Peak Oil Is About Price, Not Supply

Posted by Jeff Rubin on October 19th, 2011 under SmallerWorldTags: , ,  • 16 Comments

Heading down to Washington to speak at the Association for Peak Oil-USA‘s Truth in Energy conference on Nov. 2, I sense a general malaise within the peak oil movement.

The pequists, as they have become known, appear to be on the defensive these days as they once again roll back their dating of the dreaded supply peak, confounded by the oil industry’s never ending ability to develop new extraction technologies and discover new sources of supply.

While conventional production may have peaked long ago in the lower 48 U.S. states as predicted by the father of the peak oil movement, geophysicist M. King Hubbert, new sources of supply have been found in Alaska and under the Gulf of Mexico.

And now oil sand production from Alberta and oil from the Bakken shale deposits may soon replace conventional oil in the mix of North American fuel.

Our definition of oil has changed so much the U.S. Energy Information Administration does not even refer to oil any more but rather energy liquids. This includes energy sources we would not have previously called oil such as natural gas liquids, liquefied refinery gases, and even corn-based ethanol.

But peak oil as it turns out isn’t about supply but rather demand. It is a concept rooted more in economics than geology. It doesn’t matter if there are billions of barrels of oil waiting to be tapped from oil sands or oil shales if the prices to extract them are beyond our economies’ capacity to pay.

The peak in our oil consumption will be determined by our ability to pay ever rising prices for the fuel, not by the ability of those same prices to drive new sources of supply.

The energy industry’s task is not simply to find new fuel sources but to find new supplies of oil our economies can afford to burn. While the energy industry has an impressive record on the first count, it has a much less impressive track record on the second.

It has taken successively higher prices to get that extra barrel of oil out of the ground. The price of Brent oil, the benchmark used for most of the oil traded on world markets today, has traded in triple digit range since the beginning of this year.

Maybe that is why the world economy seems to be teetering on the brink of another recession. But if our economies will no longer be growing, neither will oil production.

Some people might call that an oil peak. Others might say we are simply running out of the oil we can afford to burn.

  • Lee Borden

    With all due respect, I think you’re doing the concept of peak oil a disservice. We who wish for the world’s people to understand the concept of peak oil make it more complicated and easier to ignore every time we try to redefine it as you are here. Peak oil is a geological term, not an economic one. It refers to the point at which the world’s oil production reaches its maximum and begins a permanent decline. We won’t know we’ve reached peak oil until several years after the event when we’re looking at it in the rear view mirror.

    Peak oil may cause prices to change, but prices won’t tell us whether we have reached it. If you want to describe a phenomenon involving oil prices, feel free to do so, but for the sake of clarity and coherent human response to the vexing challenges it faces, please don’t use the term “peak oil” to refer to it.

  • Peter Scholtens

    I have a hunch that shale oil will do to oil price and supply what shale gas did to natural gas price and supply.

  • The Peak Oil Poet

    Maybe and maybe not.

    To my mind the biggest issue of Peak Oil is to get public awareness out there – people naturally turn a blind eye to bad news in the future until that future starts to bang their heads against the wall.

    Peak Oil however you wish to define it is a meme – a meme with Geophysical aspects, economic aspects, political etc etc – it is the sum total of perceptions about the peak – with a huge variation in depth of understanding and emotional reaction.


  • JB

    Price is very muchj linked to the key issue of energy return over energy invested (EROEI).

    In 1930 humanity was drawing from the ground about 2 billion barrels of oil per year. That oil was then essentially coming from easily accessed wells with an average EROEI of about 100 to 1. Hence the amount of net energy available to humanity from oil was then of about 1.98 billion barrels energy units (The US Internal Revenue Service indicates that one barrel of oil generates about 5.8 million BTUs).In 1970 humanity was drawing from the ground about 17 billion barrels of oil per year. That oil was however coming from older or more difficult wells to access with an average EROEI of about 30 to 1. Hence the amount of net energy available to humanity was then of about 16.32 billion barrels energy units.
    In 2005 humanity was drawing from the ground about 30 billion barrels of oil per year. That oil was however coming from much older or more difficult wells to access with an average EROEI of about 15 to 1. Hence the amount of net energy available to humanity was then of about 27.9 billion barrels energy units.
    Looking forward in time at the future oil supplies of humanity, it is now becoming quite clear that their EROEI will be even much lower. Alberta tar sand oil has an EROEI of a mere 1.5 to 1. Ultra deep water oil may not be much better, if it is even positive (The BP Macondo well has shown how much technology was stretched and the newly found ultra deep water oil reservoirs off Brazil are much deeper and will be much more difficult to put into production, Arctic oil is at the moment only a dream because there is still a moving ice cap during the winter in that region). As for shale oil, like for shale gas, one will be lucky if its EROEI is even positive, in particular if you take into account the environmental damage done. As for the oil volume that humanity will be able to extract, numerous oil experts – including the Chairman of TOTAL – have publicly said that humanity will be lucky if it can reach a volume of 100 million barrels per day i.e. 36.5 billion barrels of oil per year.Hence at some point in a not too distant future, humanity’s oil production will reach 36.5 billion barrels per year with an average EROEI of about 1.5 to 1. When that happens, the amount of net energy available to humanity from oil will only be of about 12.1 billion barrels energy units…Humanity is at the moment right at the beginning of a slide down the oil net energy cliff… and the above mentioned rough estimates do not even take into account the rapidly diminishing quality of oil. Humanity’s transportation sector, it should be recalled, is today almost totally dependent on oil. And one cannot realistically expect to replace the current generation of oil powered transportation vehicles and infrastructure with something else powered by another energy source within less than 15 years.A similar declining EROEI phenomena is occurring with the rest of humanity’s fossil fuel production i.e. coal and natural gas. Fossil fuels currently provide about 80% of humanity’s energy…As for nuclear fission energy, solar and biofuels, they all have an EROEI of less than 20 to 1. Only wind has an EROEI of slightly above 20 to 1 but it only delivers intermittent energy (as for solar energy) that has to be somehow stored or backed-up by another energy source to be practically usable. The amounts invested in the existing fossil fuel energy production infrastructure are huge and something much bigger would need to be invested in the above mentioned alternative energy sources… Yet the global financial system is on the brink of insolvency and the global economy is hitting the no growth wall. The existence of that “no growth wall” is very likley related to energy availability and in particular to affordable energy availability…


