Peak Oil - Now or Later? A Response to Daniel Yergin  

Daniel Yergin's "no peak for 20 years" piece in the WSJ generated quite a bit of comment last week - here's a brief selection of posts.

I'll kick off with The Oil Drum - Peak Oil - Now or Later? A Response to Daniel Yergin.

Over the years there has been significant convergence between the peak oil and business-as-usual camps, each hopefully learning from the other. Yergin, whilst attempting to debunk peak oil, appears to have been converted to a late peakist. I can certainly relate to many of the concepts described by Yergin - price influencing supply and demand, technology, innovation and new plays etc - but wonder when these are going to result in new production capacity (supply) that exceeds annual declines?

The stakes are high. Should policy makers listen to Pulitzer Prize winning historians? Or should they listen to geologists and a growing band of economists who can see the dependency of economic growth upon increasing supplies of cheap energy that quite simply do not appear to exist? Most important of all, will the WSJ publish a modified view of the oil world than that presented by Daniel Yergin?

James Hamilton at Econbrowser seems to have received the most attention - More thoughts on peak oil.

In Saturday's Wall Street Journal, Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, gave his explanation of what's wrong with peak oil. Here's why I don't find his analysis altogether convincing.

Yergin does not offer a statement of exactly what he means by "peak oil", though his essay refers to it as a "fear" and a "specter". Let me therefore begin my remarks with a clarification of exactly what I intend to discuss. I propose the following three propositions as the core claims that need to be evaluated:

1. The annual flow rate of oil production from a given reservoir eventually reaches a maximum, after which it declines.
2. The annual flow rate of total global oil production will eventually have to decrease as a necessary consequence of (1).
3. This peak in global production will be reached relatively soon.

Of these statements, I honestly don't understand how a reasonable person could dispute (1). You could almost take it as tautological, and furthermore point to many, many examples of fields that passed their peak production long ago. I likewise see neither a conceptual nor an empirical basis for challenging (2). Thus it seems to me that the relevant debate is whether proposition (3) has any merit, and exactly what one means by "soon." That question may or may not be what Yergin was intending to address with his essay. But since for me it is the core question, I would like to comment here on the implications of what Yergin wrote for what I perceive to be the main question of interest. ...

Even in the absence of these facts, there's a real problem with Yergin's line of argument for the question at hand, and it troubles me because I have seen the same argument raised almost every time someone takes the skeptic's position on the question of peak oil. Suppose I was trying to convince you that you are a mortal being, and your counterargument was, "but that's what you said in 2005, and I didn't die then! You said it again in 2007 and 2009, and each time you were wrong. Why should I believe you this time?"

Perhaps acknowledging one's own mortality is a similar proposition to embracing the possibility that global oil production need not continue to rise forever.

In any case, I was not among those who claimed that the peak would arrive by Thanksgiving 2005, nor 2007, nor 2011. But I am among those who did claim, and still believe, that the slow rate of increase in annual oil production over the last 5 years has caused significant economic problems for countries like the United States.

Moreover, if having been wrong in the past were a valid reason to disregard everything someone says, it might be wise to ponder these words that Daniel Yergin wrote in 2005:

There will be a large, unprecedented buildup of oil supply in the next few years. Between 2004 and 2010, capacity to produce oil (not actual production) could grow by 16 million barrels a day -- from 85 million barrels per day to 101 million barrels a day -- a 20 percent increase. Such growth over the next few years would relieve the current pressure on supply and demand.

Michael Levi has some commentary at the CFR's blog - Peak Oil and Faith Based Energy Debates.

As for me, I find these sorts of muddled, often faith based dustups utterly exasperating. Peak oil types tend to assume that stagnant global production over the past half decade is, in itself, evidence that oil production is headed for decline, when in reality, it doesn’t predict anything by itself. (They also tend to throw in some Hubbert peak theory, but that doesn’t really work once you pay attention to economics.) They also tend to assume that any decline will be economically disastrous, when there’s actually very little analysis of what it would really imply. On the other side, those who are convinced that peak oil is nonsense tend too often to resort to a similar sort of slippery logic: people predicted peaks in the past, but they were wrong; ergo, they are wrong this time too. Peak oil proponents didn’t realize that innovation would deliver more oil in the past; therefore, it will also deliver more oil in the future. Peak oil opponents also seem to claim that since the peak oilers have mangled their economics, the opposite of whatever they predict is what will actually happen. Not exactly sound logic.

