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Rethinking peak oil

Faith-based theories about future oil supplies are easily knocked down, but China should still prepare for the risks of declining reserves, write Lin Shi and Yuhan Zhang.

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In recent years, Chinese scholars have been embracing “peak oil” theory in increasing numbers. The idea – first put forward by American geophysicist MK Hubbert in 1949 – is that individual oil fields, oil-producing regions and world oil production will display a “bell curve”: a steep rise in available supplies, narrow peak and subsequent rapid fall.

Proponents argue that world oil supplies will peak in the mid 2020s at an annual output of 40.3 billion tonnes, while China will see domestic oil production peak at 190 million tonnes per year by around 2015.

At first glance, their view that finite subsoil resources like oil will be harder to find and harder to tap appears very reasonable. But the peak oil model itself shows an inadequate empirical representation of historical patterns. World oil discoveries have peaked at least four times since 1950. Take the United States: here, there has been a major deviation between Hubbert’s projections and real figures of oil production. As economist Daniel Yergin has pointed out, at the end of 2010, US oil production was 3.5 times higher than Hubbert forecast.

Peak oil theory holds a static view of the world, and its models ignore price effects: lots of oil discoveries and high production mean that prices and profits wane, and incentives for further exploration decline. But ensuing oil shortages then restore these incentives. When incentives exist, the industry will continue to produce and is likely to produce even more.

Peak oil theorists also neglect the role of technological advances in oil production as a great multiplier. The history of the oil industry reflects an endless struggle between nature and our knowledge. Progress in technology allows both new discoveries and the increase in recovery rate needed to turn non-recoverable or hypothetical resources into recoverable reserves.

Worse yet, peak oil theorists do not take into account the assessment of unconventional oil resources, such as oil shale, oil sands, biomass-based liquids, coal-based liquids and liquids arising from chemical processing of natural gas. These could substitute for conventional oil when new technologies, such as steam injection for oil sands deposits, mature. Unconventional oil will very likely contribute to future production. By 2009, unconventional liquids had already contributed approximately 14% of total global production capacity, and this share was expected to grow to 23% by the end of 2030.

It’s true that China’s largest oil fields, in its north-eastern and coastal regions, are already mature and that production has peaked, with an annual output of 189 million tonnes. To date, China has already extracted 5 billion tonnes of oil out of 7.84 billion tonnes of discoveries, numbers that seem to leave little room for China to leverage output volume. But on balance, China’s overall oil production is still trending upward, at an average annual rate of 2.1%.

In addition, scientists and energy experts estimate that China’s untapped oil reserves in the western interior provinces and offshore fields could be as high as 12.2 billion tonnes (Figure 1). China will likely have an annual discovery rate of 900 million tonnes by 2020 and this rate will remain at 600 to 700 million tonnes leading up to 2030. As such, oil production is expected to continue to rise.  

Figure 1. China’s untapped oil sites with significant oil reserves (circled in red)

Source: US EIA, USGS, Chinese Academy of Engineering, 2011

None of this means that China should disregard the peak oil conversation. In the popular debate, it may be easy for peak oil sceptics to argue that economic forces and advanced technologies will stave off the feared peak. But in the policy world, things are different. China’s leadership would be wise to approach the peak oil issue cautiously and strategically. China should consider what consequences it would face in a post-peak oil era.

Declines in oil production in certain regions of China have raised a red flag, compounded by the widening gap between oil consumption and oil production. The annual growth rate of China’s oil consumption was 2.8% from 1980 to 1990. With rapid industrialisation and urbanisation, the number jumped to 7% between 1990 and 2010.

The elasticity of oil consumption with respect to GDP (a way of measuring growth of oil consumption compared to growth of the economy) also increased from 0.3 in the 1980s to 0.7 in 2000s to more than 1 in early 2011. This means that the speed at which oil consumption is rising in China has now outstripped GDP growth.

In contrast to surging consumption, China’s oil production growth rate is only 2%. China already depends more on oil imports from unstable sources than either the United States or Europe: nearly 60% of its oil is imported from regions such as the Middle East and North Africa.

China’s oil demand is expected to increase in the foreseeable future, driven by industrial and agricultural use as well as phenomenal growth in car ownership. Turmoil in oil-producing nations raises the prospect of serious energy security concerns. During the unrest in Libya, more than 35,000 Chinese evacuated and all the oil-related investments in the country came to a halt. Rising world oil prices – the price had topped more than US$100 (631 yuan) a barrel as of 2011 – also raise economic concerns about elevated inflation and affordability of life for Chinese households.

