The Peak Oil Debate Flares Up

For some time now there has been a progressively more heated debate among the oil and gas apostles over whether we are nearing, reaching or past the point in time when the easy to get oil known and in production will decline at a rate faster than it can be replaced.  The Peak Oil crowd tended to be more militant in its views and more willing to challenge the orthodoxy of the industry.  It was suspect because it also favored just as vociferously developed alternative energy sources.

The debate was largely academic for quite a while until the peak oil crowd succeeded in getting their views embedded in the views of politicians, leading researchers and agencies where is has taken on a ‘political correctness’ that like global warming resists criticism.

The debate is flaring up again because the International Energy Agency is out with its World Energy Outlook 2010 in which it uses the term peak oil in the past tense arguing that we likely reached the point to maximum peak oil production in 2006 and can expend declining production hereafter unless something dramatic happens to expand oil replacement or the world begins a much more concerted effort to replace oil use with alternative fuels.

The IEA press release on November 9, 2010 is a useful read because it exposes the policy biases of IEA in responding to the political correctness that is rampant on this topic.  In short:

“Globally, fossil fuels remain dominant over the Outlook period in the New Policies Scenario, though their share of the overall energy mix falls in favour of renewable energy sources and nuclear power. Oil nonetheless remains the leading fuel in the energy mix by 2035, followed by coal. Of the three fossil fuels, gas consumption grows most rapidly, its share of total energy use almost reaching that of coal.”

The IEA website has a WEO 2010 page to market and sell the full report to eager readers explaining:

“The World Energy Outlook (WEO) provides updated projections of energy demand, production, trade and investment, fuel by fuel and region by region to 2035. It includes, for the first time, a new scenario that anticipates future actions by governments to meet the commitments they have made to tackle climate change and growing energy insecurity.”

“WEO-2010 also puts the spotlight on several topical issues, including what more must be done and spent post-Copenhagen to limit the global temperature increase to 2°C and how these actions would impact oil markets; how emerging economies – led by China and India – will increasingly shape the global energy landscape; the costs and benefits of increasing renewable energy, the outlook for Caspian energy markets and their implications for global energy supply, the future role for unconventional oil and the crucial importance of energy in achieving the UN Millennium Development Goals.”

CERA offers an Alternative View

Cambridge Energy Research Associates (IHS/CERA) my former employer has long been the major voice questioning the peak oil crowd.  So it was interesting that in response to the release of the IEA’s World Energy Outlook 2010, CERA took the unusual step of releasing and posting its oil supply update view distributed to its retainer clients entitled: The Future of Global Oil Supply: Understanding the Building Blocks.

The views expressed by Peter Jackson take issue with the peak oil crowd about the inevitability of a rapid fall off in oil supply while not quibbling about the reality of the decline in conventional oil fields now in production.  CERA has argued for years that advanced in E&P technology and production techniques like 3D seismic and horizontal drilling opened up vast new areas of oil for economic production.  Indeed, the entire segment of the industry now called “unconventional” is the direct result of new technology making it possible to get at these fragmented supplies productively.

The headlines from CERA’s global oil supply update are:

“The controversy surrounding future oil supply can be divided into two components: a determination of the factors that will drive the much-debated future of oil supply and then, longer term, a consideration of consequences and the actions required when oil supply eventually plateaus. IHS CERA identifies a number of critical observations at the core of this analysis of future supply:

  • Supply evolution through 2030 is not a question of resource availability.
  • IHS CERA projects growth of productive capacity through 2030, with no peak evident.
  • There is no unique picture of the course of future of supply: we are dealing with a complex, multicomponent system.
  • Aboveground drivers—economics, costs, service sector capability, geopolitics, the timing and nature of government decision making, and, centrally of course, investment—are crucial to future supply availability.
  • Market dynamics will remain highly volatile.
  • The upstream oil industry faces major challenges in finding new oil and turning discoveries into commercial production.”

