EDITORIAL: Peak oil and politics

Jan. 5, 2009
Peak oil theory is important both to consider and to keep in perspective, especially as government activism regains traction in the world’s largest oil-consuming country.

Peak oil theory is important both to consider and to keep in perspective, especially as government activism regains traction in the world’s largest oil-consuming country. The theory addresses a question of obvious importance: future availability of an energy source with competitively overwhelming form value. It also raises problems.

According to peak oil theory, geologic constraints are closing in on global capacity to produce crude oil. After reaching a postulated peak, which may be imminent, production must decline, perhaps rapidly. The scenario leads some observers to seek governmental responses to a looming if indistinct decline in energy supply.

Intuitive theory

To some extent, peak oil theory is intuitive. The world has an essentially fixed endowment of liquid hydrocarbon; as far as anyone knows, rates of extraction greatly exceed rates of natural oil generation. Intuition says the world someday must exhaust the resource. Before then, production must peak.

Nature, however, isn’t that simple. Oil production is not a uniform activity. Some of it is cheap and based on massive reservoirs that were relatively easy to find. Some of it is more costly, coming from complex reservoirs in difficult environments. Some reservoirs now on production were invisible to exploration early in the Petroleum Age, awaiting refinements of geologic theory and exploratory methods. Those refinements have not ceased.

Serious proponents of peak oil theory understand the evolutionary nature of exploration and production knowledge and skill. They have concluded nevertheless that prowess can’t develop fast enough to prevent calamity. Other, equally serious observers see flaws in this reasoning.

A problem with peak oil theory is its tendency to become a political cause and hence to escape the professional debate it deserves. In politics, peak oil too easily comes to mean—simply, definitively, and incorrectly—resource exhaustion. Policy responses thus become panicky, expensive, and misdirected.

The surge in oil prices that ended last July did not signal the fateful manifestation of geologic limits on oil supply. It did signal, among other things, the world’s latest encounter with limits on the ability to bring oil products to market at rates demanded by consumers. The constraints were on the surface, not underground: production equipment, drilling rigs, pipelines, tankers, refining capacity, equipment, and supplies. Obviously undaunted by thoughts of geologic constraint, producers were adding production capacity when the market reversed and prices plunged.

The prior hard encounter of consumption with supply limits occurred in the mid-1990s after a decade of bottom-bumping oil prices and rising consumption. Pressure subsided when consumption fell after the Asian financial collapse of late 1997. When demand revived, another price-rising squeeze became inevitable.

A comparison of these episodes is useful. Global production of crude oil and lease condensate in 1997 was 65.7 million b/d. When data stabilize for the year just ended, annual average production probably will be about 74 million b/d. In fact, the global trend since the recent low of 53.3 million b/d in 1983, despite occasional down years, is solidly upward. The gains, though, come from increasingly expensive projects. Among casualties of the recent price slump are projects not nearly so prevalent in the 1990s, such as heavy oil expansions in Canada and developments in ultradeep water.

Complex message

The message in all this is not simple. The world will not soon run out of oil, but new oil supplies are increasingly hard to find or expensive to produce—or both. While the timing of peak oil production remains subject to dispute, the faster consumption grows the sooner that landmark must arrive. Furthermore, in times of economic health, oil consumption reaches growth rates that the physical supply system can’t match unless prices climb to levels that prove to be unsustainable. If nothing else, the geologic constraints that inform peak oil theory amplify this effect.

These observations should alarm no one. They define an evolution in the nature of supply within an expanding energy market. They do not require panicky political responses. They do highlight the importance of conservation, nonoil energy forms, and a regulatory environment in which adaptation receives guidance more from economics than from politics.