Search This Blog

Wednesday, July 20, 2005

Hubbert's Peak?

According to The American Enterprise article linked to by Howie's post "As long as we don't interfere too much", "in 1956, Shell Oil geologist M. King Hubbert predicted domestic oil production would peak in 1969. He missed by one year."

Did he only miss by one year? I'm wondering if that's true. We don't really know yet, since we'll have to wait till the end of time to observe that no other year going forward has higher domestic oil production before we can be sure he's right.

I've been contemplating this for a while now, after noticing that crude oil exceeding $60/bbl didn't seem to make any difference at all. No significant effect on inflation. No significant effect on GDP growth. No significant effect on employment, productivity, or anything else, as far as I can tell. A bit of bitching and moaning at the pumps, perhaps, but little else. An article by Peter Huber explains why (at least partially):
[W]hen the price of crude doubles--rising from, say, $28 a barrel to $56--the price of the average mile rises only 10% to 15%. That just isn't enough to impel most of us to change our behavior very much. People who drive expensive cars that burn lots of gas are the least sensitive to rising fuel costs. Most of the cost of quality miles lies in fancy leather and such--what surrounds the gas tank, not what gets pumped into it.
For other uses of oil, similar analyses are found. The cost of the oil is a small part of the cost of operating the devices that use the oil. What this means is that "the
demand elasticity for crude is very low".

How about the long term supply elasticity for crude? I think it is much higher than the demand elasticity. Also, I think that there is a very real possibility that at some point in the future, crude oil prices will become and remain high enough because of long term growth in demand, such that it will be very profitable to extract oil from the shale in Colorado. If that happens, the domestic oil production of the United States might greatly exceed the peak reached in 1970.

Admittedly, I wouldn't bet on it. One reason is that it is my understanding (I could be wrong here) that shale oil in Alberta is can be extracted somewhat more cost effectively than the shale oil in Colorado. There are hundreds of billions or even trillions of barrels of oil in the shale in Alberta, and by the time we even make a dent in it, the oil age might be over, replaced by new energy sources, perhaps some based on technology we haven't even thought of yet. In this case, no one would ever bother extracting oil from the shale in Colorado, so U.S. production might not ever exceed its 1970 peak.

There is so much oil that can be profitably produced at $60+/bbl that as long as that price level doesn't bring down the global economy (which it doesn't seem to be), I think we're virtually guaranteed increasing oil production, on average, for decades to come.

No comments: