George Soros has just published an interesting article in the New York Review of Books for September 25, titled The Perilous Price of Oil. In the course of explaining the recent spike in the barrel price of petroleum he writes that "the cost of discovering and developing new reserves is increasing, and the depletion rate of aging oil fields is accelerating." The discussion of these worrisome facts, he notes, "goes under the rather misleading name of 'peak oil'," a phrase that implies that "we have approached or reached the maximum rate of world output."
Soros goes on to point out that "some of the most accessible and most prolific sources of oil in places like Saudi Arabia and Mexico were discovered forty or more years ago and their yield is now rapidly falling." But, tellingly, he reassures his readers that "
is a misleading concept because higher prices make it economically feasible to develop more expensive sources of energy."
Soros is far from being alone in this opinion. There is a veritable cottage industry of economists and statisticians (including Daniel Yergin, Bjorn Lomborg, Peter Huber, and Michael Lynch) who tirelessly implore their readers not to panic over oil prices because The Market will always come to the rescue. As easy conventional oil depletes, tar sands, oil shale, and biofuels become more economic to produce. Even coal-to-liquids becomes feasible on a large scale. And, as everyone knows, there is an endless amount of coal.
Another cottage industry (this one much less prominent in the mainstream media) composed largely of physicists and geologists rebuts this argument. These writers point out that what may seem "economically feasible" on the basis of a few calculations may not be so in fact: physical barriers may prevent low-grade hydrocarbon resources such as tar sands from yielding the flow rates of regular oil, regardless of petroleum’s barrel price; and anyway, because production of these alternative fuels entails high energy costs, their break-even cost point is a moving target: as the price of oil goes up, the cost of producing a barrel of oil from tar sands goes up too.
Further, the energy profit from these alternatives is much lower than that from conventional oil from the old super-giant fields, and net energy really matters. It takes energy to get energy, and what society really needs is not energy per se, but usable energy left over after subtracting the energy expended in efforts to gather energy. If net energy is a proportionally large segment of the total energy being produced from a given source, this means that only a relatively small portion of effort must be dedicated to energy production, and so most of the gross energy yielded is available for other purposes.
In the early decades of the petroleum era, the quantity of both total and net energy liberated by efforts to drill for oil was unprecedented, and it was this abundance of cheap energy that enabled the growth of industrialization, urbanization, and globalization during the past century. It took only a trivial amount of effort in exploration and drilling to obtain an enormous energy return on energy invested. But industry tended first to find and extract the oil that was highest in quality and easiest to access; thus with every passing decade the net energy (as a percentage of total energy) derived from oil extraction has declined.
As the net energy available to society declines, increasing constraints will be felt on economic growth, and also on the adaptive strategies (which require new investment—example: the building of more public transport infrastructure) that society would otherwise deploy to deal with fuel shortages. More of society’s resources will have to be devoted directly to obtaining energy, and less will be available for all of the activities that energy makes possible.
These are matters of physics, not economics. Throwing more dollars at energy production solves nothing if the energy source has a low net payback—and the ones that Soros and the Yergin-Lomborg-Huber club point to are abysmal in this regard.
These latter commentators genuinely believe that conventional economic theory defines reality. Where there’s a buck to be made in doing what needs to be done, someone will do it, and resource depletion will never be a problem because of the principle of infinite substitutability.
But physical reality and economic theory part company in many instances, and Peak Oil defines one of the most important of these. Departing from reality sometimes has severe consequences.
I must return to that word "misleading." The economists are telling us we have nothing to worry about. Oil may get a bit more expensive, but there will always be plenty of liquid fuel to keep us going—to keep the planes flying, the tractors plowing, and the SUVs ferrying kids to soccer practice. If these people are wrong (and I strongly believe they are), they are not just "misleading" us conceptually; they are guiding us straight over a cliff.
http://postcarbon.org/peak_oil_misleading_concept