I’ve spent a fair while talking and thinking about the Peak Oil Hypothesis, and a couple of thoughts have struck me. Looking at the data, graphed below, the big increases in oil prices in the last five years or so seem to have done nothing to call forth additional supply. And for the last couple of years, output has actually declined. In that sense, it looks as if those pundits who claim that oil output has passed its historical maximum may be able claim vindication.
On the other hand, the term “peak” tends to imply a steep ascent, followed by an equally steep descent. Looked at on a time scale of several centuries this will be about right. But, year to year, the pattern is better described as a plateau with a slight downward slope.
There are good reasons for this. Once producers start to anticipate a peak in output, it is in their interests to slow down, rather than to pump out all their oil at prices that are bound to be lower than those prevailing in the future. That means that the price increase is brought forward and demand growth is constrained. So, what might have been a peak is flattened out into a plateau.
Plateaus are not very exciting as landscapes, and the Plateau Oil hypothesis is not very exciting in its implications. Given increasing demand from China and elsewhere, Plateau Oil means that consumption will have to decline somewhat in developed countries. To make this happen, prices will have to stay high, and rise gradually over time (the standard economic model has the rate of price increase equal to the discount rate of oil producers). But it’s quite possible that the biggest jump in market prices is already behind us, and that the next (probably more modest) step increase will come about when fuel taxes are increased to take account of CO2 emissions.
Of course, prediction is risky, especially about the future. It may be that we’ll see some big new fields brought on line or that new sources like tar sands will expand rapidly. Still, my best bet for the future is that global oil output will never rise much above its current level, and that a definite decline will be evident within a decade or so.
John Quiggin 
Would a consumption graph look like a mirror of the production one?
So if there are not expected to be big discoveries then the Hotelling logic takes over. Sounds plausible.
But watch what happens to oil prices if someone discoveries a cheaper way to access a backstop.
I won’t hold my breath waiting for that to happen!
The reality at the moment is one side of politics has presided over a massive cut in fuel taxes since the fuel excise was frozen in 2001, and the other side of politics is planning summits into high petrol prices.
Higher fuel taxes are just not going to happen. Its political death. As a society we’d rather drive our 6 litre V8 SUV over a cliff than pay an extra 50c/L at the pump.
John – Robert Rapier has quite a good analysis that he calls Peak Oil Lite that sort of mirrors your thoughts.
http://i-r-squared.blogspot.com/2007/07/peak-lite-revisited.html
“In the event of a worldwide peak in oil production, there won’t be enough oil to go around. Poorer countries will find themselves priced out of the market at various price points. The situation will be the same for Peak Lite, and this is what we have observed in the past 2-3 years. Many developed countries have seen their oil consumption rise over the past 2 years, even though world oil production has been slightly negative. This means that demand destruction is occurring in some locations. I expect this trend to continue.”
Given that China has enormous cash reserves we might end up being one of the ‘poorer’ countries that are outbid for tankers. We get most of our oil through Malaysia. This may mean the poorer countries in a region which compared to China we are.
carbon sink, higher fuel prices are going to happen. china has the money to pay for the change from bicycle to auto society, and they want to, god knows why. the second half of the world’s oil will be consumed much faster than the first, simply because there are vastly more consumers.
oz commuters will be on motor scooters within twenty years, for an uneducated guess. visiting chinese entrepreneurs will be honking at us to get out of the way of their limousines, if indeed they have not lobbied for a ‘mercedes only’ motor lane.
“carbon sink, higher fuel prices are going to happen”…other sensationalism.
I’m sure this will happen, but given that we have huge quantities of coal, methane etc. which can be extracted and turned into fuel, I don’t see that as exactly the end of the world as we know it.
The plateau may turn out to be a mesa if a predicted sudden switch to conservation cuts in. Oil producers may suddenly decide to reduce exports in order to supply domestic use, even at the expense of favorable terms of trade. I think the Australian version will be sending LNG tankers from the NW Shelf to customers in southern Australia and not overseas. From the overseas point of view that is a steep decline in supply.
I think coal-to-liquids will struggle for two reasons. Firstly even in the absence of carbon caps it is so egregiously greenhouse unfriendly (X2.3 CO2) that the public will rebel. Secondly it is more efficient to charge battery driven cars directly with coal fired electricity. In Japan Toyota have just released a plugin Prius that can drive 15km only on batteries. That all-electric range is sure to increase. It’s a shame Aussie car makers didn’t see this coming.
