From: The Wall Street Journal
Peak oil enthusiasts have had a rough few years. When the price of oil was racing towards its all-time peak in the feverish summer of 2008, Malthusianism was all the rage — even the usually unruffled International Energy Agency seemed to be worried that supply couldn’t keep up with demand.
The collapse of Lehman Brothers a few months after that kicked off a sharp correction in oil prices. But they bottomed out at around $40 a barrel and then resumed their climb, breaking back above $100 as the Arab Spring gathered steam in 2011.
This time, though, talk of peak oil is muted. A quick look at the beta version of Google’s Insights for Search tool shows that web searches for “peak oil” actually, erm, peaked in late 2005 and then surged again along with the oil price in early 2008. Since then, though, they’ve trailed off dramatically: so far in June, the number of “peak oil” searches is less than one-tenth what it was in May 2008.
Digital back-of-the-envelope? Maybe, but there is no denying that fears of the world running out of oil have lessened. Five years ago, or even a year ago, news that an embattled Syria had shot down a Turkish jet would have sent oil prices soaring. But on Monday, as Turkish anger over the incident seemed to intensify, oil prices actually continued falling, below $79 in the case of West Texas Intermediate.
It isn’t just that demand in the western world is down, although it is: OECD demand has dropped by 4 million barrels per day, or 8%, since it peaked in 2005. Global demand increased by 4.1 million barrels per day in that time, meaning emerging market consumption increased by roughly two barrels per day for every one that was lost in the industrialized world.
The more troublesome development for peak oil proponents is on the supply side — which, after all, is what peak oil is all about. If we are at peak oil, then global reserves shouldn’t be climbing and oil producing capacity should be maxed out or falling.
A new report from the Harvard Kennedy School’s Belfer Center for Science and International Affairs not only suggests that is not case, but estimates that the world could be capable of producing 110.6 million barrels per day by 2020, up from 93 million barrels per day now. Leonard Maugeri, who authored the report, titled “Oil: The Next Revolution”, writes that “the age of ‘cheap oil’ is probably behind us” as new sources are harder, and therefore more expensive, to develop than in the past. That said, he reckons more than 80% of the new oil production looks profitable at a long-term oil price of just $70 a barrel — well below most analyst forecasts.
Mr. Maugeri, a former executive vice president of Italian oil major Eni, is a well-known critic of peak oil theories. And while the study itself was not commissioned or sponsored by BP, it was produced under the auspices of the Belfer Center’s Geopolitics of Energy project which is suported in part by a general grant from the oil major.
Even so, it is hard to argue with the approach Mr. Maugeri has taken. His field-by-field approach actually yielded an estimated increase in productive capacity of 49 million barrels per day, but he scales that back to a net increase of about 18 million barrels per day to reflect decline rates from existing oil fields and the problems inherent to realizing the pure geological potential of a region like, say, Iraq.
His central argument — that in this decade we will reap the benefits of the wave of investment spurred by the rising oil prices of the past decade — is also hard to refute. This is what happened in the period of the oil shocks of the 1970s and the subsequent collapse in the price of oil in the mid-1980s. It is also evident in the gathering turnaround in U.S. oil production, as high prices have spurred the successful development of shale oil resources.
Going long Malthus is to effectively go short on human ingenuity and technological innovation. Belief in peak oil sows the seeds of its own refutation as it forces up prices and makes what was previously too expensive to contemplate — such as fracturing shale rocks — worth trying. Mr. Maugeri notes himself that a sudden collapse in oil prices if, say, China’s economy hits a wall, would likely lead to some wells not being drilled and thereby a smaller increase in oil output.
Equally, though, once oil companies have sunk capital into the ground, they often prove slow to curtail output even in the face of low or falling prices — witness the U.S. exploration and production sector’s continued growth in natural gas output. Most of the new projects examined in Mr. Maugeri’s report will be developed or close to completion by 2015. If demand doesn’t keep up beyond then for whatever reason (China’s economy slowing? Vehicle efficiency advancing rapidly? Natural gas vehicles taking off?) the second half of the decade could be a real downer for peak oilers — and prices.
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