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Why the Peak in Peak Oil is a Myth

October 29, 2010 | About:
Many of those who have energy investments will no doubt have an opinion on peak oil. For those not familiar with the theory, here is a brief outline of the premises that the peak oil crowd put forward. First, the world has a finite amount of oil and we have consumed approximately 2/5ths of that know resource. Further to this they believe peak oil can be represented as a bell cure, of which once we have reached the maximum petroleum extraction rate we will enter an era of sharp production decline. They also believe that we are getting close to this peak in worldwide production and that even with flat demand the price for crude oil will continue to rise.

Since I typically question conventional wisdom, I often asked myself the following questions? Who says peak oil is a bell curve, and how do we know that we have used 2/5ths of a known resource? These things are spoken as if they are matter of fact. Are we close to the maximum possible production rate? Perhaps I could offer some competing ideas that will rock the boat.



My Only Contribution to Peak Oil is that Peak Oil, as we know it, is a Myth.



My theory is as follows.

My question for you to consider is, at what price will peak oil occur? This may seem like an interesting question to ask but it plays a crucial role in understanding how the future will play out. Now price will obviously play a critical role in the peak oil debate. This is because as the oil (or gas) price increases so does the quantity of recoverable reserves AT THAT PRICE. In other words, as the price goes up, more and more marginal reserves become economic further pushing the peak oil problem into the future. We see this all the time as oil companies can book more or less of their production tail depending on the forecast prices. In many instances, wellbores that have been shut in can be restarted as the oil price increases.

It is as if total worldwide petroleum reserves represent a theoretical pyramid. The top third is conventional resources, the middle third unconventional resources, and the final bottom third is extreme unconventional (like gas hydrates, etc). As the price of oil increases, we move further and further down the pyramid unlocking more and more resources. Now the conventional oil at the top of the pyramid is very easy to access and is economic at very low prices. The unconventional oil, such as the oil sands, represents the next opportunity as it dwarfs conventional resources but more importantly it requires higher prices to profitably extract the resource. The oil sands in Canada represents an unconventional resource that rivals all of the vast oil reserves in Saudi Arabia. Now it took two things to access these resources, technology and price.

Finally we reach the final frontier of extreme unconventional resources such as gas hydrates. Accessing these resources seem completely unrealistic today. We can be sure that some day, after the low hanging conventional fruit has been harvested, we will move further down the pyramid accessing this resources. What will it take to access these resources? Obviously it will require a combination of new technology and prices to justify the extraction.


Another Problem for Rising Oil Prices



Another key problem with rising oil prices is that it increases the viability of competing resources like solar, wind, and nuclear. This will further put a lid on demand for fossil fuels. Back before oil prices ever excliped $40 per barrel, I wrote a paper in university on the viability of wind power. At the time most engineers & scientists believed it would take $75 oil to make it economic. Back then if you would have suggested that oil prices would be $75 in 2008, they would have sent you straight to the mental hospital. It is hard to imagine that only twelve years ago the price of oil averaged $11.91 per barrel for the year.

Obviously we have seen a rise of these competing resources as the price of oil increases. Ethanol production has been rapidly climbing for several years now. Technology and innovation will undoubtedly unlock more and more of these alternative energy sources in the future. A key feature of these competing resources is that many of them are renewable energy sources. Let’s not even discuss nuclear fusion.

The Final Nail in the Peak Oil Coffin



My final argument against the peak oil crowd is as follows. Most known oil pools in western Canada (and the world) typically recover anywhere between 10-40% of the original oil in place (OOIP) under primary and secondary production methods. To reach the high end of that recovery range it takes newer and newer and in some cases tertiary technology (water flooding, CO2 flooding, etc). The problem is that despite our best effort we are still leaving 50-90% of the oil in the ground.

