Hubbert’s Peak or Yergin’s Plateau?

In 1956, Shell geologist M. King Hubbert correctly predicted that oil production in the United States would reach a peak around 1970. Since his Peak Oil theory fits so well with the Malthusian worldview of “Progressives”, anti-capitalists and anarchists, Hubbert has become a posthumous hero to the Left, an unusual role for a scientist polluted by the filthy lucre of the oil industry.

Hubbert's depiction of Global Peak Oil. From Wikipedia.

Peak Oil’s fundamental assumption is that the supply of oil is finite and fixed. The peak of the oil production curve is reached when half of the total resource base has been produced, so rate vs time exhibits a symmetric bell-shaped curve. Post peak, rate declines rapidly. Hubbert demonstrated a peak for oil production in Texas, and he extended his theory to correctly predict the time (but not the rate) of the peak for the U.S. World oil production is supposed to have peaked in the last five years or so.

But Daniel Yergin, chairman of IHS Cambridge Energy Research Associates and a Pulitzer Prize-winning author, argues in a WSJ.com Saturday Essay that Peak Oil theory has a fatal flaw, which is rooted in Hubbert’s blind spot: economics. (H/T to Mark J. Perry and his excellent Carpe Diem blog.)

Hubbert was imaginative and innovative,” recalled Peter Rose, who was Hubbert’s boss at the U.S. Geological Survey. But he had “no concept of technological change, economics or how new resource plays evolve. It was a very static view of the world.” Hubbert also assumed that there could be an accurate estimate of ultimately recoverable resources, when in fact it is a constantly moving target.

Hubbert insisted that price didn’t matter. Economics – the forces of supply and demand – were, he maintained, irrelevant to the finite physical cache of oil in the earth. But why would price—with all the messages that it sends to people about allocating resources and developing new technologies—apply in so many other realms but not in oil and gas production? Activity goes up when prices go up; activity goes down when prices go down. Higher prices stimulate innovation and encourage people to figure out ingenious new ways to increase supply.

The idea of “proved reserves” of oil isn’t just a physical concept, accounting for a fixed amount in the “storehouse.” It’s also an economic concept: how much can be recovered at prevailing prices. And it’s a technological concept, because advances in technology take resources that were not physically accessible and turn them into recoverable reserves.

[The emphasis is not in the original, but comes from Perry’s quote of Yergin’s text. – Ed.]

This is true on all counts. Hubbert’s forecasts were made when the U.S. was the world’s dominate oil producer, in an environment of price stability. Until the Arab Oil Embargo in 1973, oil prices were below $20 per barrel (2008 dollars), and declining in real terms.

Rising prices undeniably add reserves. On a micro level, rising prices mean that a well that might be plugged making 5 barrels per day may produce profitably for several more years. Old abandoned wells may even be returned to production. A new prospect that is uneconomic at $40 per barrel may be drilled if prices reach $80.

At a macro level, higher prices extend the search for oil into areas that Hubbert never imagined.  Hubbert’s original U.S. projection included no Arctic reserves, as Alaska was not a state when his forecast was made. I’m certain that Hubbert never envisioned drilling in offshore waters over a mile deep, or production from then-worthless shales like the Bakken of North Dakota.

One other point worth mentioning: Hubbert’s work was derived from the “hard-rock” mining industry, which searches for minerals such as gold, silver and platinum. A key difference between these precious metal resources and hydrocarbons. Au, Ag and Pt are elements; they occupy boxes on the Periodic Table.

Unlike elements, natural gas and oil can be created from other substances by alchemy (or, really, by chemical engineering). Gas and liquids can be manufactured from related compounds found in nature, such as coal, tar sands or kerogen. Economics also control the degree to which these technologies expand the effective oil and gas resource base.

Oil resources are not infinite, and it is unarguable that most of the easily accessed, conventionally producible oil has already been discovered. I agree with Yergin’s conclusion, that rather than “Peak Oil” we may be entering a period of “Plateau Oil”. Instead of a symmetric bell-shaped curve, we are on a limb of the curve that flatten or grow slowly for some time. Reserves will be added at the economic frontier, where the search for reserves is justified whenever the marginal cost of finding and developing is less than the current market price. Ultimately, if we let free market forces dictate, new technologies will replace hydrocarbons at such time as they achieve a lower price in the marketplace.