Over the long term, China’s best bet is to scale up research, development and deployment of clean energies, particularly biofuels, as a substitute for oil. The Chinese government aims to increase non-fossil fuel energy to 11.4% of China’s total energy mix by 2015 and to 15% by 2020. These objectives are plausible, but they are not enough to decrease overall oil demand and consumption in the next two decades.

China cannot control or reduce the oil required to fuel its economic growth without accelerated structural reforms. Nevertheless, due in part to its current phase of industrialisation and urbanisation, China’s sluggish shift from heavy industry to service industry will take longer than expected.

A strategy for stabilising foreign supply is thus a short-term option. But China still needs to diversify its oil import markets in comparatively stable states such as Nigeria, Russia and the United Arab Emirates. Another good near-term strategy against future oil crises is to enhance oil extraction knowledge and technologies.

If China’s policymakers can rethink peak oil theory and prepare properly for the risks – rather than simply engaging in faith-based energy debates – then the country will find itself in a significantly more secure position. 

Lin Shi is a teaching assistant at Columbia University and consultant to the World Bank; Yuhan Zhang is a Randle International Fellow at Columbia University and former researcher at the Carnegie Endowment for International Peace.

Homepage image by saucy_pan 

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China experiments with methanol

One of the things China is doing is to further look at converting its coal resources to methanol. See http://www.chinadaily.com.cn/cndy/2012-03/05/content_14752817.htm

Methanol is cheaper and cleaner than gasoline and with very little modification, existing cars can be made to run on methanol. Also, as noted in the story from the China Daily, new cars can easily be produced to optimize the use of methanol blends.

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3.丹尼尔•尤金是唯一的信息来源,他对于石油的预测并不被看好,Jean Laherrère曾对他的预测作出分析。


5. 多数对石油峰值论有深度理解的人并没有忽视价格的影响。如果有经济学家准确地制作出价格模型,那么请你举例说明。全球油价呈现出衰退,每桶在140美元左右。而油价由保证金而定。我读到的多数石油峰值论都预计油价上扬。

Poorly Researched Oil

1 ‘Faith-based theories about future oil supplies are easily knocked down’ –Peak oil is not faith based and it not a theory. It is an observation that oil fields when produced reach a peak production and peak flow and then go into decline.

2. The original definition for Peak Oil (PO) was the peaking of conventional oil. If you bother to look up either BP, IEA or EIA you would see that the world has been on a plateau since 2005.

3. Daniel Yergin is only one source as is not highly regarded for his forecasting in relation to oil, see Jean Laherrere for an analysis of his predictions.

4. Hubbert’s prediction for the US was based on the lower 48 states. These did peak, admittedly the volume recovered has been higher. Production for the US is now made up of a lot more than conventional oil and far wider area than the lower 48. So his observation about multiple fields peaking and going into decline is still accurate.

5. Most people with any depth of understanding do NOT PO ignore price effects. How can one accurately model effects. Show me the economist that did. The world appeared to go into recession at $140+. Oil is priced on the margin. Most PO I’ve read expect a masking of peak

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Part 2

6. Peak oil theorists do NOT neglect the role of technological advances in oil production. What most with knowledge of the subject look at is how does this affect flow rates. For example the Tar Sand is an abundant resource but relative to size will have low flow rates.

7. You talk about unconventional oil but don’t discuss the EROI or energy density. Not all so called barrels of oil are the same.

8. You can talk all you want about Chinas reserves but ultimate recoverable will depend on EROI, technology and return on investment.

9. China has dramatically increased its Strategic Petroleum Reserves, so you see to be behind on this one.

10. The increasing middle classes in all the BRIC countries will create extra demand that has to come from somewhere. Depletion rates appear to be running very high and contrary to your assertion that economic drivers will deliver more oil, the IEA has specifically warned about the lack of investment. Its Chief Economist has given several warnings.

11. Do seriously believe that bio-fuels can scale up to substitute for crude oil. This really shows a lack of depth in understanding the issue. Just look up EROI for biofuels or the impact on constrained food resources. And you seem to treat all energies are to substitutes for Crude Oil. I suggest you read the Hirsch report done for the American DoE, because what we’re coming up against in PO is a liquid fuel constraint.

This was a deeply unimpressive article that was naïve and ill informed, rooted in classical economics. I suggest you read The Oil Drum or read anything.

