Hubbert’s Peak and the Fuel Transition

by Ben Johnson

The Hubbert peak is the idea that for a finite resource such as oil, production volume must peak at some point as available reserves are depleted. Recent experience with unconventional oil production suggests that each type of oil reserve (e.g., conventional, shale, etc.) may see its own Hubbert peak, and the timing of the individual peaks may create multiple fluctuations in overall oil production.

Production capacity and innovations in recovery of unconventional oil depend on the return on investment associated with prevailing oil prices. The current wave of research and investment was driven by a period of oil prices over $100 a barrel from 2011 to 2014. Further investment is relatively uneconomical at the currently low price of $47 a barrel. If oil demand remains steady, the world may revert to a tighter supply picture, incentivizing a new round of exploration and innovation. The Hubbert peak is an overarching concept and is difficult to predict accurately amidst volatility driven by market-based fluctuations in capital expenditure.

Traditionally, the Hubbert peak is seen as a turning point in our modern industrial economy, a bleak milestone that implies potential desperation for a society addicted to oil. Fortunately, innovations in transport technology may render such concerns premature. Practical, long-range electric vehicles are seeing significant improvements in cost, performance, and reliability. As about three-quarters of oil is used for transport, any shift in fuel consumption from oil to electricity would impact the supply-demand balance and help depress the price of oil. Electric vehicles will become increasingly desirable as they descend the cost curve, and will produce a sea change in the transport sector, much like the rapid adoption of modern communication technologies. As market share grows, consumers will become increasingly aware of the advantages of electric vehicles, such as at-home charging and reduced maintenance requirements.

In the context of transport electrification, the Hubbert peak could imply two related concepts:

1. Decreasing demand reduces the incentive to find new oil reserves and ways to exploit them economically. As fuel consumption for ground transport gradually declines, a greater share of oil can be used in places where substitutes are not yet readily available, such as aviation, shipping, chemicals, and pharmaceuticals.

2. Decreasing supply, resulting from relatively low prices and levels of production investment, would match decreasing demand. The fuel transition will take decades, but 2017 could be the year when we get our first glimmer of a world beyond oil. In a market with a robust and economical alternative to oil, such a decline in oil production would not be catastrophic, and the Hubbert peak would tell the story of a society that moved on.

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