoveries
    http://www.boursorama.com/actualites/je-suis-convaincu-qu-on-va-manquer-de-petrole-selon-le-pdg-de-total-patrick-pouyanne-9b2d911a65572f5f989a74319b68d296

    UBS Global Bank warns of industry slowdown and world Oil Shortages by 2020
    http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/12136886/Oil-slowdown-to-trigger-supply-crisis-by-2020-warns-bank.html

    Citigroup CEO Ed Morse warns of oil shortages coming soon
    https://www.bloomberg.com/news/articles/2017-09-25/citi-says-get-ready-for-an-oil-squeeze-than-an-opec-supply-surge

    2020s To Be A Decade of Disorder For Oil
    https://oilprice.com/Energy/Energy-General/2020s-To-Be-A-Decade-of-Disorder-For-Oil.html

    All That New Shale Oil May Not Be Enough as Big Discoveries Drop
    https://www.bloomberg.com/news/articles/2017-12-27/all-that-new-shale-oil-may-not-be-enough-as-big-discoveries-drop

    Wood Mackenzie warns of oil supply crunch and world oil shortages around 2020
    https://oilprice.com/Energy/Crude-Oil/The-Next-Oil-Price-Spike-May-Cripple-The-Industry.html

  9. MASTERMIND on Tue, 3rd Jul 2018 9:47 pm 

    Imminent peak oil could burst US, global economic bubble – study
    https://www.theguardian.com/environment/earth-insight/2013/nov/19/peak-oil-economicgrowth

    Energy watchdog warns oil and electricity shortages could develop as investment falls
    https://www.cnbc.com/2017/07/10/watchdog-warns-of-oil-and-electricity-shortages-as-investment-falls.html

    Warning: Oil supplies are running out fast
    https://www.independent.co.uk/news/science/warning-oil-supplies-are-running-out-fast-1766585.html

    Why investors’ should brace for a devastating oil shortage ahead
    http://www.marketwatch.com/story/why-investors-should-brace-for-a-devastating-oil-shock-ahead-2017-07-03

    North Dakota Department of Mineral Resources Director “We could have worldwide oil crisis by 2021”
    http://www.kfyrtv.com/content/news/Latest-oil-production-numbers-reveal-modest-drop-also-presents-potential-worldwide-oil-crisis-476721983.html

    Are We Sleepwalking Into The Next Oil Crisis?
    https://oilprice.com/Energy/Energy-General/Are-We-Sleepwalking-Into-The-Next-Oil-Crisis.html

  10. MASTERMIND on Tue, 3rd Jul 2018 9:48 pm 

    Saudi Arabian oil reserves are overstated by 40% – Wikileaks
    https://www.theguardian.com/business/2011/feb/08/saudi-oil-reserves-overstated-wikileaks

    Saudi Arabia’s Energy Minister Warns of World Oil Shortages Ahead
    https://www.wsj.com/articles/saudi-minister-sees-end-of-oil-price-slump-1476870790

    Saudi Aramco chief warns of looming oil shortage
    https://www.ft.com/content/ed1e8102-212f-11e7-b7d3-163f5a7f229c

    Saudi Aramco CEO sees oil supply shortage coming as investments, discoveries drop
    https://www.reuters.com/article/us-aramco-oil/aramco-ceo-sees-oil-supply-shortage-as-investments-discoveries-drop-idUSKBN19V0KR

    Saudi Arabia ‘may run out of oil to export by 2030’
    https://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/9523903/Saudis-may-run-out-of-oil-to-export-by-2030.html

    The collapse of Saudi Arabia is inevitable
    http://www.middleeasteye.net/columns/collapse-saudi-arabia-inevitable-1895380679

  11. MASTERMIND on Tue, 3rd Jul 2018 9:49 pm 

    Chevron CEO warns US shale oil alone cannot meet the world’s growing demand for crude
    https://www.cnbc.com/2017/05/01/us-shale-cannot-meet-the-worlds-growing-oil-demand-chevron-ceo-warns.html

