The most dangerous form of Peak Oil

Summary: Robert Hirsch describes another form of Peak Oil: political peaking. Perhaps the Middle Eastern nations can produce more oil to meet the world’s growing thirst — but will they? Is it in their interest to do so? Also, the focus of doomsters on shockwaves — instantaneous and large production cuts — ignores the more likely forms of slower political and geological peaking. Ending on a more optimistic note, history does give us some grounds for optimism.Robert Hirsch, one of the world’s top energy experts, has an important article in the February issue of Energy Policy magazine, “Mitigation of maximum world oil production: Shortage scenarios.” As usual with his work, it offers a mixture of new insights and careful analysis seldom found in Peak Oil research — on either side of the debate. I strongly recommend reading it. Unfortunately Energy Policy is subscription only. Here is a brief review of his analysis. Here are slides to an earlier presentation on this topic by Hirsch at the ASPO-USA conference in October 2007. 

Political Peaking

Hirsch introduces an important concept which he (and many others) has long discussed, but only now is formally described: political peaking, an extreme form of resource nationalism.

A few nations have the bulk of the world’s remaining conventional oil reserves. There large sources of unconventional liquid fuels: heavy oil, deep-sea, polar, bitumen (oil sands), kerogen (oil shale), coal (for coal to liquids conversion). However, these have high extraction costs — both in terms of initial capital requirements and operating costs — which create operational limits on their production flows.

The output of the few nations with large conventional reserves will become more important as production declines everywhere else. This result appears in all forecasts (e.g., EIA, EIA, energy consulting firms). Optimists and pessimists debate how much oil these nations hold, and how long they can meet the world’s growing thirst for liquid fuels. Hirsch turns the question around. Perhaps they can increase production, providing cheap and ample supplies. But will they? What best meets their long-term needs?

Policy experts have long advised conservation, seeking to cap consumption. Political peaking means that oil exporters choose to conserve their reserves — a cap on supplies.

The oil-rich peoples of the Middle East long believed their oil reserves to be unlimited. During the past decade they slowly realized their error, the “Bedouin to Bedouin over five generations scenario.” This insight changed the world. Consider their choice: after pumping enough oil to meet expenses, is it better to pump more and invest the surplus – or leave it in the ground for future generations? The latter looks like the superior bet, given the inevitable peaking of oil and the paucity of potential substitutes over the next few generations.

  1. No risk of foreign investments being expropriated.
  2. No danger of losing money from instability of financial markets or poor investment decisions.
  3. No way foreign bankers and brokers can siphon the money into their own pockets.
  4. Equal or even superior ability to grow in value.

It is a tribute to our lack of energy research and planning that this scenario is both likely and receives near-zero attention from our public policy experts.

Update: It is not a theory any more. See The world changed last week, with no headlines to mark the news.

Emergency Oil Shocks

Some points in this article seem more debatable. Hirsch opens with a commonplace among of Peak Oil literature, quoting from the Oil Shockwave study: “It only requires a relatively small amount of oil to be taken out of the system to have huge economic and security implications. That might be true of an instantaneous shock, such as the “emergency oil supply disruptions” studied in the “Shockwave” scenario.

The paradigm here is 1973, when Arab oil exporters cut their oil production by 25% (see the Wikipedia article). Oil prices quadrupled; US consumption dropped 6%. Along with other events, this resulted in a 3% decrease in US GDP, a severe recession.

However these shocks do not represent the only possible forms of Peaking, despite the often myopic focus on dramatic scenarios. Rate of change is a critical factor in any economics analysis. Both political and geological peaking occurs slowly compared with political events such as the 1973 embargo, mining the Straits of Hormuz, or bombing the Saudi oil fields. These other forms of peaking allow time for the “invisible hand” to work its magic, allowing adaption to a plateau in the growth of liquid fuel supplies.

History provides some grounds for optimism

Economies adapt, given time. “Peakists” (doomsters discussing Peak Oil) seldom mention the 1979 – 1993 period. Oil prices rose from $1.80 in 1970 to $36.83 in 1980 (Arabian Light oil price, as posted at Ras Tanura). Reacting to that, global oil consumption peaked in 1979 at 66,048 million barrels/day, then dropped by 14% through 1983 — reaching the 1979 peak again only after 14 years, in 1993 (see the BP Statistical Review for details).

During that period the global economy increased at roughly 3%, slightly below the post-WWII average (using IMF data). A fourteen percent decline in consumption! That is a far larger drop than in the post-peak scenarios many Peakists (not Hirsch) predict will end civilization as we know it.