Conrad – “I’m sure this will happen, but given that we have huge quantities of coal, methane etc. which can be extracted and turned into fuel, I don’t see that as exactly the end of the world as we know it.”
We don’t have that much coal. If we start doing this, quite apart from the CO2 emissions of such conversions, we just hit peak coal a bit later.
al loomis:
I have no doubt fuel prices will happen, but they won’t rise because politicians have raised fuel taxes. In fact, I’d bet my bottom dollar a Rudd government won’t reintroduce fuel excise indexation. Anyone want to take me up on that bet?
conrad:
Yes we have lots of other sources of fossil fuels, but the net energy return for all of these will be much worse than the cheap oil that gushed out of the ground during the 20th century. Poor net energy return means more CO2 emissions, which will accelerate the end of the world as we know it. Of course, you could just deny climate change and the problem conveniently goes away. Ahh life would be so simple if you were a delusionist 🙂
Robert Rapier makes a compelling case that transportation must be electrified and that electricity must be generated using solar or other zero carbon sources:
The Future is Solar at R-Squared
The Future is Solar at The Oil Drum
BilB if you’re around, take note.
“We don’t have that much coal”
Yes we do — we have absolutely heaps of the stuff. http://en.wikipedia.org/wiki/Coal#World_coal_reserves
and we have even more methane, its just more painful to extract.
Also, as for the CO2 arguments — I tend to think people will be more happy to trade-off CO2 emmisions than their cars, not matter what the long term damage, and no matter what they happen to say they will do.
I dont get it.
If peak production is more or less passed, and demand is increasing, how can we have seen the peak in prices? At current prices, net production is negative, and its hard to see anything other than increased demand at current prices, so…… (and perhaps I’m showing my lack of economics training here)…. how can prices not increase? Enlighten me please….
conrad – “yes we do — we have absolutely heaps of the stuff. http://en.wikipedia.org/wiki/Coal#World_coal_reserves
and we have even more methane, its just more painful to extract.”
Actually if you look at it we don’t. I hope you are not referring to the methane hydrates. I really do not think we are crazy enough to try to tap these and risk a methane burp.
Have a look at this post on coal reserves:
http://www.theoildrum.com/node/2785#more
Rickwood, I should be a bit more precise. If producers correctly anticipate future demand, prices should rise at a rate equal to their rate of discount – that is, the rate that makes them equally willing to sell now, or to hold on and sell later. That’s probably be in the range 5-10 per cent per year for the typical oil producing country.
So, prices will continue to rise, but not as dramatically as in the past few years. When I get a moment, I’ll edit the post to clarify this.
I’d rather drive my 6L V8 SUV over a greenie.
Solar electricity eh? Let the Observa household be an example of the present costs of reducing its Leigh Creek burnable dirt and gas fired electricity by 60% shall I? Since you ask here goes.
Wer’e all electric now with off peak power for hot water (6c/kwhr instead of 18c for peak summer. Annually we average 31.7 kw/day now at an average cost of 14c/kwhr so to reduce that by 60% would need 62 x 1 squ metre panels of the latest thin film silicon panels at a capital cost of $46000 and since the panels are guaranteed for 25 years that’s our term of loan for a first mortgage interest rate of 7.21% now. We’ll keep our fingers crossed about future interest rate rises OK? Looking up one of those mortgage repayment calculators shows we’d need to find another $3952 pa in payments or $152 a fortnight to stop the globe warming on account of our electricity consumption alone. That’s a cost of 57c/kwhr compared to our current 14c, assuming there’s no maintenace involved and no hail storm insurance costs and such. Almost makes you want to rush and save all those fossil fuels for Chinese and Indians straight away now doesn’t it?
observa – “Wer’e all electric now with off peak power for hot water (6c/kwhr instead of 18c for peak summer. Annually we average 31.7 kw/day now at an average cost of 14c/kwhr so to reduce that by 60% would need 62 x 1 squ metre panels of the latest thin film silicon panels at a capital cost of $46000 and since the panels are guaranteed for 25 years that’s our term of loan for a first mortgage interest rate of 7.21% now.”
