The most dangerous form of Peak Oil

Summary: Robert Hirsch describes another form of Peak Oil: political peaking.  Perhaps the Middle Eastern nations can produce more oil to meet the world’s growing thirst — but will they?  Is it in their interest to do so?  Also, the focus of doomsters on shockwaves — instantaneous and large production cuts — ignores the more likely forms of slower political and geological peaking.   Ending on a more optimistic note, history does give us some grounds for optimism.

Robert Hirsch, one of the world’s top energy experts, has an important article in the February issue of Energy Policy magazine, “Mitigation of maximum world oil production: Shortage scenarios.” As usual with his work, it offers a mixture of new insights and careful analysis seldom found in Peak Oil research — on either side of the debate. I strongly recommend reading it. Unfortunately Energy Policy is subscription only. Here is a brief review of his analysis. Here are slides to an earlier presentation on this topic by Hirsch at the ASPO-USA conference in October 2007.

Political Peaking

Hirsch introduces an important concept which he (and many others) has long discussed, but only now is formally described: political peaking, an extreme form of resource nationalism.

A few nations have the bulk of the world’s remaining conventional oil reserves. There large sources of unconventional liquid fuels: heavy oil, deep-sea, polar, bitumen (oil sands), kerogen (oil shale), coal (for coal to liquids conversion). However, these have high extraction costs — both in terms of initial capital requirements and operating costs — which create operational limits on their production flows.

The output of the few nations with large conventional reserves will become more important as production declines everywhere else. This result appears in all forecasts (e.g., EIA, EIA, energy consulting firms). Optimists and pessimists debate how much oil these nations hold, and how long they can meet the world’s growing thirst for liquid fuels. Hirsch turns the question around. Perhaps they can increase production, providing cheap and ample supplies. But will they? What best meets their long-term needs?

Policy experts have long advised conservation, seeking to cap consumption. Political peaking means that oil exporters choose to conserve their reserves — a cap on supplies.

The oil-rich peoples of the Middle East long believed their oil reserves to be unlimited. During the past decade they slowly realized their error, the “Bedouin to Bedouin over five generations scenario.”  This insight changed the world.  Consider their choice: after pumping enough oil to meet expenses, is it better to pump more and invest the surplus – or leave it in the ground for future generations?  The latter looks like the superior bet, given the inevitable peaking of oil and the paucity of potential substitutes over the next few generations.

  1. No risk of foreign investments being expropriated.
  2. No danger of losing money from instability of financial markets or poor investment decisions.
  3. No way foreign bankers and brokers can siphon the money into their own pockets.
  4. Equal or even superior ability to grow in value.

It is a tribute to our lack of energy research and planning that this scenario is both likely and receives near-zero attention from our public policy experts.

Update:  It is not a theory any more.  See The world changed last week, with no headlines to mark the news.

Emergency Oil Shocks

Some points in this article seem more debatable. Hirsch opens with a commonplace among of Peak Oil literature, quoting from the Oil Shockwave study: “It only requires a relatively small amount of oil to be taken out of the system to have huge economic and security implications. That might be true of an instantaneous shock, such as the “emergency oil supply disruptions” studied in the “Shockwave” scenario.

The paradigm here is 1973, when Arab oil exporters cut their oil production by 25% (see the Wikipedia article). Oil prices quadrupled; US consumption dropped 6%. Along with other events, this resulted in a 3% decrease in US GDP, a severe recession.

However these shocks do not represent the only possible forms of Peaking, despite the often myopic focus on dramatic scenarios. Rate of change is a critical factor in any economics analysis. Both political and geological peaking occurs slowly compared with political events such as the 1973 embargo, mining the Straits of Hormuz, or bombing the Saudi oil fields. These other forms of peaking allow time for the “invisible hand” to work its magic, allowing adaption to a plateau in the growth of liquid fuel supplies.

History provides some grounds for optimism

Economies adapt, given time. “Peakists” (doomsters discussing Peak Oil) seldom mention the 1979 – 1993 period. Oil prices rose from $1.80 in 1970 to $36.83 in 1980 (Arabian Light oil price, as posted at Ras Tanura). Reacting to that, global oil consumption peaked in 1979 at 66,048 million barrels/day, then dropped by 14% through 1983 — reaching the 1979 peak again only after 14 years, in 1993 (see the BP Statistical Review for details).

During that period the global economy increased at roughly 3%, slightly below the post-WWII average (using IMF data). A fourteen percent decline in consumption! That is a far larger drop than in the post-peak scenarios many Peakists (not Hirsch) predict will end civilization as we know it.

Absract of the Hirsch article

Energy Policy, Volume 36, Issue 2, February 2008, Pages 881-889 (doi:10.1016/j.enpol.2007.11.009)

A framework is developed for planning the mitigation of the oil shortages that will be caused by world oil production reaching a maximum and going into decline. To estimate potential economic impacts, a reasonable relationship between percent decline in world oil supply and percent decline in world GDP was determined to be roughly 1:1.

