Arthur Berman: "Peak Oil - The Hedonic Adjustment" | The Great Simplification #54
What this covers
Show Summary: On this episode, petroleum geologist Arthur Berman returns to unpack the development and drawbacks of ‘peak oil’. Art explains how our institutions have redefined what is considered oil, which has created an illusion of constantly growing oil production. The reality is that - circa 2023 - fully 40% of what is called oil is comprised of things that are ‘not oil’. What does this imply for global peak oil? Is peak oil, an observation which has been around for decades and repeatedly proven ‘wrong’, even relevant today? Is a specific ‘peak’ date even helpful or should we be focusing on the logical implications of a declining primary resource for global economies? And then, what should we do?
About Art Berman: Arthur E. Berman is a petroleum geologist with 36 years of oil and gas industry experience. He is an expert on U.S. shale plays and is currently consulting for several E&P companies and capital groups in the energy sector.
For Show Notes and More visit https://www.thegreatsimplification.com/episode/54-arthur-berman
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Global oil production appears to have peaked in late 2018, but this reality is obscured by accounting that conflates crude oil with lower-energy substitutes like natural gas liquids and biofuels—40% of reported US oil production is not actually oil, making the decline stealth and the implications for economic growth severe.
- Oil production data conflates crude oil (true petroleum) with natural gas liquids, refinery gain, and biofuels that have 30-50% lower energy content
- The US and world crude oil and condensate production is flat or declining even as total 'oil' appears to grow, due to the rising proportion of lower-energy substitutes
- This quality degradation mirrors a hedonic adjustment in economic statistics—society is consuming lower-calorie fuel while headline numbers suggest growth
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King Hubbert and Howard Scott originally conceived of peak oil in 1931 not as a doomsday prediction but as a call to replace money with energy certificates based on the energy cost of production, reflecting a foundational insight that energy underlies the entire economy.
“So, I go back to 1931 and King Hubbert, who was the fellow who at least is blamed for the peak oil concept, he and a fellow named Howard Scott came up with an idea that basically... since energy underlies the entire economy, those guys wanted to get rid of money and they wanted to replace it with what they called energy certificates. And energy certificates were going to be based on what the energy cost was to produce everything, and nothing else.”
King Hubbert's 1956 San Antonio speech predicted US oil peak and stated that if humanity could solve social and psychological problems, avoid self-destruction with nuclear weapons, and control population, resources could be properly apportioned for perhaps 300 years—but humanity failed on all three criteria, making his original concern the true core of peak oil.
“After his infamous speech in San Antonio, I think it was in 1956, where he actually showed his data predicting the peak of US oil, the part that everybody forgets is what he said. And what he said was that if we can somehow solve basically, our social and psychological problems, and not destroy ourselves with nuclear weapons, and somehow get population under control, then we could begin to talk about how to apportion our energy resources correctly for perhaps, 300 years. Now, clearly we failed on all three of his criteria.”
Diesel is the largest cash cow in the refining industry and is one of the densest products that can be produced from crude, with heat content equal to or slightly greater than crude oil itself, making it extremely valuable; diesel and heating oil are among the highest-energy-density products that can be extracted from crude.
“We need that in our refineries in order to produce things like diesel, which is the biggest cash cow in the world. And it is a fairly heavy compound. And if you look at its heat content, diesel, depending on how it's produced, it can actually have a greater heat content or energy content than crude oil.”
Shell Oil launched an investigation of King Hubbert immediately after his 1956 San Antonio speech to find where he was wrong, but they could never find errors, suggesting that Hubbert's analysis was robust despite institutional pressure to discredit it.
“When Hubbert gave his talk in 1956, the company he worked for, Shell, immediately launched an investigation of him to find out where he was wrong, which of course they never could do it.”
The early peak oil movement (2007-2010) failed to anticipate shale oil, the Gulf of Mexico, the North Slope, and globalization/debt expansion, which delayed the production peak from expected dates; this misprediction was used to discredit the entire concept
“at that time, just like Malthus or Ehrlich know about the fossil carbon pulse, and globalization, and debt, he didn't know about the Gulf of Mexico, the North slope, and then shale oil, he was just projecting conventional crude, right?”
