In the peak oil camp we have two competing arguments:

1. Pessimistic geological inevitability states that the peak will happen and there is nothing we can do about it. Declines are inevitable and will happen soon. The Geological inevitability argument favors a pure peak model focusing on 'easy oil' or 'crude + condensate.'

2. Optimistic economic market adaptability states that high prices will cause a wealth of new supply we never saw before inevitably delaying the peak to some remote future date. The economic marketers will, likely focus on 'all liquids.'

In my opinion, both views are valid. The geologic side points to old supply and its inevitable decline, the economic side points to increasing incentives to bring new supply online with each jump in price.

I think that's what we're seeing now. On the conventional crude side, former shut in capacity is opened as the high price makes it economical again. Furthermore, previously unconventional crude such as heavy oil is being added to the mix as the world demands for any oil of any kind. So in conventional crude, the decline is mitigated by innovation in pursuit of profit.

Also, on the unconventional side, the same thing is happening. Tar sands, oil shales or oil from shale basins, biodiesel, recycled cooking oil, ethanol, gas to liquids, and coal to liquids are all doing their best to come to market and make a profit.

Peak market inevitablists state that all these new liquids don't have a good EROI and more energy goes into them than ends up coming out. They claim that this will hasten the peak by resulting in rapidly crashing economic systems as the high EROI model puts a breaking strain on the world economy. In my opinion, the inevitablists are, for the most part, wrong. Long term, unmatched EROI does result in crashing systems. But the new fuels don't have negative EROI, just a worse EROI than conventional oil. But with the high EROI priced into the market, the new fuels become viable. So the adjustment results in economic slowdown as opposed to crash -- at least for the time being.

Now I'd like to make some observations given this new paradigm that's slowly coming to fore:

1. Biofuels adds a viable new fuel and feedstock for the market. Biofuels may not be as flexible or as good as oil. But with oil struggling or running out, it makes a worthwhile addition. Furthermore, innovation will push biofuels to improve on a long timescale. Look at biofuels to add around 300,000 barrels per day to world supply on a year on year basis for the forseeable future. With algal biofuels, switch grass other and cellulosic ethanol it may be possible to expand this growth on a year on year basis at a 3-5 year horizon.

2. Unconventional oil will continue to grow so long as the price of oil remains high. Tar sands in Canada will continue to expand. Natural gas needed to produce the sands will be imported or nuclear reactors will be built on site. Canada is too dependent on export of oil sands crude to the US to lose its engine for economic growth. It will make the needed investment. Other unconventional basins in the US, Venezuala, and around the world will also be expanded. Look at unconventional oil to add around 300,000 barrels per day to the world supply on a year on year basis for the next 15-20 years.

3. Conventional oil still has a few cards left to play. The most visible is Iraq. This country is the least developed of the Middle East and, probably, has the most realistic reserves estimates. It is possible that Iraq could add as much as 400,000 barrels per day for each year for the next ten years IF geopolitical conditions in the country allow for further development. Also, continued high prices will push producers to find every drop of supply available. As stated before, previously uneconomic conventional crude will come onstream slowing decline rates as well.

4. High prices will incentivize consumers to conserve fuel either by purchasing less consumptive vehicles and appliances, or by reducing the amount they travel and use energy. It will also create increasing pressure for corporations to make available new technologies that are more efficient and reduce and/or eliminate structural dependence on oil and gas. Hybrid autos, Plug in hybrids, electric autos, smaller cars, more energy efficient light bulbs and the continued increasing viability of wind and solar to meet grid demand and then grid to transportation demand will help to reduce demand growth in fossil fuels and shift demand to other energy sources. Ironically, we are most likely to see these changes first in the United States as that country has the most to lose from structurally high oil prices. In fact, we have seen a flattening in demand in the US over the past two years. It is possible that this will continue despite predictions US demand will increase in 2008. Analysis of consumer behavior already shows a strong consumer bias away from large vehicles (SUVs and other trucks) to smaller more fuel efficient models. New technology may well enhance the ability of US consumers to shift demand away from oil. Also expect these trends to begin to take hold in Asia and around the world as all countries try to answer the problem of high or increasing energy costs.

Pessimists deny the resilience of the world economy. Optimists overstate it. Often it is the pessimist's argument that these mitigating factors will be overwhelmed by the massive structural inertia of peak oil. Optimists state that these factors will, almost magically, facilitate a smooth transition. And therein lies the rub. It is likely that both sides are wrong. In my opinion, there will be a crisis. Optimists will be shocked that peak oil actually happened and put a crimp on global economic growth and impacted geopolitics for decades. Pessimists will likely be shocked that the world didn't end, there wasn't a mass die off, and the world economy did survive in some form -- albeit one radically altered from the one we see today.

In conclusion, it seems the world has reached a plateau in conventional oil resulting in a price shock. The structure has changed to produce all economically viable liquids of any type. This first scramble, in my opinion, will likely push the overall liquids peak date out a couple of years. ASPO is betting on 2010 and this seems a good estimate to me at this time. Despite the peak date likely falling back, I wouldn't bet too much on a price contraction. There is far too much market control by OPEC and far too much likelihood of new demand from Asia to result in much relaxing in price even if there are large quantities of new liquids on the market. I'd expect OPEC to start defending the price of oil at around $80 per barrel. So, regardless, the next two years are still likely to see high prices.

Despite my relative optimism as opposed to the pessimists, I am not a 'magical economy' optimist either. I do think that oil will struggle to make any gains it does in overall liquids. The decline rate and expanded consumption in producing nations will take a serious toll. So I don't expect to see a long term, decisive, rally in supply. More like marginal gains struggling to reach an overall top of around 88-99 million barrels per day in the range of 2010-2020 with best possible cases adding 1mpd per year at a year on year average until finally succumbing to the decline rate.

In my opinion, the 88-90 mbpd top is the most likely scenario putting the peak in the 2009-2010 range. Of course, I could very well be wrong. As this is only an opinion based on a little better than back of the napkin analysis.

Best wishes to all!

Rob