Peak Oil is dead! Long live Peak Oil!

One of my favorite websites, The Oil Drum, is shutting down, and I am mad! Everyone is attributing the shutdown to the death of the "Peak Oil" meme, which in turn is attributed to fracking. The first is probably true; Peak Oil mania is over. But the second is false. Fracking has not killed Peak Oil. It just hasn't fit the narratives that many of the Peak Oilers spun.

The thesis of Peak Oil is simple: Global oil production will soon peak and begin to decline. But there were two possible stories that the Peak Oilers told about how this would happen:

"Good Peak Oil": In this case, we find something that's better than oil, and switch to that, just like we once transitioned away from whale oil. In this case, oil prices and production would both fall.

"Bad Peak Oil": In this case, we don't find something better than oil, and as oil becomes more scarce, the price would go up, while oil production and overall economic activity both contracted.

What we got was neither of these. Or more accurately, we got a little bit of both, coupled with something else that doesn't fit with either story. What happened was this:

1. Global demand for oil increased, due to growth in emerging markets, pushing up oil prices in the 2000s - from around $20 to over $100, a five-fold increase.

2. At the new higher price, it became economical to tap expensive oil sources like tight oil (fracking), deepwater oil, and oil sands.

3. Even at the new higher prices, it has not been economical to increase "conventional" oil production. Instead, all net production increases have come from "unconventional" sources. And most of that "unconventional" production is not actually "oil" at all, but "liquids", which includes things like natural gas liquids.

4. There was a several-year lag in the mid-2000s where global oil production plateaued even as prices increased. This culminated in a dramatic spike in oil prices in 2007-8 which then subsided due to the global recession and the dramatic increase in unconventional oil production.

5. Oil prices are still over $100, even as global growth has been slow. Meanwhile, oil usage in rich countries has declined significantly.

This story does not easily fit with either of the Peak Oil scenarios. But it has important elements of both.

First of all, the peak in conventional oil, coupled with a dramatic surge in unconventional oil, looks a lot like the "Good Peak Oil" scenario, in which technology produces a new alternative energy source, and we switch to the new thing.

But the seemingly permanent increase in oil prices, and the fall in oil demand in rich countries, fit the "Bad Peak Oil" story. It indicates that the world is hitting oil supply constraints.

(And of course what the Peak Oilers missed was unconventional oil itself. Some of them missed the technology entirely, while others merely failed to anticipate that the industry's terminology would switch from "oil" to the more weaselly "liquids".)

So what happened was NOT that we switched to something better than oil. We switched to something worse than conventional oil: unconventional oil, which is more expensive to extract and/or to refine into usable products. This has left us permanently poorer than we would be if conventional oil hadn't hit global supply constraints. Filling up your gas tank is twice as expensive now, in real terms, as it was two decades ago. And that looks unlikely to change. In the wider economy, increased transportation fuel costs may be a main driver of the Great Stagnation, which manifests most clearly in the stagnation of transportation technology since the 1970s.

Basically, what happened is this: Scarcity attacked humanity, and Human Ingenuity battled back. Through heroic efforts, doomsday was averted. But Ingenuity did not win a smashing victory, as it did when we switched from wood to coal, or from whale oil to oil. Instead, humanity was forced into a fighting retreat, with Ingenuity executing a brilliant rear-guard action and forcing Scarcity to call off its pursuit...for now. But humanity has lost ground.

And Scarcity may not wait very long before launching another attack. Future increases in shale oil production (including tight oil and oil shale) is likely to be a lot more expensive than the low-hanging fruit we have picked thus far. Coupled with continued rises in developing-country oil demand and continued decline in conventional oil fields, this could cause another rise in oil prices. That will bring back the "Peak Oil" meme, which only seems to interest most people as an investment story. But sadly, The Oil Drum will not be around to chronicle the return of Peak Oil.

In the meantime, whatever you think of the predictive prowess of the Peak Oilers, the policy implications of the permanent transition from cheap oil to expensive oil are the same. Humanity is running out of high-quality, fungible, energy dense transportation fuel, and there is no substitute on the horizon. Creating a substitute - be it biofuels, batteries charged by cheap solar, or whatever - is going to take a lot of research, which is going to cost a lot of money. And realistically, the only entity that will put up that kind of money is the government.


Update: On Twitter, Kate Mackenzie suggested I mention climate change. In the heyday of the Peak Oil meme, some people did suggest that Peak Oil would save us from climate change. But this was always a complete fantasy; the numbers clearly don't add up. Electricity generation produces enough CO2 to cook the planet without needing help from dirty transportation fuel. The real hope for stopping global warming lies in low-carbon electricity generation - switching from coal to gas in the very short term, then switching to solar a few years later.

Update 2: Karl Smith disagrees with my post. Matt Yglesias effectively rebuts K. Smith with a single graph, writing "The good old days of genuinely abundant liquid fuel really do appear to be behind us." Exactly.

Update 3: In the comments, Robert Frey makes a VERY important point about conditional vs. unconditional prediction:

Arguing that a peak oil prediction was foolish or inaccurate because it was not realized is a bit like arguing that an inoculation program was unnecessary because the epidemic never occurred. The geologists who made such predictions were not fools. Their models were well thought out and carefully validated. They understood the conditions and limitations of their prognostications and saw themselves not as doomsayers but as agents of change. We owe them gratitude and not disdain.

YES. Exactly. If physicists predict that an asteroid is going to hit Earth, and so in response we send a bomb and successfully divert the asteroid, you hail the physicists as heroes, rather than deriding them as Chicken Littles. This is something that too many economists and economics an finance commentators tend to get wrong when talking about "predictions". Thank you.