Category — Peak oil (fixity/depletion)

“If resources are not fixed but created, then the nature of the scarcity problem changes dramatically. For the technological means involved in the use of resources determines their creation and therefore the extent of their scarcity. The nature of the scarcity is not outside the process (that is natural), but a condition of it.”

- Tom DeGregori (1987). “Resources Are Not; They Become: An Institutional Theory.” Journal of Economic Issues, p. 1258.

The confounding of physics with economics has plagued a real-world understanding of mineral resource developments. The phenomenon of entropy and the laws of thermodynamics rule in their domain. But there is no economic law analogous to the physical conservation of matter. There is no law of conservation of value; value is continually, routinely created by the market process. And this value creation does not deplete–just the opposite.

This insight reorients the peak-oil debate from pessimism about hypothetical future physical resources to here-and-now concerns over incentives and institutions–or the ability of a free market to create a robust energy future.

Market Entrepreneurship … Mineral ‘Resourceship’

Israel Kirzner in the Austrian-School tradition has emphasized the open-endedness of market entrepreneurship. “Entrepreneurial alertness [is] in principle inexhaustible,” Kirzner has stated, (1) wholly rejecting the notion of a “potential stock of entrepreneurial alertness in a society as some quantity ‘available to be used by society’.” (2) In the vernacular of the oil industry, there are no reservoirs of proved, probable, or speculative quantities for entrepreneurship.

The institutionalist conception of knowledge as the ultimate resource powerfully complements an Austrian theory of resources. Thomas DeGregori has defined resources as “a set of capabilities” (3) and “finite but unbounded” (4). He restated and embellished the “resources are not, they become” thesis of his mentor Erich Zimmermann as follows: [Read more →]

[This is the third and final part in a series on peak-oil theorist/neo-Malthusian Matthew Simmons (1943–2010). Part I by Rob Bradley examined the Simmons's peculiar interpretation of the Club of Rome's 1972 Limits to Growth. Part II by Michael Lynch reviewed the false arguments behind Simmons's peak-oil views.]

Matt Simmons was confident past a fault about the coming decline of world oil output–and record oil prices in the face of growing demand. His 2005 book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, announced that production in Saudi Arabia had peaked or was about to. In his words:

Saudi Arabian oil production is at or very near its peak sustainable volume (if it did not, in fact peak almost 25 years ago), and is likely to go into decline in the very foreseeable future. There is only a small probability that Saudi Arabia will ever deliver the quantities of petroleum that are assigned to it in all the major forecasts of world oil production and consumption.

And more generally:

We’ve run out of good projects. This is not a money issue… If these oil companies had fantastic projects, they’d be out there [developing new fields].

And at the end of the book comes the call for government to conquer the reality of peak oil by engineering an energy transformation for us mortals. Market failure yes, government failure no.

Putting His Money Where His Mouth Is

With his book out, Simmons was in full peak-oil publicity mode. It was at this time when he was contacted by New York Times writer John Tierney, a disciple of the late Julian Simon (1932–1998). A wager emerged as told by Tierney:

Five years ago, Matthew R. Simmons and I bet $5,000. It was a wager about the future of energy supplies — a Malthusian pessimist versus a Cornucopian optimist — and now the day of reckoning is nigh: Jan. 1, 2011.

The bet was occasioned by a cover article in August 2005 in The New York Times Magazine titled “The Breaking Point.” It featured predictions of soaring oil prices from Mr. Simmons, who was a member of the Council on Foreign Relations, the head of a Houston investment bank specializing in the energy industry, and the author of “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.”

I called Mr. Simmons to discuss a bet. To his credit — and unlike some other Malthusians — he was eager to back his predictions with cash. He expected the price of oil, then about $65 a barrel, to more than triple in the next five years, even after adjusting for inflation. He offered to bet $5,000 that the average price of oil over the course of 2010 would be at least $200 a barrel in 2005 dollars. [Read more →]

[This is the second part of a series on peak-oil theorist and neo-Malthusian, the late Matthew Simmons (1943–2010). Yesterday, Robert Bradley examined the Simmons's peculiar interpretation of the Club of Rome's 1972 Limits to Growth.

