Key Concept | Peak Oil | Economics, Geology, and Technology

Image: Richard Masoner

In Peak Oil article #3 we discussed the differences between conventional and unconventional sources of oil. This article will focus on the role of technology in “opening up” new oil sources, and how the peak oil debate often devolves into a conflict of economics vs. geology.

Technology tends to be the main factor in whether an oil deposit can be exploited or not, usually determining whether oil is conventional or unconventional and thus increasing the amount of oil readily available for society. But Robert Hirsch (author of the Hirsch Report) demonstrated in 2005 that technology was not able to offset declines in oil production. Using data of the Contiguous United States oil production he found that despite “large improvements in oilfield technology, including affordable 3D seismic imaging, low-cost directional and horizontal drilling, greatly enhanced geochemical understanding, dramatically improved geological modelling, etc” production declines continued.

Oil Prices and Oil Production in the Contiguous United States [x]

Oil Prices and Oil Production in the Contiguous United States [x]

Additionally new technology for oil extraction and production may simply exacerbate the problem “by increasing production rate and depletion without increasing rates of discovery and replacement“. Improved technologies may “temporarily maintain production at the expense of subsequent more rapid decline” and “increases resource supply and decreases the resource price for a while but results in sharply higher prices in later periods because the resource is exhausted faster than it would have been without the new technology“.

Technological advance masks impending production declines [x]

Technological advance masks impending production declines [x]

It goes without saying that a steeper production decline means less time for society to adapt to a post-peak world, and thus “could have unpleasant effects on the economy“.

Speaking of economics, it is often posited in the “economical” view of peak oil that scarcity of oil supplies will drive market signals, triggering technological development and exploitation of previous uneconomical resources and eliminating the danger of peak oil. They often argue that the “allocative and dynamic efficiencies of the market” will present solution because “as oil becomes scarcer, its rising price will encourage innovation and technology to develop alternatives“, and that “scarcity is a relative, not absolute, concept and that there is nothing unique about any particular productive input, including petroleum” (or as geologist Kenneth Deffeyes said, “The economists all think that if you show up at the cashier’s cage with enough currency, God will put more oil in ground“).

In comparison, the geological view is absolutist, emphasising physical limits, especially those regarding laws of energy and thermodynamics:

“According to the geological view oil reserves are ultimately finite, easy-to-access oil is produced first, and therefore oil must become harder and more expensive to produce as the cumulative amount of oil already produced grows…the recently observed stagnant oil production in the face of persistent and large oil price increases is a sign that physical scarcity of oil is already here, or at least imminent, and that it must eventually overwhelm the stimulative effects of higher oil prices on oil production. Furthermore they state, on the basis of extensive studies of alternative technologies and resources, that suitable substitutes for oil simply do not exist on the required scale and over the required horizon, and that technologies to improve oil recovery from existing fields, and to economize on oil use, must eventually run into limits dictated by the laws of thermodynamics, specifically entropy.” [x]

Or to summarise, “Geologists explain peak oil as an inevitable geological phenomenon. Oil was created in a process taking millions of years, and reserves are not being added to. Although the precise scale of total recoverable reserves is hard to know, their finite nature is certain.” It is clear to see the great divide between the two sides of the issue, but it is important to identify bias or vested interests when attempting to explain peak oil. For example, forecasts of future oil production will be optimistic when made by governments or multinational oil companies whose survival is tied to steady production increases, whereas pessimistic predictions are usually made by independent analysts. “Official” forecasts made by institutions such as the International Energy Agency or US Energy Information Administration will also tend to “project that plentiful oil supplies will be available, that supply will balance with demand” compared to more pessimistic outlooks informed by independent petroleum geologists. It is interesting to note here that a report commissioned by the International Monetary Fund states that, although their final views are not as “pessimistic” as geological arguments, there are definite “resource constraints” on future oil production and that peak oil is “uncharted territory for the world economy”.

Recent evidence that seems to confirm the geological view over the economic view was presented by James Murray and David King in the journal Nature, where they showed that despite price increases (and thus increased demand) oil production reached a “cap” where oil production did not increase regardless of price.

Oil Production Hits a Ceiling [x]

Oil Production Hits a Ceiling [x]

In the next Peak Oil article we’ll look at the issues of oil “reserves” versus oil “resources”, and how that can affect the timing of peak oil.

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2 thoughts on “Key Concept | Peak Oil | Economics, Geology, and Technology

  1. Pingback: Key Concept | Peak Oil | Reserves and Resources | Fighting The Biocrisis

  2. Pingback: Key Concept | Peak Oil | Solutions | Fighting The Biocrisis

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