Obviously this represents a huge opportunity for several reasons. First, we already know where the oil is. There is no exploration cost to find the oil. Secondly, the wells are already drilled into the formation. And finally, all we need is some new technologies to recover more and more of these known resources. What will it mankind to develop “New Technology”? Obviously the answer is a higher price of oil. The question is not if, but when we make these discoveries that extend recovery factors to 60-70% of OOIP that we will be unleashing billions and billions of known resources.

Even a 1% increase in recover would mean billions of barrels on pools already discovered. No need to fear, science and technology is working on these tough questions every day, even as you read this (Think THAI, and SAGD)

Summary – Peak Oil or Peak Prices



In summary, we are really still in the early innings of the peak oil ball game. We have done a decent job of exploiting the easy conventional targets. The reader should note that many countries in the world still don’t have a single wellbore within their borders. Conventional drilling still has a way to go. As we continue to drill the conventional resources and we will continue to work our way down the pyramid of energy. Remember the base of the pyramid represents a much larger volume of resources than the top.

As oil prices increase and new technology is discovered we will unleash more and more unconventional resources. The oil sands are one such example. Secondly, alternative energy will also become more and more viable as the oil price rises. Some of these alternatives are already experiencing rapid growth like wind, solar, nuclear, and ethanol. Finally, we already have significant amounts of know oil in the world, all we need is better technology to increase the recovery factors from know resources. This will unleash more and more potential in the future. It is hard to believe our great grandparent rode horses for transportation only 100 years ago. It seems so distant in the past, but Alberta & Saskatchewan just celebrated 100 years as provinces in Canada.

For those who may still question some of these ideas I would ask you to look at the natural gas industry. Natural gas shale, once deemed uneconomic because of it’s tight (non permeable) nature, is the sole reason for the decline in current natural gas prices. All it took was higher gas prices and technology to unleash the vast shale gas reserves.

I know some may not take these ideas seriously, but the boom bust cycle happens again and again. As the old bumper sticker reads, “Please Lord just give us one more oil boom, and this time we won’t screw it up.”




Best Regards,

Kevin

canadianvalueinvesting.blogspot.com

PS. I will try to write up my favorite my favorite energy investment this weekend, but no promises. I will post here and a link at my blog. Stay tuned.


Disclosure: Bullish on natural gas, Neutral on oil.

About the author:

Kevin Graham
I am a Professional Engineer from Canada. I am over the top passionate about value investing and reading. If I could get paid to read annual reports for a living I would gladly switch careers. Feel free to contact me at Kevin4u2(AT)hotmail.com. My value ideas can be found on gurufocus and at my blog canadianvalueinvesting.blogspot.com

Visit Kevin Graham's Website


Rating: 2.2/5 (37 votes)

Comments

spec
Spec - 3 years ago
This is a really stupid article. Peak is not a myth, it is real. It is real merely due to the fact that oil is a finite resource. Imagine if some aliens showed up and offered us a billion dollars for each drop of oil. Sure . . . we'd dig up all the oil and give it to them but at some point there will be a production peak between now and when the last drop of oil is given to them. The same is true if we extract the oil for ourselves at what ever price.

But you are also missing the point . . . the price is what matters. Who cares what the actual date of peak oil . . . if you can't drive your car anymore because gasoline costs $50/gallon, will you really care if we hit peak oil or not? What matters is the price.

Peak oil is just one scenario where the price of oil shoots up. If you want to come up with other theories that cause high prices then knock yourself out. But it is the price that is the problem, not the peak.

Peak will happen no matter what technology you have. Look, the USA has had the best oil extraction technology in the world. But the USA hit peak in 1970 and has gone (mostly) steadily down ever since. Horizontal drilling, CO2 injection, deep water drilling, tar sands . . . nothing has been able reverse the decline in production significantly. The only notable upturn was when Prudhoe bay came online but even that was unable to get us back up to the 1970 level.
paulwitt
Paulwitt - 3 years ago
Plan for the worst, hope for the best.......
Kevin Graham
Kevin Graham - 3 years ago


Hi Spec,

Thanks for the feedback. Please note I did learn some of these ideas from some senior executives from Shell. This is not all pie in the sky.