Part III will look at Simmons's failed bet with different parties that the average price of oil in 2010 would be $200 per barrel or higher.]

The death last year of Matthew Simmons, author of Twilight in the Desert and a well-known peak oil advocate, offers an opportunity to review his work and draw a cautionary lesson.

Punditry

The nature of punditry has changed in the modern age, and for the worst. The original pundits were geographical surveyors in India, mostly natives working for the British, mapping areas where few Europeans dared to go (and from which many failed to return). Their work was extremely useful, highly scientific and precise, and largely unsung, none of which applies to many modern pundits.

Now, it has become normal not only to be a self-proclaimed pundit but a self-proclaimed expert. A successful pundit is one who gains an audience, which can mean they provide insightful commentary, but more commonly they have a point of view which is popular in specific circles or, occasionally, are attractive and/or entertaining.

Of course, it helps pundits that few in the public are capable of judging their backgrounds—which are rarely investigated in any case—making it easy to pass themselves off as knowledgeable in subjects of which they are only moderately familiar. Thus, Joe Romm (one of our favorites!) posts extensively on peak oil, despite the fact that he has no expertise in the area. Having written books on energy, and served in the Department of Energy, he does however carry an aura of ‘expertiness’.

And especially as pundits are not writing for scholarly journals, but rather and books for lay audiences and, in the past few years, blogs, they are under little or no pressure to provide evidence to back up their opinions: citations, data or research that might be checked or validated. Instead, not only does opinion rule the day, it is all too often passed off as fact, and then gains immortality as those who want to believe repeat it endlessly, creating a circle of citations with no true beginning.

Making of an Alarmist

Matt Simmons, an investment banker sporting an MBA from Harvard, was quite successful in his chosen field of endeavor, lending to the oil and gas industry in the Gulf. But Simmons was hardly trained as a researcher, either in the hard or soft sciences. And Simmons certainly had no expertise in reservoir engineering or petroleum geology, although he often made technical arguments (frequently in error). [Read more →]

I am considered a leading critic of peak oil, the belief that oil production has peaked, is peaking, or will peak soon. I am a resource optimist in the Julian Simon tradition and believe that resourceship allows so-called depletable resources to expand, refuting the fixity/depletion mindset.

This said, I am empirically oriented. So let’s study and debate the facts, while remembering the record of peak-oil forecasts from the beginning to the present.

For my optimist/resourceship/expansionist position, I get slammed a good bit, such as by Joe Romm and by Gabriel Rotello at the Huffington Post (but also supported there by Raymond Learsay).  I mostly take the fuss, which is two parts emotionalism to one part intellectual argument.

But when David Hughes of the Post Carbon Institute published a piece calling a New York Times story “inaccurate, misleading and unhelpful ‘journalism’” I thought to add a comment. However, the post was not approved for some reason. While I don’t have the precise wording (it’s lost on the Internet), I will reproduce the comments here as best I’m able in the next several paragraphs.

Hughes remarks that Chinese demand is growing, without explaining why that is different from the demand growth experienced throughout the past century and a half. He also criticized the citations to what he called the “uber-optimist” CERA and a failure to mention other “credible” reports that are more pessimistic (one added comment cited the Hirsch report), but doesn’t note that the National Petroleum Council, the definitive industry voice (though hardly infallible) in its report “The Hard Truth,” examined the peak oil arguments and found them without merit.

The IEA has certainly lowered its long-term oil production forecast, but could this be evidence for a demand response to high prices (which they also predict), rather than an indication that they are more concerned than before about supply? There is also a political element on what oil exploration will be permitted by government.

Finally, Hughes attacks the article’s optimism about shale gas, citing a variety of problems facing the industry, without acknowledging that production is booming, which seems pretty clear evidence that these problems are being overcome.

Other criticisms could have been made, but for a comment on a website, brevity seemed of value. [Read more →]

The peak oil movement, now trying to turn itself into a pro-government-intervention political movement, draws the wrong conclusion by logically progressing from the wrong assumption.

This post revisits this wrong assumption: fixity. From mineral fixity, it is concluded that every act of production and consumption leaves less supply. In this Harold Hotelling world, costs must go up and prices must go up….

