Sunday, February 3, 2008

Peak Oil's Prophet of Doom

After reading the recent Texas Monthly article, "The Gospel According to Matthew", about peak oil's most ardent (and active) believer, Matthew Simmons, two of Mr. Simmon's quotes struck me as interesting (i.e. wrong).

In response to peak oil critics, such as Amy Myers Jaffe, who believe that factors such as geopolitics must be factored into the debate, Simmons replies, “I’ve never tried to integrate geopolitics with the physics of oil and gas.”

The problem with this argument is that geopolitics, both past, present and future, have a great deal to do with the debate at hand. The oil and gas policies (drilling techniques, production limits, exploration/geological technologies, cryptic/proprietary data, etc.) of the past absolutely have bearing on the calculations needed to assess whether or not we are "running out of oil." The same issues hold true for current and future geopolitical issues.

Simmon's is also quoted in the article espousing that “free markets do not work when demand outstrips supply.” Aside from the fact that the oil and gas market is anything but a "free market" to begin with, the statement itself makes no economic sense. If demand outstrips supply, price goes up (as it obviously has) and demand either reduces (in the short-run, less driving; in the long-run, efficiency gains or alternatives) or supply increases (new investments in exploration, drilling techniques (to be used in either formerly spent wells or new ones), or nonconventional oils such as Canada's oil sands, etc.)

This convenient ignorance of basic economics also inherently dismisses the role of technology in both extracting oil from formerly "spent" wells (many of which have had only 20% of the oil extracted from them) and future, price-driven advances in exploration technology. As Smil notes in his chapter on fossil fuel futures, "I [also] believe that recent technical innovations will make a substantial difference to the total amount of oil that will be eventually recovered from existing fields and from those yet to be discovered." (Smil p. 203)

Whether or not you believe that technological advances will keep pace with rising demand, they at least have the potential to mitigate some of Mr. Simmon's hyperbole.

Dismissing the geopolitical issues, getting the economics wrong, and ignoring the potential role of technology all collude to significantly discount Mr. Simmon's past, present, and future accounts of the oil and gas industry and exhibit a distinct confirmation bias in his calculations. Despite working with imprecise data to begin with (as both sides in the debate must inherently do), Mr. Simmon's numerous methodological flaws make his arguments intellectually flawed from the outset.

Although he dismisses his peak oil critics as "faith based," a significant number of Mr. Simmon's own arguments require huge leaps of faith. I hope that is why the article is appropriately titled "The Gospel According to Matthew."

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