Corn ethanol production competes with food production for agricultural land and corn supply, increasing agricultural land costs and reducing the amount of corn available for human food consumption, creating a cascade of negative economic and human consequences.
“You're competing, you're using food for fuel. And so, that has the effect of you use less of what you grow to feed people, and it also increases the cost of agricultural land, which, and again, we get into this whole complexity cascade that... It seemed like a pretty good idea to somebody when we did it, but when you actually start analyzing it, we wish that we hadn't done...”
Oil found deeper in the earth (which characterizes modern discoveries) undergoes more natural thermal maturation, resulting in a higher percentage of natural gas relative to crude oil, and the crude oil that is found has lower energy density (6-8% lower) than historically produced crude oil
“the biggest complexity in continuing to find and produce oil is that it's deeper. And the deeper it gets, the hotter it is and the hotter it is, the farther along, the natural thermal maturation process it is. And so, the earth is like a refinery. And so, most of the oil that we're finding today, it has a larger percentage of natural gas in it than the oil that we found, say 50 years ago”
Renewable energy can power a great civilization, but not the current one, because the current civilization is built on cheap, abundant oil that enabled globalization, transportation, agriculture, and industrial complexity that cannot be replicated with renewable electricity alone.
“In my writings, I say renewable energy can power a great civilization, just not this one.”
Refinery gain is a volumetric expansion that occurs when refining dense crude oil into lighter, less-dense refined products like gasoline and kerosene, resulting in 1.15 barrels of output from 1 barrel of input without adding any energy
“refinery gain is strictly, as I said before, it's simply when change something more dense into less dense refined products, you get a volume expansion. You start with one barrel and you get 1.15 barrels out because the stuff coming out is a lower density”
The world has consumed more than half of all oil it has ever used in the 27 years since 1995, and usage rates have accelerated tremendously due to population growth and economic expansion
“we're only using 70 million barrels a day of whatever you want to call oil back in the mid '90s. And today, we're using more than a hundred of whatever you want call oil. So the world has used half the oil that it's ever used since 1995, half the world's production and use has come in the last 27 years. So, the rate of use has accelerated tremendously”
The actual headline production data, when examined at a granular level by separating crude oil from NGLs and other non-petroleum components, shows that crude oil production is not recovering to 2018 levels but remaining flat or declining globally
“And if you break out the crude oil fraction of all of this, what you find is not only are we nowhere near recovering even to the late 2018 level, but the rate of increase of crude oil and condensate production is either flat or in decline”
Alternative renewable energy sources can power electric power generation, but electric power generation is a relatively smaller portion of total energy consumption, and renewables cannot solve the total energy challenges discussed.
“all of the alternatives to oil are basically only good for electric power generation, and electric power generation is a relatively smaller portion of the total energy consumption that we have...people think that somehow renewable energy is going to solve everything we've been talking about, it's simply not true, it cannot.”
There are two distinct components of oil production decline: all existing wells decline at approximately 6% per year in aggregate, and new discoveries and drilling add new production on top of this declining base. As long as new additions exceed the decline rate, total production can increase, creating a misleading picture of energy abundance.
“There are all the existing fields and wells that were drilled in the past that are continuing to produce oil. And if you aggregate all of those with no new drilling at all, they are declining at something like 6% a year. So, that's like all the stuff in the past. And then, on top of that, we are having new discoveries and new investment, and new drilling, and new fields maybe in the Arctic, or in the ocean, or in a new shale play in the US, and we're adding that production on top of this large number of declining wells. And as long as the net of those two is increasing in total, we are making new production highs over time.”
Natural gas liquids (NGLs) do not come from oil but from natural gas itself; they are extracted during natural gas processing and have approximately 67% of the heat content of crude oil, assuming all of them are used as fuel, but approximately 55% of NGLs (primarily ethane) are used to make plastics (baggies) rather than as fuel.
“Natural gas liquids, they don't come from oil, they come from natural gas... it does contain some liquids... they don't have anywhere near the energy content or the heat content of crude oil... in rough numbers, it's like 67%, so it's 33% less heat content or energy density than oil. And that assumes that you're going to use it all as a fuel. And I just told you that 55% of it's used to make baggies.”
