Peak Oil Fears

Back in 2006 EWEB invited author Richard Heinberg to Eugene, to give a talk about Peak Oil. Heinberg had just published a scary book about this, claiming :

The world is about to run out of cheap oil and change dramatically. Within the next few years, global production will peak. Thereafter, even if industrial societies begin to switch to alternative energy sources, they will have less net energy each year to do all the work essential to the survival of complex societies.

This got an enthusiastic response in Eugene. Since I’d spent some time in the oil fields doing seismic exploration, and had been hired by UO in part on the basis of my claim to be an environmental economist, I thought I should respond. So I wrote this Op-Ed for the RG, which they published in Feb 2006. It’s no longer on their website, so here’s the version I submitted:

Peak Oil and Other Fears

I’ve been following the reports about the enthusiastic reception that Professor Heinberg’s talk about peak oil and industrial collapse have received in Eugene. Here’s a related problem that I give in class: World oil reserves are 600 billion barrels, and we are using it at 20 billion barrels per year. How long until we run out? Please write down your answer before you read any more of this op-ed.

My students do the math and they tell me 30 years – maybe just 20, if we add growth in consumption and population. Good try, I tell them, but these numbers are from 1950. Hmm.

The idea of economic collapse from resource exhaustion used to be mainstream economics – a long time ago. In 1798, Thomas Malthus argued that population would soon outstrip food production, and that mass starvation would result. During the potato famine, English politicians used his economics as an excuse not to waste money on relief for the starving Irish. Stanley Jevons, in 1865, argued that England’s industrial revolution would soon come to a halt because the country was using up its supply of coal.  Actually, England still has plenty of coal, though not much use for it. As for the starving Irish, well, today 57% of them are now officially “overweight or obese.” Whoops.

While this embarrassing failure to explain reality sent economists back to the drawing board, apparently it has left the peak oil cult untroubled – their forecasts of doom and gloom are just a recycled version of Malthus’s logic, which treats humans as if we are mindless sheep, and which shows no understanding of markets or incentives.

The new model that economists came up with starts from sensible assumptions – business people aren’t idiots, they want to make money, and consumers don’t like to waste money. As more people use up an exhaustible resource like oil, the owners see the scarcity coming and they start demanding higher prices. This gives consumers an incentive to conserve, and oil companies incentives to find more oil. Companies that don’t own oil start to develop alternative energy sources. Combine these effects, and scarcity tends to go away. Add in a little technical progress and prices will fall, not rise. Sure enough, measured by how many hours we have to work to pay for a barrel, the long trend of oil prices has been downward, except for a few short spikes during wars.

The list of alternatives to oil is very long. On the production side, there’s solar energy, wind energy, nuclear/hydrogen energy, coal, tar sands, or just plain drilling more oil wells. On the consumption side, there’s insulating your house, buying a small car, or riding your bike. (If you haven’t ridden it since the last oil crisis, lube the brake cables first. I learned that one the hard way.) We don’t use these substitutes much, yet, because they are still a bit more expensive or inconvenient than oil is. But they are still out there, waiting for us.

Here’s some evidence of how painless the transition to these alternatives will be. Since it peaked around 1970, US energy use per dollar of economic output has been falling steadily. It is now half what it was. You are probably surprised to hear this – unless you are in a business that uses a lot of energy. If you are, you’ve worked like a dog to make this happen, and you’ve increased your profits along the way. But for the average person, all this has been done without much trouble or even notice by you. This is why we call the market “the invisible hand.”

I don’t understand why people continue to give predictions of resource exhaustion and economic collapse so much attention. The prior history of these predictions is simple – they have always been wrong. The theory they are built on is also simple – and also obviously wrong. But then I don’t understand why people like reading Stephen King either. Is it possible that a nice simple story about imaginary scary things is just a fun distraction for the evening?

What scares me is that with all the attention they are devoting to oil scarcity and the coming collapse of civilization, Eugene and its politicians are getting distracted from working on the many things that markets don’t reliably deliver – like health care access, affordable housing, transportation, good paying jobs, and education – and which we rely on good government to help provide.

