I’ve been surprised by how (and how quickly) the dominant online view of peak oil has changed recently, thanks to the ongoing soap opera known as the “financial crisis” and the dramatic drop in oil prices by almost exactly 50% since hitting its high of around $147/barrel.[1] Much of this reaction is simply wrong, and I think it stems from a simple and understandable misconception, that the current price of oil is a valid predictor of our position with regards to the peak of world oil production. More on this below.

I was reminded of this simmering issue of how to view peak oil yet again this morning when I saw the article Was ‘Peak Oil’ a Multi-Billion Dollar Hoax? and the reader comments it drew. My first objection is the title of the article–raising the question of whether something is “a hoax” should only be done when there is significant evidence that the phenomenon in question was triggered by not just intentional actions, but with an explicit attempt to deceive.

The author of that article recounts the recent history of the price of oil, and then quotes the president and CEO of Saudi Aramco as saying:

We have grossly underestimated mankind’s ability to find new reserves of petroleum, as well as our capacity to raise recovery rates and tap fields once thought inaccessible or impossible to produce….we still have almost a century’s worth of oil under the conservative scenario…and nearly 200 years’ worth under the target scenario. As a result I do not believe the world has to worry about ‘peak oil’ for a very long time.

That’s a reliable source? There’s not even the slightest chance that this person would have an enormous financial incentive to lie and tell the world not to panic over oil because there’s more than we could possible use in the lifetime of virtually anyone alive today?

Another, ongoing reminder of the change in perspective has come via my in-box. Apparently there’s a sub-group of the energy-aware people in this world who are not merely peak oil deniers, but enjoy waiting for something like a looming recession and a major drop in the price of oil before showing up in my e-mail to crow about how current conditions “prove” that there is no such thing as peak oil, I was duped, I helped dupe others, I must be on the payroll of some nefarious group to talk about peak oil being a real and imminent phenomenon, etc.

All of which brings me back to that fallacy I mentioned above: The belief in a hard and fast relationship between the price of oil and whether we’re near, at, or even past the point of peak worldwide oil production. This is most obviously wrong simply because the current price of oil is determined by the interaction of supply and demand, plus some other factors, such as a “war premium” and the effect of general market speculation. Imagine that President Bush addressed the nation and said that the US would soon be attacking Iran, the country that’s made no secret of their desire to block the critical choke point for oil shipments, the Strait of Hormuz, if attacked. Anyone care to guess how high such an announcement–before a single shot was fired–would push the price of oil in a matter of minutes?

To be a bit more precise, I think we need to distinguish between several separate but related events, which I define as follows:

Peak oil. This is the all-time high peak in oil production. Period. It says nothing at all about the total production capacity, the various reasons for reduced output (including politics), the quantity of oil demanded by consumers, the price of oil (either with or without some of those above-ground factors, like hurricanes, wars, and recessions, factored in), or the human and economic impact of the price of oil. It’s nothing more than a measure of actual production.

The price of oil. This is determined by a range of factors, with constrained supply due to falling production being the one many peak oil adherents point to first and most loudly in the price run-up. It was just as wrong to use price as a proxy for “having peaked” as it is now for those from a different camp to use it as “proof” that peak oil is a flawed concept.

The price of oil is not, in and of itself, interesting. It only matters because of the effects it has, such as spurring (or hindering) demand destruction or the development of more expensive oil fields, as well as the human impacts (see below).

The human and economic impact of the price of oil. This is the most important issue, of course. Modern civilization is so thoroughly dependent on oil, mostly for transportation, that a significant, sustained increase in its price could have a devastating effect on the world, national, and local economies. It would also greatly impact public policy at nearly every level, from subsidies for public transportation to decisions to go to war over dwindling oil supplies.

So where does this leave us on the issue of peak oil? I still think that the view I’ve expressed here repeatedly holds: We’re headed for a near-term peak, roughly in 2011. All of the basics of that analysis, from the list of countries that have already peaked, to our extreme level of dependence on a commodity that we consume at the rate of about 85 million barrels/day, to the numerous difficulties in transitioning away from oil (e.g. the time needed to replace a meaningful portion of motor vehicles that don’t rely on petroleum-based fuel) still point to the peak being a real and imminent threat.[2] A looming recession doesn’t change any of that, and some of it, including most of the transition challenges, are made worse by a recession.

Is it possible that we’ll have a severe and long enough recession that the drop in consumption will mean we’ve already passed peak oil? (I.e. by the time demand recovers, we will have consumed enough of the cheap, easily produced oil that we’ll have skipped past the peak.) There’s a fair amount of talk about this, and it’s certainly possible; I would rank it as the second most likely scenario, just behind a 2011 peak. But even so, we have to be very careful about our assumptions. With the price of oil dropping and the credit crunch showing signs of thawing (a much more important sign that what the stock markets do on any given day), the recession could well turn out to be shorter and/or milder than many people (including me) have feared for some time.

The result of all this “on the other hand”-ing is that we should do everything possible to avoid viewing current market events from an overly narrow perspective. Letting ourselves fall into that trap is the equivalent of becoming one of the blind men describing an elephant. And that, in turn, is a perfect formula for reaching bad conclusions and then responding to events in well intentioned but wildly wrong, and even counter productive, ways. With peak oil and global warming both being immense, imminent threats, that’s a mistake we can’t afford to make.

[1] When I say “dominant view” I’m talking about essentially the loudest opinions online, not necessarily the majority opinion. And I’m certainly not implying that any one individual person has changed his or her mind on the topic.

[2] Before anyone succumbs to the urge to e-mail me with a reminder of how much oil in the average field is left unrecovered (about 2/3, I believe), and how a higher oil price will give companies all the needed incentive to find a way to extract more of that oil, let me say: Save your keystrokes. There will certainly be some additional production triggered by a sustained higher market price for oil, just as we’ve seen natural gas production in the US increase thanks to the application of new technology. The question is not whether such a scenario repeats for oil, but how soon it happens and how much oil it generates. And that extra oil production will appear in the context of many large oil fields around the world continuing to decline in their output due to geological factors.

A further complication comes from the nature of business. The current collapse in the price of oil will greatly reduce the incentives for international oil companies to incur the huge costs needed to exploit the most expensive fields. This means we’re left hoping the oil companies make these investments now, as opposed to buying back their own stock or giving their executives obscenely large compensation packages, even though the payoff will be years down the road.



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