Corn ethanol is a net energy loser because fossil fuels are used to grow corn (fertilizer, tractors), natural gas is used to dry the corn, and fossil fuels power the conversion process to liquid fuel; Hagens published a Science paper in 2005 arguing that corn ethanol was hardly net energy positive and represented energy conversion rather than energy production.
“It was my one time that I was in the Journal Science was in 2005 talking about this on the fact that corn ethanol was hardly net energy positive and it was more of an energy conversion than an energy source because we use fossil fuels to grow the corn, and natural gas to dry the corn, and the whole process to convert this corn into usable liquid fuel for vehicles.”
Hedonic adjustment in oil statistics is analogous to hedonic adjustment in inflation measurement: quality degradation is masked by headline numbers through accounting adjustments, creating false signals of growth
“in the same way that the Bureau of Economic Analysis might create a CPI metric that over time, since people are poorer and they don't want to show high inflation, they're now eating hamburger instead of steak, and therefore they don't show much of a headline. This is like a hedonic adjustment for peak oil. Yeah, it's hamburger helper”
The oil industry has become increasingly complex over the past 40+ years, with oil becoming harder to find and more complex to produce, which has cost implications. In the 1980s, the industry became risk-averse due to investor pressure, leading to investment in shale plays viewed as no-risk propositions, but shale reservoirs are extremely complex to drill and produce, and after 25-30 years of shale focus, the industry has not been exploring for conventional oil.
“I've been in the oil business now for over 40 years, and what I see is that this business has gotten increasingly complex, just like all other human systems. And what that has meant is that oil is harder to find, and when we do find it, it is much more complicated or complex... to produce, and of course, that has implications for cost.”
In creating the detailed breakdown of US oil production, Berman segregated the data into true petroleum (crude oil and condensate) versus non-petroleum components, discovering that only 60% of what is reported as US oil production by the EIA is actually oil; the remaining 40% consists of natural gas liquids, biofuels, refinery gain, and other non-petroleum products.
“I discovered a couple of things. And so, the first thing I did to this chart was to segregate it into what is actually oil and what I call production of non-petroleum... what I found when I made that graph was, holy cow, what we call oil, only 60% of it is actually what I would call oil. So 40% of what we're counting as oil and saying, 'Okay, no problem, we're already ahead of it in the US'... is because this large portion that doesn't even come from oil is growing at a faster rate than the oil production is.”
Petroleum is derived from the Greek word meaning 'rock oil,' and true petroleum includes crude oil and condensate (the light liquid fraction of crude), which together contain approximately 93% of the energy content of crude oil and should be counted as 'oil' in energy accounting.
“Petroleum, it's a Greek word and it means rock oil. And some everything that comes from oil, I'm calling in here, oil production... crude oil and condensate, condensate being the light liquid fraction of crude oil, lighter than crude, but still in that 93% of energy content.”
The EIA and IEA oil production reports include a category called 'other,' which comprises products that are technically derived from petroleum but are not used as fuel (e.g., asphalt, lubricants, non-fuel chemical feedstocks), and these are counted in headline oil production figures despite not contributing to the energy supply that powers the economy.
“The next category up is what's called other. Okay, other, those are a whole slew of products that are not used as fuel. They are technically from petroleum, but they're things that we simply do not use as a fuel.”
Fuel ethanol (10-15% of US gasoline content) is derived from corn and adds approximately 10-15% volume to gasoline supply, but ethanol has a lower heat content per gallon than gasoline, so cars filled with ethanol-blended fuel do not travel as far as cars filled with pure gasoline, reducing the net liquid fuel available for transportation.
“Fuel ethanol is something that 10% or 15% of everything you put in your car or your truck is not gasoline anymore, it's fuel ethanol... ethanol also has a lower heat content per gallon, correct? Well, it does. So, yeah, basically, you don't get the same range. You fill up your tank with 15% ethanol and your car doesn't go as far as if you've filled it up with 100% gasoline.”
The important questions about peak oil are not primarily when global oil production will hit a maximum, but how quickly it will decline after that, and whether the shortfall in oil availability needed to power global economic growth will result in financial instability or geopolitical competition for remaining exports.
“I think the important questions, not only are when the date of global oil production will hit a maximum, but how quickly will it decline after that, and will the shortfall in oil availability that is needed to power global economic growth result in either a financial kind of rubber band dynamic or some sort of geopolitical competition for the remaining exports.”
