Friday, June 15, 2012

Peak Oil: Pro and Con

Pro: Peak Oil is Happening and Oil Will Cost $180 a barrel by 2020
The IMF model predicts that growth in demand will put continual upward pressure on price, with the inflation-adjusted price of oil headed for $180/barrel by the end of the decade. According to their estimates, those price increases would be sufficient to keep global production increasing at about the same reduced rate we have seen since 2004.

...The IMF team propose modifying the Hubbert-Deffeyes model to allow for a response of supply to the price of oil, where higher oil prices will (with a lead time of 4-6 years) stimulate higher production levels. They combine this with a traditional model in which demand for oil depends on growing GDP and the price of oil. The model strikes a compromise between the EIA and Hubbert-Deffeyes approaches, and has a better track record than either in simulated out-of-sample predictions over the last decade. _James Hamilton

The IMF working paper (PDF) which predicts oil prices in constant 2011 US dollars to rise to $180 a barrel by the year 2020.

Con: Why We'll Never Run Out of Oil
The notion that world oil production had reached its summit and would soon begin a decline -- bringing with it shortages, economic collapse, resource wars, and general ruination -- was in vogue not so long ago.

"Is global oil production reaching a peak?" asked the BBC in 2005. "We are approaching peak oil sooner than many people would have guessed," said The Houston Chronicle three years later. Two years after that, The New York Times reported on a group of environmentalists who "argue that oil supplies peaked as early as 2008 and will decline rapidly, taking the economy with them."

Government agencies also bought into the idea. In 2010, the U.S. Joint Forces Command warned that "by 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day." Just this spring, seemingly every other report warned that $5-a-gallon gasoline -- or worse -- was just around the corner, and certainly would arrive by summer.

Well, here we are at summer, 2012. The Chicago Tribune reports that the nationwide price for a gallon of regular "has fallen well below $4 a gallon." The term "peak oil" seems to have been completely forgotten. Not only that -- it is beginning to look as though the U.S. could largely cease to depend on the Middle East as its principal supplier.

The Washington Post reports that U.S. imports from OPEC countries have declined by 1.8 million barrels a day. Last year the top American source of crude oil by far was Canada, which supplies 29 percent of U.S. imports. By contrast, the No. 2 supplier, Saudi Arabia, supplies only 14 percent. "Production has risen strikingly fast in places such as the tar sands of Alberta, Canada," The Post says, "and [in] the 'tight' rock formations of North Dakota and Texas -- basins with resources so hard to refine or reach that they were not considered economically viable until recently. Oil is gushing in once-dangerous regions of Columbia and … Brazil."

But that's not all: "A host of new discoveries or rosy prospects for large deposits also has energy companies drilling in the Chukchi Sea inside the Arctic Circle, deep in the Amazon, along a potentially huge field off South America's northeast shoulder, and in the roiling waters around the Falkland Islands."

So what the heck happened? It's no great mystery. As supplies tightened and prices rose, producers were motivated to find new sources and develop new technologies. When you hear that only X trillion barrels of "recoverable reserves" of oil exist, remember: The term does not refer to all the oil that there is. It refers to those reserves that are neither too costly to tap at present, nor off-limits because of government policy. Both of those factors can change. _Alaska Dispatch

In a sense, both the "pro" and the "con" viewpoints are looking at much the same phenomena, and seeing a different future based upon what they see.

Both the IMF and Barton Hinkle clearly see that the Hubbert - Deffeyes - Campbell predictions of peak oil have failed. And both "pro" and "con" viewpoints perceive that higher oil prices lead to greater production of oil -- for various reasons.

And, interestingly, both viewpoints comprehend the eventual physical limits to large scale oil production -- the finite nature of the oil resource.

But, the IMF group thinks that there will be no valid substitutes for crude oil, so that as demand for energy rises, the price of oil will inevitably rise along with it. Barton Hinkle, on the other hand, thinks that ingenious humans will devise economical substitutes for crude oil which will allow economies to move relatively smoothly from one energy source to another.

Economist James Hamilton judges the IMF paper to be a useful -- but imperfect -- look at future oil prices:
My view is that the IMF researchers’ approach is clearly better than the simple Hubbert-Deffeyes linearization, but may still be subject to some of the other problems documented by Boyce (2012), as well as the familiar challenges of statistically distinguishing supply and demand effects. Notwithstanding, the IMF research should help raise awareness of an issue that remains underappreciated by many economists, which is that we will eventually reach a point, and may have already, at which quite significant increases in price and improvements in technology can produce only modest increases in production, or may be insufficient to prevent outright declines in annual crude oil production levels. _James Hamilton
In other words, both Hamilton and the IMF group think that we will see a "peak supply" in oil production before we see a "peak demand."

Barton Hinkle believes that we will see "peak demand" first, as a result of incoming substitute energy sources which become more economical than the most expensive sources of crude oil.

Al Fin energy analysts feel that whether we see "peak supply" first, or "peak demand," depends entirely upon political decisions being made in global governments and inter-governments. Political peak oil has always been a possibility, if governments and inter-governments prohibit the development of a wide range of economical energy sources.

But if humans can develop cleaner, safer, more affordable gen III and gen IV + nuclear reactors at all scales -- which burn 99% of nuclear fuel instead of the approx. 2% currently utilised -- the entire calculus of global energy balance suddenly changes. Particularly with the coming of an unconventional liquids boomfacilitated by high temperature industrial process heat from HTGRs -- which demolishes the EROEI boogeyman.

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Blogger Whirlwind22 said...

But don't these unconventional sources of oil require a high price in order to be profitable and dont they have low net energy?

12:13 PM  
Blogger al fin said...

WW22: You didn't read the linked article, else you wouldn't have asked your question.

When unconventional liquid fuels are produced from coal, gas, biomass, kerogens, gas hydrates, etc. using high temperature process heat from HTGRs, the cost of production will be more than competitive with crude oil at $100 plus or minus 10%.

Net energy content of the fuels themselves will be indistinguishable from that of fuels produced from crude oil.

Peak oil doom religionists often do not take the trouble to keep up with technology, so convinced are they that they are in possession of the one true faith.

Try not to let it happen to you!

1:13 PM  
Blogger Hell_Is_Like_Newark said...


Unconventional is becoming conventional. HTL (turning heavy crude into light) is profitable under $40 per bbl. HTL is profitable at under $60 per bbl.

6:45 AM  
Blogger al fin said...

HILN: What you say must be true, since the price of Canadian heavy oil on the market is at or under $60 a barrel.

It is unlikely that they would sell oil at or near that price if it were not profitable.

8:01 AM  
Blogger Hell_Is_Like_Newark said...

sorry.. that should have rea "GTL is profitable under $60 per bbl"

11:43 AM  

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