Comments on the Discussion Draft Report of the City of Portland Peak Oil Task Force

Speculation about “peak oil” is an intellectual fad that has been fashionable at various times throughout the past 120 years. Recently it has seized the spotlight again, and the Portland Peak Oil Task Force Report states that, “many experts predict global oil production will peak within five years, and few anticipate a peak later than 2020.”

This forecast is likely to be wrong, just as all previous forecasts of shortage have been wrong. Ken Deffreyes, the high priest of the current peak oil mania, has by himself established a virtual cottage industry of failed predictions, including specific predictions of peaking for 2000, 2003, 2004-2008, 2004, November 24, 2005, December 16 2006, and November 2005-April 2006. Mr. Deffreyes has been wrong every time.

Some of the confusion among the peak oil forecasters may stem from misinterpretations of the concept of “proven reserves.” Oil reserves are never large at any point in time because there is no prudent business reason for private sector firms to stockpile the asset. This fact has consistently fooled people into thinking that we face an imminent shortage of petroleum.

If one examines the known levels of oil throughout the 20th century, as displayed in Figure 1, it’s clear that the amount of proved reserves at any specific point in time was pitifully small compared to the eventual levels of consumer demand. For that reason, many people have predicted shortages, and they have always been wildly incorrect. New reserves are simply found when it is necessary and economically efficient to do so, moving the mythical peak oil date further out.

Oil supply is a function of many interactive variables, including demand, technological innovation, the cost of alternative fuels, and political developments both domestically and abroad. Therefore the reserve number does not mean very much by itself, and any effort to predict the “peak” of production is futile.

Price is the best indicator of whether or not any resource is scarce or plentiful. Clearly the general trend for the past century has been one of declining price, as shown in Figure 2. The highest prices on record occurred in 1981, when the real price of gas was $3.06 per gallon. The fact that it’s well below that price today indicates that supplies remain abundant.

The prophets of doom tend to think that oil consumption is constantly rising and will do so for the indefinite future, leading to an eventual clash with the finite limits of the earth. But actual trends indicate that total consumption is slowing, by almost any measure, as seen in Figures 3, 4 and 5.

In all cases except transportation, the peak year of consumption was in the 1970s. Since then, consumption has declined despite a steady increase in GDP, population, per capita income, and industrial output. This reinforces what is already known about the past 30 years, which is that the U.S. economy has become 100% more energy-efficient through technological innovation and market forces. In 1949, the U.S. consumed 19.57 thousand BTU per dollar of real GDP; in 2005, that number had dropped to 8.97, the lowest level in history.

Even transportation sector oil consumption is likely to level out before too long, because all relevant trends are moving in the right direction, as displayed in Figure 5.

Per-vehicle consumption rose steadily until 1972 and then began falling. Fuel efficiency reached its highest point ever in 2004, a fact often overlooked by those demanding increased mandated fuel economy standards.

Similar trends can be observed for vans, pick-up trucks, and SUVs. The peak year of consumption in this category was 1977, at 947 gallons per vehicle. That dropped to 682 by 2004.

Another way to consider this issue is in terms of BTU per vehicle mile traveled or per passenger mile. Again, it’s clear that the long-term trend has been consistently positive. Between 1970 and 2003, BTU per passenger-mile dropped 27% for passenger cars and 44% for light trucks and SUVs. Meanwhile, BTU consumption per passenger-mile increased by 69% for transit buses and 32% for rail transit, the modes preferred by the Peak Oil Task Force.

Not only is petroleum use declining, per capita energy consumption in the U.S. peaked in 1979 at 360 million BTU. In 2005 the number was 337. This explains why total U.S. energy consumption has been rising at a slower rate over time.

As displayed in Figure 6, total energy consumption more than doubled between 1949 and 1970, but slowed considerably after that. In the early 1970s it was popular for analysts to predict that the world would face imminent resource shortages due to “exponential growth” of demand. But the exponential growth never happened. In fact, in the 35 years since that doubling, consumption has grown by less than 50%.

The fact that total energy consumption “peaked” in 2004 is one of the most under-reported facts in the oil supply discussion. While it’s too early to know whether this is the beginning of a trend, it’s clear that the constant improvement in energy efficiency throughout the economy is having a dramatic effect on total energy consumption.

A similar trend can be observed on a global scale, at least for petroleum. World oil consumption doubled between 1960 and 1970, rising from 21.34 million barrels p/day to 42.89 MBD. However, consumption did not double again during the next ten years. In fact, it has yet to double 34 years later, with world consumption estimated to be 82.59 MBD in 2004.

Conclusion

Despite the fact that all previous predictions of peak oil have proven to be wrong, hope springs eternal among those who desire to use the peak oil scare as leverage to get onerous public policies that would never be approved except in a time of perceived crisis. Task Force members clearly want the public to believe that we have an oil supply problem to justify their call for greater land-use controls, more subsidies for transit, and increased mandates to prop up economically wasteful renewable fuels projects.

Nonetheless, there is no empirical basis for thinking that the world faces an imminent oil shortage, and even less reason to think that the Portland City Council could do anything about it. The only solution to a shortage of a resource (real or perceived) is to allow markets to function. Local public officials have demonstrated for decades that they don’t understand markets; this is clear because they are the enforcers of numerous anti-competitive cartels and monopolies, such as the TriMet transit monopoly, the Portland taxi cartel, the Portland real estate cartel (caused by the state-mandated urban growth boundary), and the Oregon Energy Trust monopolization of $50 million annually in electricity ratepayer funds used for green pork-barreling. All of these activities destroy wealth by increasing the cost of goods or services to above-market levels, and since it takes energy to create wealth, the government is therefore responsible for energy being wasted. The last thing we need is to worsen this problem by broadening the scope of government intervention into the economy.

Note: All data used in these comments were obtained through various reports of the U.S. Energy Information Agency.