Tedious peak oil claims from the EU Energy Policy Blog

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:

Iranian Total Oil Production and Consumption, 1977-2010
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.

 

 

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10 thoughts on “Tedious peak oil claims from the EU Energy Policy Blog

  1. Mike, you said “So far as I know, peak oil is a theory about production rate limits enforced by physical realities, not a theory about international trade.”

    First, I don’t think that peak oil is “a” theory. In its simplest form, peak oil is the mathematical fact that a finite resource (oil) cannot be produced at an ever-expanding rate, and at some point, that rate must peak.

    From an economic standpoint, the proximate reason for slowing production does not matter, what matters is the changing shape and position of the oil supply curve.

    I personally feel that above-ground and below-ground factors are tightly intertwined. If oil production had not peaked in Texas in 1970 (for below-ground reasons), we would not be now worrying about above-ground factors in Iran. Meanwhile, above ground instability raises prices, making unconventional oil such as that found in North Dakota practical to extract. If we try to attribute any shift in the oil market solely to above ground or below-ground factors, we’ll end up with even more sloppy analysis.

  2. Easy to agree that sticking to the simplest claim of peak oil, it just implies a finite resource can’t be produced forever. (We can’t know by mathematics alone whether the pattern of production will start high and then fall each year to exhaustion, start small and increase each year to exhaustion, start small and increase for a while before falling, or some less regular patter. To get some idea about the “shape” of production over time, need math + some ancillary knowledge.)

    Again, easy to agree, since it doesn’t at all take away from my point that net exports are, strictly speaking, irrelevant to the issue.

    It is also easy to agree that both above- and below-ground factors are important, but I’d hazard the guess that below-ground factors are changing relatively slowly so we can probably attribute short-term price moves to above-ground factors.

  3. I like your dichotomy of short term-above ground / long term-below ground. A good way to understand it.

    When it comes to world oil prices, net exports are relevant to the extent that consumers in the exporting countries do not pay market prices. This has the effect of making price more volatile for everyone else.

    I tend to think of two lumps of demand: from consumers who pay market prices, and those who don’t. Since the latter do not respond to the world oil price (completely inelastic demand), we can exclude them from our demand function by subtracting their demand from world supply. Since most such subsidized consumers live in oil exporting countries. this (very roughly) corresponds to a net export model.

    In other words, I agree net exports are fuzzy thinking, but I also see why many people find net export models compelling. Net exports are a way of segregating elastic and inelastic types of demand.

    I’m not sure if you saw my article where I try to put Peak Oil into a more economic framework, with a focus on the elasticity of supply and demand, but if you have not, I’d be interested in your reaction.
    http://www.forbes.com/sites/tomkonrad/2012/01/26/the-end-of-elastic-oil/

  4. The mathematics underlying net export declines are fundamentally different from the simple exponential decline rates that we seen in post-peak producing regions. For an analysis, you can do a Google Search for: Peak Oil Versus Peak Exports.

    In any case, our analysis of the top 33 net oil exporting countries in 2005, what we call Global Net Exports of oil (GNE), shows that their combined net oil exports fell from 46 mbpd in 2005 to 43 mbpd in 2010, as the ratio of their domestic consumption to domestic production increased from 27% in 2005 to 31% in 2010 (BP + Minor EIA Data, Total Petroleum Liquids).

    Furthermore, at the Chindia region’s 2005 to 2010 rate of increase in their net oil imports, as a percentage of GNE, the Chindia region alone would consume 100% of GNE in only 17 years, around 2029.

    What the recent data show is that developed oil importing countries like the US are gradually being priced out of the global market for exported oil, as annual global crude oil prices doubled from 2005 to 2011, and as developing countries like the Chindia region consumed an increasing share of a declining volume of Global Net Exports.

  5. You say in the comments section that “net exports are, strictly speaking, irrelevant to the issue.”

    If the issue is “oil prices driving a switch toward natural gas” then available net exports and increasing demand for imports has Everything to do with the issue.

    You might take a peruse through the charts at the Energy Export databrowser to get a global sense of who’s producing, who’s consuming and who’s importing/exporting:

    http://mazamascience.com/OilExport

    What becomes apparent is that the amount of oil that makes it to international markets is being squeezed by internal consumption in producing nations. This has a huge impact on the price of oil which, in turn, has a huge impact on demand for relatively cheaper natural gas.

    Having looked at a lot of data it just seems obvious to me.

  6. The transition from one technology to the next has become very popular and the world leaders are talking about it constantly but the implementation of such bold plans is all too often full of short-term solutions that can hardly be successful. Moreover, oil may be the most important resource today but there are other natural resources we are gradually running out of and little attention has been paid to it thus far. I was surprised when I read about certain kinds of natural resources which are not so well known but whose depletion would pose a serious problem for some industry sectors especially for the world of information technology. I am really concerned about whether the scientists will be able to find an effective solution to this problem other than the devastation of one of Earth’s most valuable natural resources – the ocean as suggested in the article.

  7. Discussions about the date of the global peak are a distraction from the more immediate concern that the supply demand situation has reached a point where oil is too expensive to allow for robust economic growth in the major importing countries. The supply of oil may have grown 5% since 2006 but the number of vehicles in the world has grown more.

    The oil price will probably collapse for a a few months following the next big economic contraction but it will bounce right up at the first sign of recovery. Just like a central bank putting up interest rates when things heat up and lowering them in a recession.

    Its not mad max but it is the end of 3% growth

    And as another poster mentioned there are several other resource depletion and environmental issues that will combine to put a damper on economic growth.

    This is a fact most people would rather not face and often get very hostile about.

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