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The Myth of the “Oil Peak”

I’ll bet that most Texas oil and gas attorneys (and, I’m sure, everyone in the oil and gas business) often hear the myth repeated that someday there will be a peak in oil production, followed by a rapid decline which will cause the collapse of human civilization as we know it. This myth predicts that someday, possibly someday soon, (although that date keeps getting pushed back when it turns out to be wrong) the world will simply run out of oil. Please understand this myth for what it is-unnecessary fear mongering by those with either a political purpose or who are ignorant of the oil production process.

Daniel Yergin , an expert energy researcher and the Pulitzer Prize winning author of “The Prize”, excerpts from his new book, “The Quest: Energy, Security and the Remaking of the Modern World”, in a recent Wall Street Journal interview. He describes the ways in which the purveyors of this “oil peak” myth are systematically wrong. For example, the myth drastically oversimplifies the complex nature of oil production. It is based on the concept that the world has X amount of oil, and when we use X amount, there will be none left. While in an absolute sense that may be true, oil production is not nearly as simple as that. This country has a long history of feverish predictions that we are running out of oil, going back as far as the 1880s. The actual prospect of running out of oil remains as distant today as it did then.

From 2007 to 2009, for every barrel of oil produced in the world, 1.6 barrels of new reserves were found. In addition, energy technology, including green energy, has advanced to the point where we use oil in a much more efficient way than in the past. As a result, each barrel of oil goes further. But the “oil peak” myth still holds our collective national attention for some reason. Mr. Yergin attributes this in large part to a man by the name of Marion King Hubbert, who studied geology in the first half of the 20th century. The “oil peak” is often referred to as “Hubbert’s Peak.” In 1956, Hubbert theorized that oil production would peak between 1965 and 1970. When production did decline after 1970 and the oil embargo rocked America soon after, his theory seemed vindicated. He also claimed that the generation of children born in 1965 would see oil reserves wiped out in their lifetimes. But what Mr. Hubbert did not count on was the huge increase in newly discovered oil and gas reserves found and produced in the U.S. By 2010, US oil production was three and a half times higher than Mr. Hubbert predicted it would be.

Hubbert apparently did not have a good grasp of economics and technological change, and this hampered his ability to understand the future of oil. Both economics and technological change are critical to understanding how the oil industry works and changes over time. Economics drives production through the forces of supply and demand, but Mr. Hubbert, oddly enough, insisted that oil prices didn’t matter. He was mistaken, of course. High oil prices motivate oil companies to find new reserves and to develop new technology to produce known reserves. Technological innovation has increased dramatically in the oil industry in the last decades, resulting in discovery of new reserves and production of known reserves previously believed to be inaccessible.

Oil production in the US has increased 10% since 2008, assisted by discoveries like the Bakken oil fields in North Dakota (see our previous post). Mr. Yergin suggests that instead of thinking of a peak, it is more accurate to think of oil production as a plateau, which is leveling off because of increased energy efficiency and new technology.

Yergin brings substantial background and insight to both his first book, “The Prize” and now to this new work, “The Quest”. The are both recommended reading for anyone interested in the history and the future of oil.

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