Guest post by David Archibald
When I posted on peak oil’s effect on agricultural costs and food security, some comments questioned the idea of peak oil. What follows is a summary of the subject. We will start with what is considered to be the most successful economic forecast ever made – the prediction in March 1956 by King Hubbert of the Shell Oil Company that US oil production would peak in 1970. This was in a paper entitled “Nuclear Energy and the Fossil Fuels” presented at the Spring meeting of the American Petroleum Institute in San Antonio, Texas. The paper’s title reflects Hubbert’s view that nuclear power would have to replace fossil fuels on the latter’s exhaustion. The view hasn’t changed, but the replacement need has become urgent.
Figure 1: Logistic Decline Plot for the United States
Source: Al-Husseini 2006
Figure 1 shows the basis for Hubbert’s prediction. This is a logistic decline plot of annual production divided by cumulative production to that year against cumulative production. His original analysis anticipated that Lower 48 crude production would peak at 2.8 -3.0 billion barrels between 1966 and 1971 and then enter an irreversible decline. Production in the lower 48 actually peaked at 3.4 billion barrels in 1970. Under Hubbert’s original forecast of ultimate potential of 200 billion barrels in his 1965 assessment, 1991 crude oil output was projected to be 1.9 billion barrels. Actual 1991 production was, in fact, 2.0 billion barrels – a modest variation from Hubbert’s prediction made 35 years earlier (Smith and Lidsky 1993).
Figure 2: Logistic growth curve for US crude oil production
This figure is from Nashawi et. al. 2010. The blue line is the modeled projection to 2070. The purple line is cumulative production to 2008. The US has burnt through 84% of its original oil endowment.
Figure 3: World oil discovery by year
Source: Al-Husseini 2006
Figure 3 shows that oil discovery peaked fifty years ago in the early 1960s. Based on the well-established trend, not much hope can be held for positive departure from the forecast discovery profile.
Having shown how powerful Hubbert-style analysis is forecasting production, let’s go on to look at what the global oil production profile looks like.
Figure 4: Logistic Decline Plot for Global Oil Production
As Figure 4 shows, the world had consumed half of its original oil endowment by 2005. 2005 was the year that global oil production peaked. According to Hubbert theory, we will have a few years of near-peak production before the steep decline down the right hand side of the bell-shaped curve begins.
Figure 5: A 2004 estimate of the Global Oil Production Decline
Source of figure: Al-Husseini 2006
I have included Figure 5 because it covers a 120 year span and it has been accurate for production over the last seven years since it was published.
Figure 6: World Oil Production 1965 – 2030
This is another way of looking at the coming decline which will be 1.5 million barrels/day/year. The decline will go on for about three decades at that rate before flattening out.
Figure 7: Logistic growth curve for Non-Opec oil production
Source: Nashawi et. al. 2010
Discussion of oil prices and the tightening oil market tends to concentrate on just how much spare capacity Saudi Arabia has. As Figure 7 shows, whatever swing capacity Saudi Arabia has will soon be overtaken by events. The big story is Non-Opec production, which will almost halve by the end of this decade.
Figure 8: Oil price 1990 – 2016
Modelling the oil price in a tightening market is difficult because of the dampening effect on consumption of the increasing price. Plotted logarithmically, the oil price chart itself may reflect that effect and thus might be used as a predictive tool. What it shows is that the oil price is constrained by a parallel uptrend channel rising at 15.6% per annum. The current UK retail price for gasoline is indicated on the chart to show that civilisation, of a sort, can continue at very high oil prices.
Table 1: Oil price forecast by year and the concomitant effect on agricultural operating costs.
Table 1 shows how the oil price rise derived from the established trend in Figure 8 translates through to price per US gallon and agricultural operating costs relative to the 2009 level. There will be a severe departure from what Michelle Bachman has promised to achieve.
Figure 9: Energy-related inputs relative to total operating expenses, 2007-08 average
From: Sands and Westcott 2011
Based on the USDA figures and recalculating for the $200 per barrel oil price expected in 2014, wheat and corn operating costs will be 60% higher in 2014.
In 2009, the Chief Economist of the International Energy Agency, Fatih Birol, said that “we have to leave oil before oil leaves us.” Only one country is doing that, and of course it is the same country that is proceeding to commercialise the molten salt, thorium-burning nuclear reactor – China.
