from Energy, Security, and Climate and Energy Security and Climate Change Program

How Not To Argue That We’re Running Out Of Affordable Oil

January 27, 2012

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I made a New Year’s resolution to spend less time on this blog explaining why other people are wrong.

But New Year’s resolutions are meant to be broken -- and some things just beg for intervention. That’s unfortunately the case with “Oil’s Tipping Point Has Passed”, an essay in the current issue of Nature by James Murray, an oceanographer at the University of Washington, and David King, a chemist who was chief scientific advisor to Tony Blair and now heads the Smith School of Enterprise and the Environment at Oxford.

The authors write that “there is a potentially more persuasive argument [than the danger of climate change] for lowering emissions: the impact of dwindling oil supplies on the economy”, and then go on at length to explain why. Their bottom line may be correct – there is certainly much to debate here – but their many arguments are almost invariably flimsy. I want to step through a fairly long list of those claims, both because the article is prominent and likely to be read as authoritative, and because the article provides a convenient and fairly exhaustive compendium of misunderstandings about oil.

The paper begins with a summary before getting into the main substance:

“The idea of ‘peak oil’ — that global production will reach a peak and then decline — has been around for decades, with academics arguing about whether this peak has already passed or is yet to come. The typical industry response is to point to increasing assessments of global reserves — the amount known to be in the ground that can be produced commercially. But this is misleading. The true volume of proven global reserves is clouded by secrecy; forecasts by state oil companies are not audited and seem to be exaggerated.”

Perhaps reserves are exaggerated. Perhaps they aren’t. What do the authors cite to support their position? A recent paper by none other than David King. In any case, the essay immediately goes on to more important things:

“More importantly, reserves often take 6–10 years to drill and develop before they become part of supply, by which time older fields have become depleted. It is far more sensible to look instead at actual production records, which are less encouraging. Even while reserves are apparently increasing, the percentage available for production is going down. In the United States, for example, production as a percentage of reserves has steadily decreased from 9% in 1980 to 6% today. Production at existing oil fields around the world is declining at rates of about 4.5% (ref. 4) to 6.7% per year. Only by adding in production from new wells is overall global production holding steady.”

Little of this makes much sense. Yes, it takes time to convert reserves to production, during which time other fields have declined. Oil producers know that and incorporate it into their planning. The authors seem to suggest that because new investments accompany declines, absolute production increases aren’t possible. That’s silly: just because I draw on my bank account while also earning money doesn’t mean that I won’t become richer. Nor is the fact that production as a percentage of reserves has declined over time a good argument in favor of the claim that we’ve hit a limit to production. Think about it: if a technological breakthrough doubled our reserves tomorrow, the reserve-to-production production-to-reserve ratio would be sliced in half; does anyone seriously think that this would be bad news for oil?

Let’s continue:

“In 2005, global production of regular crude oil reached about 72 million barrels per day. From then on, production capacity seems to have hit a ceiling at 75 million bar­rels per day. A plot of prices against produc­tion from 1998 to today shows this dramatic transition, from a time when supply could respond elastically to rising prices caused by increased demand, to when it could not (see ‘Phase shift’). As a result, prices swing wildly in response to small changes in demand. Other people have remarked on this step change in the economics of oil around the year 2005, but the point needs to be lodged more firmly in the minds of policy-makers.”

Start with something simple: the authors seem to have misread their reference, which reports nearly 82 mb/d of conventional oil production as of 2008 (and another 3.9 mb/d of unconventional production). [UPDATE: A commenter points out correctly that the authors were referring to a narrow set of sources than I did. I think that it’s misleading to segment production in that way, but if ones chooses to do so, the 72/75 numbers hold up.] More problematic, though, is the implicit claim that this is strictly about “economics”. One would not know from this discussion that a large fraction of world oil is produced in states that exercise strategic restraint in their production. It is entirely possible that politics is a much bigger factor than pure economics in explaining what has happened in recent years.

The authors then pivot to explaining why they think it will be difficult to expand production:

“We are not running out of oil, but we are running out of oil that can be produced eas­ily and cheaply. The US Energy Information Administration optimistically projects a 30% increase in oil production between now and 2030 (ref. 2). All of that increase is in the form of unidentified projects — in other words, oil yet to be discovered.”

This simply isn’t true. Unidentified projects don’t involve oil that is “yet to be discovered” – they involve oil that has not been specifically targeted for extraction. In fact, as best I understand, all of the production increase that EIA anticipates comes from oil that has already been discovered. Moreover, not all of it comes from unidentified projects. Indeed the authors seem to acknowledge that just a bit:

“Non-conventional oil won’t make up the difference. Production of oil derived from Canada’s tar sands — sometimes called the ‘oil junkie’s last fix’ — is expected to reach just 4.7 million barrels per day by 2035 (ref. 6). Production from Venezuela’s tar sands is currently less than 2 million barrels per day7, with little prospect of a dramatic increase.”