Or you could be sensible and replace the hot water system with a solar hot water system cutting down your electricity bill by 40%. This leaves about 20kW per day. Replacing your fridge with a 6 star unit, airconditioning with 6 star units and all your lights and halogen downlights with LEDs and CFL you could cut another 4kW per day off that leaving 16kW. Approximate cost so far $6000.00 with rebates.
Basically you have cut your bills and energy use in half without solar panels using the principle of conserving first. If you want to add panels a 2kW system should cost $10 000.00 with rebates and in the summer produce about 12kWh per day and in the winter about 5kW per day.
As usual if you start with mistaken assumptions you can make anything look bad. Seeings as the Indians and Chinese get along with about 0.7 barrels of oil equivalent per day on average and we use approx 5 boe per day perhaps we could share the Earths resources a bit more.
“I really do not think we are crazy enough to try to tap these and risk a methane burp”
Yes I am refering to that type of methane, and I’m sure we are crazy enough (or at least some country is anyway) to dig it up. After all, we’re happy dig up uranium and sell it to countries with authoritarian governments that then turn into weapons. I wonder what the risk profile of uranium vs. methane is?
observa,
Mate, if you’re using 32kWh/day then you might want to switch a few things off. Electricity is getting more expensive anyway, and not because any do-gooder greenies are whacking on a carbon tax.
Yes the economics of rooftop solar don’t add up. Your point? What’s your answer to oil depletion and climate change? Deny everything and stick your head in the sand?
John,
Firstly, a couple of questions….
1st, A couple of the posts talked about us no longer being exporters at some point because our local demand will be to high. Does the FTA with America have any control over this i.e. must we sell to the highest bidder?
2nd, I went to a talk by the head scientist of Woodside a couple of years back. He said that pretty much all of the gas in the North West Shelf reserve had been sold to the Chinese. I later read how this 30 year supply had been sold at a fixed LNG price which, in 2002, was a lot lower than it is now. I remember the PM getting some of the glory for this deal, but it hardly seems like a good business decision to me — especially given that people within the industry were already predicting that the era of cheap oil and gas ending. What are your thoughts?
Oh by the way, did anybody catch last nights discussion on this topic on the ABC?
“Given increasing demand from China and elsewhere, Plateau Oil means that consumption will have to decline somewhat in developed countries.”
Surely it will be that consumption will decline in developing and poor countries, before developed nations start reducing their demand? So the effects will fall on those least able to implement more expensive alternatives.
“Once producers start to anticipate a peak in output, it is in their interests to slow down” Can we assume that they will have that choice? The evidence so far would perhaps suggest that importing nations aren’t necessarily that patient.
Further to AKR’s 2nd point. Only 6 percent of the world’s oil reserves are held by private, investor-owned oil companies like ConocoPhillips and ExxonMobil. More than three-quarters of the world’s oil reserves are owned by national oil companies. They will continue to operate to political timetables moreso than economic ones.
“Surely it will be that consumption will decline in developing and poor countries, before developed nations start reducing their demand? So the effects will fall on those least able to implement more expensive alternatives.”
If we assume efficient markets, (always a risky assumption) then the marginal price will be determined by the buyer with the highest expected economic rate of return on the expenditure.
I suspect that may well mean Chinese and Indian beusinesses rather than western motorists.
[…] Quiggin re-christens peak oil plateau oil, predicting that global oil output will never rise much above its current level, and that a […]
Ender and Carbonsink, the figures I provided were simply to point out the current costs of reducing just my household’s electrity carbon by 60% for general info. The $46000 installation cost quoted, deliberately does not take into account the Govt rebate of $8000, because although that would reduce the private cost, in the long run we need to assume that individual taxes would rise to take account of that in the long run with widespread takeup. There’s no such thing as a free lunch. As well the 19kwhr daily output of such a system is simply the AVERAGE output over the year, taken from the supplier’s specification table. Certainly the peak summer output (rated at 25 deg Cels and 30 deg incline facing north is higher but offsetting that is the lower winter output. Hence the use of their average output figure in the example. My last year’s bill for electricity (consisting of 4 quarterly accounts which are higher in winter), excluding the supply charge to ETSA utilities, was $1620 and 30% of that was for hot water(easily identified by the off peak amount). I note a recent news report that Australia generally has used record amounts of electricity this winter, on account of the colder weather and no doubt some demography and rising use as well. Yes we can all make sacrifices to our lifestyle and nag Gen Y even more to turn off lights, get out of the shower, etc, but that wasn’t what the ‘one percenters’ have been telling us needs to happen to our lifestyles, according to my observation of their arguments. Again I repeat, it was used for an indication of the current economic viability of solar power for urban dwellers.