Figure 10: Chinese oil production, imports and coal-to-liquids production
This figure shows Chinese domestic oil production, imports and a projection of coal-to-liquids production assuming that demand follows its established trajectory.
China currently has three Fischer-Tropsch coal-to-liquids (CTL) plants and one liquefaction plant commissioned with a further three Fischer-Tropsch plants under construction. Total planned production from those seven plants is in excess of 600,000 BOPD. A journal earlier this year reported that “Chinese CTL investors will pay active efforts in preliminary works for mega size CTL projects starting from 2011 and may realise commissioning of such projects before the year 2015”. By comparison, in the United States, Section 526 of the Energy Security and Independence Act of 2007 blocks the Department of Defense from using CTL fuels because the life cycle greenhouse gas (GHG) emissions from those fuels would be much larger than the GHG emissions from conventional petroleum.
The economic effect of continuously rising oil prices will be to continuously cause economic contraction.
Table 2: Compilation of studies on the Oil Price – US GDP Effect
Source: Sauter and Awerbuch 2003
At the 1.5% average estimate of growth decrease per 10% oil price increase, the 15.6% per annum oil price rise expected over the next few years will shrink the US economy at 2.2% per annum. The fastest way to reduce this effect would be to install CTL capacity in the US. To replace all of the US’ oil imports with home-grown CTL would take more coal than is currently burnt in US power stations. It follows that what is also needed is a good, safe nuclear technology to replace coal in power generation, bearing out Hubbert’s observation of fifty-five years ago.
References
Al-Husseini, M., The Debate over Hubbert’s Peak: a review”, GeoArabia, Vol. 11, No. 2, 2006
Nashawi, I.S,, Malallah, A. and Al Bisharah, M., Forecasting World Crude Oil Production Using Multicyclic Hubbert Model, Energy Fuels, American Chemical Society 2010
Smith, A.L. and Lidsky, B.J., 1993, King Hubbert’s analysis revisited: Update of the
Lower 48 oil and gas resource base, The Leading Edge, November 1993
Sands, R. and Westcott, P., Impacts of Higher Energy Prices on Agriculture and Rural Economies, United States Department of Agriculture, Economic Research Report Number 123, 2011
Sauter, R. and Awerbuch, S., Oil Price Volatility and Economic Activity: A Survey and Literature Review, IEA Research Paper, August 2003.
October 2011
I wanted to write the same comment that – as I see – was already written by DirkH.
The logistic decline graph is straight but the actual datapoints could very well also be interpolated by a hyperbola, y=1/x, which never drops to zero which means that there is never an “end of oil”. Such a curve corresponds to constant production per year. The truth may also be in between them. At any rate, all these suggestive extrapolations are meant to predict a doomsday but one may always make equally convincing extrapolations that have a very different outcome.
>>There is nobody in the whole industry who gains anything by announcing higher reserves, but all gain tremendously when playing the “we-run-out-of-oil” tune… <<
Most people miss the point about peak oil. This problem isn't about running out of oil, or coal, or gas, etc. There will still be plenty of oil around even after people have stopped using it.
The problem is about the cost of extraction, and it's not the DOLLAR cost, but the ENERGY cost that is a concern. Once it costs as much energy to extract a fuel as the fuel itself will deliver, you're done. Why? Because you might as well just sell the energy you're using to extract. Of course, the energy cost begins to show up in the dollar cost long before you reach parity between energy in/energy out.
Richard S Courtney says:
October 28, 2011 at 5:26 am
Brutal drubbing. Kudos to you, sir.
The sum total of all the naysayers comments on here is just a blip on these predictions. We better be prepared for this. The Chicomms certainly are.
The 0dumbo Administration has decreed that drilling for energy is forbidden in these locations:
http://1.bp.blogspot.com/_orkXxp0bhEA/Rj_L7EFXTKI/AAAAAAAAAH0/ZqfsVI-gt5Y/s400/nozone.jpg
No wonder the price of gasoline is so high.
I say “Amen, Roger.” “Amen” seems appropriate here, as Peak Oil is another enviro-religious issue, just like overpopulation and AGW.
The “Peak Oil” arguments are fuzzy, relying upon production figures instead of recoverable supplies or known reserves.
Of course production in the USA peaked long ago. It’s nearly impossible to create a new refinery and our regulatory environment also makes it very hard to drill at new sites. There is plenty of oil in Alaska, off our three coasts and in oil shale. Further, coal can be converted into liquid as a substitute and while that’s technically not oil, there is enough coal in this country to last us for centuries.