You may think it is stupid, but I feel you miss the main point of the article. As the oil price increase, society feels constrained and innovation & technology take over. The high prices of 2008 has unleashed huge advancements in electric vehicles. I don't believe the peak oil crowd understands what those high prices have done to fundamentally change the course of history.

The other point is that we will ultimately reach a peak in oil production but it will not be due to to unavailable resources. It will be because of peak prices. We are now at the point where renewable energy is economically viable and this is also a game changer.

The paradigm shift has begun and you either choose to reject it or embrace it, the choice is yours. I can tell from the ratings on this post that it doesn't sit well with those with energy investments.

Psychologists call this egocentric blindness, or a rejection of facts or evidence that condradict our favored beliefs or values. This can only be corrected by searching out facts and evidence that is contrary to our favored beliefs. If I can quote my favorite psychologist, "If you don't find yourself experiencing significant discomfort as use pursue these facts, you should question if you are taking them seriously. If you discover that your traditional beliefs were all correct from the beginning, you probably have moved to a higher level of self-deception."

Good luck,

Kevin

canadianvalueinvesting.blogspot.com
petrostelos
Petrostelos - 3 years ago
I agree that peak oil is a myth. Also, as prices drive up the oil price, the search for better technologies and alternate sources will be in play. But the problem with higher oil prices is that it is not always caused by more demand and less supply, but on the excessive supply of fiat money. When compared to gold, the price of oil remains pretty stable. Thus, alternate energy is still not viable. T. Boone Pickens abandoned windmills for natural gas, because as long as natural gas is cheap, alternate energy remains non-viable. But not only so, all other commodities, particularly those which go into making windmills are also higher, so now windmills still can't compete on a level playing field with real energy. Have you considered the theory of abiotic origins of oil? That pretty much blows a hole in the "finite" view of oil.
Josh Zachariah
Josh Zachariah - 3 years ago
Peak oil has been called several times over the past 100+ years. I would never say it is or it isn't, but we have yet to fully map the fossil fuels that lie under the surface. Even if it were the case that oil production were to peak you need to consider the impact of elevated prices on the consumer. As we saw in 2008 there was a marked curtailment in consumption of gas by the American consumer. Hybrid cars were purchased, teen driving went down and other measures were taken which would were keeping consumption (and eventually prices) in check.

Prices do not rise to infinity as alternatives abound and there are limits to the consumer's budget constraint. Gasoline prices are known to be relatively inelastic* in the short-run, at least for American consumers. This means that the consumer is at the mercy of the elevated price until they can change their behavior. Often this means moving closer to work or taking other measures that generally cannot be undertaken immediately.

The main issue is how fast prices would rise. But I don't believe prices would rise so quick unless there was a major shock to the system as in the 70's with OPEC's halt of trading with the U.S. Those elevated prices we saw in 2008 could only be fleeting as eventually the prices would be too much for consumers and demand would trickle down and with it prices. Prices do not move in secular directions, we should have learned that from the housing boom.

Josh Zachariah

*Inelasticity being a measure of price sensitivity in which for a price increase demand decreases relatively little. Conversely for an elastic good like oranges, which have apples and other fruits as substitutes, the demand will generally go down quick after a price increase.
Josh Zachariah
Josh Zachariah - 3 years ago
Peak oil has been called several times over the past 100+ years. I would never say it is or it isn't, but we have yet to fully map the fossil fuels that lie under the surface. Even if it were the case that oil production were to peak you need to consider the impact of elevated prices on the consumer. As we saw in 2008 there was a marked curtailment in consumption of gas by the American consumer. Hybrid cars were purchased, teen driving went down and other measures were taken which were keeping consumption (and eventually prices) in check.

Prices do not rise to infinity as alternatives abound and there are limits to the consumer's budget constraint. Gasoline prices are known to be relatively inelastic* in the short-run, at least for American consumers. This means that the consumer is at the mercy of the elevated price until they can change their behavior. Often this means moving closer to work or taking other measures that generally cannot be undertaken immediately.

