Knowledge Problem

Michael Giberson

Not all peak oil analysis comes across as sloppy, misleading, and a bit tedious, but this one does: “Peak Oil Driving The Global Gas Shift.” Of course sloppy analysis abounds on the internet, and the best approach is usually to ignore it, but this example appears on the somewhat respectable site of the EU Energy Policy Blog.

The introduction to the article is set up as a contrast to the rosy outlook of a Citigroup report that claimed the shale gas boom was set to transform into an oil boom in North America. Not so fast, our author warns. Then, after a few “peak oil-friendly facts” picked from a subsequent US Energy Information Administration report (link), the author gives us the bad news from Iranian production:

The shrinking spare capacity of the OPEC states, of 2.5 Mbd, is almost exactly what Iran was exporting until late 2011, following a year average 2.6 Mbd in 2010, but since 2011 and for reasons only partly related to sanctions, and closer related to depletion, its oil output is falling: Iran’s net exports and export supply capacity may stand at only 2.2 Mbd today. Some sources suggest even less than that. In 1976, Iran could produce 5.75 Mbd and export far more than 4 Mbd to a world market that, at the time, consumed about 62 Mbd compared with 89.7 Mbd today. Explaining this while denying depletion and the impact of oil consumption growth in exporter countries and worldwide is mental gymnastics!

Allow me to attempt the “mental gymnastics,” which in this case seems to be the mental equivalent of sitting on a balance beam and swinging my legs: to wit, the internet search! Yielding an EIA country report on Iran and this chart:

EIA, Iranian Total Oil Production and Consumption, 1977-2010

The International Energy Agency’s numbers on Iranian oil production look much the same. Admittedly, our author is making claims about 2011, and especially about changes since 2011 (i.e. production over the first month or two this year), while the chart about only shows data through 2010. So imagine a slight drop for 2011 and a sharper drop for early 2012, perhaps like the drop seen in 2002. The IEA’s more recent analysis of Iranian oil suggests that production fell by 1.5 percent in February 2012, to the lowest rate in three years.

But can we call this a Peak Oil omen? Obviously, as the chart shows, Iranian oil production is down from the high levels of the 1970s. But, with the helpful labels inserted by the U.S. EIA “Iranian Revolution” and “Iran-Iraq War,” it is easy to see that the so-called above-ground factor of politics and war have driven the most significant swings in production. In addition, the chart makes clear that net exports (and most of the numbers cited in the paragraph quoted are net export numbers) depend on production and domestic Iranian consumption.

So far as I know, peak oil is a theory about production rate limits enforced by physical realities, not a theory about international trade. Net export data is at most suggestive. And especially when the trade data cited comes from a period of explicit trade sanctions imposed by nations who previously were significant trading partners, it seems all to easy to believe that the above-ground factors of politics are dominating the export data changes, and not the physical limits of depletion.

The author follows the Iran discussion with a wide-ranging sketch of gas market shifts, global energy policies toward renewables, and hopes for electric vehicles – the sort of view of the world you can have from reading many government reports on energy policies. Ultimately the author asserts a global move from oil, despite its high value, to natural gas, despite its lower value.

To me, the economics of the conclusion seems less than well worked out.

Michael Giberson

Clash of the titans: one of the world’s most prominent academic energy economists reacts to the peak oil commentary of one of the world’s preeminent establishment consulting energy economists. Self recommending, worth additional thought.

James Hamilton on Daniel Yergin on peak oil.

Michael Giberson

I’m sure I haven’t yet come to grips with the views expressed by commenters on my last post about economics and peak oil, but here is another paper on economics, Hubbert’s Peak, and peak oil.  In short the authors  model resource extraction scenarios in the manner that economists sometimes do, and conclude that the timing of the peak production will be determined by “above the ground” factors such as cost of production, oil prices and political constraints on access to resources rather than “below the ground” geological factors.

Note that the economist views I’ve cited from time to time – from CERA/Yergin to James Smith and now Pierre-Noël Giraud at CERNA and colleagues from EDF-R&D in France – are not denying that petroleum is an exhaustible resource nor that production will peak.  But, and speaking just for myself now, I am denying that the date of the peak is particularly significant and that sometime shortly after the peak we will face any kind of significant social strife, economic collapse, or other major drama. I’m stuck in a “business as usual” pose, because I expect business as usual.

More specifically, I expect over time petroleum will become expensive relative to other energy sources, and we will substitute away from petroleum and toward alternatives as that happens.  Of course it is already true in niches – there is a reason we don’t have kerosene lamps in our homes anymore and remote flashing roadside signs are solar powered – and the niches will grow as alternatives begin to make more sense.  Eventually, petroleum will become the niche fuel in an energy economy mostly running on other sources.  I don’t expect the social trauma associated with this transition to be any more wrenching than the shift from wood to coal or coal to oil.

If you think I am wrong, I’m willing to be educated.  But note that it will take quite of bit of educating to get me to drop economist habits of thought, so the simpler way to convert me to another way of thinking about peak oil is to point to an analysis with a reasonable economic foundation. I encourage commenters to direct me to their favorite such analysis.

NOTE: Here is the authors’ abstract for the paper, “Hubbert’s Oil Peak Revisited by a Simulation Model“:

As conventional oil reserves are declining, the debate on the oil production peak has become a burning issue. An increasing number of papers refer to Hubbert’s peak oil theory to forecast the date of the production peak, both at regional and world levels. However, in our views, this theory lacks microeconomic foundations. Notably, it does not assume that exploration and production decisions in the oil industry depend on market prices. In an attempt to overcome these shortcomings, we have built an adaptative model, accounting for the behavior of one agent, standing for the competitive exploration-production industry, subjected to incomplete but improving information on the remaining reserves.

Our work yields challenging results on the reasons for an Hubbert type peak oil, lying mainly “above the ground”, both at regional and world levels, and on the shape of the production and marginal cost trajectories.

Michael Giberson

Kate MacKenzie at the FT Energy Source blog asks, “Are policymakers, economists and peak oilists starting to speak the same language?“

A rash of papers, comments and interviews have made us think this recently. It’s not as simple as ‘policymakers are waking up to peak oil’, but that all those groups — and indeed, industry — are increasingly talking about the same issues looming in fossil fuel production, even if they’re using different terminology.

Later:

We’d venture that several things have kept talk of peak oil apart from the mainstream: a disagreement over the effect of price on demand, and a perception that many interested in peak oil simply predict overly dramatic, armageddon-style trajectories that sober-minded policymakers see as overblown.

And she concludes:

The debate is beginning to converge around a few central issues: how will economies that developed on cheap, abundant oil deal cope with the transition to expensive, scarcer oil? What will it mean for the emerging economies hoping to emulate those growth patterns? And finally, how will this play out in terms of pollution and climate change?

MacKenzie’s link included above is to James Hamilton’s excellent 2005 post, “How to talk to an economist about peak oil.” Comments at Hamilton’s Econobrowser and responses at peak oil blog The Oil Drum revealed that economists and peak oilers were not communicating well in 2005. I’m not as convinced as MacKenzie seems to be that we’re doing much better in 2010.

Personally, I like the undulating oil plateau.