In 1956 M King Hubbert predicted that oil production would reach a peak level of production and then production would decline as oil became increasingly scarce

Topics: Peak oil, Petroleum, Hubbert peak theory Pages: 5 (1639 words) Published: January 28, 2015
In 1956 M King Hubbert predicted that oil production would reach a peak level of production and then production would decline as oil became increasingly scarce. How could we tell if oil was becoming scarce and is there evidence that Hubbert was right?

This essay will first attempt to identify the indicators of scarcity and then will analyse the debate surrounding Hubbert’s theory of Peak Oil (1956) and whether scarcity is the sole reason for production levels of oil peaking.

Introduction

M. King Hubbert predicted that oil production in the United States (US) would peak around 1970 and that the world production would peak in 2000. In the words of Jeremy Rifkin: [“Hubbart] argued that oil production starts at zero, rises, peaks when half the estimated ultimately recoverable oil is produced, and then falls, all along a classic bell-shaped curve.” His theories proved to be extremely accurate for US production as it peaked in 1971 (Figure 1), however with regards to world production, it is clear to see (Figure 2) that production has not been consistent with Hubbert’s Peak Theory as it is currently on the rise. This has, consequently, spurred much discussion and examination surrounding the integral factors that affect oil production.

Indicators of Scarcity

Hubbert’s theory proposes that scarcity was the prominent catalyst for oil production peaks but there is much deliberation surrounding the proposed indicators of scarcity.

Work by James L Smith argues that scarcity indicators should be evaluated using a comparative static criterion developed by Brown and Field (1978), by which an indicator of resource scarcity might be assessed. It states that: “A minimum condition (for a good index of scarcity) is that the index go up when underlying determinants shift to increase actual or expected demand for the resource relative to actual or expected supply”. According to this criterion, if, for example, there is an unexpected decrease in scarcity due to a new oil discovery, the indicator of scarcity should fall.

Smith also shows that the traditional economic indicators of resource scarcity (unit cost, resource rent, and price) provide inconsistent signals of real changes in the underlying degree of resource scarcity, and also mentions that they integrate the stochastic influence of long-term trends unrelated to changes in economic scarcity. This is supported by Farzin (1995) who notes, “The search for an appropriate indicator of scarcity is complicated by the fact that, in numerous cases, the three traditional indicators will not move in concert along the equilibrium path.”

Moreover, given the possibility of variation in the exogenous factors that enter these models (e.g. technological progress and exploration), almost any pattern involving the traditional economic indicators might be encountered as the economy progresses along its equilibrium depletion path. Thus, it is evident that it is not plausible to rely on any set of market indicators to measure the status of exhaustible resources. This conclusion echoes the view of Cleveland and Stern (1999), who suggests, “…In order to develop more effective forecasts of future resource scarcity we need to look beyond the indicators to the production technologies, natural resource bases, and market structures that influence the indicators.”

Misplaced Emphasis on Hubbert’s Peak Oil

Since Hubbert proposed the idea of Peak Oil in 1956, there has been a growing debate surrounding the validity of his theory. Whilst many economists believe there are elements of the concept that should be utilised as warning signals, there is collective scepticism surrounding Hubbert’s method of treating predictions of oil production as an exogenous process, purely based on geological measures of oil dissociated from economical market incentives. If the peaking phenomenon did not register changes in the underlying economic factors, it could hardly serve as an indicator of...


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Hanley, N., White, B. & Shogren, J., 2001. Introduction to Environmental Economics, Oxford University Press, USA.
Krautkraemer, J., 1998. Nonrenewable Resource Scarcity.
Livernois, J., 2009. On the Empirical Significance of the Hotelling Rule. Review of Environmental Economics and Policy, 3(1).
Shogren, J., 2013. Encyclopedia of energy, natural resource, and environmental economics, Elsevier Science.
Smith, J., 2012. On the Portents of Peak Oil (and Other Indicators of Resource Scarcity). SSRN Electronic Journal.
Smith, J., 2009. World Oil: Market or Mayhem? Journal of Economic Perspectives, 23(3).
Watkins, G.C., 2006. Oil scarcity: What have the past three decades revealed? Energy Policy, 34(5).
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