The main issue is how fast prices would rise. But I don't believe prices would rise so quick unless there was a major shock to the system as in the 70's with OPEC's halt of trading with the U.S. Those elevated prices we saw in 2008 could only be fleeting as eventually the prices would be too much for consumers and demand would trickle down and with it prices. Prices do not move in secular directions, we should have learned that from the housing boom.

Josh Zachariah

*Inelasticity being a measure of price sensitivity in which for a price increase demand decreases relatively little. Conversely for an elastic good like oranges, which have apples and other fruits as substitutes, the demand will generally go down quick after a price increase.
spec
Spec - 3 years ago
Oh I completely get it. You just are not good at expressing yourself.

"The other point is that we will ultimately reach a peak in oil production but it will not be due to to unavailable resources. It will be because of peak prices."

So you just contradicted yourself. "Peak Oil" just means that maximum production will be reached and then decline. Geological constraints is one possible reason it may occur. There are many other reasons peak oil may occur. National oil companies may decide they don't want to produce more since it is more valuable for them to keep in the ground. Investment into exploration & drilling may be too slow thus limiting production. We may not be able to scale up oil sands as quickly as we would like. A war may break out thus blocking access to some big oil fields. It doesn't matter which of those causes it, it is still "peak oil". So even you admit that Peak oil is not myth.

At best, we'll find an attractive alternative to oil and then oil will peak because the alternative will be more economic than using oil. Again, that would still be 'peak oil' but that will be the best possible outcome. However, I've spent a lot of time researching the alternative vehicles. Hydrogen is a complete pipe dream. Just read the Joseph Romm material. But electric vehicles are very promising and I'm a huge advocate of electric vehicles. However, they are not competitive with gasoline vehicles at current prices and I don't see them becoming competitive at current prices. Instead, we will see oil continue creeping upward until it finally hits the price where EVs are cost competitive.

I'm not a peak oil doomer that thinks there are going to be riots and collapse. But things are going to become increasingly painful over the next 20 years because oil production is going to struggle to keep up with demand. And thus the price of oil will shoot up in order to ration out the oil to those that can afford it. That will be painful for a of people.

EVs will become competitive eventually. But the days of buying a $15K car and filling up with $3/gallon gasoline are going to be "the good old days" in just a few years. People are going to have to adjust to buying $30K electric cars with 100 mile range. There will be a lot of economic pain between here and there.

Oh, the high prices of oil did NOT unleash advances in electric vehicles . . . hard working materials engineers did. And they've been working on Li-Ions for decades because of cellphones & laptops. The high price of oil just made the car companies realize that they better start building EVs because they are getting close to becoming economically viable. Not because of some miracle breakthrough in the battery technology but because oil has gone up by over 4X in the last 8 years.

AlbertaSunwapta
AlbertaSunwapta - 3 years ago
My thoughts:

- Peak oil is a physical resource reality. (The timing of whether or not we ever reach the peak will be determined by a number of factors.)

- Huge populations are rapidly adopting petro use to power their countries (China, India)

- Oil is used not only in ships, vehicles, planes but also in plastics, fertilizers and other products

- as oil usage progresses and today's know reserves are depleted, we can expect much more price volatility (as price forecasting hits greater and greater extremes with new discoveries or the lack of new discoveries - since oil discoveries and the bringing of known reserves online aren't evenly distributed events)

- Some reasonably cheap alternatives already exist and so as oil prices rise some but not all alternative uses will become employed (they will likely compete with other products though (ie ethanol, strategic metals used in nuclear plants, solar etc using up copper for more and more distribution wires etc)

- some important uses may not be able to be suitably replaced (fertilizers possibly)

- in the future some wealthy populations will be able to afford to maintain the old, conventional, possibly wasteful usage (this may NOT include America due to its financial decline)

- as a readily available resources disappears the alternatives may never be as 'good' as the old resource (imagine clean air disappears - filters can clean it but everyone that can afford one, may have to wear a face mask so quality of life suffers, bluefin tuna disappeared and pig food like lobster got rebranded as a delicacy, the Chestnut tree disappeared and lower quality houses and furniture were built with the alternatives, the passenger pigeon disappeared and farms had to ramp up chicken production at some cost to producing other goods...)