    It takes 2,500 shale wells a year just to sustain output of 1 million barrels a day in North Dakota’s Bakken shale, according to IEA. Iraq could do the same with 60 conventional wells.
    https://www.bloomberg.com/news/articles/2014-02-27/dream-of-u-s-oil-independence-slams-against-shale-costs

    The IEA is grossly overestimating shale growth
    https://oilprice.com/Energy/Oil-Prices/The-IEA-Is-Grossly-Overestimating-Shale-Growth.html

    Peak U.S. Shale Could Be 4 Years Away
    https://oilprice.com/Energy/Crude-Oil/Peak-US-Shale-Could-Be-4-Years-Away.html

    Shale Produces Oil, Why Not Cash?
    https://www.wsj.com/articles/shale-produces-oil-why-not-cash-1498486995

    Shale Trailblazer Turns Skeptic on Soaring U.S. Oil Production
    https://www.wsj.com/articles/shale-trailblazer-turns-skeptic-on-soaring-u-s-oil-production-1520257595

    Is Wall Street Funding A Shale Failure?
    https://oilprice.com/Energy/Energy-General/Is-Wall-Street-Funding-A-Shale-Failure.html

    Is Peak Permian Only 3 Years Away?
    https://oilprice.com/Energy/Crude-Oil/Is-Peak-Permian-Only-3-Years-Away.html

  12. Boat on Tue, 3rd Jul 2018 9:52 pm 

    Antius

    We can agree for once. But for example for the sake of discussion let’s say world Peace broke out. Plenty of old conventional oil around to maybe even kill fracking and oilsands because of overproduction. Lowest cost producers will win market share. Geopolitics has held back conventional oil for decades.
    In theory fracking and oilsands should have happened in the future.

  13. MASTERMIND on Tue, 3rd Jul 2018 9:52 pm 

    Peak oil is not a myth -The Royal Society of Chemistry
    https://www.chemistryworld.com/opinion/peak-oil-is-not-a-myth/7102.article

    The future of oil supply –The Royal Society of Science http://rsta.royalsocietypublishing.org/content/372/2006/20130179.short

    A Regional Oil Extraction and Consumption Model. (Dittmar 2017)
    https://arxiv.org/pdf/1708.03150.pdf

    Projection of World Fossil Fuels by Country (Mohr, 2015)
    https://www.scribd.com/document/375110317/Projection-of-World-Fossil-Fuels-by-Country-Mohr-2015

    Economic Vulnerability to Peak Oil (Kerschner 2013)
    https://www.scribd.com/document/375485924/Economic-Vulnerability-to-Peak-Oil-Kerschner-et-Al-2013

    Forecasting OPEC crude oil production using a variant Multicyclic Hubbert Model (Ebrahimi 2015)
    https://www.sciencedirect.com/science/article/pii/S0920410515001539

    Aging giant oil fields produce more than half of global oil supply and are declining (Hook, 2009)
    http://www.sciencedirect.com/science/article/pii/S0301421509001281

    Australian Government (Leaked) Study: concludes world peak oil around 2020
    https://web.archive.org/web/20170415190328/https://www.aspo-australia.org.au/References/Bruce/BITRE-Report-117-Oil_supply_trends-2009.pdf

    German Military (leaked) Peak Oil study: oil is used in the production of 95% of all industrial goods, so a shortage of oil would collapse the world economy & world governments
    http://www.energybulletin.net/sites/default/files/Peak%20Oil_Study%20EN.pdf

  14. Boat on Tue, 3rd Jul 2018 10:00 pm 

    Mm

    Ask DerHund. Aliens might fly down and point out hundreds of billions of missed oil and better tech to extract it. Royal Chemistry my ass.

  15. MASTERMIND on Tue, 3rd Jul 2018 10:25 pm 

    Antius is right..And no amount of fake news from the great neckbeard (lynch) can change this..

  16. MASTERMIND on Tue, 3rd Jul 2018 10:27 pm 

    Boat

    We are alone in the universe see Fermi’s paradox and the drake equation..

    The likeliest reasons why we haven’t contacted aliens are deeply unsettling
    http://www.businessinsider.com/why-aliens-have-not-contacted-humans-2015-9

    See I got doom for days motherfucka!

    And MM won’t be out doomed! EVER!!!!!!!!!!

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