Is there a way out of this morass? Let me try. There are three different debates being conflated here. The first is over whether geological limits are bringing the world to a point where global production must soon start to steadily decline. The second is over whether political decisions will lead global production to soon start steadily declining. The third is over what the consequences will be if either of these things actually happen.

And finally, John Daly has a dissection of Yergin's piece at Foreign policy Journal - Daniel Yergin and Peak Oil: Prophet or Mere Historian?.

The essay will doubtless have widespread influence amongst prosperous The Wall Street Journal readers, but in his glib dismissal of “peak oil” theory advocates, Yergin glosses or ignores a number of issues fundamental to the larger picture, for whatever reason, and these oversights should be considered in any evaluation of the piece and the peak oil “specter.”

Yergin notes, “Just in the years 2007 to 2009, for every barrel of oil produced in the world, 1.6 barrels of new reserves were added.” But this fails to take into account the following points.

First is that for oil producing nations, reserves are like money in the bank, and inflated reserve figures are common. Even with the newest technology, oil reserve figures remain at best “guesstimates” and should not be taken as hard and fast figures.

Secondly, while the Middle East for the foreseeable future will remain the world’s top producing area, it is unhappily also one of the most politically unstable regions of the world. The “Arab Spring’s” impact is still playing out, much less the potential impact of Palestine’s incipient bid at the United Nation’s for recognition, both of which could yet still throw a major spanner in the works.

To recap briefly:

Saudi Arabia, the world’s first or second-largest producer, vying with the Russian Federation for top position, is not immune from either of the two aforementioned effects. Saudi Arabia does not allow foreign oil companies concessions and has adopted a strict conservation policy, so don’t expect to see a massive rise in production there anytime soon. As for Palestine’s impact, last week former head of Saudi Arabian intelligence and ex-ambassador to Washington, Prince Turki al-Faisal, in an essay in the New York Times warned that an American veto of Palestinian U.N. membership would end the “special relationship” between the two countries, and make the US “toxic” in the Arab world.

As for Iraq, eight years after the U.S.-led invasion, holder of massive amounts of untapped reserves, the country remains mired in a low-grade civil war and unresolved political issues between its oil-rich northern Kurdish region and Baghdad. Further east, Iran is most unlikely to boost production significantly anytime soon because of U.S. sanctions imposed in 1979.

Libya remains the wild card, with only 25 percent of the country’s oil potential explored, but it has been wracked by six months of civil unrest, and the irredentist cadre of Gaddafi supporters could easily target the country’s oil infrastructure in the future.

In the Western Hemisphere, OPEC recently announced that Venezuela’s potential reserves could top those of Saudi Arabia, but the deteriorating relations between Caracas and Washington make an increase here unlikely anytime soon.

Many optimists pin their hopes on increased offshore production, from Brazil through Western Africa, the Mediterranean and the Caspian to the South China Sea, but these regions’ output will suffer from the twin curses of both greatly increased “lifting costs”, in the billions, as well as political instability. West Africa is synonymous with corruption and civil war; Lebanon, the Republic of Cyprus, Israel, and Turkey are sparring over eastern Mediterranean hydrocarbons; two decades after the collapse of the USSR, Azerbaijan, Iran, Kazakhstan, the Russian Federation, and Turkmenistan have yet to reach a definitive agreement on the division of the Caspian’s offshore waters, and tension is rising markedly in the South China Sea, where China, the Philippines, Taiwan, Vietnam, Malaysia, and Brunei are all pursuing contesting claims.

Of the aforementioned areas, only Brazil has uncontested national sovereignty claims over its offshore deposits, and the government is sufficiently concerned about their security that it is considering building a nuclear submarine to patrol its offshore oil platforms. As for the rest, it is difficult to see how the nations involved will be able to attract large-scale investment into potential conflict zones.

Furthermore, quite aside from political wrangles, offshore drilling is both extremely expensive and comes with increased environmental risks.

Interestingly, the word “environment” appears only once in Yergin’s essay, in the sentence, “Environmental and climate policies can alter the timing and scale of development, as can geopolitics and politics within oil-producing countries.”

Given that the majority of the future’s oil production increase will come from offshore developments, the term should have been given greater prominence.