I'll have to research the history of America's Peak Passenger Pigeon Production :-)
Saildog
Saildog - 3 years ago
This article is very light weight - it just trots out the usual economics 101 stuff about price and technology. It has also missed the point entirely because the Peak Oil Hypothesis postulates one thing only: that production of oil is aflow that has already, or will at some point reach a maximum that cannot be exceeded. Note that the reasons this flow cannot be increased are many, but include geology, politics, economics, technology, ageing production infrastructure and a lack of trained personnel. These issues have built in feedback loops that obscure and confuse. From there one can predict a number of consequences:

1. The net energy contribution from oil production to society is already diminishing and will continue to do so.

2. The impact on the global economy is likely to be significant, but uneven, both geographically and in timing. The GFC was at least partly caused by Peak Oil and will continue unless/until oil production (flow) increases to the point where price decreases dramatically (to $30 per barrel of less.

3. Much more than simply our "Happy Motoring" culture will be impacted. Agriculture for instance is heavily hydrocarbon dependent.

4. Price is unlikely to rise significantly from over $100. At around $80, the price of oil acts like on a throttle on the economy preventing it growing faster/further, but encouraging efficiency and reducing oil intensity gradually. Jevons paradox ensures that any increase in efficiency/reduction in intensity is invested in growth, not savings (eg the airline industry).

Thus we will likely "muddle along" with low growth and high unemployment and underemployment. There will continue to be denial and ignorance (like this article) and among our ruling elite. It is unlikely Peak Oil will ever be a central political issue - it is simply too complex for public discourse. Also it is a symptom. The actual problem is over population and that certainly will never be addressed with cognitive action. As resources and the quality of our economy and environment diminishes our reptilian brain will respond as humans always have: with greed and violence.

ApogeePrime
ApogeePrime - 3 years ago
I think you need to read this from the ex-Head of the CIA and ex-US Secretary of Energy.

He recently wrote the foreword for a new book on this subject written by the VP of Exploratory research at Exxon. The co-authors briefed Obama, McCain and Clinton in the last 12 months. I also suggest you read the recent internal discussion at the Pentagon about this.

Sivaram
Sivaram - 3 years ago


I think we need to be clear on what we are discussing. It is pretty much a given that oil will peak at some point. This is no different than how copper will peak at some point; or how iron ore will peak; and so forth. It's a given for non-renewable source. I mean, even automobiles will peak at some point. The question, then, is whether it will peak within the short to medium term (say 5 to 15 years). If the peak will occur 100 years from now, I don't think it really means anything.

In investment circles, the so-called Peak Oil Theory is used to justify oil extraction peaking within a few decades (say 15 to 20 years) and causing prices to skyrocket. If the peak occurs more than 50 years from now, or if the prices don't rise, then it doesn't mean much for investors.

The question I have for all the oil bulls who believe in Peak Oil Theory is: when? When is it going to peak? I remember a few years ago when many prominent Peak Oil Theorists, such as Matthew Simmons, claimed oil was to peak before 2010. Well, we have passed their dates. Now some are claiming it will peak in the next 5 years; some say 10 years; and so on. Without the Peak Oil Theorists picking a point in time--just a rough date--the discussion is completely meaningless.

Secondly, if Peak Oil was so imminent, how come OPEC had to cut production in 2008 to prop up prices? Oil was well on its way to the $20s and $30s--I believe the marginal cost of production is somewhere around there--yet production had to be cut to maintain prices. Does this resemble a peak in oil? I don't think so.