The opening decline graph is misleading and dishonset. What it shows is this;
Current Production / Total Production versus Total Production
If anyone cannot spot why this is declining they don’t understand mathematics. Every year cumulative production goes up, so even if the US produces more oil each year, the graph will show production as declining.
For example, consider that US production starts out at 1, and increases by 1 each year. You end up with the series:
1,2,3,4,5…
cumulative production is then:
1,3,6,10,15…
However, when you divide production by cumulative production you get:
1, 0.67, 0.5, 0.4, 0.33, 0.29, 0.25….
So, even though production is increasing, the graph will make it look like it is decreasing. Did Mann or Jones produce this graph?
Jay Curtis says:
October 28, 2011 at 6:16 am
“The problem is about the cost of extraction, and it’s not the DOLLAR cost, but the ENERGY cost that is a concern. Once it costs as much energy to extract a fuel as the fuel itself will deliver, you’re done. Why? Because you might as well just sell the energy you’re using to extract. Of course, the energy cost begins to show up in the dollar cost long before you reach parity between energy in/energy out.”
This is inherent in the term “economically recoverable” and I think every modestly knowledgable student of energy resources is aware of it. But we are also well aware that recovery methods constantly improve. Necessity is the mother of invention. We can routinely and cost effectively drill horizontally now, for instance, which vastly increases what’s economically recoverable. In the past it was economically possible to recover oil from a mile beneath the ocean’s surface but that’s routine now too. For peak oil to become a real threat one must assume that recovery technology will suddenly stop improving. There’s no historical basis for imagining that technologic improvements that reduce recovery costs will come to a halt.
@wayne Job: the full quote is:
“The Stone Age didn’t end for lack of stone, and the oil age will end long before the world runs out of oil.” — former Saudi oil minister Sheik Ahmed Zaki Yamani, a man who has knowledge of oil reserves that nobody outside the house of Saud shares.
It would be worthwhile to replot Figure 5 (World Production Oil Decline) starting from 1970 and ending in 2010 (where the data ends and the projections begin). Also plot exploration investment, or new infrastructure investment on the same graph.
What you will see is that oil production is higher in 2010 than in 1970 and that but investment has really picked up over the past few years.
Without comparing investment in new oil fields with total production it is hard to argue for peak oil.
But I thought your summary was excellent otherwise.
By comparison, in the United States, Section 526 of the Energy Security and Independence Act of 2007 blocks the Department of Defense from using CTL fuels because the life cycle greenhouse gas (GHG) emissions from those fuels would be much larger than the GHG emissions from conventional petroleum.
There you have the real “reason” for peak oil in the USA. Thermal coal is $20 a ton in the US. This has the same energy as two barrels of oil worth $200. A ten times price difference between coal and oil. The US has the largest known coal reserves on the planet. The US could be converting coal to oil on a massive scale. Given the price difference, and the US dependence on imported oil, the question to be asked is WHY ISN’T IT?
US Law prevents the US from defending itself with secure fuel supplies because of environmental worries. No problem using depleted Uranium in the Balkans or Agent Orange in Vietnam, but heaven forbid releasing CO2.
Smokey says:
October 28, 2011 at 6:22 am
“No wonder the price of gasoline is so high.”
The price of gasoline is so high because foreign sources (read OPEC) control the top marginal rate it and extract every penny (and then some) that the market will bear.
I mean c’mon. Crude price went from $20/bbl in 2001 to over $120/bbl in 2008. What The F Is Up With That!? What kind of moron do you have to be to believe that price increase has any relation whatsoever to production cost or known reserves? This is all political and ecnomic manipulation. Consumers are having their pockets picked clean by those controlling the cost of energy. Whatever price can be maintained just bloody short of worldwide economic collapse. Does anyone really think there isn’t a causal connection betweent the economic meltdown in 2008, which is still ongoing today, being a direct and immediate result of artificially inflated energy prices? Don’t be naive. Vote for Rick Perry and give him a cooperative Republican congress and he’ll end this nightmare. Perry knows the goose that lays the golden eggs is energy producers and he knows how to end this nonsense with artificial price inflation driven by foreign energy cartels. Let him do it. We’re *ucked if we don’t.
Hey, I like Rick Perry.
I like Herman Cain, too.