But going from the natural science, perfect knowledge, hypothetical world to the real world, just the opposite is true. There is not a fixed supply, known or unknown, from which extractions leave less supply for the future. Costs do not have to go up, and neither do prices.

Try answering this question to see how the peak oilers have it wrong for the business/economic real world. Do we have more or less oil today than when the nation was founded in 1776? Does the world have more or less oil in 2010 than in 1910?

The natural-science answer is that in a physical sense, there is less oil today that then by the amount of extraction. But in a social science sense, we have much more oil today than in 1776 or in 1910 because today’s supply is inventoried and produced from known reservoirs. The same promises to hold true in the future in a consumer-driven, entrepreneur friendly world. [Read more →]

In a post on his blog and then again on the Huffington Post, Joe Romm challenged me to a wager on oil prices, claiming prescience concerning the price rise in the past decade compared to my 1996 forecast of low prices for two decades.  He seems to be implying that that I have refused to wager him, having closed the webpage to any further comments.

I find myself taken aback, as my experience with the blogosphere is somewhat limited.  My experience is primarily as an academic, writing articles for refereed journals and books, as well as working papers, with an intention to make them carefully sourced and referenced.  A blog can consist of nothing more than a rant, and the comments appended to them often worse (and usually anonymous).  I will not however yield to the temptation to follow suit (even if our illustrious moderator would permit it, which he won’t).

Having put up approximately 20 posts on the subject of peak oil, it might be thought that Romm is an expert on the subject. But so far as I know, he has a grand total of one article on oil, his famed, “Mideast Oil Forever” Atlantic Monthly piece (co-authored with Charles Curtis), which is the source of his pride on the subject.

A careful reading of “Mideast Oil Forever” shows that his argument was not so much that prices would soar, but that global dependence on Middle East oil would soar, which has not happened.  My argument was that the forecast of rising Middle East market share was likely to be incorrect, and it was (see Figure), so that economic fundamentals would not imply ever rising prices.

Forecasts of OPEC Market Share from 1996/97

Which is a far cry from saying my forecast was wrong and Joe’s correct.  In my testimony, I specifically stated,

“The reality is that prices may go up in the future.  And Persian Gulf oil production and exports will rise.  However, the most likely scenario, given what we know about oil supply and demand and what we have learned about forecasting in the last 10 to 15 years, is that OPEC is going to be under continued pressure for at least the next 10 years, possibly for much longer, that they will be fighting with each other for market share.  And, it’s going to require some very substantial changes in the world to see prices rising.” (See my opening statement on pp. 127-128.)

Arguably, the price collapse leading to the rise of Hugo Chavez, the September 11 terrorist attacks and the Bush Administration’s decision to invade Iraq, are those ‘substantial changes’.  Certainly, not the soaring Middle East market share predicted by Romm.  (Since he downloaded the transcript of the hearing, it’s not clear how he missed this.) [Read more →]

For some peak oil advocates who are nervous about the idea of a post-apocalyptic vision of society, it has become popular to argue for a peak and plateau rather than a peak and decline of 3–5% per year, as some of the original work postulates. This seems more palatable than calling for a global upheaval, Hollywood notwithstanding.

The original peak and decline scenario was based on the bell curve popularized by M. King Hubbert. A number have disputed the shape of the curve, arguing for a Gaussian curve instead, for example. But they are avoiding the basic question of causality. The appearance of a bell curve appears to be more coincidence than anything else, since it is not often replicated in reality. The 1998 Scientific American article, “The End of Cheap Oil,” by Colin Campbell and Jean Laherrere, contained the laughable figure of several stylized oil fields’ production curves surmounted by a bell curve and the assertion that the one aggregated to the other.

More recently, some peak oil advocates have ‘modeled’ national production as following a rise, plateau, decline shape that, in the most general sense, is accurate, but again assumes that all nations follow a fairly similar path, which implicitly assumes that geology determines that path. In fact, in many cases the level of the peak and subsequent production patterns are due more to fiscal terms than geology, as can be seen by several countries where changing government policies led to a reversal of the decline, such as in Argentina or Venezuela.

