Truck and Barter

While there is some chatter going on around other blogs about oil supply issues, I wanted to make mention of something I think is important to the debate.

The definition of oil supplies often carries (and too often does so implicitly) the descriptor "economically recoverable". That is, the amount of oil that can be drawn from the ground using today's technology and todays cost-structure for doing so and reap a price that companies are willing to sell it for. By its nature, this means the amount of oil is in constant flux. An alternative description is the amount of "oil-in-place", i.e. the amount of the stuff that is extant, no matter how hard it might be to extract. (Including the stuff just found in this guy's back yard.) Of course, this number itself moves since the geological assessment benefits from ever-improving measurement methods.

To get an idea how much this number has increased, here's a chart from an EIA presentation that shows some early measurements (1942) at 600 Billion barrels of oil as ultimately recoverable, all the way up to just under 4 Trillion barrels in a 2000 USGS survey.

In the same presentation, the amount of oil-in-place is estimated at around 6 Trillion barrels. Estimates of the amount of oil to be recovered, then, depend heavily on the technological ability to make extra barrels recoverable. And, of course, as the price of a barrel of oil rises, the more economically reasonable it is to go after those additional barrels.

Currently, the EIA is using an estimate of about 1.3 Trillion barrels of "proved" oil reserves. The remarkable thing about this is that, in just 1980 that number was approximately 644 Billion (NOTE: XLS file). Clearly it would be wrong to consider any single number the exact amount of oil that is truly left in the world.

This has large impacts on anyone trying to truly predict where "the peak" might come in oil production. Yet another picture from the EIA; this time it's projected "peaks" in the production curve. As can be seen, the date of the peak is highly sensitive the changes in the projected level of production growth. There is a 46-year difference between 1% and 3% growth. It is also important to mention a couple of other items on this graph. 1) Note the sharp decline in the demand following the oil shocks of the 1970s. 2) Recent projections of growth extrapolate a trend that includes a period of time when oil was US$10 a barrel, meaning that industries like auto makers were responding by caring less about conservation. In both cases, the extremes of prices resulted in marked shifts in market actions (people wanted, and got, more efficient cars in the early 80s, then wanted, and got, gas-guzzlers in the 90s). I don't think there is any reason to suspect this time will be any different.

In a note to this slide, the EIA puts things quite nicely:

The peak year would be delayed by discovery of a larger recoverable conventional resource base than is currently estimated, or it could occur earlier with accelerated production rates. It may also vary as global oil demand varies. For example, if demand for oil weakens for economic reasons or because substitutes for conventional oil gain market share, the conventional oil production growth rate may decline and result in a later peak.

I think it would be quite reasonable to see a sustained growth in the price of oil, and thus gasoline and other fuel products, as the best way to curb demand. As the price climbs, oil companies will become more active in searching for new reserves as well as researching new technologies to make more of known reserves, meanwhile the demand for the oil will fall, and alternatives become more appealing. The reaction, I would suggest, is a pushing off of the coming peak in production. If that's so, then any attempt to restrain the rising price through some sort of governmental intervention (stepping in to respond to the people who cry "there oughta be a law" and those who simultaneosly complain both about high gas prices and the polluting nature of fossil fuels) could result in, all else equal, bringing the impending peak closer and closer to fruition.