Home > Economics - General > Peak oil point falls flat

Peak oil point falls flat

August 5th, 2011

That’s the title of my piece in the Fin yesterday, reproduced over the fold. Feel free to discuss, but please take anything related to nuclear power straight to the sandpit, and even there, try to avoid repeating the same old points.

One of the more intriguing sidelights to debates over climate change and energy policy is the idea of Peak Oil. On the face of it, the Peak Oil hypothesis is a straightforward claim. The amount of oil generated by any given field follows a bell-shaped curve, first rising as the field is developed and then declining as the oil becomes harder and harder to pump.

The curve is referred to as the Hubbert curve, after US geologist M King Hubbert[1] who used it to predict the peak of US oil output around 1970. Applying Hubbert’s analysis to the world as a whole yielded the prediction that the global peak in oil production should be happening around now.

On the evidence available, the predictions of the Peak Oil hypothesis don’t look too bad. Despite near-record prices for oil, the output of crude oil has remained broadly constant for the last seven years. Such an apparent plateau is exactly what the Hubbert curve would predict, bearing in mind that commercial production began 150 years ago.

The economic effects of the depletion of oil resources will be mixed. Clearly, since underlying demand is rising with population and income growth, the price of oil must rise to clear the market. That’s good for suppliers of oil, as well as competing energy sources, and bad for consumers. Overall because of the unpriced negative effects of burning oil, the most important of which is the release of carbon dioxide, a reduction in oil output is beneficial for the planet as a whole.

This is all straightforward: economists have been analysing markets for exhaustible resources ever since the pioneering work of Harold Hotelling in the 1930s. The observed outcomes fit Hotelling’s model pretty well – rising real prices are needed to sustain an optimal extraction path.

But discussions around Peak Oil are dominated, not by economic analysis, but by a range of more or less apocalyptic scenarios. In these scenarios, an end to ever-growing output of oil means an end to industrial civilisation as we know it.

There are a number of misunderstandings here. A lot of discussion seems to assume that Peak Oil means an immediate end to oil production, when the Hubbert curve implies a gradual decline over 100 years or more.

More importantly, though, the Peak Oil story is about production. But, if oil is essential to modern civilisation, what matters is not production but consumption.

The Oil Peak that actually mattered was the peak in consumption per person, which took place back in 1980 at 5.3 barrels per person per year. Since then, consumption per person has dropped to 4.4 barrels per person per year. Given the growth of demand in Asia, consumption per person in the countries that were already rich in 1980 has fallen much faster. Meanwhile living standards have risen substantially[2], unconstrained by declining consumption per person of oil, and of energy more generally.

Oddly enough, most people who worry about Peak Oil are also environmentalists concerned about climate change. From this viewpoint, which I share, Peak Oil looks like good news rather than bad. But the optimistic interpretation is trumped by the spurious idea that there is a 1-1 relationship between oil (or energy) and economic activity. This fallacious idea is held both by Peak Oil fans and by the rightwing doomsayers who suggest that reducing emissions of CO2 will destroy the economy.

A particularly interesting subgroup of Peak Oil fans are those who see nuclear energy as the only possible solution, a view that was mooted by Hubbert himself. This part of the discussion is dominated by a belief in something called ‘baseload power demand’ which must be met at all times if disaster is to be avoided. The idea that demand responds to prices and market structures seems entirely foreign to this discussion.

One of the few upsides of the disastrous Fukushima meltdown is that it has allowed a perfect test of this theory. Following the meltdown, Japan has taken 38 of its 54 reactors offline. It’s now midsummer there, and the blackouts predicted by the scaremongers have not occurred. Instead, the reduction in supply has been handled by (mostly voluntary) efficiency measures.