The CERA work does not fall into this pattern, however, not just because the author(s) are not in the peak oil camp in any form. [Read more →]

The latest peak oil news is simply astounding: a whistleblower inside the International Energy Agency (IEA) claiming that “the US has played an influential role in encouraging the watchdog to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves.”

The fact that this report appeared in the Guardian, which has published questionable articles on peak oil, is suggestive.

First and foremost, one is tempted to conclude that this story represents poor reporting, bringing to mind an earlier Guardian story claiming that Fatih Birol, the IEA official in charge of the World Energy Outlook, acknowledged peak oil. It turns out that Fatih was misquoted. And while I might be biased, considering Fatih a friend, the nature of the present story is close to ridiculous, rather than misleading. (Sadly for him, Birol is often a lightning rod for any disagreement about energy forecasts.)

This is a long-standing problem with peak oil advocates, many of whom misrepresent comments as agreeing with them. [Read more →]

The recent Houston Chronicle op-ed, ostensibly written to respond to my New York Times op-ed, is worthy of reading for a variety of reasons, but primarily entertainment. The reference to me as Stephen Lynch was apparently an editor’s error, but the analogy of oil fields and glasses of water was quite enlightening as to the state of the debate. The three gentlemen comment on the difference between a straw in a glass (a supergiant field) and a puddle of water on the table requires many straws.

In fact, I know of no supergiant fields that have not required many straws, since oil fields are not ‘pockets’ of oil but rather oil that is in rock, rather as water is in a sponge. Drawing all of the fluid from one spot doesn’t mean that all of the oil will flow freely and uniformly to the straw: to the contrary, a given well usually drains a very limited area, and supergiant fields typically have numerous wells, hundreds even thousands, depending on the geology and geography.
[The inappropriate use of analogy is reminiscent to the website of Colin Campbell, the founder of the Association for the Study of Peak Oil. He points out that when you have finished half the glass in a beer, you only have half left. Given that he lived in Ireland, this prompted the rejoinder that his inability to find another glass of beer should raise questions about his understanding of resources.]

There is also the rather illuminating comment that not knowing much about Russian and Middle Eastern supergiants suggests that they could decline much faster than we expect. And yet, couldn’t they also decline much slower than we expect? This selective attention is what is known as ‘bias’. In fact, while it is not possible to download comprehensive information about oil fields in those areas, I have done work in the past by relying on such information as is available, including the piece, “The Economics of Petroleum in the Former Soviet Union,” in Gulf Energy and the World: Challenges and Threats (The Emirates Center for Strategic Studies and Research, Abu Dhabi, 1997) as well as “Crop Circles in the Desert” (on this website), which show what can be done, given a little effort. [Read more →]

[After publication of my New York Times Op-ed on peak oil, Joseph Romm posted a response—and a challenge—on his website, and later expanded it on The Huffington Post. Below is Michael Lynch's response.]

Thank you very much for your invitation to a wager on the price of oil, Joe, which I take to be serious, even though you made no effort to convey the wager to me personally. (If you were simply making a “‘pr” effort, feel free to withdraw it.) I would warn you that for most of my career I have been referred to as a ‘heretic’ or ‘contrarian’ and have repeatedly outperformed other forecasters by explaining (in a number of academic publications) why the forecasting of oil price and supply has been so deficient. That you appear to have been more prescient than me no doubt gives you confidence. But success can be misleading: in the long run, it’s better to be smart than lucky.

Parenthetically, bear in mind that I regard myself as a technocrat, not an ideologue, and my denigration of ‘peak oil’ theory comes from a careful reading of the ‘research’ as well as decades of research on the subject of oil and gas supply. I do not regard oil, gas, solar, nuclear or dung as ‘good’ or ‘bad’ except as the situation dictates.

In fact, for some years, I lived car-free, working and residing in the Boston area, dependent on the subway. Owing to an unfortunate editing error, my op-ed implied that I disapproved of conservation, which is most certainly not the case. Conservation can be one of the cheapest energy ‘sources’ around, depending on the circumstances. (Conservationism is another story.)

Back to 1996

Regarding our appearance at the Congressional hearing in 1996 (for which your post criticizes me): [Read more →]