Peak Oil, Daniel Yergin & Impending Doom

The theory known as “peak oil” has at its core the belief that we are rapidly running out of oil.  Reasonable people can agree or disagree on this of course. The oil expert, consultant and author, Daniel Yergin addresses peak oil theories in this lengthy piece in the Wall Street Journal.  I recommend reading the whole thing so I’ll just touch on the highlights [emphasis added]:

Since the beginning of the 21st century, a fear has come to pervade the prospects for oil, fueling anxieties about the stability of global energy supplies. It has been stoked by rising prices and growing demand, especially as the people of China and other emerging economies have taken to the road.

This specter goes by the name of “peak oil.”

Its advocates argue that the world is fast approaching (or has already reached) a point of maximum oil output. They warn that “an unprecedented crisis is just over the horizon.” The result, it is said, will be “chaos,” to say nothing of “war, starvation, economic recession, possibly even the extinction of homo sapiens.”

To me, warnings of scarce oil sound suspiciously like theory — let’s call it peak food — first proposed in 1798 by Thomas Malthus.   Malthus predicted that population growth would soon exceed growth in the food supply leading to, you guessed it, really bad things.  When it comes to our day, the philosophy of scarcity comes full circle in the peak oil theory.  At its heart this philosophy of scarcity utterly fails to take into account human ingenuity, economics, technology and other important factors.  In other words, long before oil actually ran out, the price would go up so much that people would cut back on its use, find alternatives and seek out new sources of supply.   With world oil consumption and production going up, at some point oil reserves could actually go down, but that has not happened yet.

This chart from the WSJ piece, shows world oil production dating back to 1950.  Though peak oil theorists have been predicting a shortage for may years, production appears to be going up, not down:

Source: Wall Street Journal

Global supply of oil going up too

If production is going up, what about supply? In this section, Daniel Yergin points out that oil supply is going up too:

Pulitzer Prize-winning author Dan Yergin says the global supply of oil and gas has risen in the last 20 years, defying the predictions of “peak oil” theorists. In the Big Interview with WSJ’s David Wessel, he looks at the world’s energy future.

The date of the predicted peak has moved over the years. It was once supposed to arrive by Thanksgiving 2005. Then the “unbridgeable supply demand gap” was expected “after 2007.” Then it was to arrive in 2011. Now “there is a significant risk of a peak before 2020.”

…This is actually the fifth time in modern history that we’ve seen widespread fear that the world was running out of oil. The first was in the 1880s, when production was concentrated in Pennsylvania and it was said that no oil would be found west of the Mississippi. Then oil was found in Texas and Oklahoma. Similar fears emerged after the two world wars. And in the 1970s, it was said that the world was going to fall off the “oil mountain.” But since 1978, world oil output has increased by 30%.

Just in the years 2007 to 2009, for every barrel of oil produced in the world, 1.6 barrels of new reserves were added. And other developments—from more efficient cars and advances in batteries, to shale gas and wind power—have provided reasons for greater confidence in our energy resiliency. Yet the fear of peak oil maintains its powerful grip.

There is no doubt that oil and energy use is likely to go up over time.  And, energy demand will increase.  However, there are obvious economic principles that will kick in if demand for oil outstrips supply — the price of oil will go up.  When it does, some users will switch to other sources such as natural gas, which is incredibly cheap now.  There will also be serious efforts to use energy more efficiently.  And, alternative energy sources would become competitive if oil prices were to go up significantly.  The reason oil prices are far from their 2008 peak price is simple supply and demand. With a slowing global economy, demand is slowing and supply is increasing.

Daniel Yergin continues:

…Estimates for the total global stock of oil keep growing. The world has produced about one trillion barrels of oil since the start of the industry in the 19th century. Currently, it is thought that there are at least five trillion barrels of petroleum resources in the ground, of which 1.4 trillion are deemed technically and economically accessible enough to count as reserves (proved and probable).

Based on current and prospective plans, it appears that the world’s production capacity for “oil and related liquids” (in industry jargon) should grow from about 92 million barrels per day in 2010 to over 110 million by 2030. That is an increase of about 20%…

If demand goes up much faster than that 20% increase in production, then prices would normally rise.  With rising prices, demand would soften and supply would increase as costly oil fields became profitable.  Thus, demand and supply would once again be in balance.  That is how economics works.

I believe there are plenty of issues to worry about right now, but peak oil is not one of them.

MarketWatch