Energy is important, but it is no more ‘essential’ or ‘special’ than many other goods and services in a modern economy. If the supply is reduced, the market will respond to bring demand into line, especially if this response is facilitated by sensible government policy. No single source or technology, such as oil, nuclear or solar is essential, although none should be dismissed out of hand.

fn1. A fascinating guy, by the way. He was associated with the Technocracy movement, which briefly in the 1930s looked like a serious contender as an alternative form of government for the US. Wikipedia has lots on this.

fn2. In the rich world as a whole, and in most of Asia. Those in the bottom half of the US income distribution and in some very poor countries haven’t done so well, but that has nothing to do with oil.

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  1. quokka
    August 8th, 2011 at 20:04 | #1

    @Mulga Mumblebrain

    The answer to your question about decommissioning is “yes” – a fact you could easily have established for yourself. For example Maine Yankee 860 MWe PWR in 2004 at a cost of $635 million. They blew up the containment structure with explosives which I suppose is about as “decommissioned” as you can get. The cost is broadly in line with IEA estimates of 15%-20% of capital cost.

    But this of course has nothing to do with the materials requirements of wind and CSP, which is, I suppose, why you raised it.

  2. August 8th, 2011 at 20:14 | #2

    Quokka, wind tubines built and being built here in South Australia don’t use that much concrete. For example the Hallet 5 windfarm uses about 46 cubic metres, or 110 tonnes, of concrete per megawatt of capacity:

    http://www.agk.com.au/hallett5/index.php/the-project/

  3. August 8th, 2011 at 20:30 | #3

    I started lurking on the oil drum about 7 years ago and have stayed, mostly, because of the quality of the discussion in both comments and posts.

    I certainly don’t accept without question everything (or indeed anything) I read there. But the lack of barrow-pushers and trolls (particularly in comments) makes most Australian sites look like infantile poo-fights (present company being one of the least-worst in that regard).

    As with so much discourse in Australia, the level of unbalanced and unjustified throwaway jibes directed at mention of that site (and vaguely at its ‘followers’) is sad when compared with the serious issue of declining net oil availability.

    Why does everything need to be divided into two teams with “Cornucopians” on one side and “Doomers” on the other? Can’t we do “cautiously concerned” anymore?

    Imagine what 85 million barrels of oil looks like.

    As one of my favourite old commenters, now deceased, used to say: “Have you hugged your bag of I-NPK today?”

  4. Hermit
    August 8th, 2011 at 21:14 | #4

    I see that indeed Hallett 1 wind farm uses a rock anchor and that Hallett 2 has an impressive 39% capacity factor http://en.wikipedia.org/wiki/Hallett_Wind_Farm
    Assuming Halletts 1 and 4 have 25% c.f. the three wind farms (1,2,4) that operate (according to Wikipedia) produce an average 90 MW or so of electricity. That is half the 180 MW available anytime from the Hallett gas fired power station that draws on the Moomba gas pipeline. Moomba has about 11 years of gas left according to one source. What happens when the wind stops blowing and there is no gas ?

    Megan I think The Oil Drum distills the thinking some of the ‘clueyist’ people in the English speaking world. Since the overall tone is pessimistic we would do well to heed it.

  5. Mulga Mumblebrain
    August 8th, 2011 at 21:18 | #5

    I see that I have been misinformed, and a number of nuclear sites have been, at least partially, de-commissioned. It looks pretty expensive, ‘though. The United Kingdoms Nuclear Decommissioning Authority’s initial estimate of 70 billion to de-commission the 19 sites in the UK is pretty rich, I would say, and will probably rise, unless they get the Chinese to do it. The costs of decommissioning wind turbines might, I imagine, not be quite that extreme. And, of course, there is the cost of storage of nuclear waste for centuries, the cost of accidents (uninsurable! with the tax-payer lumbered with liability). And then, not to forget to cross the eyes and dot the tea, there is the expense of nuclear mining. The experience with tailings dams and contamination of ground water, particularly with ‘in-situ leaching’ makes me surmise that great costs, economic and environmental, will flow from mining, as well. All in all, I think that your assertions concerning the greater expense of initial construction of wind and solar facilities, with which I am not equipped to quibble, are vastly outweighed by the unavoidable costs of nuclear power production, from mining to waste disposal, and almost limitlessly outweighed by the costs of accidents.

