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High gas prices don’t mean peak oil

Prices at U.S. gas pumps are edging above $4/gallon, and consumers are desperately looking for someone or something to blame. In truth, there are numerous causes. But one that can be eliminated from the list is the concept of “peak oil,” at least according to Pulitzer Prize-winning author Daniel Yergin who chairs IHS Cambridge Energy Research Associates, an energy think tank. Yergin’s firm has forecast that oil production won’t peak before 2020, and this would not be a “peak” but rather an “undulating plateau.”

To understand this viewpoint, one has to go back to the originator of the peak oil theory, the geologist M. King Hubbert. Hubbert’s theory argues that world oil output is currently at or near the highest level it will ever reach, and that about half the world’s oil resources have already been produced. Hubbert devised his peak theory in 1956. He claimed U.S. oil production would likely peak somewhere between 1965 and 1970 -- reaching a point that became known as Hubbert’s Peak -- and then precipitously decline.

Hubbert wasn’t exactly an optimist. As Yergin relates, Hubbert predicted in 1978 that children born in 1965 would see all the world’s oil used up in their lifetimes. He also greatly underestimated U.S. oil production. By 2010, the U.S. produced four times as much oil as Hubbert had estimated.

Hubbert’s 1971 estimate was no more than 1.5 million barrels daily, whereas the real number turned out to be 5.9 million barrels daily.
One problem, says Yergin, is that Hubbert didn’t factor in technological progress or the effects of price into his calculations. Hubbert’s Peak theory also depends on a statistical argument rather than geology: That oil production would follow a bell curve. The latter point has proven to be false, mainly because of pricing power and better technology.

For example, only about 40% of the typical oil field’s production comes through traditional methods. New technology gets more production out of existing fields. And this is why a declining discovery rate for new oil fields is not a trend to worry about, says Yergin. Most of the world’s supply is not the result of new discoveries, but comes from additions to existing reserves. One study by the U.S. Geological Survey found that 86% of oil reserves in the U.S. arise not from estimates at the time the field was discovered, but from revisions and additions that come to light as the field is developed.

That’s why most oil fields don’t decline symmetrically and follow a bell curve, Yergin explains. They eventually reach a physical peak of production and then often plateau and more gradually decline.

That model would explain why at the end of 2009, the world’s proven oil reserves showed as slightly higher than figures at the beginning of that year. In other words, there were enough discoveries and revisions and additions to replace all the oil produced that year. And in this regard, there was nothing special about 2009.

All in all, estimates for the world’s total stock of oil keep growing, says Yergin. It is now thought that there are at least 5 trillion barrels of oil resources, of which 1.4 trillion is accessible enough to count as proven reserves. Based on current plans, it looks as though world production capacity should grow from about 93 million barrels/day in 2010 to about 110 mbd by 2030, about a 20% increase.
Of course, that is small solace when you pull up to your local gas pump.

TAGS: Markets
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