As a limiting case for decline rates, giant fields were examined. Actual oil production from Europe and North America indicated significant periods of relatively flat oil production (plateaus). However, before entering its plateau period, North American oil production went through a sharp peak and steep decline. Examination of a number of future world oil production forecasts showed multi-year rollover/roll-down periods, which represent pseudoplateaus. Consideration of resource nationalism posits an Oil Exporter Withholding Scenario, which could potentially overwhelm all other considerations.

Three scenarios for mitigation planning resulted from this analysis:

  1. A Best Case, where maximum world oil production is followed by a multi-year plateau before the onset of a monotonic decline rate of 2-5% per year;
  2. A Middling Case, where world oil production reaches a maximum, after which it drops into a long-term, 2-5% monotonic annual decline; and finally
  3. A Worst Case, where the sharp peak of the Middling Case is degraded by oil exporter withholding, leading to world oil shortages growing potentially more rapidly than 2-5% per year, creating the most dire world economic impacts.

Please share your comments by posting below (brief and relevant, please), or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information about Peak Oil

  1. When will global oil production peak? Here is the answer! (1 November 2008)
  2. The world changed last week, with no headlines to mark the news   (25 April 2008)
  3. Peak Oil Doomsters debunked, end of civilization called off  (8 May 2008)

Here is an archive of my articles about Peak Oil.

Here are other resources about Peak Oil.

11 thoughts on “The most dangerous form of Peak Oil

  1. Hirsch writes:”At present, the impending maximum of world oil production is an abstraction to most people and governments, since there is little to signal the onset of such a peak, and there are many disbelievers in peak oil. At some future date, that abstraction will become reality, due to some trigger event that leads to world oil shortages and new large increases in oil prices. Such an event would necessarily have to be of long enough duration that its impacts could not be ignored, e.g., a brief terrorist incident would not suffice.”

    If alternative energy is very, very good, this won’t happen at all. The 99% probability is that alternative energy won’t be very, very good.

    However it is possible that the planet will avoid this long period when the abstraction becomes concrete. A lot depends on how well nanotech and MEMS based conservation measures turn out.

  2. “Peakists” (doomsters discussing Peak Oil) seldom mention the 1979 – 1993 period.

    An excellent point that is not made nearly enough. On a similar note, I have yet to see a peak oil model that incorporates any feedback between price and demand (or long-term investment, for that matter).

    Amory Lovins provides a good discussion of the response to the 1970s oil shocks.
    * Video: “Amory Lovins: We must win the oil endgame
    * “Winning the Oil Endgame“, Rocky Mountain Institute (free PDF of the book).
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    Fabius Maximus: I agree. In fact, I have seen no econometric modeling of Peak Oil — other than “shockwave” (sudden geopolitical events). Any of the giant global macroeconomic models could run simulations of various scenarios which, while not definitive, would tell us much more than the inspired guesswork we now rely on.

  3. Also, a nit I have to pick. You say that “global oil production peaked in 1979” which is true if one equates a peak with a local maximum. Most peak oil material I read, however, implies that a “peak” corresponds to a global maximum, by which definition 1979 was not a peak. The distinction matters, yet I rarely see it made.
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    Fabius Maximus replys: I do not understand your point. The BP data is for global production. It was a peak in production (but of course not THE peak).

  4. Let me clarify. I was using mathematical terminology. A “local maximum” of a function loosely corresponds to a point where it reaches a maximum value over some local neighborhood [in precise terms, a local maximum is a point at which the function’s first derivative is zero and its second derivative is negative]. In other words, what you call “a peak.”

    A “global maximum” is the largest value a function takes on over a given domain. In other words, what you call “THE peak.”
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    Fabius Maximus replies: Every day one learns something new! Thanks for the clarification.
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    We may see another “local maximum” if real global economic growth slows much below 2% in the next year AND high prices stimulate substantial changes in energy use (demand destruction and increased efficiency). Then another one in a few years later, as demand catches up with the supply growth expected for 2008 – 2010. After that the forecasts are lost in the fog…

  5. I’m part of the backstop technology theory crowd.

    I finished university as economist and believe that the economies will adapt – and that expectations & limitations of the mechanical engineering industry will be the key to how fast the economies adapt. It’s actually quite similar to warfare – mankind is great at adaption under pressure.

    We will probably pay a lot for our fuel in 2020 (today, a German pays twice as much than a U.S.American due to taxes), but we will have enough fuel.
    Reasons;
    a) improving energy efficiency
    b) partial avoiding of fuel-consuming activity due to cost
    c) Coal-to-Liquids (especially in the PR China)
    d) the PR China will have its economic downturn eventually
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    Fabius Maximus replies:
    “will be the key to how fast the economies adapt”
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    Of course the world economy will adapt. The question is how painful will the adaption process be? It is not magic, so that we need not prepare for the inevitable peaking.
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    This was the subject of the Mitigations study by Robert Hirsch et al. This DOE study shows that energy technologies (e.g., efficiency, CTL) have long lead times; it takes decades for rollout to the extent that they have substantial macroeconomic effects. Peaking, geological or political, can take place in a few years.
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    A slowdown in China would have an impact, but real global GDP growth seldom slows below 2% (the point at which oil demand growth is aprox zero). And only for a year or two, in the post-WWII era.