“Hydrocarbon liquids—crude oil, condensate, extra heavy oil, and natural gas liquids—are a finite resource; but based on recent trends in exploration and appraisal activity, there should be more than an adequate inventory of physical resources available to increase supply to meet anticipated levels of demand in this time frame. Post-2030 supply may well struggle to meet demand, but an undulating plateau rather than a dramatic peak will likely unfold. Moreover, if the “peak demand” now evident in the OECD countries is a precursor of later developments in the emerging markets, world demand itself could eventually move on to a different course.

In the short term the industry is at another crossroads following the precipitous fall in demand in 2008–09 in response to the onset of the recession. The oil price has roughly halved from its peak of $147 per barrel in July 2008, OPEC has recently cut production, OPEC spare capacity has nearly tripled to 6.4 mbd, and the industry has slowed its pace of expansion. Early in 2009 IHS CERA estimated that as much as 7.5 mbd of new productive capacity could be at risk by 2014 if costs remained high and oil prices hovered just below the cost of the marginal barrel for two years. Since then the oil price has recovered strongly to around $70–$80 per barrel, and some confidence has returned. Even in these unpredictable times the industry has continued to invest and to build new productive capacity; indeed, Saudi Arabia recently brought onstream the giant Khurais field, which at plateau is expected to produce 1.2 mbd. With sustained investment, a healthy cushion of spare capacity, and slow to moderate post-recession economic growth, supply should not present major problems, at least in terms of availability, in the short term.

Of course looking further ahead, it is important to recognize that oil is a finite resource and that at some stage supply could fail to meet demand on a consistent basis. It is impossible to be precise about the timing of this event, but given the pace at which demand has increased in the past decade a pivot point may well be reached before the middle of this century. Much depends on key factors such as global economic growth, the capability of the upstream industry, costs, government policies on access and taxation, the evolution of renewable and alternative energy sources—particularly for transportation—and the effect of climate change issues on policies and regulations concerning the use of fossil fuels. However, there is time to prepare and to make rational decisions to avoid being forced into short-term approaches that may not resolve longer-term problems.”

So what’s this all about?

The peak oil crowd argues that the world is running out of cheap oil and that is will be increasingly more difficult to find replacement oil so, as a consequence, the world must change its wasteful energy ways, use less fossil fuels, develop alternative fuels and expand energy efficiency.  The peak oil crowd and the IEA in the World Energy Outlook 2010 talk about scenarios of change to live into the Copenhagen agreements and pushing for strengthening those agreements in Cancun.  They largely ignore the utter failure of the Copenhagen conference to find agreement among the major powers.

While the peak oil arguments have gained credence over time if for no other reason than they were repeated so often and became embedded in EU political correctness that they were hard to ignore.  Even the new CERA report represents, it seems to me, a softening of its views about peak oil by saying that the recession has driven down the price of oil and lower oil prices make it more difficult to find and develop the new supply sources needed to offset the decline of existing fields.  CERA still maintains there is plenty of oil to be found and developed but prices matter significantly about when that will happen.

While both sides of this debate are focused on peak oil there are other profound changes going on in the world’s energy outlook that bear mentioning.  Unconventional oil and gas development is the fastest growing segment of the American energy market and is fundamentally changing America’s energy mix. This development is due largely to America’s technology strategic advantage in horizontal drilling and hydraulic fracturing making access to new supplies possible.  At the same time, government mandates and stimulus subsidies are causing an explosive growth in the installed capacity of wind and solar energy.  While now enough to displace baseload generation as a reliable supplier they are making possible the transformation into a distributed energy future that offers opportunities for substitution.

Despite being the skunk at the Copenhagen lawn party, China is now the undisputed global leader in manufacture and export of solar PV panels and wind turbines much to the chagrin of subsidized producers in EU and American markets.  Nonetheless, lower prices for wind and solar make market share growth possible around the world.

The world is not running out of energy, but the energy business is transforming as technology, supply and demand, and prices work together as they always have to produce a healthy market.