Twin Peaks: The Fossil Fuel Edition -- Part I

by Joseph Tomain

April 22, 2019

In 1956, Texas oil geologist M. King Hubbert predicted that U.S. oil production would peak no later than 1970. Lo and behold, in 1970, oil production topped out at just over 9.6 million barrels a day (mbd) and began its decline. The predicted peak had been reached. Regarding the world oil supply – no worries. There were oceans of oil in Middle East deserts, particularly in Saudi Arabia. Additionally, new finds in the North Sea, as well as discoveries, largely offshore, of recoverable oil in other parts of the world, meant that the world was not running out of oil; just the United States was.

Domestically though, trouble was brewing on two fronts. For most of the century, U.S. oil imports were modest. Then, in the mid-1950s, oil imports reached 1 mbd and began climbing. From a consumer perspective, imported oil meant lower prices. But for domestic producers, cheap oil meant decreased revenues. To shore up revenues, domestic oil companies successfully lobbied the Eisenhower administration to impose import quotas on Mideast oil. Bad idea. In retaliation for those market restrictions, Middle East oil states formed the cartel known as OPEC – the Organization of Petroleum Exporting Countries. Now world market prices were cartel-controlled as the U.S. was becoming increasingly dependent on foreign oil, a dependence that shattered the U.S. economy in the 1970s.

The other emerging trouble for fossil fuels was environmentalism. In the early 1960s, Aldo Leopold's A Sand County Almanac was rediscovered, Rachel Carson's Silent Spring was published, and both became key tracts for the environmental movement. At that time, there was little conflict between energy and the environment. Energy policy continued down its fossil fuel path without interference from environmentalists, but the truce between energy and the environment was to change, and change dramatically, over the coming decades.

Loosely aligned with society's developing environmental consciousness was a Malthusian concern over an exploding global population and concern about the adequacy and availability of natural resources. That concern generated a significant literature, and that literature generated significant controversy – the world was either running out of natural resources or it was not. The two sides of this controversy were rapidly placed into two camps. Those who saw natural resources peak were labeled pessimistic Chicken Littles. Those who denied that resources were being exhausted were portrayed as having an optimistic faith in human ingenuity.

Paul Erhlich's Population Bomb and the Club of Rome's Limits to Growth were both read as manifestoes warning about the likelihood of running out of natural resources, including energy resources. Erhlich became something of an environmentalist darling and was a popular presence on television. To counter what many believed to be his pessimistic views about the future were such writers and thinkers as Julian Simon and Herman Kahn, who directly answered Ehrlich's analysis by denying that the world was on its way to running out of resources because new and innovative technologies would solve the problem; they always did according to this script. Still, the idea that resources were being depleted continued to attract attention. As recently as 1998 and 2001, the journal Scientific American could publish articles entitled "The End of Cheap Oil" and "The End of Oil."

What, though, actually happened with domestic oil production? In 2008, crude oil production bottomed out at 5 mbd. Hubbert's prediction was confirmed. That is until January 2019, when oil production rose to 11.8 mbd and jumped past the peak by 2 mbd.

The increase in domestic oil production was a direct result of horizontal drilling combined with hydraulic fracturing. In other words, the new application of an old technology discovered more oil than was previously believed to be recoverable. Middle East oil reserves remained strong, and now U.S. production of oil significantly cut into our need for imports, and our increased natural gas production generated a healthy amount of natural gas exports. Fossil fuel fields were flush and energy independence was in our sights.

The natural resources optimists seem to have won the debate. We are not running out of fossil fuel energy resources, and technology, once again, has apparently saved us from resource depletion.

The problem with this narrative is that the concept of peak oil or peak natural resources is the wrong story to tell. True, we have not run out of fossil fuels, but we have hit peak use of those dirty fuels. The point is a simple one: There are two resource peaks, not one. Having not reached peak production does not mean that the United States has not reached peak consumption. The natural resource optimists were correct – innovative technologies can prevent energy depletion – but only at the long-term cost of devastating environmental harm to the planet. As a result, the technology of the future is not about more fossil fuel recovery; it is about clean substitutes for those fuels as clean resources gain an increasingly large share of the energy resources market.

The innovation mantra is that market share, not market size, matters. Consider horses. The United States has not run out of horses, and yet its use of horses for transportation peaked in 1910 simply because they were replaced by cars. Most notably, and importantly for our understanding of our fossil fuel future, is that the peak in horses occurred when the penetration of cars in the transportation sector was just 3 percent. Shortly thereafter, horses trotted off the transportation stage. Keep that 3 percent figure in mind; it will turn up again in my next post.

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Also from Joseph Tomain

Joseph P. Tomain is Dean Emeritus and the Wilbert & Helen Ziegler Professor of Law at the University of Cincinnati College of Law.

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