  6. I’ve made graphs from BP’s Statistical Review of World Energy 2007, you can find them here & here. You can see that the “local maximum” of 1979 coincided with a spike in prices (graph 2). All graphs are free.

  7. In a period of less than ten years, Britain and Indonesia became net importers after some years of being net exporters. The number of exporting countries is shrinking. Mexico will likely become an importer in the next five to ten years. The United States used to export oil and stopped 25 years before its production peaked. The issues is how much time will we have to develop viable alternatives before many nations compete for a limited supply of exported oil.

    Shale and tar sands require huge amounts of energy and water to produce liquid fuels and there are major difficulties in increasing production.

    The assumption that the “invisible hand will work its magic” is not a plan. Markets forces are reactions to reinforcement contingencies and do force change, but not necessarily in a timely way. Mitigating against peak oil will require planning which ought to have started in 1979, but did not. We can reasonably predict that prices for liquid energy will increase overall and not decrease over the forseeable future.

    If there are major advances in technology which provide viable alternatives which mitigate against peak oil, I will be delighted. However, this is not be counted upon when collectively what we need a bird in the hand. Given what we know now about the utility of petroleum for fuel, manufacturing, and agriculture, we currently have no scalable energy dense alternatives.

    In the last few years, worldwide production has been flat to slightly increasing, booming economies in India and China are increasing demand, and petroleum exports are declining in all but a few countries. The evidence of a near term peak. If the Saudis have more capacity, a peak can be forestalled for a few years or a plateau may occur. Increasing demand against declining or steady supply will cause price increases.

    Alan Drake, contributor to the Oil Drum website and Light Rail Now, advocates switching long-distance freight to rail and developing communities which encourage walking, cycling and transit. Many others have plans to mitigate against peak oil, but any plan requires international cooperation, investment and forethought. I do not necessarily subscribe to the idea that all is lost or that civilization will stumble, crumble and drown. However, the longer we do nothing, plan nothing or plan stupidly, the more likely disaster scenarios become. We need a better understanding of the full scope of the problem as it is occurring in the backdrop of climate change, population growth and other resource depletion (fresh water, ocean fisheries).

  8. The Article says:

    “Peakists” (doomsters discussing Peak Oil) seldom mention the 1979 – 1993 period. Oil prices rose from $1.80 in 1970 to $36.83 in 1980 (Arabian Light oil price, as posted at Ras Tanura). Reacting to that, global oil consumption peaked in 1979 at 66,048 million barrels/day, then dropped by 14% through 1983 — reaching the 1979 peak again only after 14 years, in 1993 (see the BP Statistical Review for details).

    During that period the global economy increased at roughly 3%, slightly below the post-WWII average (using IMF data). A fourteen percent decline in consumption! That is a far larger drop than in the post-peak scenarios many Peakists (not Hirsch) predict will end civilization as we know it.

    — The thing is that in 1979, oil was used extremely inefficiently, for exaple in electric power plants. That was very easy and quick to replace by coal plants. Today, oil is still used a lot for domestic heating. This one can be replaced too in a quite cost-fficient way by better insulation and renewable technology, but will take much more time – perhaps 15 years. Next, people who have the bucks certinly will buy electrical cars for local-area transport once the 12000 dollars of increased costs pay out. But oil products for heavy transportation, trucks and ships cannot be replaced anytime soon. It takes a lot of time and money to build electrical railway lines and I haven’t seen yet any battery ship. And this is the danger.

  9. Oil products for heavy transport, trucks and ships cannot be replaced anytime soon.

    Ships could be nuclear powered. If you don’t like the security implications, they could be wind powered (i.e. sails) for slow moving freight or else hydrogen fuel cell powered (iceland recently completed a trial of fuel cell powered tugs).

    As for heavy 18 wheeler 20 ton trucks, well maybe not, but Smith Electric Vehicles already have 13 ton 14 foot vehicles with a 150 mile range and a top speed of 60 mph. These work very well in hub and spoke delivery systems.

    As for electric rail, well yes it takes time and money. How much money are we spending to fund the current oil infrastructure annually and to keep secure our access to foreign oil fields? Do the calculation and the costs no longer seem so huge.
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    Fabius Maximus replies: All true. This is discussed at Peak Oil Doomsters debunked, end of civilization called off (8 May 2008), and in detail at the website Peak Oil Debunked.

    The danger is the transitional period. Economic impacts are large a function of their rate of change. If we have a long enough warning of geological peak oil (unlikely) or a long plateau (i.e., 10 years, possible), then we have time to adapt without much shock to our economy. A peak like that commonly seen in individual oil fields (i.e., Cantarell, UK North Sea) — sharp with a 6 – 12% annual decline rate — would be catastrophic.

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