How is the peak oil movement dealing with the oil price crash?

Things are eerily quiet over at the Peak OIl subreddit. There’s been only a handful of posts in recent weeks. None of them seem to engage directly with the elephant that just parachuted into the room:

Source NASDAQ
Source NASDAQ

At oilprice.com, they’re furiously counting barrels produced and making bold predictions that this is the view we get from the summit. This is it! This is peak oil. There is scarcely a mention of price. Similar at PeakOilBarrel.

Over at peakoil.com, however, they’re addressing the issue, listing reasons that cheap oil doesn’t mean the end of peak oil. The key arguments basically insist that the oil price will go back up.

“(12) Chevron have released a presentation for their investors … which indicates an expectation that 40% of the “new oil” will come from deepwater fields, 20% from U.S. shale, 10% from increased tar-sands production, 25% from OPEC growth (Venezuelan extra-heavy oil?), and around 5% each from shale outside of the U.S. (Russia?) and “onshore and shallow offshore”.

(13) Chevron also stress that production from these sources will not come cheap, and will probably be of the order of $100 a barrel (“Breakeven price” or “marginal cost”).

(14) Hence at under $50 a barrel selling price, these projects will not go ahead, or they will be money-losers (cost more to produce the oil than it sells for). This year, $150 billion worth of new projects may face the axe, which are mainly from heavy-oil, deepwater, tar-sands and shale-oil.”

I think this analysis looks sound as far as it goes, but it doesn’t address two big issues.

1. What OPEC might do next.

Although oil prices had fallen around 30 percent before the seismic November meeting in Vienna, the cartel is the reason behind much of the oil price crash.  Will they regroup? Or is this the end of any and all caps on production, and might the oil price sink further.

2. Demand.

Talking about a market from only one side, as though demand was limitless, is as silly as assuming supply is limitless.

Peak oil appeals as a theory because it is self-evidently true. Oil really is non-renewable, and we use a lot of it. There will be a single day on which more non-renewable hydrocarbons are extracted from the earth than any day before or after. That day is the peak of production.

But – Peak oil is a hot topic, and despite debates about the accuracy of reserve estimation techniques, it’s not because of the physics of reserves. Peak oil matters because of the assumption it is going to be a problem.

Really, peak oil is not about oil. It’s about whether we can adapt. It’s about how we manage demand. That’s a question about the operation of markets, about the functioning of governments, about technology.  About action guided by markets and action guided by collective planning. And that, in my opinion, is far more interesting.

The main assumption regarding demand is that oil consumption rises as the world grows richer.

This is the unstated fact behind the implication that peak oil is a catastrophe. Rising demand has been true for a long time. But need it always be true? Sometimes long-standing trends defy extrapolation.

There may be a few reasons to start thinking about peak oil from a demand perspective. Here are three.

1. It’s well-known that the energy intensity of a country’s GDP declines as that country goes from being involved in heavy industries to producing more services. China burns 250mL of oil to make a dollar of GDP. The UK uses more like 80mL. As places like China develop, their economies will become more fuel efficient.

But the relationship is not simple across countries, with very poor countries using very little energy and some rich countries using a lot

energy efficiency

It’s possible to see the above curve as a Kuznets curve lying on its side. (I’ve written about Kuznets curves before in a very different context).  Very poor countries and very advanced ones are more efficient. Middle income countries (and freezing cold Canada) are worst. If the most populous countries continue to develop, oil demand could shift.

2. Technology is crucial. Obviously, high prices drive the adoption of energy efficient practices, which is one reason why the Toyota Prius sold so well in the last ten years of high oil prices, and cars that get 13.3L/100km, like the one below, did not.

the car of the future

If oil prices stay low, that will be because those technologies – electric cars, solar power, biofuels –  are having their effect. But oil prices will probably go back up ( in fact they already have bounced a little). If that happens, households and companies will regain motivation to adopt technologies to conserve usage, and we will probably be having these debates about when peak oil will occur in another hundred years.

3. Climate change. We may see peak oil happen long before we’ve used up half the world’s known reserves. Moving carbon from beneath the earth’s crust to its atmosphere produces externalities that could, any moment now, become so obvious that they drive a political consensus to leave the carbon beneath the surface, where it is relatively safe.

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thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

4 thoughts on “How is the peak oil movement dealing with the oil price crash?”

  1. Great post. Totally agree that peak oil is not a major problem at all. I’ve said for years that it is obvious and true that this day will come, but if the peak happens slowly while alternative energy sources are coming online then there will be little economic disruption.

    Compared to the economic fluctuations from pure speculative investment cycles peak oil is pretty benign.

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    1. Perhaps the worriers should re-brand peak oil to Energy Transition Trough – the idea that there will be gap between oil, and say, solar. Peak production is never the problem. It’s about what happens after that…

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  2. Wide fluctuations in oil price are a well-known factor of the peak in production. The fact that oil prices are currently low does not negate peak oil. On the contrary – it is an indicator that we are at the peak.

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    1. I guess that’s the point of the peak – it will be a time when volumes are highest, and that -wth shale and a disintegrating OPEC – seems to be now. The fact of a peak still doesn’t say much about how we’ll manage the downhill slope, and whether that slope is steep, which is a far more complex topic.

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