Chris Nelder and Gregor Macdonald respond to Daniel Yergin in the Harvard Business Review blog

October 9, 2011 at 8:00 am
Contributed by: Chris

In the Harvard Business Review blog this past Tuesday, I had the privilege of publishing a response to Daniel Yergin’s recent anti-peak oil editorial in the Wall Street Journal. It was my first collaboration with my friend and fellow energy analyst Gregor Macdonald and, I hope, the first of many. Read it here: “There Will Be Oil, But At What Price?

My thanks to senior editor Jimmy Guterman for accepting it, and to our friend, financial maven Paul Kedrosky, for making the introduction.

The post was picked up by Brad Plumer’s blog at the Washington Post and by Michael Levi’s blog at CFR. Unusually good comment threads ensued on both blogs. I was encouraged to see the topic of peak oil being considered seriously in such mainstream venues for a change.

Here are a few additional thoughts that didn’t make it into our piece due to length constraints. I will not write a point-by-point debunking of the numerous factual errors and mischaracterizations in Mr. Yergin’s editorial, but I have provided a list of responses that did so at the end of this post.

Peak oil is no longer a question worth debating or studying. It is a fact, and it has been for years. As the data shows, the global peak-plateau of conventional crude arrived at the end of 2004, and we’ve been stuck there ever since. This fact has been deliberately obscured by continually reclassifying marginal new resources which are not oil and are not equivalent to oil as “oil.”

Mr. Yergin’s longstanding opposition to the notion of peak oil, and his cartoonish depiction of its proponents, is essentially ideological and conforms with the views of his clients in the oil and gas industry. For them, it’s an article of faith that improving technology and the Invisible Hand of the market will always bring sufficient resources to market at an acceptable price, regardless of geological or qualitative factors, and permit economic growth in perpetuity. Faith does not require evidence; it only requires belief.

This, I believe, is the crux of the matter. For many years now, I have watched as mainstream publications give high-profile coverage to the cornucopian views of analysts like Mr. Yergin, while ignoring (or covering in a dismissive and disparaging way) the views of analysts who believe that peak oil is a serious and proximate threat to our economy and our way of life. And I have wondered why that is, especially when the historical data is so inarguable.

It isn’t a question of credibility. Peak oil analysts like Colin Campbell, Jean Laherrère, Robert Hirsch, Henry Groppe, Ali Morteza Samsam Bakhtiari, Chris Skrebowski, Kjell Aleklett, Jeremy Gilbert, Walter Youngquist, David Hughes, and dozens of others have impeccable bona fides and decades of experience–each–in the oil industry. They are honest petroleum scientists who have done rock-solid data analysis on peak oil, usually on their own time, and for no pay. Their credentials as petroleum analysts are eminently superior to those of Mr. Yergin, whose bona fides are in economics and politics.

My surmise, very simply, is that it’s a matter of tribal identity. A study covered in Tuesday’s New York Times explains the issue:

McCright says, up to 40 percent of all white males in the study sample believe in hierarchy, are more trusting of authority and are more conservative. Conservative white males’ motivation to ignore a certain risk — the risk of climate change in this case — therefore, has to do with defending the status of their identity tied to the white male establishment.

The coverage of peak oil in the mainstream press bears this out nicely. Mr. Yergin is invariably introduced on television and in the press as “a highly respected authority” or an “energy guru.”  The message that our status quo reliance on oil will be with us for decades is always made clearly and loudly, with just enough carefully chosen data (glossing over the end of cheap and easy conventional crude) to reassure the audience that economic growth can be with us forever. Because that is what the tribe of business leaders wants to hear, and the editors who depend on their advertising dollars know it. It is also true that many editors and writers in the mainstream press have too little literacy on energy to see through such glossy, cornucopian forecasts.

I’m sure his excellent reputation as an author and energy historian is deserved, but Mr. Yergin’s forecasting is anything but impartial. Dozens of peak oil analysts forecasted the current supply plateau and the price volatility of oil beautifully, while Mr. Yergin’s abysmal predictive track record missed it entirely. He has offered no apology or explanation for this. He ignores the fact that consumers in the West are simply being priced out of the market by the growing economies of the East, even when his firm’s own data demonstrates it. He paints a picture of continually rising resources with a broad brush, while ignoring essential problems like lower flow rates and lower energy content. He has refused to debate authoritative peak oil analysts, refused invitations to attend or speak at their conferences, and ignored their $100,000 bet that he is wrong.

