Peak Oil and Peak Demand

I enjoy reading the essays of Gregor Macdonald. Mr. Macdonald asserts the Peak Oil hypothesis. He has amassed a collection of supporting factual detail. The Peak Oil hypothesis holds that worldwide annual petroleum production increased to a peak in the first decade of the third millennium, and annual production will decline hereafter.

Why the peak? There are several explanations, and here are some of them. They aren’t mutually exclusive.

1. "Global oil supply ran into geological constraints." -- Gregor MacDonald

2. All the easily extractable oil has been found. What now remains is the more difficult oil.

3. The marginal cost of a newly extracted barrel has increased dramatically.

4. People would rather use a less costly fuel. In many cases, coal has become the fuel of choice.

5. We can roughly estimate the oil produced from a well in any year is 1/10th the remaining oil in the well. This rule of thumb, which I picked up back when I worked for an oil company, models a declining level of production from each well that resembles observations. With each existing well producing less each year, increases in aggregate production can only come from additional new wells. Humanity can’t feasibly drill so many wells.

6. The oil consumers have chosen to use less oil. This is a watershed event, an epochal societal change. This is the Peak Demand hypothesis, which Mr. MacDonald scorns.

Mr. MacDonald is due a great deal of our respect. His astute analyses aren’t easily gainsaid. I may agree with him ultimately, but for now, I prefer to wait and see.

I think we have alternate explanations for a production decline. The cost of petroleum has increased dramatically during the last decade. In 1998, a BTU of energy from oil cost twice as much as a BTU of energy from coal. In 2008, an oil BTU cost ten times as much as a coal BTU. U.S. Department of Energy charts and graphs  show this clearly. The value of fossil fuels consumed in the U.S. reached USD 382 billion in 2008, the highest level of expenditure ever. About 10% went to coal and 45% went to oil.

Under these circumstances, we can easily imagine consumers choosing to substitute coal for oil, simply to reduce their very significant energy costs. This might occur as a simple day-to-day budget rebalancing by those who can most easily change their preferred energy source. If this is true, then both Peak Oil and Peak Demand are unnecessary explanations.

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