Absract of the Hirsch article

Energy Policy, Volume 36, Issue 2, February 2008, Pages 881-889 (doi:10.1016/j.enpol.2007.11.009)

A framework is developed for planning the mitigation of the oil shortages that will be caused by world oil production reaching a maximum and going into decline. To estimate potential economic impacts, a reasonable relationship between percent decline in world oil supply and percent decline in world GDP was determined to be roughly 1:1.

As a limiting case for decline rates, giant fields were examined. Actual oil production from Europe and North America indicated significant periods of relatively flat oil production (plateaus). However, before entering its plateau period, North American oil production went through a sharp peak and steep decline. Examination of a number of future world oil production forecasts showed multi-year rollover/roll-down periods, which represent pseudoplateaus. Consideration of resource nationalism posits an Oil Exporter Withholding Scenario, which could potentially overwhelm all other considerations.

Three scenarios for mitigation planning resulted from this analysis:

  1. A Best Case, where maximum world oil production is followed by a multi-year plateau before the onset of a monotonic decline rate of 2-5% per year;
  2. A Middling Case, where world oil production reaches a maximum, after which it drops into a long-term, 2-5% monotonic annual decline; and finally
  3. A Worst Case, where the sharp peak of the Middling Case is degraded by oil exporter withholding, leading to world oil shortages growing potentially more rapidly than 2-5% per year, creating the most dire world economic impacts.

Please share your comments by posting below (brief and relevant, please), or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

Posts about Peak Oil

  1. When will global oil production peak? Here is the answer!
  2. More answers about Peak Oil! (or just better phrased questions)
  3. Peak Oil, part 3: discussing the solutions
  4. Links to articles and presentations of some A-team energy experts
  5. Myths about Peak Oil – part I: There are not enough petro-engineers!
  6. Good news about Global Oil Production!
  7. More good news about Peak Oil, on the demand side
  8. The most dangerous form of Peak Oil
  9. The three forms of Peak Oil (let’s hope for the benign form)
  10. The world changed last week, with no headlines to mark the news

Originally posted in Fabius Maximus and reproduced here with the author’s permission.

4 Responses to "The most dangerous form of Peak Oil"

  1. Guest   June 26, 2008 at 9:24 am

    First, I’ve made this point before on the main blog. Given the critical importance of oil to the global economy, it’s amazing how poor the knowledge is about exactly what reserves exist. The secretive nature of the Saudi’s (about their Ghawar reserves) is doing as much to confuse this situation as any other policy failing. Even people who have been studying oil economics for a long time have to make guesses about available reserves – because no hard data exists. That doesn’t make any sense.Second, at some point oil prices should reach a plateau where new forms of oil (e.g. oil sands, deep sea oil) provide a greater source of supply. Some commentators are assuming that the oil price rises indefinitely. But it seems more likely that prices will hold at some new high level, when we reach a stage where newer forms of (expensive) production can add to the existing global oil supply.PeteCA

  2. Fabius Maximus   June 26, 2008 at 10:01 pm

    PeteCA, thank you for commenting.First, I absolutely agree. This is one of the major themes of my articles. As David Halberstam says in The Best and the Brightest: "The elephant is great and powerful, but prefers to be blind."Second, this overlooks the major difference between conventional and unconventional sources. The latter are limited in flows by massive capital costs, to a degree far greater than conventional sources. To replace a million b/day from decline of Mexico’s Cantarell field requirest hundreds of millions of dollars in capex and years of construction.Consider conventional vs. unconventional reserves similar to fresh water resources vs. the oceans. The oceans have vast "reserves" of water, just like unconventionals (oil sands, oil shale, polar, deepsea, etc) — but they are not considered direct substitutes.

  3. flipper   June 27, 2008 at 5:00 am

    All peak oil fans are just extrapolating recent trends. It does not simply work in the long run. There are numerous potentiall improovement on the energy side – from new improved conservation to new technology. Oil caonsumption can easily be lowered by a firt or even half with existing tech.A funny thing, pentagon now considers going back to sails for water transports – the idea is to launch a giant kite and use a complicated software to manage it, wind is much stronger several tens of meters from a sea level.

  4. joew   June 27, 2008 at 12:04 pm

    the reason those unconventional resources are unconventional is also because it takes great amounts of energy to extract them, not just great amounts of capital. as the cost of energy rises, the cost of extracting those unconventional resources also rises. in the case of ‘oil shale’, it may never be feasible to extract the kerogen contained within for precisely this reason. it requires a great deal of energy to extract kerogen from rock. if you’re hoping for a techno-miracle, good luck with that!