Interestingly enough Ender here’s a comparison of the various hot water systems
Click to access hot_water_systems.pdf
and note particularly the comparison table of carbon emissions for the different systems. My off peak electric is the largest emitter. Using the CO2 emitted as a proxy for electricity use, then my hot water is costing about $100/tonne of emissions ($486 total for the year) and I can reduce that to about $200/year by using gas instant, heat pump electric, or electric boosted solar, these being equivalent. Now a solar system equivalent storage to what I have now costs $4530 ‘basic’ installation, while a heat pump costs $3000 and that will most likely replace the existing without any extra cost. As well I can have it operate on off peak at 6c/kwhr, instead of 16-18c peak, giving a further saving
for no extra GG emissions. (I can get a once off total rebate of $1210 from the Govt for the solar, but again that free lunch?) I reckon that’s the way I’ll go when the current one packs it in fairly soon.
Hmmm, on second thoughts and some quick googling, I might have to do some more research on that idea.
http://www.solahart.com/default.asp?V_DOC_ID=837
It would seem the ‘icing’ problem may be highest at night on off peak tariff when the outside temperture is coldest in winter, precisely when you need hot water most. It’s then the less efficient booster element would come into play the most. Might be OK still in Adelaide’s mediterranean climate.
Observa, you need to subtract the captial gain on your house from the number you quoted. I’ll bet that in some places (like Melbourne) things like decent looking water tanks would add more to the value of a property than they cost (Some types of heating and cooling certainly do), although I’d be interested to know about solar panels.
observa – I am glad that you are switching. You may want to consider the evacuated tube type of solar hot water. They are much more efficient than the flat plate type and work in colder conditions better.
http://megasun.net.au/apricus/index.html
http://www.endless-solar.com.au/index.htm
These people have systems you can retrofit to your existing hot water system so you do not have to ditch it if it is OK. I am going to fit an 11 tube system to my gas storage hot water system.
Yeah thanks for the links Ender. I was aware of the glass tube technology as a business acquaintance was engaged in setting up China imports of such units using German technology. Must look him up. Apparently they were units that didn’t even need direct sunlight but use other reflected rays from the sun’s spectrum. Very necessary in high rise China, but maybe not needed much here.
An important consideration for Adelaideans with hard water is the life of the cylinder/storage vessel, which the soft water states can more readily ignore. Consequently the dearer the system the the less attractive the investment return, cyl/storage vessel life being equal. I installed the current 401 litre Rheem Optima, mains pressure storage heater about 10 years ago. The ‘Optima’ lasts longer(10 year cyl warranty instead of 5 years) largely due to a much thicker magnesium protective anode installed. Also I check it annually for deterioration, unlike most owners who wouldn’t even know about the anodes and even if they did, paying a plumber to check it would not be economic. Consequently my Hot water systems can last up to 15 years, when many replace them at 7-8 year intervals. Dearer solar systems need to match this useful life under Adelaide water conditions and I’m not sure they can, but I’ll do my homework on them. Reminds me it’s time to check the anode again.
observa:
I agree with you entirely about the ‘one percenters’. I don’t believe that climate change or oil depletion will be easy problems to solve. I don’t believe (as ProfQ does) that the total cost of fixing climate change will be a few months of lost income spead over 40 years. Equally, I don’t believe that denying there’s a problem, or that its a problem too expensive to fix, is a credible position to hold.
I’m glad you’re considering switching to solar. I replaced my electric storage hot water system with solar a few months ago. We’ve only needed the booster once or twice this winter, and we don’t have due north orientation. Our electricity usage has dropped around 10 kWh/day since we installed it.