  6. Dylan
    August 8th, 2011 at 22:33 | #6

    > Energy is important, but it is no more ‘essential’ or ‘special’ than many other goods and services in a modern economy.

    This is where I would say a lot of people who understand peak oil well would start to disagree with you. Have you read any E.F. Schumacher? In his book _Small Is Beautiful_ he makes a distinction between primary goods and secondary goods.

    “First, Schumacher drew a hard distinction between primary goods and secondary goods. The latter of these includes everything dealt with by conventional economics: the goods and services produced by human labor and exchanged among human beings. The former includes all those things necessary for human life and economic activity that are produced not by human beings, but by nature. Schumacher pointed out that primary goods, as the phrase implies, need to come first in any economic analysis because they supply the preconditions for the production of secondary goods. Renewable resources, he proposed, form the equivalent of income in the primary economy, while nonrenewable resources are the equivalent of capital; to insist that an economic system is sound when it is burning through nonrenewable resources at a rate that will lead to rapid depletion is thus as silly as claiming that a business is breaking even if it’s covering up huge losses by drawing down its bank accounts.”

    This is an excerpt from an excellent article that goes into explaining why oil and all sources of energy are in an economic category all of their own — essentially because the quantity/availability of these goods are what define the configuration of goods and services in an economy. The article in full is here:

    http://thearchdruidreport.blogspot.com/2009/05/guide-for-perplexed.html

  7. Tim Macknay
    August 8th, 2011 at 23:32 | #7

    @Megan

    But the lack of barrow-pushers and trolls (particularly in comments) makes most Australian sites look like infantile poo-fights (present company being one of the least-worst in that regard).

    Yes I agree, the comments threads on The Oil Drum are quite civil compared to some Australia blogs.

    Why does everything need to be divided into two teams with “Cornucopians” on one side and “Doomers” on the other? Can’t we do “cautiously concerned” anymore?

    I also agree wholeheartedly with this sentiment. These labels are thought-stoppers. The ‘insider-outsider’ mentality they create is an obstacle to serious discussion of energy sustainability issues.
    I find it ridiculous that I can be regarded by many acquaintances and colleagues as an excessive pessimist because of my tendency to focus on environmental problems and at the same time be regarded as a ‘cornucopian’ by some in the peak oil community because I don’t think it is inevitable that industrial civilisation will end in my lifetime.

  8. BilB
    August 10th, 2011 at 04:30 | #8

    Here is an interesting article from Robert Rapier on alternative energy and the US economy. Regardless of Peak Oil or Climate Change, the US needs alternative energy. Why?

    http://www.consumerenergyreport.com/2011/08/04/the-need-for-a-real-domestic-alternative-energy-policy-in-the-usa/

  9. Ken Fabos
    August 10th, 2011 at 08:05 | #9

    The loss of oil isn’t a problem in and of itself – it’s the intersection of need to reduce emissions and the demands of an economy that has built itself on energy that’s high emissions. Ignore climate change and there’s plenty of fossil fuels capable of replacing oil – coal to liquid, shale oil, gas (fracked csg or otherwise). If we accept even as a possibility that climate science is right we know that we really will not like the consequences of ignoring the clear warning it’s giving us. At this point the only political party that really gets this is, unfortunately, the Greens. So, yes the coal industry has to be phased out or at least way down – unless it actually can deliver CCS, not because the Greens are radical civilisation haters but because the threat is very real and for us to have a long term future – a civilised future – we have to stabilise the climate and invest in sustainability. I think the fossil fuel industry will have to pay to develop CCS itself if they can – they can certainly afford the attempt without sucking up all the public R&D funding that can be used to develop renewables – except that there’s 3.57 times the mass of CO2 to deal with as the black coal burned producing it, the kinds of deep drilling required (more than the whole oil industry?) – would surely be better used drilling hot rock geothermal. I can’t see CCS as anything but a dead end waste of time and money whilst remaining an ongoing excuse to avoid facing reality.

