Tuesday, January 13, 2009

Not-So-Peak Oil

There is an interesting theory floating around proposed a while back by a guy named King Hubbert. It's called Hubbert peak oil, or as we like to call it now in short, peak oil.

Peak oil is a scientific method for predicting the point of maximum oil production of a given area. The idea is relatively stable - oil production in a given area will continue to rise with increased drilling activity over a given time period until it hits a certain limit. At the point where this limit is reached the production of oil from a given area will then continue to decline even with an increase in oil drilling activity. There is historical president proving this theory as well - Hubbert was able to predict the production peak of the United States between 1965 and 1970.

History has shown his theory to be true so it was only natural that many smart people began to set out on a bit of a quest to figure out just when the Earth would reach peak oil.

There was one small hitch though - Hubbert created the first peak oil models in the 1950's. Oil production has come a long way in the 50+ years since. We can extract oil effectively from tar sands for instance now, and off shore oil drilling as really caught on with huge finds happening off the coast of Newfoundland and many other places in recent history. (The oil finds in Newfoundland are so huge that Newfoundland is now giving money to the other provinces in Canada as opposed to taking cash. It's what we call a "have" Provence.)

So these new finds have thrown the whole peak oil thing a bit of a curve ball, but nonetheless the smart people pressed on and before long, they had some predictions. It was looking for a while like the pessimistic ones would be true. In early 2008, we had triple digit prices for oil however current oil prices are much, much lower(at the time of this post, they are under $40/barrel)

So what happened? As it turns out it wasn't peak oil, rather it was good old fashion supply and demand. The global economy was growing at a pace that greatly exceeded the price of oil production. Sure there were other factors along the way that contributed to the rise - 6 pipelines being attacked in Mexico, OPEC at one point having lower than expected output ect. But overall, the main factor that ultimately drove the price of the oil through the roof was a global boom that sent speculators crazy, thus giving oil it's incredibly high price.

So this is the part where I admit that for now at least, I was wrong. I predicted that the price of oil would continue to rise, and that we would see the introduction of better alternate fuel sources as a result. We're still seeing those alternate fuel sources come into play, but without the economic motivator of high fuel prices, sales of alternate energy sources will likely stay flat.

The economy is great at adapting to market unfriendly conditions. If we see 300 or 400 dollar per barrel oil, many new technologies will become vary attractive. When they reach sufficient market penetration they will become much cheaper, effectively limiting our need for oil, thus dropping the price of oil.

I think peak oil is real - we will eventually see a point where global the growth of the economy outstrips the demand and does so in a more long term fashion. When that happens, more ways of powering transportation will emerge, effectively dropping the price of oil thus keeping it at a realistic level. There are a lot of doom-and-gloom predictions about how our reliance on oil will end (often ending in the fall of the western world), but I think all of these underestimate the resilience of humanity, and it's ability to adapt to rapidly changing conditions.