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75 comments on Another Way of Looking at CERA

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louGrinzo on September 14, 2005 - 6:58am Permalink | Subthread | Parent | Comments top
"I also think that the theoretical justification for the model's end-state behavior is pretty weak. While it might make sense for a given oil field (and I have seen such curves look pretty good for individual fields), running out of oil on a world-wide basis is a very different phenomenon, especially if there are no good replacements. With prices rising through the roof the incentive to find more oil and increase productivity will plausibly move us considerably above the logistics curve. The very fact that prices are higher towards the end of the curve than at the beginning is going to bias most production towards that end state. That means that extrapolating behavior during the low-price regime is going to underestimate total production levels. That makes the CERA curve not look so bad to me."

Bingo!  This is a point that I've been meaning to bring up here.  Worldwide PO is a very different phenomenon than an individual well, field, or even country reaching peak.  The reason is simple: Incentives.

Halfin correctly points out the effect rising prices have as we approach the world peak, but let's also look at what happens when a country reaches peak.  Assume it's 1970-ish, and you run an oil company.  You have the rights to some fields in the US (onshore or off) that can be profitably exploited only at a ridiculously high market price, say >= $20/barrel.  Of course you don't extract and market that oil, as it would be a money losing operation.  The fact that the US just reached peak is irrelevant--there's enough production from the rest of the world to keep the price below your magic threshold.

Fast forward to 2005, and not only have market prices increased, but improved technology has likely reduced your cost of production by anywhere from a little to a lot.  It could very well be a financially sound move to produce oil from that field now.

Similarly, as market prices rise there will be some demand response, as we've seen very recently from China.

And on top of that, we have public policy, in which those of us lucky enough to have enlightened leaders can look ahead and take actions now to further reduce consumption.  Plus infrastructure bottlenecks, supply constraints caused by natural and man-made phenomena, etc.

Any model that's based solely on geology and ignores these other factors will inevitably predict a quicker arrival of the peak, with a sharper decline.  I have no idea how to adjust the model to take all these issues into account; if I did, I would be on the short list to replace Alan Greenspan.

I'm not anti-model, by any means; hell, when I was (briefly) in economics grad school one of my planned areas of specialization was econometrics.  IMO, as useful as models are, they're most useful when we're aware of both their strengths and weaknesses.

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Stuart Staniford on September 14, 2005 - 9:52am Permalink | Subthread | Parent | Comments top
Mmmm. There is also an argument that the combined effect of prices and new technology is to move production forwards, and then cause steeper declines. The (1-Q) term in Hubbert's model is kind of like randomly searching for oil (so the chances of finding it are proportional to the amount remaining), or sucking oil with a vertical well out of a depleting layer, with increasing amounts of water coming in from the bottom of your well. When instead, you know exactly where the oil is because you've mapped the geology and done 4D seismic on the field, and when you've put MRC wells exactly into the top of your oil layer, then you can keep production higher for longer, but it's going to collapse a lot faster afterwards.

Eg, Colin Campbell used to estimate URR at 1.6T. He's had to increase his estimate several times in order to have a roughly Hubbertian peak (to the great joy of Michael Lynch). But one alternative explanation would be there really only ever was 1.6T (or some number thereabouts), and technology effects will cause the curve to dive below the linear trend (ie a substantially asymmetric peak on the production/time graph).

At this point, the data are too unclear for me to feel comfortable taking a firm position on this possibility. I don't think it can be ruled out.

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Eroie Van Tanstaafl on September 14, 2005 - 10:25am Permalink | Subthread | Parent | Comments top
I made a similar argument on the PASO thread this morning:

using US production as a model for global production is invalid because the US is not a closed market system: US production is price sensitive (+), so US production responds to changes in world prices, and thus declining US production is NOT a reflection of absolute limits on US supply, but rather a consequence of competition with low-cost foreign producers.  

It's like saying that the decline of the US consumer electronics industry is a model for the impending decline of the global consumer electronics industry.  Except that, quite obviously, US electronics makers declined because they have been under-cut by low-cost foreign producers and protected "national champion" electronics firms, first in Japan, then Korea and Taiwan, and now China.  And, equally obviously, total production of consumer electronics has and will continue to rise.

JLA offered good comments, which I responded to there.  In particular, he pointed out that if competition from cheaper oil sped up the decline following the 1970 peak (i.e., from 1970-1973), the high prices in 1974-1985 should have led to a resurgence in US production.  As I noted - that's what in fact happened.

I think perhaps a way to moderate the mutual distrust of the geologists and economists is to view the market for oil as having distinct segments: $10 oil, $20, $40, $80, etc... (in inflation-adj. constant dollars) They replace each other.  They exist in different quantities, in different locations, and peak at different times and rates.

$10 oil peaked decades ago.
$20 oil peaked very recently.
$40 oil is only starting to be developed (again - it's first heyday was 1979-85).

As a result, while the depletion curves for a specified price may be accurate, you'll have to consider the effects of rising prices on total oil production.  While field depletion in a constant-price environment - recent North Sea, US 1970-73, etc., may be steep, global depletion in a rising price environment will be MUCH slower when it happens (and the transition to declining production may consequently be quite far off).

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JLA on September 14, 2005 - 10:56am Permalink | Subthread | Parent | Comments top
I believe that much of that surge in US production was from Prudhoe Bay, a massive find that we are not likely repeat in the U.S.  Prudhoe Bay peaked in 1987 and continues to decline despite rising prices.

Article:
 http://www.washingtonpost.com/wp-dyn/content/article/2005/06/06/AR2005060601742.html

Graphic:
http://www.washingtonpost.com/wp-dyn/content/graphic/2005/06/07/GR2005060700548.html

There is no question that higher prices make the exploitation of more fields feasible.  My question, however, is whether any combination of tar sands, heavy oil, deep water, polar, etc., will make up for declining production rates from the North Sea, Alaska, Saudi Arabia (sooner or later), Iraq, Mexico, Indonesia, etc.?  I have my doubts.  If not, the oil that might be produced profitably at $40 might sell for $100+ due to overall limited supply.  

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75 comments on Another Way of Looking at CERA

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