Some Basics on Peak Oil (1)

Energy is an essential factor in the production processes. Three decades ago, Georgescu-Roegen pointed out the central importance of energy in the economic processes. He emphasized that energy cannot be easily substituted with other production factors because of the second law of thermodynamics (Georgescu-Roegen, 1976). Fossil fuels are a finite resource being irreversibly degraded by the economic processes. Georgescu-Roegen (1976) concluded that energy could constrain future economic expansion, and that we need to re-design the human economy according to energy limits. However, most economists have not seriously considered energy as a constraining factor of production because energy sources, in particular fossil fuel, have been bountiful. In general, energy scarcity has been treated as a more or less unimportant topic in the mainstream economic literature.

Today energy receives some attention in the economic literature because of the challenge of climate change and public concern over peak oil production. In fact, there was a boom in energy economics after the oil shocks in the 1970s and 1980s, but the interest faded away when oil became cheap again. Some argue that global oil production seems to have reached its peak, which will cause energy prices to soar as we briefly observed in 20081. Peak oil was originally suggested by M. King Hubbert in 1956. Hubbert investigated production data of oil wells and concluded that there exists a bell-shaped production curve (Hubbert curve) of non-renewable resources. Then, he projected his findings to the national level and predicted US oil production would peak in the late 1960s (Hubbert, 1956), which later turned out to be accurate. Figure 1.4 is the original Hubbert curve, which projected US crude oil production peaking in the late 1960s.

References Cited

Georgescu-Roegen, N. (1976). Process analysis and the neoclassical theory of production. In Energy and Economics Myths. Institutional and analytic economic essays (pp. 37-52). New York, NY: Pergamon Press.

Hubbert, M. K. (1956). Nuclear energy and the fossil fuels. Drilling and Production Practice, 95.

*This series of posts is excerpted from my dissertation. I hope these posts help my visitors understand this critical matter better.*