Re: Free Marketers:
I often hear this: “If we were to free up the market from onerous laws and regulations, we would all have plenty of oil.” However, absolute power corrupts absolutely, regardless of whether it resides in government or free market corporations.
On one side of the coin: The free market has often resulted in the highest net income producer squeezing out the marginal performers. Unfortunately, once the competition has been shut down, the consumer has been, at times, harmed by the corporation king’s carelessness (tailings flowing down mountains and entering streams, lead in paint, lax sanitation in food production, etc). So laws were made to bar corporation kings from engaging in careless practices. However, these same laws prevent start-up businesses from entering at the ground floor and placing healthy competitive pressure on the status quo.
On the other side of the same coin: An out of control growing governmental body will often meddle in the business of creating wealth by attempting to be in the economic driver’s seat, or worse, by resting complete control and ownership over businesses. This governmental grab for power prevents start-up businesses from entering at the ground floor as well. Who would want to start up a business you cannot have control over, and what government cares about the pennies a start up business will generate in the beginning?
Is there a happy middle?
I’ve often thought the oil companies invented global warming to hide peak oil. After all what better way to convince the world that oil isn’t running out than by getting every politician to run round like a headless chicken shouting that the biggest problem on earth is that there’s too much fossil fuel.
Of course the economics is all to pot. Oil will not so much rise in price as earnings will drop relative to oil. Or in real terms it will become cheaper to employ someone/some animal to do the work than to employ a mechanical machine.
Richard S Courtney
Your comment that we didn’t reach “peak flint” reminded me of a quote by Sheikh Yamani, the former Saudi Oil Minister:
“The stone age didn’t end because we ran out of stones.”
We’re now effectively in the oil age, and whilst there are different ways of producing oil such as from coal, these all cost more and currently are produced at a slower rate than conventional crude. Peak oil is not the running out of oil, or the ability to produce it, but is when the maximum rate of global production is reached.
Perhaps we can sink more wells to produce it faster or use EOR to squeeze more out, but that costs more money and the price of oil increases to match this. Peak oil will happen because the cost of producing it will exceed what people can afford to pay. An alternative will be found, but the age of oil will have ended.
I personally think it will be nuclear fusion that will take over, but my friend who works at the Joint European Torus tells me that commercial fusion reactors are about 25 years away.
I’m guessing the oil price will continue to rise until then.
“The Stone Age didn’t end for lack of stone, and the oil age will end long before the world runs out of oil.”
There is a story told by old miners of the rats in the mine who fed on the human waste. Once a year the mine would shut down for a week or two leaving the rats nothing to feed on. So, the minors would fling the last of their sandwiches in a metal wagon with a plank to allow the rats to get in, but escape was impossible due to the steep metal sides.
It is said that when they got back, there would be one very fat rat left in the wagon.
The rats didn’t die for lack of food … they died because there was one very fat rat that eat the rest of them. The Stone Age didn’t end for lack of stone …. it came because someone with a copper axe (not bronze that was later) bludgeoned to death anyone whose only weapon was a stone axe.
ferd berple says:
October 28, 2011 at 6:38 am
Right on brother. It’s now or never. Evict the leftist idiots from Washington once and for all and replace them with a majority that know energy production is the key to restoring the economic success of the United States. You can fund grandiose entitlement programs with a vibrant growing economy and full employment. The only way to get there is to remove the obstacles in the way of restoring low energy prices. Energy price is a major cost component of just about everything else with tangible, real value. We have the energy sources. What we don’t have are enough self-interested guilt-free adults in federal government willing to exploit our natural advantage in being an energy-rich nation.
I’m here to tell you sh*t rolls downhill and when the U.S. is made to suffer by naive energy policy of Ivy League academics without a lick of common sense or street smarts in high public office the rest of the world ends up suffering too. This isn’t theoretical, it’s playing out before our very eyes as we speak. Send the Ivy League dipsh*ts back to the academic enclaves where they belong and put some practical minded adults who know the real world works back in charge of things. It’s the only way out of this mess.
SteveE says:
October 28, 2011 at 6:10 am
“You can’t know the future, you can’t predict the future”
The funny thing about the future is that we all believe in it, yet when you think about it the future doesn’t actually exist. No one has seen it or been there. We might as well compare the future to Santa Claus. When it finally does arrive, it turns out to be nothing like what you imagined.
