NS4053 Fall Term 2013

Handbook of Oil PoliticsLaura Graefe – Peak Oil

Peak Oil I

• Past half-century debate has raged over when “peak oil” will occur

• Until recently debate largely academic• However as price of oil became unusually volatile in

2000s issue of peak production has received much attention from policy makers

• Concern over future supplies and availabilities of oil• Problems – much of debate susceptible to

• Emotional bias

• Selective interpretation of data

• Rigid opinions on both ends of the spectrum

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Peak Oil II

Why pay attention to controversy?• If peak oil correct, possible security, social,

economic consequences• If peak oil is believed to be correct, possible

policymaking and mass psychological consequences

• If peak oil is not correct, learn to recognize the argument and understand the debate when it comes across your desk

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Peak Oil III

What is peak oil debate about?• Agree that there is a limit to fossil fuels, but what is

the problem?• Debate among geologists, economists, and

technologies

• Geologists focus on limits and impact on society/civilization

• Economists focus on prices and markets

• Technologists focus on innovation

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Peak Oil IV

• Other problems in the debate adding to uncertainty

• Notable absence of uniform standards for measuring and sharing estimates of oil resources and reserves

• No common framework of definitions with which simple comparisons can be made

• Different opinions about the effect of above ground factors which could greatly alter the future rate at which oil resources are depleted

• Definition of “Peak Oil”

• “Peak oil” is not about running out of oil

• World will have oil to pump for generations to come

• “Peak oil” refers to the inevitable point at which the world’s petroleum output can no longer increase

• Production then begins to decline 5

Peak Oil V

• At first glace, idea of peak oil would not appear to be controversial

• Largely a question of geology – how much is left?• Disagreements center around uncertainty about basic

aboveground factors• On the supply side:

• How much will oil companies invest in capacity?

• How will extraction and refining technology advance

• How many hurricanes or wars will occur in oil producing regions• On demand side

• How fast will global economic and population growth be

• What impact will future environmental policies have on oil consumption and conservation?

• What role will renewable fuels play in replacing global dependence on hydrocarbon energy?

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Peak Oil VI

• With concerns over peak oil, calls for political response become louder

• Political leaders have begun to entertain notion that policy should incorporate the risk of peaking oil production

• Study for the USDOE frames political response to peak oil as an issue of risk management:

• Downside risks of being unprepared (social economic and political) once world does reach peak oil production are high

• sufficiently dire to warrant significant political action to avoid such a scenario even if such an outcome is considered unlikely

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Peak Oil VII

• Given oil not uniformly disbursed throughout the world:

• Middle East 63% proved reserves

• Central and South America 10%

• Africa 10%

• Eurasia 8%

• North America 5%

• Rest of the world about 4%• Reactions to potential of peaking oil supply vary

considerably

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Peak Oil VIII

• In general net oil exporters take much different approaches to planning for peak oil than importers

• Exporters

• setting up sovereign wealth funds

• developing alternatives like solar,

• considering cutting back of consumer subsidies• Importers have tended to place more emphasis on

conventional alternatives• Also the energy intensity of the economy of an economy

and the local availability of substitutes greatly influence how public policies incorporate the perception of peak oil.

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Peak Oil IX• Views of policy makers also vary considerably• Some claim that peak oil debate based purely on geology

is irrelevant• Argue global energy demand will peak before the global

supply does

• Economic slack

• Efficiency advancements

• And/or consumption cutbacks in response to environmental legislation

• Should result in peak in oil production being driven by demand side rather than supply side constraints

• Therefore: The peak oil/policy relationship is two-way• Prospect of peak production influences policy decisions

but public policy inherently affects the use of oil and therefore the timing of any potential supply peak. 10

Peak Oil X

• Why a Peak Oil debate: Sources of Uncertainty• People have been calling for the begging of the end of oil

about half the life of its industrial use• In 1956 geologist M. King Hubbert predicted the US was

near a national peak in petroleum output• Very controversial causing quite a backlash • Critics claimed forecast unrealistically dire

underestimating

• Potential for higher prices and

• Improvements in production and exploration technology

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Peak Oil XI

• Peak oil proponents: Hubbert’s peak (1956) mathematical and geological limits of production

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Peak Oil XII

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Peak Oil XIII

• Peak Discovery

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Peak Oil XIV

• Debate has changed little since Hubbert’s day• Pessimist continue to argue:

• Unrealistic to base forecasts on assumption that some not-yet-realized technology or circumstances will establish access to today’s inaccessible resources

• Maintain that production either has peaked or sill soon peak and painful shortages will ensue

• Resource optimists contend

• Easily accessible oil has been abundant for most of the industry’s history providing little incentive for • Investment in new recovery or production techniques• Technological advancements and• Improved access will increase reserves over time

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Peak Oil XV

• Experts tend to agree

• Oil production, whether for an individual field or country, or world as a whole more or less follows a bell curve

• What is more ambiguous is the exact shape and asymmetry of the curve

• Will production taper off slowly once production peaks?

• Or will it undulate steadily for many years?

• Or will it drop off steeply?• Topic becomes even more divisive when effort made to

pinpoint how far along the curve global producing is today and level it will peak in the future

• Most of the debate lies in the fuzzy nature of information at the margin.

