More economists thinking about 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.

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5 thoughts on “More economists thinking about Peak Oil

  1. I totally agree that the precise timing of the peak is of no significance whatsoever. What really matters is the demand/supply balance. In terms of how painful the substitution process will be, it depends on the quality of available substitutes.

    For transportation applications, the available substitutes aren’t great. Biofuels are in limited supply because they require so much land, while electricity and natural gas require very expensive vehicles and significant additional infrastructure. On the other hand, technologies for reducing demand (mass transit, efficient vehicles, and batter pricing structures) are mature and cost-effective, so I expect the response to rising prices will be more demand destruction than substitution.

  2. Ah! Once again I read the ecomomists signal failure to understand the laws of thermodynamics.

    Not a single mention of the ever plummeting energy return over energy invested.

    “this theory lacks microeconomic foundations” (whatever that is supposed to mean!. Whether or not, it was right in the case of the US lower 48 states. The timing may be a bit off, but it will also soon be right about the world too.

    @Tom
    Totally agree about transporation substitutes. My big concern is that agrobusiness will fold quite rapidly in the event of a fall in the availability of diesel fuel. ALL the crops, transportation to processing stations and delivery to your local store are utterly dependent on it. Mmmmm – electric powered combined harvester. I think not.

  3. But asserting an “ever plummeting energy return over energy invested” implies no change in technology. Yes, it makes sense to develop the cheap/easy resource first, then harder to reach resources later, but the technology improves. Whether EROEI falls or not depends on relative speed at which technology improves relative to the difficulty of developing more resources, AND on decisions by oil companies, which will either develop resources with relatively low EROEI or not, depending on prices.

  4. I would suggest that EROEI is diminishing faster than technology is replacing it, in spite of what you economists might hope.

    Do you hink that “they” have not thrown their best efforts at such places as the North Sea, Mexico (Cantarell), the North Slope… etc, etc.

    EROEI is simply NOT dependent upon prices, as you economists seem to think. Once EROEI reaches 1:1 it is game over, no matter what the price, or whatever the technology.

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