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The problem with "Peak Oil" from an economist’s point of view

The National Geographic Daily News blog cites a new International Energy Agency report that pins 2006 as the year in which oil production rates attained a pace that will not be again matched. Or, in other words, 2006 was the year of “Peak Oil.”  That projection is just one scenario of several looked at by IEA, but in their view this scenario is the most likely outcome.

The Daily News blogger admits that the “peak” is not expected to be followed by significant declines – rather, IEA projects a leveling out of conventional oil production at levels just below 2006′s peak for at least the next 25 years and minor increases in unconventional oil production and minor increases in natural gas liquids production.  In short, the IEA’s report more resembles CERA’s undulating plateau story than peak anything.  Yet we are told the “age of cheap oil is over” and the consequences of relying on on natural gas liquids and unconventional fuels are “stark.”

A more reasonable characterization of IEA’s most likely scenario is that it estimates oil production will remain steady for the foreseeable future at around the level attained in 2006.  Scary? Rioting in the Streets? Stark?

No? Well, are you at least mildly concerned?

A lot of peak oil analysis leaves economists cold. After all, production levels are in part a result of production choices, and in markets production is driven in part by costs and prices.  The popular Hubbert’s Curve approach to modeling peak oil ignores all of this.  Here is a quote from a recent analysis by James L. Smith:

[Hubbert’s model] is problematic for economists since the volume (and timing) of ultimate recovery presumably depends upon price — which in turn depends upon demand, interest rates, and the cost of production — none of which are incorporated here. There is no assurance in Hubbert’s model that the projected rates of future production will actually clear the market. Although the prediction is simple, it is not credible due to neglect of these fundamental economic factors.

Smith also notes that “Empirical tests of [Hubbert-style analysis] … failed badly in predicting the peak, which reinforces economists’ theoretical objections to the underlying method.”

[And to be clear, I’m not asserting the IEA modeling is “peak oil analysis.” So far as I can seek, the peak attribution was that of the Nat Geo writer, not directly drawn from IEA’s projections.]

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