Wednesday, February 1, 2023

The Unbearable Tightness of Peaking

Sandwichman came across a fascinating and disconcerting new dissertation, titled "Carbon Purgatory: The Dysfunctional Political Economy of Oil During the Renewable Energy Transition" by Gabe Eckhouse. An adaptation of one of the chapters, dealing with fracking, was published in Geoforum in 2021

As some of you may know, the specter of Peak Oil was allegedly "vanquished" by the invention of methods for extracting "unconventional oil" from shale formations (or "tight oil"), bitumen sands, and deep ocean drilling. A large part of that story was artificially low interest rates in response to the stock market crash of 2008 and subsequent recession. 

What Eckhouse's dissertation and article explain is the flexibility advantage that fracking provides because the investment required for a well is two orders of magnitude less than for exploiting a conventional field and the payback time is much shorter. The downside is that the cost per barrel of the oil is much higher. Until now loose monetary policy has buffered that cost differential.

The strategic advantage of fracking, combined with the volatility of oil prices over the past two decades and uncertainty about possible future government decarbonization policies (what oil industry figures are ironically calling "peak oil demand") are making large, long-term investments in conventional oil extraction -- investments of the order of, say, $20 trillion over the next quarter century -- less attractive. 

Although the latter might sound like a good thing, what it implies is a full-blown energy crisis occurring much earlier than any purported transition to renewable non-carbon energy sources. I wouldn't be surprised to see reactionary politicians and media agitate a "populist" movement to scapegoat "climate-woke" activists and scientists as saboteurs responsible for "cancelling" long-term investment in a cheap oil economy.

I had forgotten the oil price rise of 2007-08 when a barrel of West Texas Intermediate crude rose from $85 in January 2007 to $125 in November to $156 in April 2008 to $190 in June. Now I remember my sense of awe at the time and dread that something really, really bad was soon going to happen to "the economy." But then nothing happened. Nothing, that is, but the collapse of Bear Stearns and Lehman Brothers, a stock market crash, emergency bank bailouts, and subsequent central bank monetary policy of low, low interest rates. But "the fundamentals were sound."

It scrambles my brain trying to distinguish cause from effect. Did the ultra-low post 2008 crash low interest rates incidentally drive the subsequent fracking boom? Or was specifically a fracking boom one of the core objectives of the low interest rate regime?

Whither "peak oil"? According to Laherrère, Hall, and Bentley in How much oil remains for the world to produce? (2022) "the end of cheap oil" did not go away when the oil can was kicked down the road:

Our results suggest that global production of conventional oil, which has been at a resource-limited plateau since 2005, is now in decline, or will decline soon. This switch from production plateau to decline is expected to place increasing strains on the global economy, exacerbated by the generally lower energy returns of the non-conventional oils and other liquids on which the global economy is increasingly dependent.

If we add to conventional oil production that of light-tight (‘fracked’) oil, our analysis suggests that the corresponding resource-limited production peak will occur soon, between perhaps 2022 to 2025.

Including "all liquids" pushes that horizon out to 2040. In short, we overshot peak oil by a couple decades with the aid of loose money and tight oil, with a little additional help from the Covid pandemic. Those of us with a memory longer than the news cycle may recall that the current round of interest rate hikes by the Fed was initiated in response to inflation, which reached a 40-year high in June of last year due to record gasoline prices. Lower demand for gasoline brings down gas prices while higher interest rates may discourage new investment in fracking posing the specter of an oil supply crunch a couple of years down the road.

The cartoon below illustrates the loose money/tight oil -- tight money/peak oil dilemma:


Anonymous said...

According to Laherrère, Hall, and Bentley in How much oil remains for the world to produce? (2022) "the end of cheap oil" did not go away when the oil can was kicked down the road...

[ An important essay, however a Chinese perspective would argue the end of cheap oil is nowhere in sight, as China has discovered and confirmed large reservoirs of oil that while expensive to recover with conventional technology are inexpensive with Chinese developed and owned technology. Chinese energy technology is advanced in every major category. ]

Anonymous said...

I am grateful for this short essay, since it meant thinking through the nature of energy scarcity even as China is becoming or has already become energy self-sufficient. After all, I have listened to prominent lecturers claim this would be impossible. But, the progress made has been entirely dramatic and will prove lasting because renewable energy is so profound a share.

So, I am writing notes to myself and will talk about the matter with students.

You always inspire thinking and rethinking.

Sandwichman said...

I am so glad you appreciate these posts, anne. Thanks for letting me know!

run75441 said...


I have this over at AB, It is ready to go. I did not release it because I know you usually put your own up at AB. I thought I would ask first. May we release it?


run75441 said...

Anonymous (Anne?):

In all my working travels through Asia, China was the most interesting. There is so much to see and gain from China's historical background. The trains there are magnificent. We took them out of Shanghai to various suppliers in other cities.

I took an extra day while meeting with our plant management in Tianjin. We took off for The Wall and zipped by the Ming Tombs which we should have stopped at also. It wasn't planned and I was afraid the Japanese President of all the plants there would not approve. He had offered up his van and Chinese drivers to take us to The Wall.

When the Chinese plant cook keeps a store of American beer just for us and our visits, cooks a huge spread for our lunch; we could not ask for better hospitality. We were treated very well. We would reciprocate when they came to the US also.

I was invited to speak to undergrad juniors and seniors at my alma Mater (Econ Masters) to talk about travel in Asia and how not to be an ugly American. The point being "blend, listen, and learn. Not sure if they listened that much. I did plant the seed.

China does have great and untapped resources of traditional energy. I believe you are correct on the topic. It will come sooner than later.

Anonymous said...

In all my working travels through Asia, China was the most interesting...

[ Fascinating and helpful account. Thank you very much, Run. ]

China does have great and untapped resources of traditional energy...

These resources have needed advanced technology for discovery and tapping, and that advanced technology has been and is now being developed domestically.

Anonymous said...

A sense from Bangladesh:

June 16, 2022

China sets two world records in deep-sea energy exploration
By Liu Xun

China's self-developed multifunctional modular seabed trencher, Shenlong-3, completed the laying of over 100 kilometers of the first offshore pipeline project in Bangladesh, setting world records in "sea land directional drilling crossing" and "deep-sea trenching behind the channel," the China National Petroleum Corporation (CNPC) announced Saturday....

[ Remember, Chinese development of renewables is strong and advanced in technology and growing from Saudi Arabia and the UAE to about the Chinese coast. ]

Sandwichman said...


Yes, go ahead. I am immersed in a pop-up book project on housing.

Anonymous said...

About housing; I have no understanding of Canadian housing prices, but the increases appear to be historically unprecedented and could be of concern:

January 15, 2018

Real Residential Property Prices for United States and Canada, 1992-2022

(Indexed to 1992)

Anonymous said...

February 13, 2023

China’s Wind and Solar Are Now Almost Enough to Power Every Home

[ The degrees to which China has become energy self-sufficient and is using renewables are remarkable. ]