    We’ve been winding up the thermostat on a system that takes decades to centuries to restabilise at the new setting, the particular style of thermostat is easy to turn up but next to impossible to turn down. We’re being told it’s okay turn it all the way past defrost – that we actually need to keep cranking it up or the contents will spoil. That dripping from the freezer? We’re told that doesn’t mean anything, that the thermostat isn’t actually connected at all. The experts called in to check say it’s already turned past defrost but it’s such a big system it’s not that apparent, yet – except for the dripping from the freezer which is a clear indicator. Looks expensive. More expensive than following the non-expert advice to ignore the drips, they’ll go away on their own. And keep winding the thermostat upward.

  10. Greg
    August 10th, 2011 at 20:32 | #10

    I’m afraid you are the one who misunderstands “Peak Oil” which might explain your radiating optimism. I quote “There are a number of misunderstandings here. A lot of discussion seems to assume that Peak Oil means an immediate end to oil production, when the Hubbert curve implies a gradual decline over 100 years or more.” Actually no scientifc discussion I have read states that. They don’t say that at all. Peak Oil doesn’t simply mean production starts to decline. It means supply fails to meet demand. That concept is the scary part if anyone remembers what happened in the 70s. Now factor in a very shaky global economy and you get the picture. Imagine demand is 100% and supply is say 70% and countries are competing for 100%. Economies grind to a halt. Everything you do, eat, wear and drink is based on oil. Not just your fuel guzzling tank parked in the driveway. Your consumption argument is even more ludicrous. You are not factoring in population growth over the time period which has been massive over the last few years. Per capita is meangingless if you are talking about a difference of a Billion people. You are also not factoring in massive demand increase from India and China. In a nutshell this article is completely devoid of scientific and statiistical fact. It smells more to me like misinformation than information. On a final point regarding renewables. Yes you can produce electricity and sustain a modern society but forget about a global population of 6 Billion and all your electric gizmo’s. Lose about 5 Billion and you might be ok. Forget about huge cities where the inhabitants push paper around all day for a living. Electricity will be a very scarce resource. The electricity grids of today will have to be downgraded to a local level. You can’t sustain baseload with solar etc. There appears to be an assumption that we can simply churn out solar panels. Most of them are made conveniently in China. There is a good reason for that and it’s not what you think. China controls the market for rare earth elements essential for the production of solar and wind turbines, batteries, cell phones etc. When Peak oil hits it will hit fast and the politicians will not help us. Finally and you guessed. It requires a lot of oil to churn out wind turbines and solar panels. Bottom line. The way we live and our populations are completely unsustainable without oil and thankfully it’s running out. PS I think climate chnage is a crock but the end game is going to be the same anyway. The irony of all his. The 3rd world african countries we look down on will survive and thrive. They used to not having anything and without US interference will thrive. On a final note I love this downplay “Peak oil fans”. Last time I checked when you have something finite and use it up. It ends. As for the fans. Quite a few of them are scientists, geologists and very senior ex Oil people. Saudi Arabia, the worlds biggest oil producer has currently concluded a contract with GE to build 16 nuclear reactors for $300 Billion. Has the penny dropped yet.

  11. Tim Macknay
    August 11th, 2011 at 11:30 | #11

    The comment above has reminded me of another thing that irritates me about The Oil Drum: the prevalence of climate change delusionists.

  12. Mulga Mumblebrain
    August 12th, 2011 at 18:47 | #12

    Tim Macknay, I often find myself occupying a ‘Doomutopian’ position when I contemplate the one pitifully small consolation that one can draw from the coming auto-genocide of our species. At least the denialists, the Dunning-Kruger-Joyceites, the psychopathically greedy and malevolent economic elites and all the various rabbles of assorted imbeciles, ignoramuses and senile delinquents who comprise the ideological Right, will disappear, too. Just imagine the horror if we were to survive with this type still in charge, and escaped into the cosmos, to spread hominid destruction and exploitation amongst the stars.

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