When you are a status quo authority, you do not need to stoop to such things.

Additional responses by peak oil analysts to Mr. Yergin’s editorial

Of the many responses I read to Mr. Yergin’s editorial from the peak oil community, I thought these were the best.

Related articles

There Will Be Oil, But At What Price?

11:26 AM Tuesday October 4, 2011
by Chris Nelder and Gregor Macdonald

Daniel Yergin’s typically sunny outlook on oil in his recentWall Street Journal piece, “There Will Be Oil,” suggested that technology and new energy discoveries would avert any of the economic disasters portended by peak oil. We found Mr. Yergin’s dismissal of these risks premature and repetitive. After all, he has asserted since 2004 that global oil production was nothing to worry about, and that there would be few effects on the economy.

We counter that managers who would see their businesses survive the next few decades of extreme economic volatility will need to develop some literacy about oil and its complex relationships with the economy. They would be wise to consider the long list of peak oil analyses by the world’s militaries, and they would take heed of the sobering outlook offered by veteran analyst Robert Hirsch for the Department of Energy. And we must correct some of Mr. Yergin’s assertions.

Conventional crude ended its 150-year-long growth trajectory in 2004 and flattened out around 74 million barrels per day. Crude supply did not budge when oil prices tripled from 2004 to 2008, but global demand remained firm, shrugging off a recessionary dip in 2009. All the growth in supply since then was not crude but unconventional liquids, including natural gas liquids, biofuels, refinery gains, synthetic oil from tar sands, and other marginal resources. These liquids are by no means equivalent to crude. Yergin’s calming charts include these unconventional liquids and hide the fundamental issue of the depletion of mature fields. They also hide the declining energy density, higher cost, and lower flow rates of these new resources.

As Shell, Chevron, Total, the IEA, and a host of other serious observers have openly declared since 2005, the age of cheap and easy oil has ended. The “oil” that’s left is progressively expensive, difficult, risky, marginal, and fraught with secondary effects like increasing carbon emissions, demand for water, and competition with food.

A wide spectrum of agnostic analysts with decades of distinguished service in the oil industry and its press have addressed this. We like the formulation of petroleum economist Chris Skrebowski, which defines peak oil as the point where “the cost of incremental supply exceeds the price economies can pay without destroying growth at a given point in time.”

The connection between oil shocks and recessions has been understood for decades. We have ample historical evidence that when petroleum expenditures reach 5% of GDP, recession typically follows. Annual energy expenditures rose from 6.2% of U.S. GDP in 2002 to a painful 9.8% in 2008, which was immediately followed by an economic crash. And now oil is sending energy expenditures back above 9% of GDP, just as we see fresh indications that the recession persists. This is not a coincidence.

It’s difficult to tease the oil price signal out of the concurrent financial crisis and opportunistic speculation, but it would be a grave error to think it had no effect on the economy. Indeed, we believe it was, and remains, the most important fundamental of our present recession. On the plateau of oil supply, prices are trapped on a narrow ledge. Economic growth requires more oil, which requires high oil prices, which in turn undermine economic growth. And that ledge is getting narrower. We know that the economy fell on its face at $147 per barrel in 2008, and brought growth to a halt in 2011 at $120. The new pain tolerance limit appears to be $90 in the U.S., but $100-110 in China. At the same time, it costs $80-90 to bring a new barrel of supply online from marginal resources such as deepwater, tar sands, and the Arctic.

Yergin wants to have it both ways: He wants us to believe that the market will bear the high prices required to keep supply increasing against the backdrop of mature fields — which are declining by 5% per year — while at the same time asserting that prices will remain low enough to engender continued economic growth. This, we submit, is impossible.

Peak oil poses a host of systemic risks to the global economy, and will increasingly disrupt supply chains in our globalized world. Contra to Yergin’s view that Ricardian Comparative Advantage will produce abundant oil for export, oil-producing nations will continue to feed their domestic populations, leaving less for sale on world markets. OECD consumers will be increasingly priced out of oil markets as their disposable income adjusts downward to reflect energy costs.

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