In Hubbert's Peak: The Impending World Oil Shortage, Kenneth S. Deffeyes argues that the petroleum era is coming to a close. He points out that fossil fuels are non-renewable gifts from nature that are being used up by the energy demands of the modern world. Deffeyes expects global oil production to peak sometime between 2004 and 2008, never to rise again. He does not make the claim that we will run out of oil, only that after peak production is reached the economic consequences will be dire unless other sources are developed quickly.
While many may attempt to dismiss Mr. Deffeyes as another of the long line of Chicken Little doomsayers who have been predicting that we are running out of oil since the late 1800s it is important to note that his predictions are based on the proven models developed by M. King Hubbert. Mr. Hubbert was the much-mocked Shell geologist who in 1956 predicted that American oil production would peak in the early 1970s. Pro-Hubbert and anti-Hubbert arguments persisted until 1970 when, right on schedule, U.S. oil production peaked and began its long decline.
Deffeyes uses a more sophisticated version of the Hubbert methodology to produce global production calculations. His calculations identified 2003 as the year of global peak production, but due to the inexact nature of global reserve estimates he settled on a range of 2004 to 2008. For the Deffeyes prediction to be proven to be wrong we would need to see one of three events. The first would be the discovery of massive new oil deposits. This is unlikely since no major new supplies have been found since the mid-1970s. A second factor would be the advancement of drilling technology to permit more oil to be recovered from known reserves. This is also unlikely since we have already had massive investments in drilling technology without much improvement in our ability to extract oil cheaply. The third factor would obviously be a major rise in oil prices, which would make it economical to recover marginal oil deposits. The problem with high prices is that it would not bring enough new production on-line to make much of a difference in the timing of the peak. Think of building numerous processing plants to produce tar sands oil. By the time these projects came on line production drops due to depletion in older oil fields would dwarf the new production made possible by the new projects.
Mr. Deffeyes makes it clear that regardless of any new initiative the peak production year will likely remain unchanged. He warns us that unless we get over our dependence on petroleum over the next decade our economy will suffer a major contraction from which it will take a long time to recover. A similar argument can also found in the extremely readable and highly recommended The Color of Oil: The History, the Money and the Politics of the World's Biggest Business by Michael Economides.
From a purely selfish viewpoint these books may point to a way to get superior returns from our equity investments. Those who are looking for the Iraq conflict to drive energy prices much lower may be correct in the short term but even if they are such price drops would discourage new investment in exploration and increase the depletion rates. That brings the peak production year closer to the current time and makes it extremely profitable to invest in high reserve companies in stable geographical areas.
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Thanks for your very thorough analysis. I haven't read the books, but will do so in the near future.
Thanks for your e-mail,
Mike
