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A man walks past storage area for oil barrels in Shanghai. (ALY SONG/Aly Song/Reuters)
A man walks past storage area for oil barrels in Shanghai. (ALY SONG/Aly Song/Reuters)

Neil Reynolds

There is no 'peak oil.' But there is supply and demand Add to ...

The price of crude oil, in the money of the day, fell as low as 4 cents a barrel in early 1933 - or, expressed in equivalent 2009 terms, 66 cents (U.S.). It bounced back to 10 cents (2009: $1.64). Yet the decade of the Great Depression produced the greatest oil field discoveries in the history of the United States. Was this, as some Malthusian economists assert, mere predestination, documentary proof of the country's upward thrust on a preordained Bell curve trajectory toward peak oil?

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No, says University of Calgary economist John R. Boyce, not so. The oil boom of the Dirty Thirties, he says, proved only that crude oil behaves as other finite commodities behave. Crude oil discoveries tracked price incentives in the Great Depression - and tracks them globally now.

With production quotas imposed in the Depression (mostly to assist Big Oil), Prof. Boyce notes, the price of crude abruptly increased tenfold to $1.18 a barrel (2009: $19.35). The subsequent increase of oil field discoveries, 1933 through 1940, was never subsequently matched in the continental U.S. Significant discoveries did occur again when crude prices hit $140 a barrel in 2007. In this instance, though, these discoveries followed a mere doubling of prices. Think what further discoveries would probably have occurred, Prof. Boyce suggests, were prices to rise by a Depression-equivalent factor of 10 - taking oil to $700 a barrel.

In a paper published last year, Prof. Boyce offers a devastating analysis of peak oil theory. Obviously, he wrote, any finite commodity can ultimately "peak," assuming accumulative consumption exceeds accessible reserves and keeps rising. But crude oil itself has already peaked - at least five times since 1950, Prof. Boyce says - without beginning to approach the demise of oil anticipated by peak oil theory's famous Bell curve. Indeed, crude oil reserves have doubled roughly every 15 years since 1850 and the world now has more proven reserves than it has ever had in the ensuing 150 years.

Prof. Boyce replaces the Bell curve with a conventional stock market chart to track the rise and fall of oil discoveries, as influenced by price incentives. Expressed in five-year averages, new oil discoveries peaked in 1952, for example, at 25 billion barrels; then fell to 18 billion. They peaked again in 1970 at 55 billion barrels; then fell to 25 billion. They peaked yet again in 1990 at 80 billion barrels; then fell to 20 billion. And they peaked once more in 2007 at 85 billion barrels; falling since to 45 billion. In this same period, proven reserves increased to 1.4 trillion barrels.

The explanation reflects classic economic theory. When incentives exist, the industry produces lots of discoveries - enhanced by technological innovation. These discoveries produce a decline in profits and prices, lowering the incentives for exploration. The subsequent shortages restore incentives. The process repeats itself in "a multiplicity of peaks."

"The data," Prof. Boyce wrote, "resoundingly rejects ... peak oil." Why? Peak oil, he says, is one-dimensional and mechanical. It omits human behaviour and human choice. It is mere extrapolation from arbitrarily selected statistics: Peak oil analysis "is not an economic model." Thus it rests upon an assumption that people don't make decisions - don't make choices.

Based on his study of oil discovery and oil production in 44 countries and 24 U.S. states, Prof. Boyce concludes: "In all aspects, I find the peak oil model an inadequate empirical representation of historical patterns. This is not to say that oil production may eventually peak. It does say that the peak oil model will have little, if anything, to say about it."

Further, if you insist on a Bell curve for oil, Prof. Boyce says, you must logically use a Bell curve for peak aluminum, too. And peak iron ore. And, for that matter, peak cement. Yet the per-capita consumption of 80 minerals increased throughout the 20th century even as prices for almost all of them fell. As with oil, so with minerals: Technological advances, driven by price incentives, produce the paradox of rising production at falling costs. The exploitation of methane gas and shale gas will take place, Prof. Boyce suggests, in the same way.

Prof. Boyce takes a long view of these things - a perspective that tends to level off all the different energy peaks. He notes that Britain experienced peak coal and then (according to some peak oil theorists) peak oil, too - apparently without missing a beat. From 1820 through 1913, the age of coal, Britain recorded an average annual per-capita increase in GDP of 1.14 per cent. From 1913 through 2003, the age of oil, it recorded an average annual per-capita increase in GDP of 1.63 per cent - which, rather eerily, is almost precisely the same annual increase (1.67 per cent) in global oil production.

Focus only on aberrations, in other words, and you can miss the message. Prof. Boyce notes that oil contributes only 4 per cent of global GDP. He doesn't say so exactly but he appears to advise peak oilers: Get a grip.

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