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Source link: http://archive.mises.org/5892/surprise-surprise-surprise-the-great-peak-oil-theory-is-just-not-all-that-it-is-cracked-up-to-be/

Surprise, Surprise, Surprise: The Great “Peak Oil” Theory Is Just Not All That It Is Cracked Up To Be

November 14, 2006 by

“World oil production will not begin to fall for at least another 24 years, contrary to doomsday theories that supply is already in terminal decline, a prominent energy consulting group said Tuesday.

“Cambridge Energy Research Associates said in a report that the world has some 3.74 trillion barrels of oil left — enough to last 122 years at current consumption rates and triple the amount estimated by ‘peak oil’ theorists…

“‘Oil is too critical to the global economy to allow fear to replace careful analysis about the very real challenges with delivering liquid fuels to meet the needs of growing economies,’ said Peter Jackson, director of oil industry activity for Cambridge, a Massachusetts-based consultant to the oil, natural gas and electric power industries.

“They said the peak in global daily oil production will not come before 2030 and will be followed not by a steep decline, but rather by an ‘undulating plateau’ of ups and downs in output before a gradual dropoff, according to the report.

“Jackson said the main flaw in ‘peak oil’ theory is that it fails to account for exploration, technology, rising estimates of the size of existing fields and geopolitical shifts

“‘The peak’s been called on many occasions, and dates come and go without any scientific explanation,’ Jackson said in a teleconference to discuss the report, Why the ‘Peak Oil’ Theory Falls Down: Myths, Legends, and the Future of Oil Resources.

“Actual production has exceeded ‘peak oil’ predictions by 15 billion barrels in the United States alone, and such contrary data has caused advocates of the idea to keep shifting the predicted peak year into the future, Jackson said.

“‘In doing this, they’re proving the opposite of what they’re suggesting,’ Jackson said.”

{ 26 comments }

Jim Waddell November 14, 2006 at 9:53 pm

Rather than sneer, you may want to check some of Cambridge Energy’s previous predictions.

In 2005, they predicted that oil could fall “well below $40 a barrel as 2007-2008 nears” (also here). Today, it closed at $58. Take their side of the bet if you like.

Peak Oil, properly understood, does not imply that we will “run out of oil”. It merely posits that we are running out of cheap oil, and that future oil from tar sands, or deep wells, or shale, will be more costly to produce. As long as the price mechanism is allowed to function (i.e. no price controls from government), the price will rise, resulting in increased exploration, investment, and experimentation with alternatives. At some point, the alternatives look attractive, and we will make an orderly transition. But in the mean time, oil prices will rise, which is exactly what has been happening these past two years.

It’s true that some professional doomsayers who do not understand economics have latched onto Peak Oil. This does not make the geology underlying Peak Oil incorrect. Your approach to Peak Oil should be from a rational, inquiring perspective, not an ideological “we understand economics and they don’t” attitude. The implications are serious for almost anyone’s portfolio.

But, if you disagree, that’s okay. Be my guest and go short on oil all you want. I’ll be on the other side collecting the profits. :)

Matthewson November 14, 2006 at 10:10 pm

Jim Waddell,

You seem to have a very nuanced view of “peak oil,” but I can assure you that you are not in the majority. You can even ask Al Gore or do a simple Google search. Your view, with a semblance of knowledge of economics, is in the great minority. This study seems to do more good than bad to disseminate the intricacies involved in this topic.

Sione Vatu November 14, 2006 at 10:58 pm

Interestingly enough the price of oil has been falling recently.

I recall purchasing petrol at rather higher prices earlier in the year than I can get it for now.

I hope Cambridge Energy’s forecast holds true.

Sione

Mike D. November 14, 2006 at 11:49 pm

I think Jim is right. It is the cost that is important. Here are a couple of simple answers. Will we run out of gold? No, even at a few parts per trillion in sea water, there is a huge amount of gold. However, at what cost per ounce is it economically feasible to extract this gold. Or as Robert Blumen pointed out to me, suppose their is a large asteroid made out of gold? It is not going to make any difference if the cost of mining an asteroid exceeds the value of gold.
A similar argument hold for hydrogen and natural gas. Jupiter is made up of hydrogen and Europa, I think, has oceans of liquid methane. If we use them up, there is always Saturn, Uranus and Neptune – all gas giants!< \p>

Walt D. November 14, 2006 at 11:56 pm

Matthewson:
You can even ask Al Gore?????
Al Gore is a dunce – he only ever took one science course and got a D !!!
He probably knows as much about peak oil as my Aunt Fanny!
Walt

Sampson November 15, 2006 at 12:15 am

Mike D.

