What’s Wrong With Peak Oil? It Ignores Economics

Mark Perry
updated | Author's Website
Daniel Yergin explains in today’s WSJ why “peak oil” is “peak idiocy” (thank to Mike Munger for that one) – its originator completely ignored the important role economics, market forces, prices and technological change:
“The [peak oil] idea owes its inspiration, and indeed its articulation, to a geologist who, though long since passed from the scene, continues to shape the debate, M. King Hubbert. Indeed, his name is inextricably linked to that perspective—immortalized in “Hubbert’s Peak.”
Hubbert was imaginative and innovative,” recalled Peter Rose, who was Hubbert’s boss at the U.S. Geological Survey. But he had “no concept of technological change, economics or how new resource plays evolve. It was a very static view of the world.” Hubbert also assumed that there could be an accurate estimate of ultimately recoverable resources, when in fact it is a constantly moving target.
Hubbert insisted that price didn’t matter. Economics – the forces of supply and demand – were, he maintained, irrelevant to the finite physical cache of oil in the earth. But why would price—with all the messages that it sends to people about allocating resources and developing new technologies—apply in so many other realms but not in oil and gas production? Activity goes up when prices go up; activity goes down when prices go down. Higher prices stimulate innovation and encourage people to figure out ingenious new ways to increase supply.

The idea of “proved reserves” of oil isn’t just a physical concept, accounting for a fixed amount in the “storehouse.” It’s also an economic concept: how much can be recovered at prevailing prices. And it’s a technological concept, because advances in technology take resources that were not physically accessible and turn them into recoverable reserves.

In the oil and gas industry, technologies are constantly being developed to find new resources and to produce more—and more efficiently—from existing fields.  New technologies and approaches continue to unlock new resources. Ghana is on its way to significant oil production, and just a few days ago, a major new discovery was announced off the coast of French Guiana, north of Brazil. As proof for peak oil, its advocates argue that the discovery rate for new oil fields is declining. But this obscures a crucial point: Most of the world’s supply is the result not of discoveries but of additions and extensions in existing fields.

Things don’t stand still in the energy industry. With the passage of time, unconventional sources of oil, in all their variety, become a familiar part of the world’s petroleum supply. They help to explain why the plateau continues to recede into the horizon—and why, on a global view, Hubbert’s Peak is still not in sight.”

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