Sunday, September 18, 2005

Peak Oil: a matter of opinion

Despite the growing public awareness of Peak Oil, the mainstream media continues to portray the issue as a polarized debate between doomsayers and techno-optimists. For example, an opinion editorial in the New York Times opens with the views of Mr Pickens, a reputable Texan oilman, who has “taken sides in a surprisingly heated debate” because he “subscribes to what is being called the peak oil hypothesis”.

The Times editorial declares the “peak oil hypothesis ... holds that there simply isn’t very much new oil left to be found in the world. As a result, we are currently in the process of draining the proven reserves that are still in the ground.”

The Times editorial characterizes the world view of those it terms “peakists” with a quote from Matthew Simmons, that energy demand is about to outstrip supply and “we are in a serious energy crisis”.

Opposing this view, of course, is another group, “who argue with equal vehemence that the world is not in an energy crisis and it probably won’t face one for a very long time.”

Notably, this other group is spared the trite epithet “theorist”. Their arguments are never labelled “hypotheses”. Perhaps that’s because this group rallys to the mantra, “Price is the only thing that matters.”

That’s right, “It’s the geologists on one side and the economists on the other side”, energy analyst Seth Kleinman explains.

Not surprisingly, given their god-like status these days, the economists are revered with child-like credulity, while the geologists are deemed mere theorists. Moreover, the issue is not so much about scientific fact as it is about opinion.

Does it surprise you, that the issue would be portrayed as an argument about whether or not we are facing a crisis? It shouldn’t.

This representation of the Peak Oil debate exemplifies the fanfare and pretension that characterises much of the mainstream commentary on most issues. It reveals a lack of intellectual rigour and an inability to comprehend some fairly basic science.

For a start, Peak Oil is not a theory or hypothesis, it is an observable phenomenon. Peak Oil is simply the point at which oil production from a notional deposit ceases to increase and begins to decline. If oil production from a typical field is graphed against time, it follows a bell curve, the familiar pattern of a normal distribution. The peak in oil production is that portion of the curve tangent to maximum production.

Peak Oil applies equally to individual well heads, oil fields, basins, producer states, regions and the world as a whole. There is no dispute about the fact that Peak Oil is an intrinsic attribute of oil production.

Indeed, every single oil producing country outside OPEC and the FSU has already peaked and is now in terminal decline. For example, Germany peaked in 1967, the US peaked in 1971, Indonesia in ’77, India in ’95, Malaysia in ’97, Columbia, Equador and the UK in ’99, Australia in 2000, Oman and Norway in ’01. Peak Oil is a fact!

By comparison, the economists’ arguments really are pure theory, with very little relevence to the real world beyond the rarified climes of financial institutions. So let’s take a look at their theories.

The economists describe two possible consequences of escalating oil prices; one is that higher energy prices will make it viable to invest in more expensive and less profitable energy sources, such as deep water reserves, shale oil and tar sands. The other possibility is that higher energy prices will dampen demand and reduce consumption, which will lower the price of oil.

The dilemma for investors is the risk that major capital investments could prove unprofitable if energy prices fall. Proven short term profits are substantially more attractive than possible longer term losses. Hence the energy industry prefers to maximize the profit making capacity of proven reserves while minimizing exposure to future losses.

There is a temptation to postpone major capital investment in the face of future economic uncertainty, and focus on the near term advantage of high profits. This approach ensures future supply constraints and prices hikes, which in turn raise the likelihood of economic recession.

The free market forces of supply and demand form the fundamental framework of neoliberal economic theory. The profit motive is the prime mover of all transactions, in a game plan where self interest is the ultimate goal.

Three basic assumptions are axiomatic to economic theory; resources are limitless, knowledge is perfect and markets are rational. Of course, in the real world, resources are very much limited, knowledge is never perfect and markets do not always act rationally.

The challenges posed by the inevitable depletion of world oil reserves represent a set of circumstances for which contemporary economic theory has no logical solution. The techno-optimist fantasies of hybrid cars, nuclear reactors and fuel cells are about as plausible as the clean green dream of corn and sunflower powered trains and planes.

The real debate is about the precise timing and consequences of Peak Oil. The Times editorial alludes to this fact, but nowhere makes it explicit. Instead, it presents an argument that is completely irrelevant and actually misleading, an argument that serves to confuse and obscure the fundamental dilemma posed by Peak Oil, an argument that stifles and obstructs the development of strategies for responding to the inevitable and predictable consequences of Peak Oil.

Like much of the mainstream commentary on Peak Oil, the New York Times erroneously portrays the Peak Oil debate as a political battle, a matter of opinion, devoid of real world certainties. This approach to news reporting is becoming increasingly popular, since it requires so little thought or research. Journalists are encouraged to champion conventional wisdom and obscure unpleasant facts.

Natural limits, ignored by economic theorists but recognised and studied by ecologists, biologists and geographers to name a few, clearly apply to humankind as much as to any other species, notwithstanding our sophisticated technology and ability to manipulate the environment.

The ecological carrying capacity of the environment is a natural limit that cannot be ignored with impunity. Any species which exceeds that limit risks calamity and mass starvation. For this reason, in nature, most species are limited in range and number. Humans are unique in that our population has hitherto grown exponentially, a trend that is clearly unsustainable.

The single most important limiting factor for any species is the availability of energy. Sunlight is the primary source of energy for life on earth. Seasonal fluctuations in plant growth and animal reproduction correlate with variations in the amount of solar energy available from one season to the next.

Humans have been able to exceed the natural ecological carrying capacity of the environment by exploiting energy reserves that have accumulated over millions of years. There is nothing inherently wrong or immoral about this, but it is important to realize that there is a cost associated with exceeding natural limits.

In our case, the cost could be as high as mass starvation, or as low as a simple change in attitude and lifestyle. The determinant will be global political leadership. If the risks are recognised in time and the appropriate solutions are devised and implemented, it is possible that future generations will be spared the worst consequences of Peak Oil, the twin perils of energy scarcity and environmental degradation.

But while our leaders maintain their current stubborn delusion and misplaced faith in economic theory, while they continue to ignore the warning signs and scientific studies, the prospects of a brighter future fade by the day.

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