That’s right, but it’s beside the point. Among the authors’ apparent blind spots are offshore drilling and tight oil in the Americas and beyond; the potential for increased production in Iraq as security improves; and the possibility of higher Saudi output. None of this gets mentioned in the essay. None of it, of course, shows that oil production will be sufficient going forward, but the argument in the paper falls woefully short of demonstrating the opposite.

What about resources other than oil? Here’s how the authors deal with that:

“Many believe that coal will be the solution to our energy needs, and will stay cheap for decades. But several recent studies suggest that available coal is less abundant than has been assumed. US coal production peaked in 2002, and world coal-energy production is projected to peak as early as 2025 (ref. 8)…. The US National Research Council’s Committee on Coal Research, Technology, and Resource Assess­ments to Inform Energy Policy noted in 2007 that ‘present estimates of coal reserves are based upon methods that have not been reviewed or revised since their inception in 1974 … updated methods indicate that only a small fraction of previously estimated reserves are actually mineable reserves.’”

Let’s start by getting the fact straight again. Yes, U.S. coal production peaked around 2002 (actually in 2001); then, in 2003, it reversed course again and started heading back up. Coal production in 2005, 2006, 2007, and 2008 exceeded 2001 and 2002 levels. More important, production is a function not only of supply but demand. Coal production in the United States has been restrained not because it’s scarce but because it’s increasingly undesireable.

What about the observation that “only a small fraction of previously estimated reserves are actually mineable reserves”? It’s important to put that in context. Previous estimates of coal reserves are astronomical. The mere fact that they have been revised downward tells us essentially nothing about whether the world has enough coal.

And then there’s natural gas:

“Natural gas is still abundant and large discoveries have been made recently, notably in Israel and Mozambique last year. Power plants using natural gas provide 25%, and rising, of electricity generation in the United States. Production of conventional natural gas in North America peaked in 2001 (ref. 2), but energy companies have worked hard to promote the idea that hydraulic fracturing of shale rock will lead to ‘the age of natural gas’. There is no doubt that US shale-gas resources are immense, but recent reports suggest that both reserves and future production rates have been substantially overstated….”

It’s not clear what the authors’ point is here. On the one hand, they cite some of the biggest pessimists in the natural gas world; on the other, they talk about “immense” resources. In any case, the bigger question mark for the purposes of their essay would seem to be whether natural gas can penetrate the transport sector in a big enough way to dent demand for oil. (I happen to be slightly skeptical.) The essay, though, is silent on that count.

Having tried to make their case for an inevitable oil shortage, the authors turn to consequences:

“What does this mean for the global economy, which is so closely tied to physical resources? Of the 11 recessions in the United States since the Second World War, 10, including the most recent, were preceded by a spike in oil prices. It seems clear that it wasn’t just the ‘credit crunch’ that triggered the 2008 recession, but the rarely-talked-about ‘oil-price crunch’ as well. High energy prices erode family budgets and act as a head wind against economic recovery.”

Any scientist knows that correlation and causation are different things. The authors cite a serious paper that claims that expensive oil helped bring the 2008 recession forward by a few months, but don’t have any backup (aside from the fact that it “seems clear” to them) for their claim that pricy crude actually “triggered” it. Instead, they turn to anecdotes:

“Another powerful example of the effect of increasing oil prices can be seen in Italy. In 1999, when Italy adopted the euro, the coun­try’s annual trade surplus was $22 billion. Since then, Italy’s trade balance has altered dramatically and the country now has a deficit of $36 billion. Although this shift has many causes, including the rise of imports from China, the increase in oil price was the most important. Despite a decrease in imports of 388,000 barrels per day compared with 1999, Italy now spends about $55 billion a year on imported oil, up from $12 billion in 1999. That difference is close to the current annual trade deficit. The price of oil is likely to have been a large contributor to the euro crisis in southern Europe, where countries are completely dependent on foreign oil.”

This is mostly the subject for a future post, but I’ll just point out for now that oil imports have little or no power to predict current account deficits. Both Germany and China, for example, import a lot of oil, yet they have not run current account deficits in recent years. The Italy example is nothing more than cherry picking. As for the claim about the euro crisis, one would presumably need to explain why others with big import bills haven’t been similarly affected in order to conclude as the authors do. They make no attempt to do that, but they do have a bottom line:

“Historically, there has been a tight link between oil production and global economic growth. If oil production can’t grow, the implication is that the economy can’t grow either.”

Once again, correlation and causation are different things. The U.S. economy, for example, has grown much faster than its oil consumption has. Europe has grown while its oil consumption has remained flat. Could limits to oil production restrain economic growth? Sure. But the case is far less clear cut than the essay suggests.

The rest of the Nature article gets into solutions, most of which are eminently sensible, even if one doesn’t buy the authors’ description of the problem. I won’t get into them here, since that’s not the point of this post.

But I want to finish with a broad observation. When opponents of action to deal with climate change rest their case on weak and logically unsound arguments, they are rightly assailed by serious scientists – including, quite often, the authors of the present essay. When these same climate experts cross over into talking about oil, it would behoove them to write with the same rigor that they demand of their adversaries elsewhere.

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