Risks Of Blind Extrapolation

Another more urgent problem is the approaching end of 'the age of oil' when global output peaks and begins to decline. The received wisdom on this subject is that there is still plenty of oil, at least when rising prices 'unlock' resources that are currently too costly to exploit. The situation has been obscured up to now by cheerful forecasts by industry figures and government agencies (such as the IEA, the USGS and the US Department of Energy), suggesting that increasing global demand, for the next two or three decades at least, will be met at stable prices (Energy Information Administration (EIA) 2004; International Energy Agency 2004). These optimistic forecasts are strongly influenced by mainstream economists who still argue - as they did in their response to the Limits to Growth book - that there is plenty of oil in the ground and that rising prices will automatically trigger more discovery and more efficient methods of recovery (Meadows et al. 1972). The optimists note that oil prices declined dramatically in the 1980s and early 1990s because high prices in the 1970s stimulated both exploration and investment in energy conservation, the latter for the first time.

However, in the past few years many petroleum geologists have become convinced that global output of petroleum (and of natural gas soon after) is about to peak, or may have peaked already. US petroleum discovery peaked in 1930 and production has been declining since 1970. Globally, discovery peaked in 1960 and discoveries in a given year have exceeded consumption only twice since 1980 (1980 and 1992), and the ratio of discovery to depletion is continuously declining. It would not be surprising if global output had already peaked or will do so in the next year or so.

So-called 'proved resources' (90 percent certain) are still increasing (barely) because formerly 'proved and probable' resources (50 percent certain) are being converted to 'proved' as existing fields are fully explored. But the latter category is the one that best predicts future supplies - and the two curves are converging. Big publicly traded oil companies are showing increased reserves, but what they do not mention is that this appearance of growth is mostly from 'drilling on Wall Street' - that is, buying existing smaller companies - rather than drilling in the earth (companies that did not follow this path, like Shell, have faced strong pressures to meddle with their reserve statistics in order to reassure stockholders.) The fact is, new oil provinces are not being discovered; no super-giant field has been discovered since the Alaska North Coast.3

In any case, we think basic energy prices, especially for hydrocarbons, are more likely to increase than to fall in the next few years. The 'peak of oil' is only one of the reasons. Another reason for this is the perceived need to limit emissions of sulfur dioxide, nitrogen oxides, particulates and, especially, of greenhouse gases (GHGs) such as carbon dioxide. Emission controls are already a significant element of costs to electric-power producers, refiners and other industrial fuel users.

Oil (and natural gas) are not the only physical resources for which prices may rise in coming decades. Copper - essential for electrical wiring - is a serious candidate, along with platinum (the catalyst for petroleum cracking and automobile exhaust emissions control) and lithium (for rechargeable high-energy batteries). It must be acknowledged that none of these natural resources has exhibited a long-term increase in prices up to now, although it is hard to distinguish a major fluctuation from a long-term trend reversal (such as we might now be seeing in the case of copper). But, in general, extrapolation from past experience seems to suggest that declining trends in commodity prices will continue indefinitely.4 We think such extrapolation is unjustified, at least for petroleum and gas and some of the metals.

What this means is that cheaper energy from new discoveries or more efficient extraction of petroleum (or natural gas) can no longer be expected to drive economic growth. This is because the fundamental mechanism for economic growth has always been that lower prices stimulate increasing demand. Clearly the reverse case must be considered: a trend toward higher prices will - other things being equal - result in reduced demand for energy and therefore for energy services, which we call 'useful work'. The only way to compensate for more costly primary energy (exergy) is to increase the efficiency with which primary energy is converted into useful work and mechanical power.

Electric power and mobile power (from internal combustion engines, mostly for transportation or construction) are the two most important types of useful work. The other two are muscle work, which is no longer important in industrialized countries, and heat delivered to the point of use (Ayres et al. 2003). But it is often forgotten that the cheapest source of electrical power - falling water - has already been largely exhausted in the industrial countries. Higher electricity prices won't create another Niagara Falls, although a large number of small streams may still be tapped for power. Coal-burning steam electric power plants are a much less efficient substitute for falling water and nuclear power is even less efficient. Declining prices for electric power, due to economies of scale, are also largely exhausted. Only fundamental improvements in technology - for example, combined cycle or combined heat and power (CHP) plants - offer near-term opportunities for future cost reduction for electric power.

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