Finally, if Peak Oil will cause prices to rise--admittedly some Peak Oil Theorists don't share this view--why is so-called Big Oil buying back shares and paying out dividends instead of investing in E&P? If oil were to become even more precious than before they would lose nothing by expanding production. Even the hard-to-find, expensive, oil would be highly profitable since the market price would be higher. Yet, even some of the biggest oil companies don't believe in it.

Sivaram
Sivaram - 3 years ago
One thing to note is that Peak Oil Theorists also keep changing their definition. At one point, peak in total oil (all oil types) was supposed to occur. Then they changed it to easy-to-extract oil. Now it seems to be for conventional oil. I mean, if the Peak Oil Theorists keep shifting the definition, which essentially means they were wrong with the date, it doesn't help anyone form an economic or investment opinion on the matter.

As far as I'm concerned, you need to look at the peak in total oil. Simply paying attention to one type is misleading. I mean, just look a the natural gas bulls from a few years ago who got killed because hard-to-extract unconventional natural gas, which was very expensive a few years ago, became really cheap all of a suddden. If conventional oil peaks but unconventional (or some futuristic form) oil doesn't, I wouldn't consider Peak Oil to have materialized.

ApogeePrime
ApogeePrime - 3 years ago
The latest numbers unequivocally show that we have been on a fluctuating plateau for the last six years. This has NEVER happened before. Demand and supply are in a current state of balance. This is happening during the worst recession in 80 years. Meanwhile the price of oil is still at approx $80 a barrel despite the fact that demand is in the toilet. The people who actually know what they are talking about, most of whom are retired and have no vested interest in saying anything one way or the other, are saying that decline will inevitably begin within 2-5 years.
energywonk
Energywonk - 3 years ago
"the only people who believe exponential growth can occur in a world of finite resources are madmen or economists" kenneth deffeyes.

conventional oil has already peaked canadian. i estimate it peaked around 2005. it could probably be pushed to 100mbd but why spend trillions upgrading infrastructure when you know that within a decade you are probably back at 85mbd. production will bump along a plateau due to politics, price and futures manipulation, but at some point it will enter terminal decline. non conventionals can and will make up the difference, but at what price? there is such a thing as ultimate recovery rates (URR) and Energy returned on energy invested (EROEI), which has been declining for around 40 years. and EV's are not even close to being the solution, it is unlikely they will penetrate more than 15% of vehicle fleet without huge technological breakthroughs in the grid and the storage.a very superficial article im afraid. try again.

EVsRoll
EVsRoll - 3 years ago
If you think Peak Oil is a myth fine. Perhaps then you can tell the rest of the world how to get more oil out of a rock. That's right, big surprise, oil comes from rocks not a big hole under the ground. All of the soft, porous and easy rocks like Salt Domes and such are long since empty. Details here: http://www.evsroll.com/Peak_Oil_Myth.html

Once you figure out how to suck the planet's oil rocks dry, then you can criticize the theory of Peak Oil. Until then the rocks rule, and EVs too by the way.

EVsRock!

ranjitkumaru
Ranjitkumaru - 3 years ago
I like the author's point of view about price and production

Firstly if we think peak oil indicates inability to produce more oil after a mentioned period, then it might not hold good as price equation changes the game. If the price of oil rises enough most of us would be looking at geology/technology to find out other sources of producing more oil or producing more oil from the same wells which would increase the production of oil.

If we think peak oil is the peak production of oil that the world will achieve because there is a better alternative and we don't need to increase oil production then it is a real certainity that peak oil might come in the next few years for next few decades.

There are two situations though which would be of interest,

The time taken to produce oil which is quite long (5-10 years) using the current technologies available in the short term. So there is an opportunity for those who know how to exploit the demand/supply game for this commodity as is the case for all the commodities.

Oil shocks/disruptions such as that we had during 1970 where we can have supply restricted by the countries which produce large amounts of oil such as Iran, Russia & Venezuela which can create dire short term scenario's for the world more so in the current situation when we do not have a proper alternative to replace oil.

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