The Fed and peak oil  

Lou Grinzo has a post on a paper from the Federal Reserve Bank of Atlanta on "The Peak Oil Debate" (pdf) - The Fed and peak oil. I like the paper's point "Perhaps the peak oil literature would better serve society by being more solution-oriented, focusing on discovering the best way to transition to a world with less conventional oil rather than locking horns about discrepancies in terminology.".

Laurel Graefe, a senior economic researcher working for the Federal Reserve Bank of Atlanta has written an excellent overview of peak oil, “The Peak Oil Debate” [16page, 1.6MB PDF].

I consider this a must-read piece, as much for armchair oil experts as beginners, and as much for who published this as what it contains. This should be very high on your list of “brother-in-law” documents, the ones you can safely recommend to co-workers, neighbors, or, well, your brother in law.

While Graefe has taken a decidedly middle of the road approach, which will be enough all by itself to infuriate the Apocalypticons, she also touches on several points that I would have expected a publication from any part of the Fed to ignore.

I should also mention that if you’re one of those economist-haters who have seizures when I or one of my fellow dismal scientists does the “on the other hand…” thing, then you should probably read this only under the influence of a suitably calming libation. I thought Graefe used this technique properly, in that she highlighted some of the rampant uncertainties involving oil, but at no point did I think she was hiding behind a false question to escape taking a position.

The notable details, in no particular order:

The paper talks about peak oil, by that name, without condescending to prefacing it with “so called” or anything similar. I know this sounds like a triviality, but I think it’s critical to de-demonize the term so that politicians and voters can talk about it without all the baggage that the term has grown over the years.

Graefe tells us on page 1 that “The term ‘peak oil’ is not about running out of oil; oil; we will likely have oil to pump for generations to come. Peak oil refers instead to the inevitable point at which the world’s energy output can no longer increase, and production begins to level off or decline.”

She gives the reader an excellent overview of the kinds of oil we use–conventional vs. unconventional, proved vs. probable vs. possible reserves, deep sea reserves, etc.–and never strays far from two critical details, the cost and the role of technological advancement in extracting various kinds of oil.

She mentions on page 7 what I consider the key detail in our run-up to peak oil:

“Still, despite their drawbacks, nonconventional resources will likely play an increasingly important marginal supply role in the future as reserves that are easier and cheaper to produce become depleted.” This is the mechanism that (1) will impact human beings and (2) give us the needed incentives to transition away from oil, both via increased prices. The view, sometimes implied quite subtly in online conversations, is that we’re going to hit a wall at full speed when we reach the peak. That characterization is as wrong as it is cartoonish.

Graefe also talks candidly about Matt Simmons’ number one issue (and references his work in a footnote), the lack of transparency in oil reserve numbers.

In talking about oil prices in 2008, she says:

However, the price spike also had an upside: Consumers began to drive less and conserve more, while businesses and producers set out ambitious plans to invest in energy-saving technology and upgrade outdated equipment. Alternative (both nonconventional and renewable) sources of energy, which historically had been price prohibitive, emerged as attractive substitutes to $145 per barrel oil and gasoline above $4 a gallon. World oil demand plummeted as record prices and a worldwide economic slowdown forced consumers to cut back on their energy use. But just as talk of a new green era was entering the mainstream, crude prices retreated as quickly as they had come.

I found this notable simply because of the explicit comment that driving less and conserving more were positive developments. This is a mindset that can only help us in the coming years.

The last three grafs of the paper deserves quotation in full (emphasis added):

The supply of energy as we have known it is in the process of transition. Today’s “easy” conventional oil that the world relies upon as a primary energy source is being depleted, and, regardless of the exact timing of peak oil production—be it this year or fifty years down the road— the world faces the challenge of adapting to a new model of energy supply. Although the peak oil literature tends to concentrate heavily on the scenarios of peaking world oil production, the true underlying issue is a fear that the transition from conventional oil to substitutes will be expensive and chaotic, leaving insufficient time for supply substitution and adaptation.

This adaptation process—which involves using more renewable resources and conservation and developing new technology and processes to better access hydrocarbon deposits and more efficiently extract and refine nonconventional sources—has already begun. But the road to the future energy balance—one with dwindling amounts of conventional oil—is far from mapped out.

It is possible that the world’s vast endowments of hydrocarbon resources will be heavily relied upon to answer this growing call for substitutes for the conventional oil supply. However, there is also potential for an energy future largely diversified away from hydrocarbon use. Most likely, future energy sources will be a combination of the two. Perhaps the peak oil literature would better serve society by being more solution-oriented, focusing on discovering the best way to transition to a world with less conventional oil rather than locking horns about discrepancies in terminology.

Do I have to say how delighted I am to see this emphasis on the timing of the transition and her rebuke of the more obsessed members of the peak oil community? I didn’t think so.

To be sure, I think there are some problems, or at a minimum, things I would have preferred to see done differently in this paper.

No mention of Chris Skrebowski’s bottom-up analysis of world oil supply? Given his methodology and background, not to mention his 2011 prediction, I think this stands out as a conspicuous omission.

It’s “Fatih Birol”, not “Faith Birol” (page 12). Death to spellcheckers!

My biggest concern is that the overall paper is so controlled in tone that a newcomer to the field who hasn’t read Simmons, Skrebowski, Aleklett, or any of the other rational people writing about peak oil could jump to the conclusion that, “Nobody knows what’s going to happen, so I’m not going to change anything or worry about it. Things will work themselves out.” That’s precisely the mindset that will be most damaging, since there is still quite a lot people can do individually and through their influence over concentrations of power (via their vote and spending patterns) before they’re forced to take action by much higher oil prices in just a few years.