With oil prices at record levels, the perennial related problems of "running out of oil" and the reality of the "oil weapon" are in the news again.
The real oil problem goes back to the fact that oil discoveries took place in the wrong sequence. In the best of all worlds, the lowest-cost Middle East oil should have been exploited first before high-cost sources were tackled. But of course, the existence of sources only becomes known through exploration—and this has not been done in any systematic way. As a matter of politics, high-cost domestic US oil had to be protected in two ways: through a quota-based, import-control program and through production restrictions on domestic wells by quotas set by state agencies, the major one being the Texas Railroad Commission. This system worked, more or less, until about 1970 and kept the US price from collapsing, at around $2/bbl.
Once US wells ran out of spare capacity, however, Middle East nations began to take over the concessions held by multinational oil companies and were able to raise prices and appropriate the profits. The world price rose rapidly from about $3 to $12/bbl; inept meddling in negotiations by the US State Department, plus the so-called Arab oil embargo, merely speeded up the inevitable price rise.
All of this history has a bearing on the validity of M. King Hubbert's methodology, evidently embraced by many. Around 1956 he predicted the 1970 peak in US production. I consider this "prediction" to be a fluke—and therefore doubt the predictions of an imminent peak in world production put forth by Kenneth Deffeyes, Colin Campbell, etc., using Hubbert's methodology.
I note that in his book "Hubbert's Peak," Deffeyes expects the peak to occur between 2004 and 2008. For what it is worth, the Energy Information Administration, in its December 2004 report, predicts world consumption of oil to rise smoothly from its present 80 million b/d to about 120 million b/d in 2025—and peaking beyond.
Looking at Hubbert's 1970 peak, it is easy to see that if not for the restrictions imposed by the Texas Railroad Commission, domestic oil production would have peaked much earlier. And after 1970, when the Oil Import Quota system ceased to be effective, domestic prices for "old oil" were frozen (by price regulation) while "new oil" had to be developed over time and later was subject to a disincentive "windfall profits tax." In other words, the location of the peak was controlled by regulatory factors and by oil prices, not by geology.
It is worthwhile to examine now the rather simple scheme adopted by Hubbert's disciples. It consists of three steps:
1. Estimate "Total Recoverable Oil" (TCO).
2. Curve-fit this TCO quantity to the area under a Gaussian.
3. Assume symmetry, so that when one half of the TCO has been lifted, you will have reached the production peak.
What's wrong :
TCO is a moving target, even if based on best current geologic information. Its value depends on future exploration and production technology and on future price (which depends on many factors, including the availability of substitutes).
There is no reason why the production curve over time should be a Gaussian. All one can say for sure is that starting with zero production in the 19th century and eventual zero (or near-zero) production in the future, there must be at least one peak somewhere.
There is no a priore reason to expect the production curve to be symmetric. On the contrary, with the existence of "backstops" like the Canadian tar sands and the Orinoco deposits, one would expect a long production tail well out into the future.
Related to the forecast "shortage" of oil is the much-hyped "oil weapon." Here one must distinguish between two rather different cases:
1. A selective embargo (that leaves total world production and price unaffected) is completely ineffective—except perhaps for propaganda purposes. I cite here the "embargo" declared by Arab producers against the US in 1973—or the converse and equally ineffective embargo declared by President Jimmy Carter against Iranian imports during the 1979 hostage crisis.
2. A real supply reduction—whether by war, sabotage, or by an economically irrational decision to shut-in production—will simply raise the world price to all consumers, with the available oil going to the highest bidder. The real hardships will not be inflicted on developed nations (as many assume) but on poor nations that use mostly oil for electric generation, heating, and transportation. The US is blessed with huge coal resources and derives, in addition, about 20% of its electric power from nuclear energy. It is nations like China that stand to lose if oil prices rise.
S. Fred Singer
President
The Science & Environmental Policy Project (SEPP)
Arlington, Va.