You’re first para sums up my view too carbonsink. JQ has some rose coloured glasses about costs and who will bear them IMO. I think a big worry is putting many peoples scarce dinner in our tanks, a concern expressed here
http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2007/07/22/nbook122.xml
I’ll do just fine in JQ’s brave green world. As I pointed out in a previous post, if the SA Govt introduce their mooted mandatory buyback of solar energy by the utilities on a 2 for 1 basis, then I’ll have a $13990 net cost (after $8000 Fed rebate), 32 panel thin film silicon solar panel system on the garage roof in a flash, earning me 9.6% tax free return on my investment. I’m about as keen on the cost transfer to struggletown of that as I am over the cost to the third world of biofuels, but if them’s the rules, them’s the rules. I’ll be no economic martyr.
Actually it was a mooted 2.5 to 1 buyback.
observa:
Apart from the debunking of biofuels as a solution to climate change, Booker’s piece in the UK Telegraph is complete and utter nonsense.
Yet another example of how sensible discussion of climate change policy is almost impossible at the moment. Opinions range from Booker’s attempt to deny, delay and debunk everything, to doomsayers predicting Greenland will melt next week, to ‘one percenters’ who tell us it will cost us nothing more than a cup of coffee a week.
Carbonsink, it’s easy to show an absolute upper bound of 10 per cent, using the solar technologies discussed here as backstops. But no serious economist who’s looked at the question thinks the cost will be anything like as high as this. Everyone from Stern to ABARE is in the range 1-3 per cent for plausible scenarios
If you or observa want to say that what I’ve posted on this is comparable to the climate denialism you mention, you’d better offer more than the bluster and assertion I’ve seen so far.
I read an interesting paper recently – AR Brandt, “Testing Hubbert”, Energy Policy 35 (2007) 3074-3088. This paper looks at oil production data from 139 oil producing regions (at a range of scales). The paper suggests that asymmetric models fit the data better that symmetric models like the Hubbert curve. On average, oil production would increase at a higher rate than it would decrease after the peak in production. I suspect this might lead to more climate change that would be predicted by a Hubbert curve (depending on how “pointy” the peak in production is).
“Apart from the debunking of biofuels as a solution to climate change, Booker’s piece in the UK Telegraph is complete and utter nonsense.”
It was the legislation and figures on biofuels that caught my eye. The rest was a general whinge.
ProfQ:
At no point did I say your position is comprable or equivalent to climate change denialism. IMO you have an overly optimistic view of the costs of dealing with climate change, and you seem to have more faith than I do in our political class taking the problem seriously.
For example, our dear leader read the same ABARE reports as you did and concluded that the costs of dealing with climate change are downright catastrophic, requiring (among other things) the removal of every car and truck on the road, a 10% fall in GDP, a 20% fall in real wages and a “staggering rise in electricity and gas prices”.
Now I know Howard is up to his usual fear-mongering, but OTOH I don’t believe we can overhaul our entire energy infrastructure in a few decades for the cost of a cup of coffee in 2050. The truth lies somewhere in between. At the moment we are doing next to nothing to deal with climate change. Regardless of who is elected later this year we won’t see emissions trading until 2010 at the earliest. No doubt the initial emissions allocations will be extremely generous, and we won’t see emissions from electricity generation stabilise until 2015-2020. And of course, neither party will do anything about fuel taxes and emissions from the transportation sector. The fuel excise will remain frozen, the AUD will remain strong, and Australians will continue to be protected from rising oil prices.
Raising energy prices, and particularly petrol prices, will not be politically acceptable in Australia for the foreseeable future. Our politicians will conclude that the Australian lifestyle is not negotiable, and we will continue hurtling towards the cliff until things get really desperate and draconian measures are required.
Ok, you might say this is an overly pessimistic view, but can you honestly tell me there’s a politician in the land who has the courage to raise fuel taxes?
The chart presented does not seem to offer much support to the argument presented. Between mid 2000 and late 2002 the chart indicates a decline in output steeper than any current trend and that decline subsequently reversed. The current plateau would seem consistent with just about any conclusion that you care to draw (ie it will soon rise, it will soon decline, it may stay flat). The current plateau is hardly out of character across the timeframe offered by the chart and the overall trend of the chart is clearly upward so if this was the only point of reference the best guess would be for a further increase in output. The AGW proponents better hope so because oil is a rather friendly fuel compared with coal.
[…] declined either. I came up with the innovative description of our current position as “Plateau Oil“. If I had bothered with Google, I would have noticed that the International Energy Agency […]