Depletion Is Economic, Not Just Geological, Concept

As I head down to Washington to speak at the ASPO-USA (Association for the Study of Peak Oil and Gas) 2010 World Oil Conference this week, I can't help but reflect on how far the peak oil movement has come over the last decade. It's not too hard to figure out why. There is a very simple litmus test for the credibility of the movement's central theory of depletion--the price of oil. With oil already trading at over $80 per barrel in the shadow of the world's deepest-ever postwar recession, I guess there's not much of a debate anymore.

Of course the world will never run out of oil in the literal sense. There are some 170 billion barrels of the stuff trapped in the Alberta tar sands, and over 500 billion barrels more in the Orinoco tar sands in Venezuela. And if we suck them dry, there are billions more barrels of oil in shale, just as there is natural gas.

But what the global economy has already run out of is the oil it can afford to burn. Depletion isn't just a geological concept; it's also an economic one. From a purely geological standpoint, you can always boost production--or at least offset depletion--by accessing increasingly costly and environmentally problematic sources of new supply (such as the tar sands). But as we saw from the recent recession, the global economy can't afford to run on the prices needed to pull that oil out.

For some people, the fact that oil prices fell to around $40 per barrel during the depths of the recession was proof enough that it had no business being in triple-digit range in the first place. But what those folks forget is that world oil demand fell during the recession for the first time since 1983. Peak oil is not a problem if the economy it's supposed to power is shrinking--it's only a problem if we actually want our economies to grow.

The first thing you notice about an economic recovery, even an anemic one, is that the world economy starts consuming more oil. The next thing you notice is that the price of oil starts heading up.

We all might have liked the pump prices that came with $40-per-barrel oil during the recession, but we shouldn't expect much to be flowing out of the gas pumps at that price. Even deep-water oil, like at BP's ruptured Macondo well in the Gulf of Mexico, doesn't work at that price, to say nothing of mining bitumen in Alberta and processing it into synthetic crude.

If you doubt that, just look at what happened in the Alberta tar patch when world oil prices plunged during the recession. Some $50 billion of planned investment was cancelled literally overnight.

No, the world's not running out of oil. It's just running out of the oil we can afford to burn.