Before you get all hysterical, If you read the article or the report you would see that they are making the same point. Relax, calm down, all is well in the world. Jim W. is just saying that his view is the majority, but most would concede that it is the minority opinion given the lack of economic education and the vast amount of publicity the “peak oil” folks are granted these days.

Walt D.

I think that was Matthewson’s point. Al Gore does not know more than your Aunt Fanny.

Carl Marks November 15, 2006 at 12:37 am

Matthewson:
Since when do people only learn while in school?

More on point though, this post is way off topic and clogs my RSS. There are too many postings that add very little to debate and do nothing to expand economics. Stop will all the criticizing and start doing some original economic thinking for once. If I want political rantings or debates on weather patterns I will go to the experts, which do not reside on this site.

Dyrdek November 15, 2006 at 1:37 am

Carl Marks,

I don’t see “school” mentioned once.

As for your RSS feed, it may need a little fixing. Maybe a simple push of the delete button would suffice. Then you won’t be wasting anyone else’s time either. I don’t see “political rantings” or “debates on weather patterns” in this post. What kind of opium is Carl Marks smoking if it isn’t religion?

David White November 15, 2006 at 7:43 am

Jim Puplava over at FinancialSense.com keeps pointing out that, at most, 15% of the world’s oil reserves are contolled by private oil companies, while the rest are controlled by national(ized) oil companies.

If you add to that the fact that Shell Oil got caught grossly overstimating its reserves a few years ago, does anyone in his right mind believe that governments — especially closed ones like Saudia Arabia — aren’t doing the same thing, only on a much more massive scale?

Thus do I side with the Peak Oilers, my distrust of the state trumping all other considerations.

And besides, if oil were so plentiful/accessible, why would the US government have invaded Iraq? WMDs? Yeah, right.

David White November 15, 2006 at 7:53 am

And then there’s this to consider:

Peak Oil: The Infrastructure Spending Crisis

http://www.financialsense.com/editorials/duarte/2006/1113.html

N. Joseph Potts November 15, 2006 at 8:32 am

Shortages (and gluts) of oil will be brought about in the same way as ALL famines in at least the past hundred years: by men carrying guns.

This factor affects: WHETHER consumers can get at the crude oil; how they can transport it; where and how they can refine it; where and how they can transport the finished product; to whom; for what purposes; at what price; and HOW they can find and extract it.

The next most-important factor is how the fuels can be used (repeat list above).

Only after these come (pure) economics, and after that, geology. Geology only matters in the context of the factors listed above.

Björn Lundahl November 15, 2006 at 3:31 pm

People do not realize that gas, in a free market, does not suddenly run out.

Gas does not suddenly, in a free market run out. Prices today reflect “expectations” of the available supply and demand for goods and services “today and tomorrow”. If, for instance, the expectation is that oil supply will decrease or will be less than demand in ten years time, it will influence oil prices today. Prices today will go up. People will have the incentive to conserve (demand will decrease) and to develop new alternatives.

Actually, we are probably conserving too much, because of OPEC and Governments taxations are keeping prices higher than they otherwise would be. “That oil soon runs out” is a political slogan that keeps coming up to keep politicians busy. This political slogan sounds true and will, therefore, “in the political market” sell. Only true markets can handle this sort of complex things. Compared to markets, Governments are too simple minded and primitive, because of the fact; they lack the essential tools that are needed to solve these kind of “problems”. They primitively, for example, regulate car manufacturers (and in the end consumers) to produce cars which improve gas mileage and impose upon people speed limits, without knowing if these actions are good or bad. Only markets can tell if conservations are good or bad, because market prices gives people the necessary signals of supply and demand, and people can therefore compare these prices to their own values if they are profitable or not to realize. The essential tools that are needed (which Governments are always lacking) are, as mentioned, “market forces and the market price mechanism”. Without these mechanisms nothing can be done. For example, a scientist will not reach the truth in trying to calculate physical available quantities and compare that to what he expects physical demand will be. It is silly, it is static and mechanistic.

Every individual and every business around the whole world, with all the different knowledge, all the time, and in all possible situations, and which are directly influenced of higher prices, will conserve and try out alternatives. Even people and businesses that are not directly influenced of higher oil prices, also, have incentives to find out alternatives. These things happen all the time with all goods, services, capital and raw materials, and it run smoothly without us even noticing it. If Governments were going to replace the markets, we would probably end up with no available goods and services at all! In a sense, this would solve the “conservation problem” (joke).

To make an example of this lack of knowledge and the belief that you can ignore markets, look at the so called “Club of Rome”, a group that made fools of themselves in the 70s with their book “Limits to growth” http://www.answers.com/the+club+of+rome?gwp=11&ver=2.0.0.453&method=3
If their predictions were right, we would barely, even, live today!

