September 30, 2008


The tank isn't empty: a review off The Myth of the Oil Crisis: Overcoming the Challenges of Depletion, Geopolitics, and Global Warming By Robin D. Mills (Steven Martinovich, September 29, 2008, Enter Stage Right)

The peak oil argument largely stems the prediction made by Hubbert in 1956 that American peak oil production would take place in 1970. The problem with Hubbert's methodology is that it has only ever been proven correct that one time. His succeeding predictions, including that the world would hit peak oil production in 1995, have been uniformly wrong. That hasn't stopped his acolytes from continuing to promote the notion that we are in imminent danger of running out of oil.

Mills, a petroleum economics manager for the Emirates National Oil Company in Dubai, argues that peak oil advocates have long underestimated the amount of estimated and proven reserves and that exploration has largely keeping pace with production when necessary. The recent rise in oil prices doesn't reflect scarcer resources but underinvestment on the supply side and global economic growth on the demand side.

To support his argument Mills carefully surveys the world's oil producers and analyzes their past, present and predicted future output. Unlike peak oil advocates, Mills generally takes a guardedly optimistic view and argues that many nations have untapped resources that haven't been exploited for various reasons which include economics, technical and environmental, or that they simply aren't needed at the moment.

From there Mills examines what he refers to as "unconventional oil", oil that is derived from deep sea drilling, the arctic and shale, among other sources. He estimates reserves as high as a trillion barrels of oil, more than enough to keep the global economy moving for decades. Mills also looks at the role that alternative fuels will likely play in lessening oil use and acting as a cushion for the inevitable day when we transition from an oil-based economy.

-EXCERPT: from Myth of the Oil Crisis

The current high prices certainly seem to give some credibility to the idea that we are approaching some fundamental limit of oil resources. But we should remember how we arrived at this situation, since the culprit is not constraints on oil in the ground: it is the long 1986-98 period of low prices and under-investment. Low prices decimated the oil industry, while the rise of energy-hungry new powers in Asia, combined with robust demand in the developed world and geopolitical upsets in major producers, stealthily ate up spare production capacity. The inevitable result, perhaps amplified by ‘speculation’ and market nervousness, has been a so-far inexorable rise in the oil price.

This price rise is not driven, then, primarily by geology. But many commentators outside the energy business, and some within it, believe high oil prices vindicate their often-repeated claims that ‘peak oil’ is imminent. Supporters of this view point to the work of the American geologist M. King Hubbert, whose seminal 1956 paper prophesied a peak in US output by 1965-1970 (the actual year was 1970), a success often taken to prove that oil depletion must follow ‘Hubbert’s Curve’. Yet when applied to other countries, ‘Hubbert’s Curve’ and its variants are at best approximately right, but frequently wildly wrong.

Predictions of the date of ‘peak oil’ require some estimate of the amount of oil reserves known today, and the quantity to be found in the future. Believers in imminent depletion state that global reserves, particularly in the OPEC countries, are heavily over-stated, that exploration success is falling well short of replacing production, and that technology does not unlock significant new oil. These assumptions imply that we are on the cusp of producing half of our ultimate total of oil. Hubbert’s method therefore predicts imminent decline.

Although a few countries may be over-estimating their reserves, comprehensive industry databases suggest that, if anything, the aggregate official figures are somewhat low. OPEC’s upgrades in the mid-1980s are mostly reasonable given prior conservatism, exploration success and advances in technology. Lack of recent exploration success is due to limited effort during the low-price era, and to restrictions on access to promising areas like major OPEC countries, Russia and the US offshore. In any case, huge recent discoveries in areas like deepwater Brazil confound the pessimists. ‘Reserves growth’ is a real and major phenomenon in many major oil regions, not an artefact of conservative reporting – the best place to look for new oil is in oil fields, with fresh ideas and methods.

‘Unconventional’ oil is becoming conventional, and making up a growing proportion of supply. Output from the famous ‘oil sands’ of Canada is growing rapidly; heavy oil all around the world is attracting new attention, from the UK to Russia to Saudi Arabia to Congo. Liquid fuels can be made from abundant coal and gas. ‘Second generation’ biofuels, from non-food crops, promise to overcome the problems of rising food prices, while the trillions of barrels in oil shales may be on the verge of being unlocked. And a wide swathe of oil demand can be substituted by abundant natural gas, which, even more than oil, is nowhere near ‘peak’, and which emits much less carbon dioxide.

Nor is geopolitics the insuperable threat it is made out to be. The abundance and geographic dispersal of unconventional oil and other energy sources renders a long-term oil embargo self-destructive. Nor is the Middle East rabidly hostile to the West and keen to wield the ‘oil weapon’, despite xenophobic claims. Modern ‘resource wars’ cannot pay for themselves, as the Iran-Iraq war and the recent Iraq conflict amply demonstrate. Terrorism is not capable of disrupting the long-term energy picture – as long as it does not provoke its victims into ill-conceived retaliation. The military, practical and political difficulties of blocking the ‘choke-points’ of international oil trade are widely under-estimated. ‘Energy independence’ cannot be attained at acceptable cost by any large consuming or producing nation. Retreats into paranoid self-sufficiency threaten a re-run of the grim 1930s; energy security can only be achieved, or at least improved, by a balance between the needs of exporters and importers, and a web of mutual inter-dependency.

Even the serious environmental problems associated with fossil fuel extraction and use, particularly some unconventional sources, can be tackled by new technologies, incentivised by policies to make the ‘polluter pay’. The environmental impact of modern oil extraction, even in sensitive areas such as offshore or in the Arctic, is much less than generally imagined. The very real threat of climate change requires a portfolio of solutions. A key one is ‘carbon sequestration’, the locking away of carbon dioxide in underground reservoirs, a method that can also liberate additional oil and gas. Despite claims to the contrary, all the components of carbon sequestration are proven; they need only to be put together on a large, repeatable scale.

Energy efficiency and renewable energy are key components of the fight against both climate change and the phantom of oil depletion. A growing economy and living standards would be possible even in the face of declining oil use. ‘Neo-Luddite’ calls for the end of industrial civilization are, if taken seriously, both naïve and apocalyptic. In this sense, oil will never ‘run out’; it will be replaced by something better. That is

Posted by Orrin Judd at September 30, 2008 6:52 AM
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