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请允许我引用周大地的说法,他是中国最具影响力的能源专家之一,同时也是《中国能源发展中长期战略研究(2030、2050)》的撰稿人,“石油峰值现在争议很大, 产生石油峰值的原因主要是两大类: 一类是针对资源性的, 就是储量和库存的问题; 一类是由于经济因素如投资不足或其他问题造成的增加比较困难的问题. 如果真把"峰值" 当回事, 来所谓这种预测, 是没有道理的, 也不是主流意见。”







And...We Are Back: The Ways Decision-Makers Should Think

Thank you for responding to our points on peak oil theory. We can see you already have faith in “peak oil”. Your understanding of peak oil is basically correct. As you may see and cite from our first paragraph, “The idea – first put forward by American geophysicist MK Hubbert in 1949 – is that individual oil fields, oil-producing regions and world oil production will display a ‘bell curve’: a steep rise in available supplies, narrow peak and subsequent rapid fall.” Alas, you did not see in our op-ed piece and you may not know that for at least 100 years people have repeatedly warned that the world oil production will peak soon, and our planet is running out of oil. In 1920, the US Geological Survey estimated that the world contained only 60 billion barrels of recoverable oil. But to date we have produced more than 1000 billion barrels and currently have more than 1500 billion barrels in reserve.

Please allow me to cite a statement by Zhou Dadi, one of China's most prominent energy experts and the author of China's Energy Medium- and Long-term Development Strategy Research (2030, 2050), "石油峰值现在争议很大, 产生石油峰值的原因主要是两大类: 一类是针对资源性的, 就是储量和库存的问题; 一类是由于经济因素如投资不足或其他问题造成的增加比较困难的问题. 如果真把"峰值" 当回事, 来所谓这种预测, 是没有道理的, 也不是主流意见".

We admit that any resources will be finite, including conventional oil. But we do argue that in the near term, for example, China will not witness an oil production peak (see paragraph two). Daniel Yergin, in your view, might not be highly regarded. However, IHS CERA is an authoritative company (in the US) analyzing and forecasting global oil market trends. Have you talked with experts about the peak oil issue?
True: the Peak Oil debate continues to rage without any obvious progress. But upon careful examination, the Peak Oil theory falls down because of serious flaws in logic and application.

If you read it carefully and if you understand the current situation in China, you should perceive that this article is a call to China to think about the oil issue strategically. The peak oil debate is really not the thing that the policymakers should focus on.

Similarly naive is your faith in China’s action to increase its SPR. We have been a long-time observers on China and we are from the country. SPR cannot fully resolve the oil problems. I recommend you read more Chinese articles and talk with some senior people in the Chinese government.

There are many economists and experts you can talk to and argue with about peak oil. Time will give us the right answer.

Kind regards.

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据此,长远来看,石油,煤炭和天然气都不是可持续能源,而中国喜欢着眼未来。不依托食物来源和非占用农田的生物能源将行之有效。生物降解可提供持续的乙醇,甲醇和甲烷(见生物沼气第三章:中国沼气指南)。 大卫·布鲁姆的《酒精制燃气》一书对此颇有见解。在中国,尤其是相关领导人应该阅读这本书。它绘制出一个路线,以可持续农业为核心的体系可以使中国可以实现粮食和能源安全。

Sustainability, food, and fuels

The key question on the sustainability of a liquid or gaseous hydrocarbon fuel is "where does it get its hydrogen and carbon from?" If it gets them from prehistoric subterranean deposits then it is not sustainable. They will run out eventually. If it gets them from the air and water then it is sustainable.

By this logic, oil, coal, and natural gas are all not sustainable, particularly in the long range. China is much more experienced in long range thinking. Bio-fuels that are based on non-food feedstocks, especially ones that do not use farmland are available. Ethanol, methanol, and methane from biodigesters are sustainable (see Biogas Volume 3: A Chinese Biogas Manual). A highly recommended book on this is Alcohol Can Be A Gas by David Blume. This book should be read by many in China, especially people in leadership roles. It maps out a course that China can use to reach food and energy security using a permaculture-centered system.

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I fully agree on the need to strategic action with regard to future liquid fuel supplies, for both China and for the world as a whole. This I think was the key point the authors sought to make in their initial defense of their article. However, as a longtime non-technical student of energy futures, I cannot help thinking they do a great injustice to their argument by not discussing the key issues which will govern future oil supply strategy - notably:
- issues associated with costs of production (or EROI)
- the numerical significance (or otherwise) on a global scale of 'new discoveries', unconventional oil sources and new production technologies
- the sheer scale of the task of replacing declines in unconventional oil production. These are the issues which must and will drive future policy and not simply in China! See Mushalik's site for some excellent references at http://www.crudeoilpeak.com. Also http://www.graphoilogy.com. Savvas