Everyone I talk to agrees with me that your series is the most significant in our memories. Mr. Hubbert described the occurrence of the oil production peak as a deadline for deciding how we will transition from conventional petroleum. It appears that we have not done a very good job preparing for the deadline. Your series may be the catalyst that is needed.
The emerging issue is one of rate of production, not necessarily quantity of reserves. I submit to those who argue that peak production is not imminent that they ignore two relevant facts:
- The sum of oil field decline (say, 2 million b/d/annum) and economic growth (say, 1.5 million b/d/annum) points to a need for 3.5 million new b/d each year if market forces are to adequately address the problem. This increased production must come from growth in existing fields (only a few petroleum systems qualify) or increasing discoveries (only two major discoveries have been made in the past 25 years). With the opportunities so geographically restricted, and dependent not only on investment, but also on policies, negotiated agreements, regulatory compliance, etc., there is no guarantee that the reserves will be available to the extent required.
- The rate at which new oil production is brought on line—or other energy forms for that matter—is a function of investment attractiveness. Investment attractiveness is decreasing, not increasing, both because of increased production risk and because of uncertain costs pertaining to new sources. In addition to geologic (production) uncertainty, investment decisions must account for the potential for adverse politics, short-sighted government policies, government instability, sabotage, uncertain regulatory costs, and other risks that will give pause to a prudent investor. There is no guarantee that adequate investment capital will be made in time to produce the necessary new oil.
Add to this the fact that the energy cost of producing energy is increasing. Even though the efficiency of converting end-use energy to wealth (GDP) is increasing (appliance efficiency, etc.), the efficiency of producing end-use energy is decreasing. It is not clear which trend is changing faster. But there is, and will continue to be, substantial reduction in production efficiency as we move from conventional light petroleum, to heavy oils, to unconventional oils, to renewables. Any alternative to conventional oil will suffer a lower 1st law efficiency, if for no other reason than there is a preconcentration step required to reach the same process point as we enjoy with crude oil.
Hubbert knew of this thermodynamic reality when he wrote, "When the energy cost of recovering a barrel of oil becomes greater than the energy content of the oil, production will cease no matter what the monetary price may be." [referenced by Ivanhoe, 1982]. The point of no net production is reached when the 1st law efficiency is 0.50, meaning one has invested as much energy in production as is realized. If the overall efficiency (primary energy to GDP path) is declining, as I believe it is, one has to produce even more primary energy just to break even on GDP.
After petroleum, the next most efficient, and large, resources appear to be unconventional tar sands and oil shale. By my calculations the 1st law efficiency of producing end-use fuel from Alberta tar sands is about 0.78, whereas conventional petroleum is about 0.87 (for additional comparison, alcohol from corn is about 0.51 efficient). In spite of higher capital costs, tar sands possess high production certainty and high quality certainty, characteristics that add to their investment attractiveness, and tend to offset their lower 1st law efficiencies. Once mature, I expect US oil shale to show efficiencies and economics similar to Alberta tar sands.
In order to avert an oil peak, or slow the decline, using unconventional resources, investors must believe that the risks for these capital-intensive projects are acceptable. After a 40-year incubation period, the Alberta tar sands appear to be on a major growth curve. Whether the capital can flow to the US oil shale or the Orinoco and Maracaibo basins bitumen in time for these unconventional resources to help fill the impending gap is an open question.
In the end, the ultimate recoverable reserve estimates only serve to determine the area under the Hubbert curve. Rate of investment will determine the shape of the decline curve. In the near term, sustained, higher prices will 'squeeze the sponge' and defer the peak for a period of time. But there comes a point when higher prices stunt economic growth and demand will contract to meet supply, effectively solidifying the peak. When that happens, everyone will know it and it won't be a matter of conjecture anymore.
James W. Bunger
Bunger & Associates Inc.
Salt Lake City, Utah