The idea that the future is predictable rests on Victorian Age physics. The sort of physics taught in high school that we now know to be incomplete and thus misleading. The future looks predictable because high school physics treats the future incorrectly, as though it was something real, a destination to which we are traveling. A destination that does not exist until we get there.
Scottish Sceptic says:
October 28, 2011 at 6:56 am
I’ve often thought the oil companies invented global warming to hide peak oil. After all what better way to convince the world that oil isn’t running out than by getting every politician to run round like a headless chicken shouting that the biggest problem on earth is that there’s too much fossil fuel.
Of course the economics is all to pot. Oil will not so much rise in price as earnings will drop relative to oil. Or in real terms it will become cheaper to employ someone/some animal to do the work than to employ a mechanical machine.
——————————————————————–
Ship that scotch to Canada because you’re not making sense. Oil companies are not interested in convincing the public there is too much oil. And get ready for higher oil prices. I can imagine driving a 400 HP BMW but I can’t imagine looking after 400 horses. Even at $200 a barrel oil is CHEAP. People don’t get that. and when oil hits $200 there is a whole lot of “new” oil ready to come on stream.
Peak use of oil maybe, but no to peak oil.
Dave Springer says:
October 28, 2011 at 6:46 am
“What kind of moron do you have to be to believe that price increase has any relation whatsoever to production cost or known reserves”
It relates to demand. The demand has increased and in order to meet that demand more costly production techniques have to be used to extract the oil. Currently fields are being developed that cost in excess of $80/bbls to produce from. Ten years ago these would have been considered uneconomic, but as the demand is there now these can be brought on stream. OPEC hasn’t significantly cut it’s production, it just is unable to significantly increase it’s production.
SteveE says:
October 28, 2011 at 6:59 am
It can’t. The past ten years has been an acid test of how much and how fast oil price can rise before worldwide economic meltdown. In 2001 it was $20/bbl which was the historic, inflation adjusted norm that reflected both actual scarcity and cost of production. In 2008, just 7 years later, it peaked at $120/bbl and economic meltdown was real and imminent. It almost immediately retreated to $35/bbl for long enough to avert a meltdown and then has been allowed to creep up to somewhere between $75-$100/bbl which the powers that be have evidently determined can be sustained without global economic collapse but instead perennial economic malaise. I’m sick of it. Vote the morons out of office who are willing to continue putting up with it. Vote for Rick Perry. He’s not a great debater but he understands that energy policy is the key to restoring the U.S. economy and he knows it isn’t green energy that’s going to save our bacon. Romney will fail every bit as much as Obama failed. Get energy prices back down, put a couple million people back to work in the energy industry, and everything else that needs fixing will get done as a consequence of that bounty.
SteveE says:
October 28, 2011 at 6:59 am
my friend who works at the Joint European Torus tells me that commercial fusion reactors are about 25 years away.
Fusion is like Hansen’s predictions about sea level rise in New York. Always 20 years away from whatever day the prediction is made, whether the prediction was made today or 20 years ago.
Dave Springer says:
” For peak oil to become a real threat one must assume that recovery technology will suddenly stop improving. There’s no historical basis for imagining that technologic improvements that reduce recovery costs will come to a halt.”
That’s not true. Whilst technology has improved, that has come at a cost. A deep water well off the West coast of Africa can now cost in excess of $150 million.
Whilst 20 years ago the technology wasn’t there to drill such wells, with the oil price at $20 a bbl it made no sense to even try. Now that it’s at $100/bbl this type of exploration can take place.
Smokey says:
October 28, 2011 at 6:51 am
“Hey, I like Rick Perry.”
“I like Herman Cain, too.”
The pizza mogul doesn’t realize that he can’t control the United States with the authority of a corporate CEO and majority stockholder. He’s an unelectable distraction of the same mold as Donald Trump. Everyone knows it.
There are two serious contenders able to manage and fund a successful presidential campaign against a weak incumbent. Those two are Rick Perry and Mitt Romney. Rick Perry has the better staff and fund raising ability. The theatrics of the Republican debates will fade away quickly, they always do, and the real campaign with the big money media ads targeting the critical markets will, as usual, decide the winner. Perry is coming into his strength and perennial presidential contender Mitt Romney comes into his weakness. Slick debate skills are no advantage when the contest turns to slick advertisements, lots of money to pay for them, and lots of money to employ campaign staff who know how to win these things.