Taking a short interlude from my recent treatments of technology, I feel the need to do a quick post on Peak Oil’s continued transformation toward respectability. Some months ago, I highlighted the fact that the IMF had openly recognised the Peak Oil argument in even its most prestigious publication, the World Economic Outlook (see my post here). In particular, IMF staffers now appear to be thoroughly acquainted with the work of Steve Sorrell, who has provided us with some of the most in-depth reviews of the Peak Oil literature (see my post here).
Now, when I say ‘recognised’ that did not mean ‘accepted’. Rather, the IMF acknowledged in the World Economic Outlook that price alone had not brought forth sufficient supply or substitutability over a multi-year time frame, as had previously been predicted. Economists at the IMF, therefore, seem to have decided to widen their intellectual net to bring in some fresh ideas.
In a recent paper (here), however, the IMF has gone a step further and actually started to incorporate aspects of Peak Oil methodology (what it calls the geological approach) into a new oil price forecasting model:
We discuss and reconcile two diametrically opposed views concerning the future of world oil production and prices. The geological view expects that physical constraints will dominate the future evolution of oil output and prices. It is supported by the fact that world oil production has plateaued since 2005 despite historically high prices, and that spare capacity has been near historic lows. The technological view of oil expects that higher oil prices must eventually have a decisive effect on oil output, by encouraging technological solutions. It is supported by the fact that high prices have, since 2003, led to upward revisions in production forecasts based on a purely geological view.
The abstract appears very even-handed in awarding merit badges to the two approaches, but if you read the body of the report I have to say that Peak Oilers have come out on top. In particular, the IMF points out that the forecasting fidelity of the major organisations making traditional oil price projections has been appalling. Here is the track record of the US government’s Energy Information Administration (EIA):
As an aside, note that the EIA is currently producing bullish forecasts for shale gas production in the US, and these have got even President Obama excited. The above chart alone should suggest a note of caution to all those espousing imminent energy independence for the US.
By way of contrast, the IMF highlighted the forecasts of prominent Peak Oiler Colin Campbell to represent the ‘geological camp’. It sees this as a miss as well, but in my eyes a far less spectacular one than the EIA’s:
Putting the geological with technological approach together within their new model, the IMF comes up with this rather scary chart:
And the accompanying frank commentary in the conclusion:
Our empirical results vindicate this choice. Our model performs far better than competing models in predicting either oil production or oil prices out of sample, in a field where predictability has historically been low. Our empirical results also indicate that, if the model’s predictions continue to be as accurate as they have been over the last decade, the future will not be easy. While our model is not as pessimistic as the pure geological view, which typically holds that binding resource constraints will lead world oil production onto an inexorable downward trend in the very near future, our prediction of small further increases in world oil production comes at the expense of a near doubling, permanently, of real oil prices over the coming decade.
Finally, the IMF not only takes on board the implications of Peak Oil for the oil price, but also that a potential doubling of the oil price in the space of a decade takes the world economy into ‘unchartered territory’:
Our current model of the effect of such prices on GDP is based on historical data, and indicates perceptible but small and transitory output effects. But we suspect that there must be a pain barrier, a level of oil prices above which the effects on GDP becomes nonlinear, convex. We also suspect that the assumption that technology is independent of the availability of fossil fuels may be inappropriate, so that a lack of availability of oil may have aspects of a negative technology shock.
The fact that an institution as eminent as the IMF is now flagging the possibility of such stormy seas ahead is certainly refreshing. As yet, though, global political elites appear blissfully unaware that their economic growth projections could be so imperilled by such oil scarcity, and the mainstream financial media like the Financial Times and Wall Street Journal still give it short shrift in their pages.
As I mentioned in my previous post, the current debate between austerity and public spending appears sterile to the extent that neither option addresses the underlying long-term structural impediments to growth, Peak Oil among them. At some stage, politicians may have to tell their electorates that unlimited economic expansion is becoming unfeasible, and some other path to personal fulfilment is needed to replace the desire for rising individual consumption. Don’t hold your breath.