Arnold Kling  

The Peak in Oil Supply

Useless Information... What's Wrong with Conventional...

is still in the future, according to Daniel Yergin.

There will be a large, unprecedented buildup of oil supply in the next few years. Between 2004 and 2010, capacity to produce oil (not actual production) could grow by 16 million barrels a day -- from 85 million barrels per day to 101 million barrels a day -- a 20 percent increase.

This is based on what Yergin calls a "field-by-field" analysis. He goes on to say,

The oil industry is governed by a "law of long lead times." Much of the new capacity that will become available between now and 2010 is under development. Many of the projects that embody this new capacity were approved in the 2001-03 period, based on price expectations much lower than current prices.

For Discussion. If you believe this forecast, what should be the pattern for oil prices, production, and inventories for the next several years?

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COMMENTS (5 to date)
Mcwop writes:

First an interesting history tidbit: A shell scientist, King Hubbert, predicted in 1956 that the U.S. would peak as an oil producer in the early 70’s. He was right, but off by a few years (people did made fun of him). Peak oil production happens. While U.S. production declined other countries took up the slack.

With that said, I don’t think world peak production is right around the corner. There are ample reserves to be tapped at the right price (emphasis on the right price). Example, the Canadian tar sand have lots of oil, but it will not be cheap to extract.

From the article:

The share of "unconventional oil" -- Canadian oil sands, ultra-deep-water developments, "natural gas liquids" -- will rise from 10 percent of total capacity in 1990 to 30 percent by 2010. The "unconventional" will cease being frontier and will instead become "conventional." Over the next few years, new facilities will be transforming what are inaccessible natural gas reserves in different parts of the world into a quality, diesel-like fuel.

This oil will not be produced at $30 a barrel, becuase it simply costs more to extract.

At the end of teh article, the author does concede that there will be high demand. Supply can go up, but if demand keeps pace then prices stay high. I think that over the next few years, demand will keep prices higher than we have become accustomed to during the 90’s. China’s oil demand is increasing at a rate that it is pushing their country further into running a permanent global trade deficit. Based on recent trends, There is a possibility that Asia's demand will double over the next 7-15 years.

spencer writes:

Until recently the majors drilling budgets assumed under $20 oil. That has recently increased to around $25. But as oil prices remain high this price assumption will creep higher. The oil service industry is operating at near full capacity. If this does not lead to an increase in supply we should reevaluate many of our economic beliefs. But this has no impact on the "peak" oil argument. Even if the peak oil thesis is correct, higher prices should shift some of the future production forward.

Moreover, it does not mean that Mcwop is wrong.
You can easily get both higher demand and supply with prices remaining high.

Interestingly, virtually the only way demand can fall in the short run is through a recession. In the just released 2nd Q GDP report energy as a share of consumer spending rose in both nominal and real term. Real PCE of energy is 4.1% higher then a year ago. Americans have yet to make any significant measures on the demand side to adjust to the more then doubling of oil prices.

Robert writes:

Back when S. Africa was under embargo, they were preparing synthetic fuels from coal at something like, if memory serves, $3/gallon gasoline. Does anyone have a ballpark number as to at what (stable) oil price coal liquefaction can become a significant part of the fuel industry?

David Thomson writes:

I don’t think we have a long term serious problem. The market economy will ultimately save the day. Human beings are highly resilient. We will find a way to make the system work. Just don’t let the government throw a monkey wrench into the works---and we will find solutions. Is my faith justified? Yes, the abundantly available evidence supports my confidence. The odds are decidedly in our favor.

Dez Akin writes:

Applying conventional economic wisdom to oil production is a dangerous fallacy, and putting blind faith in markets that routinely produce bubbles and inefficiencies (despite efficent market theory) is rather dangerous. Much of our economic growth for the past century has been due to productivity improvements related to inexpensive oil supplies, and we have many tens of trillions of dollars sunk into infrastructure that assumes relatively inexpensive liquid hydrocarbon fuels.

While I don't claim that we're heading toward the end of civilization (see for many doomers of the millenialist flavor) we certainly are running huge risks in economic growth just by doing naive demand/supply extrapolations. What are the substitutes for oil?

Natural gas, coal, shale, tar sands, and finally synthetic fuels with external power inputs for synthesis (nuclear, solar, wind.) They can all be turned into gasoline at higher prices, but remember that this is a huge price multiplier for all goods requiring oil in the economy (just about everything.)

And when the substitutes start being attractive for fuel synthesis that will drive up the cost of conventional power production; People start turning coal and natural gas into diesel and gasoline, driving up the price of utility electric plants. Everything gets more expensive.

Think 1970's Arab oil embargo with no turning the taps back on. Eventually the economy restructures around more expensive substitutes; We know how to do nuclear, wind, and synthesize fuel. But with the tens of trillions of sunk costs in the assumption that oil will be relatively cheap, the transition will be long and painful.

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