World oil production continues to rise; outlook good for next decade or more.

Peak Oil, a theory popular among Chicken Little types, has been much in the news recently.  The idea behind it is that future production levels of any consumable resource can be reliably predicted based off a single factor: the size of the known reserves.  Once half those reserves have been consumed -- so the theory goes -- production will steadily fall, no matter what.

So when world petroleum production dipped slightly in 2006 and again in 2007, this predictably brought the usual Peak-Oil disciples out of the woodwork.  The global oil peak -- first predicted for the mid-1990s, and many times since -- was finally upon us, they said. From this moment on, production would steadily fall, culminating in the end of life as we know it.

But once again, their crystal ball has failed.  Petroleum production for the first quarter of 2008 rose to 74.5M bbl/day -- 1.2M higher than the 2007 average. Those figures don't take into account Saudi Arabia's recent pledge to pump another half-million barrels a day, a promise they've already met by the first 300,000.

Even better, a landmark study of 800 major oilfields recently performed by Cambridge Energy Research Associates (CERA) found that the rate of decline averaged only 4.5% -- about half of what was previously thought. That, coupled with new field development, means the world is on track to be pumping more than 100 million barrels/day by 2017, according to CERA.

How does Peak Oil get things so wrong? First, it ignores technological improvements in oil discovery and production. As science advances, the URR (ultimately recoverable reserves) of existing fields rise in pace. Thanks to advances in water and CO2 injection, many oilfields predicted to have been dry a half-century ago are still pumping strong today.

But more importantly, Peak Oil puts the economic cart before the horse, with the notion that supply is independent of both price and demand. So much for Economy 101. Higher demand means higher prices... and higher prices increase supply. There are trillions of barrels in the ground that can't profitably be pumped at $50/bbl. But at $140, the story is different. Existing fields are worked harder, unprofitable fields get opened up, and exploration picks up pace.  

Several large new fields have been discovered in the past decade alone, such as Brazil's Tupi and Kazakhstan's Kashagan -- the latter not much smaller than Saudi Arabia's Gwahar, the largest field in the world.  In fact, since 1965, we've found five new barrels of oil for every three we've burned.  And vast North American deposits of tar sands and oil shale -- too expensive to process even a decade ago -- are now beginning to look like a bargain. 

Most of the world hasn't even been fully explored for oil, including vast stretches of land in Russia, the Arctic and Antarctica, and nearly all the deep sea itself.  Some of these undiscovered fields are in places we can't pump oil -- not with today's technology. By 2050, though, wells atop the thickest Antarctic ice, or through five miles of ocean floor will be trivial to implement.

Higher prices have another effect -- they enable alternatives. At a cost of somewhere around $150/bbl, coal can be directly transformed into oil -- and the US has the largest coal reserves in the world, enough for hundreds of years.. At even higher prices, oil can be synthesized out of nothing but CO2 and water...if one has an abundant supply of electricity.

Throughout history, many other resources have hit production peaks. But the point missed by Peak Oil acolytes is that past declines -- on everything from whale oil to natural rubber -- were the result of falling demand. Prices rose until alternatives became cheaper, which reduced demand...and so production fell.

So yes, oil will one day peak. But it won't be in our lifetimes, or our even our grandchildren’s. And when it happens, it won't be an earth-shattering catastrophe, but rather a smooth and natural progression to better, cheaper alternatives.

"It's okay. The scenarios aren't that clear. But it's good looking. [Steve Jobs] does good design, and [the iPad] is absolutely a good example of that." -- Bill Gates on the Apple iPad

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