Or, in a more likely scenario, politicians will muck up the whole thing, thinking they will be the first beings in the history of the planet to outsmart the law of supply and demand.

Cross-posted at RedState.com.

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6 Responses to Hubbert’s Peak or Yergin’s Plateau?

  1. Even if Yergin is right (big if) that doesn’t change anything about peak oil theory accept that peak may be later than Hubbert expected. And even that is weak given Yergin’s speculations that price will slow the process down – it’s not a real market when you have a Cartel controlling a good deal of the supply and it’s traded on a manipulated exchange with derivatives.

    This isn’t even a real critique, unless you are arguing oil is not a finite resource. Which would also be wrong based on all available evidence, “alchemy” (seriously?) aside.

    Oil production will, at some point, peak. Right now we have no real alternatives to make the economy function without oil but maybe if we begin now we can transition relatively painlessly. Opposition to that concept is absurd unless you believe oil is infinite.

    • Steve Maley says:

      OK, then, what is the size of the ultimate oil resource? What ever number you name is likely to be low. It only took a few years for Hubbert’s original estimate to be proved low.

      We have already produced more natural gas than was thought to exist in 1978. And we have something like 100 years worth left at current consumption rates.

      As for alchemy, I’m talking about oil from kerogen (“shale oil”), which is really more of a wax than oil.

      • I think your points are fair in terms of ‘doing more with less’ or even innovation INSIDE of the industry itself (turning things into oil like shale, tar sands).

        It just seems, from a risk management perspective, investing in alternatives is prudent beyond measure – if near term peak oil theory is wrong and we have many years of new finds and in-industry innovations, great! If near term peak oil theory is right we are going to have major major conflicts that could leave thousands/millions dead. Oil is that vital right now for food and energy needs. There is no alternative (to paraphrase Thatcher).

        I think this post is useful for getting an opposing view but still maintaining and understanding of peak oil as a threat – I think this post is destructive if it gives people a false sense of security or an excuse to not make investments in transitioning away from oil.

      • Steve Maley says:

        I’d agree with that. We need to be realistic, though, about the costs, capabilities and limitations of replacement technologies. Wind and solar are not replacements for petroleum, because they are not transportation fuels. Ethanol is largely made from food and there are serious questions as to whether there’s even energy gained, esp. with corn ethanol.

        The transition will be as orderly as possible if we let the market dictate it, rather than have central planners somewhere try to divine an outcome & impose it on us.

  2. Rising prices do not add reserves. They just make recovery of the reserves more feasible. That’s not the same thing.

    The fact is, the world contains a finite amount of oil, and even if it’s all recoverable, the cost of recovering the rest of it and the cost of synthesizing alternatives will soon put oil out of reach for the average person. The result of that will not be a plateau – it will be a downward slope.

    I guess the good news in all of this is that some cornucopians are now able to recognize that they were wrong. Unfortunately, they are now adopting another fallacy – that the current plateau can last forever. I guess that’s progress. I’ll check back with you in a few years, when the plateau is history. I’m guessing by then you’ll be arguing that the downtrend is merely temporary.

    • Steve Maley says:

      All that sounds good, but with all due respect, you don’t have a clue what you’re talking about.

      I’m a petroleum engineer, a petroleum reservoir engineer, by training and background. And 33 years of experience. The “reservoir” part means that reserve estimating is what I do. I could testify in court as an expert. I didn’t just learn about this on Wikipedia.

      There’s a difference between “reserves” and “resources”. I will stipulate that there’s a finite number of hydrocarbon and hydrocarbon-like molecules on the planet (putting aside for a moment that some believe they are being continuously generated…)

      If you were able to count all those molecules, whereever they may be, only a subset meet the definition of “technically recoverable resources”. A subset of those are “reserves”, a definition that depends on their ability to be recovered from existing wells or from drilling nearby existing wells.

      And if you read the linked article, you would understand that “reserves” by definition depend on the ability to produce them economically.

      You put lots of words in my mouth in that comment. I don’t have the time or the inclination to defend positions that aren’t even mine.

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