Not long ago an article was published on the site Master Resource which featured an outlandish denial of verified (and hypothetical) oil resources in the United States (U.S.). Specifically, with oil imports costing the U.S. almost a billion dollars a day, readers were told that a huge amount of oil reserves were actually available, and President Obama lied when he said that there was a drastic shortage of oil in the crust of the earth. Instead, within the onshore and offshore boundaries of the U.S., there was abundance.

That misperception of reality was also published on a site where I have been graciously allowed to demonstrate my competence in oil and nuclear matters, which occasionally included insisting that I am the leading academic energy economist in the world, which in turn usually meant expressing myself in a manner that ostensibly offended a number of readers. To be explicit, I never miss an opportunity to claim that lies and misunderstandings are a clear and present danger confronting all students of energy topics, although I suspect that the present price of motor fuel is revealing to observers in many countries the shortage of the oil from which that fuel is produced.

As is now painfully obvious to many of us, what is happening on the oil front is that supply is flattening, while consumption continues to increase. Some relief is obtained however because a small fraction of what we call oil is actually a collection of items similar to but not the same as conventional oil. These ‘oils’ are conveniently referred to as liquids, and examples are natural gas liquids (or condensates), biofuels, and perhaps a few others. In any event, we are moving toward some kind of output peak whose geometry displays a certain ambiguity, but even so there is nothing ambiguous about the concomitant fiscal burden that will be experienced in most (or even all) countries consuming oil and oil products. That burden is inescapable, regardless of how lifestyles are organized or reorganized, because it has a macroeconomic component.

In my course on oil and gas economics at the Asian Institute of Technology, I identified the International Energy Agency (IEA) and the (U.S.) Energy Information Agency as purveyors of an absurd scenario of future oil demand and supply (although a director of the IEA informed me that his organization did not deal in supply). These organizations have apparently come to their senses, and today the great wholesaler of pseudo-scientific oil inquiries is the Cambridge Energy Research Association (CERA), which is located in Massachusetts, although it very likely has an international clientele. A very short and non-technical article in ‘Science’ (2012) identified Daniel Yergin as their chief ideologue, and that gentleman has assured his firm’s clients that oil production is a high-technology industry where “innovation will not come to an end”.

The less said about Mr Yergin and his recent book ‘The Quest’ the better, but I would like to say hallelujah to that contention. Innovation will not come to an end, nor will the production of oil (and other liquids), but ceteris paribus they will not suffice to keep the average standard of living increasing in a world where aggregate population is growing at almost a billion persons per decade. I hope that I don’t have to describe what a failure of this nature is eventually going to mean both socially and politically.

Someone in Mr Yergin’s firm used the picturesque word “garbage” to describe the work of peak-oil believers, adding that instead of a peak there will be a long series of “undulations” where the global oil supply is concerned. My comment here is ‘right on’, because harmful large and small undulations in the macro-economy as a result of spikes in the oil market are exactly what we have seen since the first oil price shock in l973. An econometric or even a Fournier Analysis will immediately show the relevant causality, although no statistical or mathematical approach can properly deal with the events of 2008, when the oil price almost moved off the Richter scale. In July of that year the concept peak oil and its associated terminology became completely irrelevant, as the global macro-economy moved into a partial meltdown. Please let me assure you and yours that neither high nor low technology will save us if we encounter the oil price catastrophe that will emerge if the aggregate (WTI and Brent) oil price continues to rise.

The last paragraph in the Science article deserves special notice, because the author mentions a contention formulated by economists of the oil major British Petroleum (BP) that OPEC will raise its production by 8 million barrels of oil a day (= 8 mb/d) in the near or distant future, with 6 million of that “split” between Iraq and Saudi Arabia. I neither know nor am interested in the output plans of Iraq, but Saudi Arabia is not going to increase its sustainable output above the present 10 mb/d, and more important present exports are liable to decline as domestic oil consumption increases.

The senior economist of BP, Mark Finley, says that the oil challenges the world faces are much more above than below ground. If by that he means lies and misunderstandings he is correct, however I can accept an equality for these ‘face-offs’. I am willing to claim that OPEC controls the marginal barrel, and Mr Economist should jump for joy, because their agenda is identical to the one BP would contrive if given the opportunity. As for below ground, take a look at the production curves for the largest 100 oil fields in the world, and see for yourself how things are going to turn out.

REFERENCES

Banks, Ferdinand E. (2012). Energy and Economic Theory. London, Singapore and New York: World Scientific Publishing Company. (Forthcoming). Kerr, Richard A. (2012). ‘Technology is turning U.S. oil around, but not the world’s. Science. (3 February).