Fall from peak oil
One of the most popular theories of the past decade has been “peak oil.” Namely, that the world’s supply of cheap oil was running out and, eventually, oil supplies themselves would start to run down.
To some degree that is probably right, in the sense that one cent a gallon petroleum, even adjusted for inflation, won’t be seen this millennia. But adjusted for inflation and exchange rate fluctuation, the truth is oil today is expensive but about the same price as it peaked at during great Arab oil shock of the early 1980s. See table
More to the point, the world is a lot wealthier since then, so it can absorb 80 dollar a barrel oil much better.
Peak oil theorists, notably experts like Colin Campbell, have argued that the supermassive oilfields that drove the world economy for decades were heading for exhaustion. Price would simply be a symptom of the fact it would get increasingly more difficult to extract oil. Matthew Simmons and other peak oil theorists then extrapolated from geological surveys that places like Saudi Arabia would start to exhaust their largest oilfields – and not replace them. He famously placed a bet that oil prices would reach $ 200 a barrel by 2005.
I originally assumed these fellows knew what they were talking about. Campbell’s arguments, which were less about price but simply that the world was exhausting a series of superbig but easy-to-tap oilfields without finding new ones to replace them, were persuasive. Campbell argued oil production would peak in 2010.
Over the years, I began to have some doubts.
The most devastating was from the Saudi oil minister, Ali bin Ibrahim Al-Naimi, whom I had a chance to chat with for several minutes in Riyadh. He said the Simmons analysis was based on numbers that only included Saudi Arabia’s sweet oil reserves – because Riyadh didn’t bother in those days to keep a tally of what was seen as useless sour crude. I subsequently met geologists for various oil companies and even the World Bank who cast a sceptical eye on many of the peak oil theorists’ claim.
But it was watching the past few years that convinced me the argument that the huge mountains of sweet light crude that drove the Western economies two decades ago were running out was sound, but that crude as a whole was doing just fine. The world kept seeing huge oil-exporting countries like Iraq and Iran being knocked out of the market because of war and so on. Prices would spike, but Saudi Arabia or someone else would come in and compensate.
Now, we have a number of studies, the most recent and comprehensive being Leonardo Maugeri’s Oil: The Next Revolution which convincingly argues that far from running out, the world is already well into a major oil boom fed by new technology, the tapping of shale oil and other new sources.
Where once Saudi Arabia alone ruled the roost, the next decade would see the United States, Russia and Iraq all match the desert kingdom in terms of 10 million barrels per day production – with Canada and a few others not far behind. Shale oil may run out one day too, but the fact is that there are huge amounts of the stuff, dwarfing the world’s liquid crude reservoirs hold. It will take some time.
So my conclusions are, yes, the age of cheap sweet light crude is over. The age of medium-priced heavyish crude has begun. But this could go on for a century or so, given how much shale oil there exists and the technological improvements that exist in terms of more efficiently squeezing oil from fields.
Price is still the best way to judge whether a commodity is running short. Oil prices have risen, but once you factor out the geopolitical risks like wars and revolutions that have triggered repeated spikes in the past decade, the truth is prices have risen to a higher plateau since about 2005, but that plateau is more in the region of $ 70 to 80 a barrel. See graphic
Wars and the rest triggered the peaks that followed. But the system will stabilize at this $ 70 to 80 a barrel for quite some time to come, not least because the US is re-emerging as a petroleum giant after decades of import dependency. The rise of US, Canada, Brazil and other Western hemispherical nations will mean countries with minimal political risking taking the helm in global oil production. Iron out the politics and one gets a new age of Plateau Oil. Peak oil will have to wait.