Friday, April 01, 2005

Hubbert's Pimple


Imagine that you plotted the historical graph of oil production, from the start of the oil era just before the beginning of the previous century, continuing to the present, and extending into the future. What would it look like?

The graph of the early 1900s rises gradually from zero. Oil is just beginning to become important in the economy. Facilities and infrastructure for exploration, development, refining, and distribution are barely existent.

As the century progresses, the graph turns sharply upward. Oil becomes the essential fuel of the modern economy. Manufacturing and transportation depend heavily on it. Exploration is conducted in earnest. A huge new industry is centered around finding and delivering oil.

As the oil economy takes hold, there is plenty of oil in the ground. It is easy to find and easy to develop. As you plot your graph, you see that demand (driven by economic growth) and production climb steadily in unison. The graph curves upward exponentially.

But as the 20th century wears on, a fundamental change creeps into the picture. The most productive oil fields have been found and developed. The petroleum industry begins to concentrate increasingly on new technologies for extending the life of these oldest producing fields, for squeezing additional production from them, and for exploring and developing more difficult and less promising areas. Exploration increasingly involves poking around in obscure nooks and crannies--quite a difference from the early bonanza days. Starting in the 1970s, periodic shortages occur. The curve backs off from its exponential rise.

Late in the century, the easy oil has been found. Not only is oil now harder to find, but that which has been found is harder and more expensive to recover. For a while, technological advances are sufficient to keep production moving smartly ahead. But it becomes increasingly difficult to match production with demand, and advancing technology only goes so far.

Of course, all of this was eminently predictable: when a finite resource is developed, the easiest and most profitable instances are developed first. As demand continues, development ventures into more difficult areas. At some point the earliest discoveries are mostly used up, and what remains is ever harder to find and produce. There comes a time when production cannot be maintained at its previous levels, and begins to decline.

Your pencil wavers as you trace your graph. What now?

We may not quite be at the point of production decline, but we are very nearly there--close enough to reach out and touch it. It is conceivable, even probable, that production will never significantly increase beyond its current level. So look out a year or two or three. What happens to the graph you are drawing? It bends over, begins to turn down. As you plot oil production into the future, the downward part of the graph follows the same essential shape as the upward part, but in reverse. What you see before you is our old statistical friend, the bell shaped curve.


I said that all of this was predictable, and indeed, it was predicted. Beginning in the 1940s, oil geologist M. King Hubbert did extensive theoretical work on the course of future oil production, and understood the essential bell shaped curve that describes humanity's use of oil. The same basic curve applies when graphing other fossil fuels, either separately or in aggregate. When considering the graph of all fossil fuel use in all of human history, past and future, the solitary bell shaped curve momentarily spikes above an elongated time line. This spike has been called "Hubbert's Pimple".


We have seen that the graph of oil production is a bell shaped curve. We now find ourselves at or near the uppermost point on that graph: the curve is beginning to roll over and will soon head down. Perhaps it has already begun its decline. Yet if we were to graph oil's demand curve, we would see that it is heading exponentially upward. That is, as we approach the zenith of oil production, our economies have a fundamental expectation of ever increasing oil availability. Our very way of life is predicated upon it.

Up to now, oil's demand and production curves have tracked closely together. But for the first time in history, demand and production are poised to diverge wildly. It is hard to overstate the economic, political, and social implications of this divergence. We are literally entering uncharted territory. The ride will be a rough one, perhaps horrific.


Almost all of the world's oil producers are operating at or near maximum capacity. The one possible exception is Saudi Arabia, which is the sole source of slack or liquidity in the oil market today. The Saudis claim that they can increase production to satisfy increasing world demand, from their current 8 to 10 million barrels per day to perhaps as much as 12 to 15 million barrels per day. But all the information we have on Saudi reserves comes from the Saudis themselves, and their claims are by no means universally accepted. At any rate, there is no independent source of authoritative information on Saudi capabilities.

Meanwhile, world energy demand continues to grow. Exxon Mobil chairman and CEO Lee Raymond said in June 2004 that "we see overall global energy use growing by about 40 percent by 2020, as demand rises from about 215 million oil equivalent barrels per day to almost 300 million oil equivalent barrels per day." And he added: "For a variety of reasons, we expect fossil fuels to provide about 80 percent of the energy used in 2020, and to increase -- and I emphasize increase -- in absolute magnitude by about 65 million oil equivalent barrels per day. Just how much is 65 million barrels per day? Well, it is close to eight times Saudi Arabia's current crude oil production."


What is the essential lesson of "Hubbert's Pimple"? From the perspective of all of human history, it is that humanity's dance with fossil fuels is destined to be brief. But for the fateful present moment, the take-home message is this: Hubbert's bell shaped curve of the extraction of a finite resource peaks when about half of that resource has been removed. At that point, the decline begins.

With half of the world's recoverable supply of oil yet to be pumped from the ground, the world will not run out of oil tomorrow. But that is small consolation, because once the peak has been reached, each passing year's production will be less than the preceding year's. How to reconcile the reality of ever increasing scarcity with the explosion in world demand is the question of the day. We've done a frightfully poor job of posing that question, let alone answering it. The consequences of our failure could be staggering.

Copyright (C) 2005 James Michael Brennan, All Rights Reserved


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