China should prepare for the risks of declining oil reserves for the sake of future energy security
In recent years, Chinese scholars have been embracing “peak oil” theory in increasing numbers. The idea – first put forward by American geophysicist MK Hubbert in 1949 – is that individual oil fields, oil-producing regions and world oil production will display a “bell curve”: a steep rise in available supplies, narrow peak and subsequent rapid fall.
Proponents argue that world oil supplies will peak in the mid 2020s at an annual output of 40.3 billion tonnes, while China will see domestic oil production peak at 190 million tonnes per year by around 2015.
At first glance, their view that finite subsoil resources like oil will be harder to find and harder to tap appears very reasonable. But the peak oil model itself shows an inadequate empirical representation of historical patterns. World oil discoveries have peaked at least four times since 1950. Take the United States: here, there has been a major deviation between Hubbert’s projections and real figures of oil production. As economist Daniel Yergin has pointed out, at the end of 2010, US oil production was 3.5 times higher than Hubbert forecast.
Peak oil theory holds a static view of the world, and its models ignore price effects: lots of oil discoveries and high production mean that prices and profits wane, and incentives for further exploration decline. But ensuing oil shortages then restore these incentives. When incentives exist, the industry will continue to produce and is likely to produce even more.
Peak oil theorists also neglect the role of technological advances in oil production as a great multiplier. The history of the oil industry reflects an endless struggle between nature and our knowledge. Progress in technology allows both new discoveries and the increase in recovery rate needed to turn non-recoverable or hypothetical resources into recoverable reserves.
Worse yet, peak oil theorists do not take into account the assessment of unconventional oil resources, such as oil shale, oil sands, biomass-based liquids, coal-based liquids and liquids arising from chemical processing of natural gas. These could substitute for conventional oil when new technologies, such as steam injection for oil sands deposits, mature. Unconventional oil will very likely contribute to future production. By 2009, unconventional liquids had already contributed approximately 14% of total global production capacity, and this share was expected to grow to 23% by the end of 2030.
It’s true that China’s largest oil fields, in its north-eastern and coastal regions, are already mature and that production has peaked, with an annual output of 189 million tonnes. To date, China has already extracted 5 billion tonnes of oil out of 7.84 billion tonnes of discoveries, numbers that seem to leave little room for China to leverage output volume. But on balance, China’s overall oil production is still trending upward, at an average annual rate of 2.1%.