Wednesday, July 07, 2010

Harnessing the Power of Hubbert: Reducing our Exposure to the Oil Risk

By David Mitchell, Breakthrough Fellow.

This is a guest post from the Breakthrough Generation blog. Breakthrough Generation is the young leaders' initiative of the Breakthrough Institute, a public policy think tank. Founded in 2007, Breakthrough Generation has fostered the development of young thought leaders capable of fully grappling with the scale and complexity of today's greatest challenges and advancing large-scale solutions over the near and long term. To read more writings from this year's 2010 Breakthrough Fellows, head to

Many "peak oil" theorists suggest we will reach peak oil production by the year 2020. I argue that this peak is artificial, occurring only due to economic, technological and political limitations. While I contest the "peak oil" theory, I do believe that we can harness the real power of its assertions: governments and businesses should make large-scale investments to reduce their exposure to the oil risk. We can therefore get to the "End of Oil" without adhering to the "Peak Oil" theory. Today we need a new logic - one of environmental protection, energy security, and national prosperity - for ending our addiction to oil.

In 1956, M. King Hubbert produced his famous symmetrical exhaustion curve, forecasting a peak in global oil production. The curve that he constructed is both simple and logical, and appears to work well for the U.S. Yet this seemingly inescapable curve was wrongly fitted to the total, global oil resource. In reality the geological fact that oil, a finite resource, is depleting has thus far been estimated, as Stouteberg (2008) shows, with a wide range of uncertainty.

In turn, there are a number of key errors with Hubbert's curve:

1. It assumes constant technology, when our efforts towards exploration and extraction have obviously changed dramatically over time.
2. It lacks an economic dimension, failing to take into account prices and how these impact rates of extraction.
3. It doesn't account for how we are getting more efficient at using oil. Over the last 200 years, energy use has gone up by a factor of 4; energy intensity has gone down by a factor of 6. Massive improvements have been made. As efficiency improves, the peak, by definition, must be shifting.
4. Hubbert looks only at "Conventional" reserves. Ignoring "Unconventional" reserves (tar sands, oil shale) is a mistake when trying to predict the "peak" of oil production.

For his work, Hubbert used the analogy of a voyager starting out on a major expedition of discovery, equipping himself with charts of two kinds - detailed charts of known shores, and comprehensive charts of whole oceans. He wrongly suggests that, in the case of oil, we have these detailed and comprehensive charts. For while the U.S. has been drilled extensively, the world has not been drilled to the same degree. This presents us with a large set of unknowns.

In the case of oil, we have long had the problem of people crying wolf. The "McBride survey" (McBride & Sievers, USGS, 1921) famously said about the availability of gas: "the data at hand in regard to the gas still available underground...make it probable that the annual output will never be very much more than it was during the period 1916-1920." We therefore find a recurring perception of scarcity with resources. In the case of oil, this drives up prices and leaves us vulnerable to manipulation by OPEC.

One of the industry's most prominent consultants, Dan Yergin, explains how this is not the first time we have "run out of oil". It is more like the fifth. Yergin says that a number of oil projects that are under construction will increase the supply by 20% in five years and that technological advances will increase the amount of oil that can be recovered from existing reservoirs. Estimates report reserves of conventional oil at around 1,000bn barrels of oil (143-150 gigatonnes), while reserves of unconventional oil (oil shale, heavy crude oil, and tar sands) could be as high as 245 gigatonnes.

The points I make are not to suggest that we have a bright future of oil use ahead of us. For, while I contest the "peak oil" theory, I do suggest that we must appreciate the real power of Hubbert's curve: governments and businesses should begin to make investments to reduce their exposure to the oil risk.

In this way, "peak oil" and "end of oil" can be decoupled.

"Turning oil into salt", a 2007 article by James Woolsey and Anne Korin, employed an oft-used phrase to explain the logic for getting off of oil: "just as the stone age didn't end because we ran out of stones, so the oil-age will not end because we are running out of oil". And, they argue, just as salt held a strategic value some 400 years ago (indeed wars were fought and people died over it), so today oil holds a strategic value.

While we may not have reached the physical peak of oil, I suggest we are reaching the peak in terms of its strategic value.

Turning oil into salt and transforming our energy future, Woolsey & Korin argue, will largely depend upon the actions not only of the government, but also of regional alliances, the private sector, and civil society. I fully agree with this logic.

At present, oil consumption is about 84 million barrels a day: this represents a massive exposure to financial, environmental, and strategic risk. We therefore need massive investments in alternative energies to reduce, indeed end, our exposure to these oil risks. By those means, the End of Oil is nigh.

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