  • Montrealstewart

    please provide further details

  • Stephen DeGrace

    Any extraction peak such as peak oil should refer to the direct extraction of a single primary resource. I think you should stick with peak *conventional* oil, and not try to shoehorn sources of unconventional oil into the term. We’re almost certainly at or past conventional peak crude now, or else we would not be maintaining the prince levels needed to sustain unconventional production.

    There are many sources of synthetic crude, including oil sands, oil shale, synthetic crude from coal or biomass from the Fischer-Tropsch process, or even if you can imagine it, if we could somehow economically and sustainably grow oil-rich algae in brine, the triglycerides could be refined into virtually any hydrocarbon and there would be no peak, it would behave like the classic laws of supply and demand, where demand conjures supply into existence and the price is found at the intersection of the supply and demand curves.

    Anyway, I agree with Lee Borden – I think you should keep the concept of peak oil focused on conventional crude. The implication of peak oil, then, is the price needed to sustain unconventional production and the long term impact on our economy and environment.

  • Rojelio

    Thanks for that interesting information.  I’m sure these concepts apply equally well to almost every other commodity as well. The global shortage of phosphate, required for modern agriculture, comes to mind. I wonder then, is humanity in ecological overshoot or is there a way out of this mess without WW-3?

  • Rojelio

    Why isn’t it doing it then? They’ve been tapping it North Dakota pretty hard. Where’s my $2/gallon gasoline?

  • Rojelio

    I see your point, but I don’t think 99% of the public could care less about peak oil education. Whether or not we peaked already, or are just about to peak is more of an academic question. Thankfully for that we have an amazing resource like the for those who would like to educate themselves.

    Jeff is right in the sense that it is price that people respond to.  Price determines everything about people’s behavior.

    Regarding education, I am personally more annoyed with the mainstream press for their worthless coverage of this issue.

  • Smokey

    You’ re only going to get the goods if you are willing to pay a fair price. New tech costs a bit more but gives infinite supply.

  • Smokey

    Mainstream press covers AGW /climate change in minute detail  which is propitiation for their sins.  Or maybe this is also worthless?

  • John

    In general, yes, but credible EROEI estimates can vary broadly. Tar sand EROEI is sometimes stated around 5:1-10:1, and shale estimates vary between 2:1 and 20:1, depending on field access and new extraction technology forecasts. But the trend you highlight is real and irreversible. And Rubin’s analysis is spot on – affordable energy was the key to strong growth. The era of cheap, concentrated energy is over. It is only uphill from here.

  • John

    We will be lucky to see 1MBBD from U.S. shale by 2020. See comment above on EROEI.

  • John

    Peak Oil is like Ohm’s Law. It’s not simply an economic term or a geologic term. It is many dynamics working in tandem. “Oil production” is inexorably related to both price and demand, so calling “peak oil” strictly a geologic issue is an oversimplification. The geological reality is that there will always be enormous stores of fossil energy in the ground. But the cost to extract that energy is now increasing far faster than inflation – this is primarily an economic issue (supply-demand-cost-means to produce).

  • Deirdre Kent

    Thanks for this Jeff. I see Chris Martensen has posted on your talk at ASPO. We are in an election right now and the treasury has put out a pre-election fiscal update where one of the assumptions is that the price of West Texas Intermediate oil will be $93 a barrel in June 2016. What do you think of this? New Zealand imports 97% of its oil and last year the cost blew out 22%. I think most of our was labelled Dubai as it comes from the Middle East. Curious as to why the Treasury chose WTI oil as a benchmark. Would love you comment. Also you might like to look at, a new political party I am involved with.

  • VancouverDave

    I have this vision from science fiction that one day our major cities will have massive city-sized factories nearby to produce energy from increasingly EROEI marginal sources and processes.