New Revelations about the Future of Oil

Everyone wants to know the future price of oil, but has the most authoritative source on the topic been politicized?

According to the Guardian newspaper, 2 senior officials from the International Energy Agency are claiming that the IEA is knowingly exaggerating the future availability of oil. See the full report at: http://www.guardian.co.uk/environment/2009/nov/09/peak-oil-internat
Between 2005 and 2008 the IEA had already reduced its forecast of oil production in 2030 from 120 to 105 million barrels a day. Current production is 83 million barrels per day. These officials are saying that “even 90m to 95m barrels a day would be impossible”.

This is particularly important to HOMER users because the future price of oil is one of the most important variables in the design optimization of hybrid power systems. Getting authoritative information about oil reserves is notoriously difficult. We had thought that the IEA was one of the more reliable sources, at least relative to the companies and countries that have an incentive to exaggerate reserves.

I always found it curious that the companies and countries that were claiming that global oil production was going to increase weren’t building new refining capacity. Existing refineries are operating near capacity. What are they planning to do with this promised new oil production? Maybe their actions speak louder than their words.

As skeptical as I am about optimistic predictions of global oil production I also think there is a techno-economic flaw in most of the peak oil discussion. I don’t believe that global oil production will decrease at the same rate that production from individual oil producing regions has declined in the past. When individual oil producing provinces went into decline, increased production in other provinces was more than compensating. As a result prices stayed “approximately” level. For the planet as a whole there won’t be any other province coming into production to compensate for the decline, so prices will rise. This will increase production over what it would have been at constant prices. Whether that delays the start of the decline or merely slows its rate remains to be seen. The real issue is the economic impact of increasing prices, not the actual quantity of oil produced. The irony is that increasing prices will depress demand, either through recession or motivating investments in alternative fuels and more efficient use of oil. We should expect to hear a lot of economic nonsense that oil production peaked because high prices decreased demand, not because the low cost resources have been depleted. In other words, we may hear that high oil prices are the cause of peak oil, rather than the effect.

That last argument is academic. The practical issue is that hybrid power systems are an increasingly attractive way to reduce the consumption of diesel fuel for electric generation. If adopted on a large scale they can help reduce demand for oil and the economic impact of rising oil prices.

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