Thursday, November 13, 2014

Reaching My Limit With Peak Oil Theory Predictions

Back in elementary school, I was taught that oil was a nonrenewable resource, and because of that, we should use our resources wisely. Nothing wrong about that unto itself. It's when you learn more nuanced arguments about the issue later down the road, such as peak oil theory. Just to clarify, this is not a question of "when will we run out of oil?" M. King Hubbert's theory, which dates back to 1956, states that oil will hit a certain flow rate maximum, after which, its production will lull into a decline (see below).

Looking at US oil production, it did hit a peak at 1970, after which, it went on the decline. Then a funny thing happened. In 2009, the number of barrels produced per annum started going up again, and we have seen an upward trend ever since. What caused the detour from the bell curve?

In a word: technology. Peak oil theory can be likened to drinking beer. For proponents of the theory, "the glass starts full and ends empty, and the faster you drink it, the quicker it's gone." Innovations in extraction technology have given us such an advantage that we have been able to increase our production over the past few years, which means the metaphorical glass of beer can be refilled. Even better, in its 2014 International Energy Outlook, the U.S. Energy Information Administration finds that petroleum production will be increasing for the foreseeable future (Table A4), and the International Energy Agency finds that oil production will start plateauing in 2040.

For argument's sake, let's say that the simplistic theory is true, even though the International Energy Agency is not on board with the theory. What then? Should we care? After all, oil prices are going to increase, and that is because there is only so much oil, which means that the world supply will eventually shrink. Taxes, environmental policies, geopolitical strife, corruption, and mismanagement of resources can all affect oil supply, which is all the more reason we need to diversify our energy portfolio so we can minimize risk if and when this situation arises. Diversification is simply a good investment strategy. Even so, it doesn't bother me because one of four things will happen: we'll try harder in finding additional reserves, we'll learn to live with less, we'll develop technologies that will entail less oil consumption [per capita], or we'll find energy substitutes for oil, the latter of which would help in making alternative energy more affordable. There's no reason to freak out, even in the short-to-medium-term. Yes, we want to use our resources wisely, but we shouldn't swap alarmism for what technology and innovation can mitigate or even eliminate.

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