Alex Kozinski wrote and I quote;

“The Limits of Growth made some very concrete and highly alarming predictions: “there will . . . be a desperate [arable] land shortage before the year 2000 we would run short of gold by 1979, of silver and mercury by 1983, of petroleum by 1990, of zinc by 1988, of tin by 1985 and of natural gas by 1992. The book’s forceful message was that we were headed for a world-wide calamity, and must fundamentally — and immediately — change the way we live. Nor was this merely a question of physical survival; at stake was humanity’s very
soul: “The crux of the matter is not only whether the human species will survive, but even more whether it can survive without falling into a state of worthless existence.””

http://notabug.com/kozinski/gorewars.pdf

Björn Lundahl
Göteborg Sweden

Björn Lundahl November 15, 2006 at 3:45 pm

Information

Regulations on cars manufacturers to improve fuel efficiency and the imposition of speed limits were not imposed to combat pollution but were imposed for the reason to conserve oil and to reduce oil consumption. This started during the 70s.

I quote from answers.com;

“regulations in the United States, first enacted by Congress in 1975, exist to regulate and improve the average fuel economy of cars and light trucks (trucks, vans and sport utility vehicles) sold in the US in the wake of the 1973 Arab Oil Embargo. It is the sales-weighted average fuel economy, expressed in miles per gallon (mpg), of a manufacturer’s fleet of passenger cars or light trucks with a gross vehicle weight rating (GVWR) of 8,500 pounds (3,856 kg) or less, manufactured for sale in the United States, for any given model year. The National Highway Traffic Safety Administration (NHTSA) and Environmental Protection Agency (EPA) regulate CAFE standards.

If the average fuel economy of a manufacturer’s annual car or truck production falls below the defined standard, the manufacturer must pay a penalty, currently $5.50 per 0.1 mpg under the standard, multiplied by the manufacturer’s total production for the U.S. domestic market”.

Please go to;

http://en.wikipedia.org/wiki/Corporate_Average_Fuel_Economy

And to;

http://en.wikipedia.org/wiki/1973_oil_crisis

Björn Lundahl, Göteborg, Sweden

Dan Mahoney November 15, 2006 at 9:25 pm

Jim Waddell writes:

“Peak Oil, properly understood, does not imply that we will “run out of oil”. It merely posits that we are running out of cheap oil, and that future oil from tar sands, or deep wells, or shale, will be more costly to produce. As long as the price mechanism is allowed to function (i.e. no price controls from government), the price will rise, resulting in increased exploration, investment, and experimentation with alternatives. At some point, the alternatives look attractive, and we will make an orderly transition. But in the mean time, oil prices will rise, which is exactly what has been happening these past two years.”

This is true of ANY good; oil is in no way
unique in this regard, and I have never received
an answer, straight or otherwise, from Peak
Oil theorists when asked to explain what sets
oil apart from these other commodities whose
fluctuations in supply and demand are handled
rather well on a free market.

Peak Oil theory is either trivial or idiotic.
Kudos to a mainstream outfit like CERA (their
previous wrong prognostications are entirely
irrelevant here) for making their case.

David C November 16, 2006 at 12:08 am

It seems to me that Peak Oil is really just a red herring that serves to distract from the fact that skyrocketing oil prices have little to do with supply problems and greedy oil companies, and everything to do overbearing bureauocrats that regulate and lie to us about the value of our money.

Robert November 16, 2006 at 1:27 am

Energy is not like other commodities.

http://www.dieoff.com/page185.htm

From the article above:
“Although economists treat energy just like any other resource, it’s not like any other resource. Available energy is the precondition for all resources — including more available energy.”

Björn Lundahl November 16, 2006 at 2:33 am

Many thanks to free market economics which teaches us that only the market economy can solve our so called energy problem.

Björn Lundahl
Göteborg, Sweden

Saturdaynightspecial November 16, 2006 at 4:56 am

Did someone insert a measuring stick into the planet and check the level of black ooze ? Is it done monthly ?

If we suddenly run out would we all perish ? Do nuclear power plants depend on oil ? Do not listen to greenies.

agent00yak November 16, 2006 at 12:05 pm

For a more nuanced and intelligent view on peak oil, you should check out the oil drum.

Here is their initial response to CERA’s latest yearly report:

http://www.theoildrum.com/story/2006/11/15/83857/186#more

The question of peak oil is a question of a supposed information asymmetry in the markets. If it is true, and this asymmetry goes away (there is currently a huge data transparency issue in the oil industry), then the theory doesn’t necessarily imply that there will be a huge disaster (Although many huge disasters could have the side effect of spiking oil prices). It will of course drive the price of oil up and a lot of the capital structure that depended on cheap crude will be worth much less.

Entrepreneurs can of course invest in nonconventional but viable oil sources to help mitigate this impact, and they are doing this – but with most of the world’s oil resources under corrupt government control (Of all the potential producers, Canada seems safest and even they aren’t that safe) it is a riskier task than it would be in a market free from the risk of government acting when the companies are seen as “too profitable”.

ps: I hope this doesn’t post twice, I previewed it then tried to submit it – but was told I’ve submitted too many comments in a short time frame…

Dan Mahoney November 16, 2006 at 9:26 pm

Robert,

Energy is not like other commodities, because
it isn’t a commodity at all; it’s a PROPERTY of
commodities/goods. Do you understand the
difference? Apparently not. Thanks for the
wacko link, though.

Robert November 17, 2006 at 3:15 am

Dan,
Exactly. That property (and its carrier) is subject to physical laws, just the same. Energy sources are useless once they consume more energy to obtain than they produce, yes? Easy cheap oil has apparently been played out, and demand continues toward the exponential. Perhaps inquiring minds can devise less destructive energy alternatives, quickly. Otherwise, carrying capacity will diminish rather abruptly. Dreams of unlimited growth meet the basic facts of ecology – draw-down, overshoot, crash, die off.

“Wacko” links have an interesting function in store for the dogmatic religious ones: an upsetting discontinuity within, resulting in a knee-jerk, egoic, self-defensive need to brand their authors as heretics and “wacko”.

Why would you want to do that?

Cid April 1, 2007 at 3:51 pm

Well, here we are in April of 07, and oil is sitting at $65/barrel. Björn Lundahl states above “Many thanks to free market economics which teaches us that only the market economy can solve our so called energy problem.” The problem with the above thinking is that if we are going to switch to an alternative energy system, we cannot wait for price signals to move the market into doing it, for it will be too late. It is not a question of capital, but of time. We have to start now in building an alternative.

Björn Lundahl April 1, 2007 at 5:35 pm

” The problem with the above thinking is that if we are going to switch to an alternative energy system, we cannot wait for price signals to move the market into doing it, for it will be too late. It is not a question of capital, but of time.”

In the 70s they thought so too. There is no real alternative to the market. Only the market can do the necessary forecasting, speculations and adjustments. If the supply in the near future is suddenly expected to be severely limited, the market will adjust quickly to the new expected situation. The more limited the supply is suddenly expected to be in the near future, the more drastic and costly actions will the market undertake. Only the market can do the necessary balancing between costs and profits. Governments do not know anything about that.

As I wrote and I will emphasize this again:

“If Governments were going to replace the markets, we would probably end up with no available goods and services at all! In a sense, this would solve the “conservation problem” (joke).”

Who are you to believe that you know better than the market? Your thinking is supposed to replace the interactions of billions of people? Blimey!

Björn Lundahl

Mark Brabson April 1, 2007 at 5:56 pm

The current price signals don’t have anything to do with long term supplies. They have everything to do with the deterioting situation in Iran. Oil speculators are anticipating a crisis situation, thus the current spike in oil futures. The only thing that will end this spike is a peaceful resolution of this crisis. If war results, you will see oil at $100.00 a barrel in the first 24 hours and probably spiking to $120.00 to $150.00 The only person on this planet that can truly benefit from this situation is Hugo Chavez.

Björn Lundahl April 2, 2007 at 2:48 am

Mark Brabson

Yes, I think you are correct. I was going to write something similar but I focused instead of trying to explain that there exist no substitutes for the market process.

Björn Lundahl

David White April 2, 2007 at 8:29 am

Whatever remaining doubts I had about Peak Oil were dispelled when I watched this presentation — http://video.google.com/videoplay?docid=-596805984521272213 — and took note of the correlation between oil depletion and easy credit, as this was enough to convince me that a near-century of non-asset-based “liquidity” had distorted the market out of all proportion.

That is, without the corruption of money, the world would not have depleted its oil reserves so rapidly. Instead, easy credit has provided for rapid depletion while keeping prices down, doing so to the point that “Peak Credit” is now on the horizon — http://www.abc.net.au/worldtoday/content/2005/s1446716.htm

Thus does it all come down to what Nobel Laureate Robert Mundell said in his 2000 acceptance speech:

“The main thing we miss today is universal money, a standard of value, the link between the past and the future and the cement linking remote parts of the human race to one another. The absence of gold as an intrinsic part of our monetary system today makes our century, the one that has just passed, unique in several thousand years.”

Indeed it does.

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