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Peak Oil XVI

• Measuring Remaining Resources• Number of unknowns cloud energy outlook and foster

flexible interpretations of the supply data that are available

• 1. impossible to have definitive measures of total reserves

• Even best estimates susceptible to major revisions• Official measures of remaining resources raely come in

the form of one concrete number but rather as a range of different estimates each assigned a probability

• U.S.G.S. estimates with 95% certainty that the world’s undiscovered conventional petroleum is at least 0.4 trillion barrels

• 5% certainty that undiscovered resources are at least 1.2 trillion with the mean estimate at 0.7 trillion

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Peak Oil XVII

• Range of estimates mean either side can use in debate to make their case

• Same vacation occurs in estimates of how much of the earth’s oil resources will actually come into production

• Some analysts consider only “proved reserves,” or those with a 95% probably of being produced

• Others look at (higher) estimates of reserves with a lower probability of coming into production.

• Still others focus on entirely different indicators of the earth’s remaining resources

• Another factor that obscures the outlook on oil supply – no internationally consistent method for collecting and sharing information on a country-by country basis about national energy endowments

• Nearly every oil producing country uses a unique system for reporting and defining oil supply

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Peak Oil XVIII

Reserve Estimates• Currently no transparent or audited internationally

agreed-upon procedure for calculating or reporting reserves

• Three primary categories under which reserves classified• Proved Reserves – reasonably likely or with a 95% of

being produced• Divided into

• Proved developed – can be produced with little or none in way of additional capital investment

• Probable reserves are “reasonably probable” to be producible using current or likely technology at current prices

• Possible reserves – or any reserves that have a chance to be developed under favorable circumstances – typically those with a 5% certainty of being produced

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Peak Oil XIX

• Role of Non-Conventional Resources• Within classification of oil reserves also important

distinction based of different physical and logistical characteristics

• Conventional oil that which can be extracted or produced under existing (or foreseeable) technological conditions.

• Non-conventional resources – those more difficult and expensive to put into production

• A more precise definition from USGS differentiates on basis of petroleum’s density (gravity and viscosity_

• Conventional (light) oil has low gravity• Non conventional (heavy) oil high gravity – and extra-

heavy oil – mainly Venezuela’s Orinoco Oil Belt – Canada’s oil sands even denser, thicker version of heavy oil

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Peak Oil XX

• Other non-conventional oil resources• Some other resources are often categorized as non-

conventional oil, depending on whether a study is defining oil by its physical attributes or its economic viability

• Natural gas liquids – liquid components of natural gas

• Shale oil

• Deep water petroleum

• Synthetic oil – liquid fuel created by converting natural gas, coal or biomas – usually very expensive

• Polar oil

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Peak Oil XXI

• Non-conventional resources• Amount greatly exceeds quantity of conventional oil• 84% world liquids production conventional oil• 13% natural gas• 3% non conventional• Problem with non conventional – much more capital and

energy intensive than conventnionaloil – expensive toproduce

• Given relativelyhigh envriuonmental impact of extracting and producing non conventional – adds to costs

• Still non-conventional linelyto play an increasingly important marginal supply role in the future

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Peak Oil XXII

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Peak Oil XXIII

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Peak Oil XXIV

• Role of Prices and the Prospect of Peaking Demand• Future oil demand will determine speed at witch

resources depleted – factors involve• Pace of economic growth• Nature of globalization• Environmental preferences and legislation• Availability of close subsitutes• All will influence the oil supply/demand balance through

the price mechanism• Some econoimists argue even in absence of any major

policy initiatives, societysh ould naturally move away from conventional oil as it peaks because rising prices will make substitutes more attractive

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Peak Oil XXV

• Rising oil price in anticipation of future supply declines will allow for a transition to alternative or non-conventional source of energy (or more conservation) before cut-back becomes physically necessary

• Hotelling’s rule (1931) – as long as information is transparent and markets are free to operate efficiently,

• since the price of oil includes the knowledge of future supply declines, preparation for peak oil will occur naturally

• The markets will establish an efficient allocation of oil over time.• This process is the conventional economic view of non-

renewable resources

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Oil Curse XXVI

Problem -- Information about the global oil markets is far from being fully transparent• Current supply data are incomplete and difficult to

interpret• Future paths of technological innovation and demand are

difficult to foresee• Markets are not entirely free to incorporate expectations

about the future• Taxes and subsidies may distort prices as political

leaders act to maximize short term benefits at expense of long-term outcomes

• OPEC acts as a cartel to deliberately influence market prices withholding supply thereby distorting market pricing

• Estimates are that over one half world population received some form of fuel subsidy or price control 27

Peak Oil XXVII

• Some of the subsidies and controlled prices have been rolled back in recent years as governments

• Attempt to shore up government fiscal positions during the price spike and subsequent economic collapse

• Low energy prices generally thought to encourage economic growth can also have longer term neggtive effects

• Discourage efforts towards conservation and efficiency• Impede future production projects• Delayed investment spurred by soft energy prices could• Create an environment of lagging supply and price spikes• Risk particularly apparent in the case of non-conventional

and alternative resources, which tend to be relatively expensive to produce.

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Peak Oil XXVIII

• Distortionary pricing discouraging investment is just one example of an above ground issue that can have as much effect on the path of oil production as physical supply

• In sum timing of peak oil production dependent on

• Evolving technology

• Economic growth

• Fiscal regimes,

• Geopolitics,

• Environmental preferences and

• Regulations

• Both sides seem to feel the long-term trends of oil prices is upwards

• Disagree of society’s ability to adapt to new environment29

Peak Oil XXIX

• Oil Price Forecasts (IMF 2012)

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Peak Oil XXXI

Possible Impacts of higher energy costs• Volatility due to low spare production capacity• Inflationary pressures• Diversion of Investment capital from other

productive enterprises• Distributional consequences of higher energy prices

within countries and across lobe• Who wins and who loses• Uneven distribution across globe of societies’ ability

to adapt

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