Bill Harbaugh, Associate Professor of Economics, University of Oregon

I soon started getting angry emails about my claims, including one from a Portland businessman who accepted my offer to bet that the price of oil wouldn’t go above $200 in real terms within the next 10 years. He backed out when he realized I was prepared to put $10K on it.

So what’s happened? I haven’t been keeping an eye on global production, but today the Dept of Energy’s weekly report is out, and US oil production has now hit 11M barrels a day, up from 5M in 2006:

The price of sweet West Texas Intermediate, which was $78 at the time, briefly got up to $161 in 2008, but it’s currently about $70. (All in 2018 dollars). So what are the predictions for future oil output and prices? If you’re still asking that question, you didn’t understand my op-ed.

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12 Responses to Peak Oil Fears

  1. A duck says:

    So the takeaway I’m getting from this is never trust economists?

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    • uomatters says:

      Only trust us when we tell you not to trust us.

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  2. honest Uncle Bernie says:

    Yes, Bill, you deserved to become a Full Professor! And it shows how the notion of “environmental” doesn’t always suit people’s agendas.

    I’ve been reading about peak oil for decades, it never seems to happen. The U.S. was supposed to have declining oil production, there was the “energy crisis” (really dates me, doesn’t it!), all of that stuff. Now, look at that graph of U.S. oil production! The U.S. is or soon will be the largest energy producer in the world, probably a net exporter (when you include all forms of energy, not just oil). No economist could have predicted fracking and all the other advances in oil technology.

    There was also a time when nuclear power was going to take over the electricity industry. Not happening in the U.S.!

    As for trusting economists — what I would like to know is whether I should believe this stuff about the “yield curve.” Supposedly a very reliable predictor of recessions, and looking like one coming in 2 or 3 years (just in time for Trump to get re-elected, wouldn’t you know!) So say many economists. But others say “it’s different this time.” Bill, who should I believe? (For what it’s worth, I am guessing it’s not different this time. Am ready to cash out my ORP funds in a year or two.)

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    • uomatters says:

      I love you Bernie, but if I knew the answer would I give it away free on the internet?

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      • honest Uncle Bernie says:

        Bill, you are a professor, right? Which means you are a benefactor of humanity, right?

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  3. Dog says:

    Short comment

    Peak OIl has always been a physically bad concept on the global level. Since about 2005 oil production global distribution has been refinery limited.

    In 2005 global distribution was at about 82 MBD
    Now its about 90-91 MBD

    this gives rise to the plateau behavior which can easily be seen
    in any global data post 2005.

    The Hubbert Peak was a local phenomena and of course new fields in the Bakken and North texas have lead to the uptick.

    However, just like Alaska, the is at best a decade of crude in these new resources given our demand, which is about 22 MBD.

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    • uomatters says:

      Hi Dog, I’m willing to put $50K down on a bet that the price for a barrel of WTI on July 18 2028 will be less than $70, in 2018 dollars. You in?

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  4. Anonymous says:

    Probably true in 2028
    Unlikely to be true in 2048

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    • uomatters says:

      It’s never too early to plan for my potential grandchildren’s college tuition. 2048 it is. Please send me your contact info so we can draw up a contract.

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  5. Hippo says:

    He meant to bet that oil *wouldn’t* go above $200 a barrel. I think that very well clears things up.

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  6. ODA says:

    Dr. Economist,

    What ever happened to the idea of energy too cheap to measure? We have aging dams and sparkly new wind, wave, and solar (funded often by tax coffers *BETC) and are taking nuclear offline in many places.

    I wonder what the world would look like with free energy.

    Thoughts/derision?

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    • Anas Clypeata says:

      BLS data shows electricity prices per KWH at 4.6 cents in 1978, 13.9 cents today.

      https://data.bls.gov/timeseries/APU000072610?data_tool=XGtable

      Adjusted for inflation, 4.6 cents in 1978 would be 17 cents today. That’s a 22% drop in real prices for electricity.

      When you add in the vast improvements in energy efficiency since then (a 60-watt incandescent has been replaced by a 7-watt LED; a typical refrigerator is larger, better, and uses 1/4 of the electricity of the 1978 version per year), you get a drop in the price of electricity services of roughly an order of magnitude in just 40 years.

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