Peak oil

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Background

Modern industrialized economies are highly dependent on a variety of non-renewable resources. The scarcity and depletion of some of them had already been a major subject of concern for thinkers and economists in the past, as fertile land was for Malthus (1798) or coal for Jevons (1865). These considerations were dismissed by the next generations of economists when the potentials of fertilizers and petroleum became evident, facilitating the emergence of modern agriculture. It would take until the 1970s with its two consecutive oil-shocks and the publication of The entropy law and the economic process (Georgescu-Roegen 1971), The limits to growth (Meadows, Meadows et al. 1972), and other books by H.T. Odum, Barry Commoner, F. Schumacher, for the debate to awaken again.

Definition

Today, with the depletion of ―proved reserves‖ of oil being only 40.5 years away at current consumption rates (BP 2008), the debate around the limits of non-renewable resources is seemingly becoming less marginalised and abstract. However, its point of departure, namely depletion, is ill-conceived. The critical moment for human society is not when the last drop of oil will be extracted; in fact this will never happen. One hundred percent recovery of most resources is physically and economically impossible. Conventional petroleum fields for example usually have an average recovery rate of only around 35%. Instead, the critical point is that of maximum or peak extraction, as this is the point when the resource stops being ―cheap‖. Prices will increase not only because demand will continuously outstrip supply but also because the second half of the remaining resource is usually of a lesser quality, more difficult to extract and/or in politically unstable regions (e.g. Nigeria).

In the case of petroleum, this phenomenon is today referred to as Peak Oil and was first described by petroleum geologist M. King Hubbert (1949). He argued that production peaks in the form of bell shaped curves that could be observed for individual oil fields, would eventually occur for entire oil regions, countries and eventually the world. These production peaks and the shape of the curve could be predicted mirroring the discovery peak curve. However, several ―resource conditions‖ must hold:

Figure 1: Source: ASPO

First, the resource must be key, so that demand for it rises steadily over time. In fact, it could be argued that the abundance of some resources and therefore their relative cheapness in itself stimulates further increased demand in the first place. This initial abundance gives way to an increasing amount of applications. Second, substitution must be costly, difficult or impossible. Third, market access to the resource must be granted i.e. extraction is allowed by the resource owner (usually nation states). The more important the resource, the higher the international pressure on resource owners to grant this access. Finally, reasonable profits must be able to be gained by the entity (state or a private company) involved in extracting the resource. The higher the profits involved, the larger is the incentive for a resource owner to grant access. The US was a role model for satisfying all these conditions. Discovery had peaked in the 1930s, which allowed Hubbert (1956) to predict the US peak for the lower 48 US states for 1971, being only a few months off the actual peak in October 1970. Resource conditions, which diverge from those described (e.g. the owner does not grant access for political reasons), can lead to depletion curves which differ from that described by Hubbert, at least over the short run.

Today the Peak-Oil debate has become quite lively (Hirsch 2005). Fundamental disagreement exists over the question of when peak oil is going to happen and how important it is going to be for the world economy. On the one hand there are the ―geologists‖ which are also referred to as the ―pessimists‖ because they argue that Peak Oil is more or less imminent and will have devastating consequences for human society (e.g. Campbell and Laherrere 1998). This position is close to that of ecological economists, who generally believe in the absolute scarcity of low entropy resources (e.g. Georgescu-Roegen 1971).

On the other hand there are the ―optimists‖ who argue that market forces, driving up oil prices when scarcity increases, will lead to increased exploration and will inspire human ingenuity to develop substitutes and alternatives for oil. This group is also referred to as the ―economists‖, because market forces and technological change are believed to render Peak Oil a mere anecdote without any potential for causing a major enduring economic. In line with this reasoning Saudi Oil Minister Sheikh Ahmed Zaki Yamani famously said: "The Stone Age came to an end not for a lack of stones and the oil age will end, but not for a lack of oil."

A very important argument made by the ―pessimists‖ is that, since every system has its particular energy source, the system will change radically once this resource. This is to counter those who believe we can easily substitute oil and gas as major energy sources, with for example, shale oil, tar sands, nuclear energy or renewable energy (agro-fuels, wind, solar, geothermal). If the properties of the potential new energy source are different in terms of net energy (Odum 1971) or Energy-Return On Investment (EROI), which is essentially the case for the alternatives to oil and gas that we know of, then the human economic system is bound to change radically.

Other important concepts within ecological economics are those of post-normal science and complexity, relevant to Peak-Oil as far as the technological optimism of the ―economists‖ mentioned above is concerned. The positivistic belief that all human problems have technological solutions that can be devised by human ingenuity seems to contribute to the fact that Peak-Oil has not been featured as an urgent issue in the appropriate arenas. Economics textbooks have not mentioned Peak-Oil, as they could and should have done since 1950. In reality most technological advances of our society are results of and dependent on the enormous energy affluence provided by fossil fuels. Finally Peak-Oil has important implication for the conflicts that take place at the ―commodity frontiers‖. This is not only of relevance for the exploration of oil, which is pushing further into so far untouched environments (as in certain parts of the Amazon forests or Alaska) but also for most other raw materials.

References

  • BP. (2008). " Oil reserves." http://www.bp.com/sectiongenericarticle.do?categoryId=9017934&contentId=7033489 Retrieved 1st April, 2008.
  • Campbell, C. and J. Laherrere (1998). "The end of cheap oil." Scientific American (March): 78-84.
  • Georgescu-Roegen, N. (1971). The Entropy Law and the Economic Process. Cambridge. Mass., Harvard University Press.
  • Hirsch, H. L., Bezdek, R., Wendling, R., (2005). Peaking of World Oil Production: Impacts, Mitigation, & Risk Management, Report to US DOE, February 2005.
  • Hubbert, M. K. (1949). "Energy from fossil fuels." Science 109(2823): 103-109.
  • Hubbert, M. K. (1956). Nuclear Energy and the Fossil Fuels. Meeting of the Southern District Division of Production, American Petroleum Institute San Antonio, Texas, Publication No. 95. Houston: Shell Development Company, Exploration and Production Research Division.
  • Jevons, W. S. (1865). The Coal Question; An Inquiry concerning the Progress of the Nation, and the Probable Exhaustion of our Coalmines. London, Macmillan and Co.
  • Meadows, D. H., D. l. Meadows, et al. (1972). The limits to growth : a report for the Club of Rome's project on the predicament of mankind. New York, Universe Books.