The economy is shifting toward a 'mordor economy' where an increasing fraction of total energy is directed to the energy sector itself; in 1999 this was at a low of approximately 5% of total energy, and by the time of this conversation it is 10% or higher and rising, reducing the net energy available to the rest of society and forcing higher prices or lower consumption elsewhere.
“We've been growing the total amount of global oil production. And as we're going to talk about in a moment, it's not even oil that we're growing, but we are gradually slowly turning into what I call a mordor economy, which is more and more of our energy is directed to the energy sector, meaning that the rest of the world has to pay higher prices or use less because the energy sector is pulling that up. And we hit a low, as a society, in 1999 of around 5% of our energy going to the energy sector, and now, it's 10% or above en route to something larger.”
Peak oil is a poor lens for analysis because it focuses obsession on predicting the precise date of peak (e.g., 2008, 2005, 2012) rather than on the underlying causal reasons for discussing peak in the first place, causing the movement to lose sight of its original purpose.
“The problem that I see with peak oil is that we very quickly... got involved with trying to predict the peak without really worrying about any of the underlying causes or reasons that we were even talking about a peak. And everybody got obsessed with, well, it will be 2008 or was it 2005, or is it going to be 2012? And to me, that's where every movement, if you will, falls apart. It forgets why it started.”
The US refining, petrochemical, and oil industries are operating exactly as investors demand—maximizing shareholder value and return on capital employed—but this optimization is not serving the wellbeing of the United States as a nation.
“the US oil industry, refining industry, petrochemical industry is doing exactly what its investors expect from it. It's maximizing shareholder value, it's maximizing profit, ROCE, return on capital employed, doing all the stuff that everybody wants it to do, demands that it do, but it's not necessarily doing that for the wellbeing of the United States.”
The controversy Hubbert raised after his 1956 speech was greater than any peak oil movement controversy 10-15 years ago because challenging the status quo of perpetual growth is fundamentally threatening.
“the controversy that he raised was greater, I think, at the time than anything that the people in peak oil experienced 10, or 15, or even a few years ago. He was really on the hot seat...It's threatening to the status quo to say that there may be less in the future.”
The EIA and IEA accounting systems are useful but inherently conflate different types of liquids without energy quality adjustments, making it impossible to assess true energy availability for civilization without disaggregating the components.
“I'm not in any way criticizing the EIA, or IEA, any of these organizations, I'm just saying, look, this is their accounting system, and it's useful as far as it goes. But for those who are deeply concerned about how we're going to maintain our civilization, since it's based on oil, we better look at how much of that is actually oil”
In his first article on The Oil Drum in 2006, Hagens argued that peak oil would 'silently morph into peak liquids,' because the definitional categories EIA uses conflate crude oil with biofuels, natural gas liquids, and coal liquids that are not equivalent in energy provision, and this definitional ambiguity would make peak oil increasingly confusing and contentious.
“In 2006, peak oil will silently morph into peak liquids. This is relevant because the definitional layers that we add on top of crude oil are not equal in what they provide to society. It is also relevant in that the logistical heuristic used by M. King Hubbert was not intended to include corn and sugar cane derived ethanol, tar sands, or natural gas liquids in its predictive theory of oil basin decline. The concept of peak oil already not widely believed will start to be very confusing and probably even more combative.”
Peak oil as a concept has been incorrectly labeled a 'theory' in popular discourse when it is actually an observation of physical limits, not a falsifiable hypothesis; the observation—that finite resources require increased effort and cost to extract—is never wrong, though specific predictions about when the peak occurs can be incorrect.
“It's fascinating that so many people talk about it as if it's a theory. They call it the peak oil theory. And whether it was right, wrong, or neutral, it was never a theory, it was an observation. It was an empirical kind of thing. It said, 'Hey, we have a limited volume of this stuff. At some point we're going to have to spend a whole lot more money and work a lot harder to get what's left.' That was never a theory and that was never wrong.”
November 2018 global oil production reached approximately 100+ million barrels per day; in 2020 production fell due to COVID and the economy shutting down, with oil prices briefly reaching -$37/barrel due to lack of storage; since mid-2020 production has recovered to approximately 100 million barrels per day as of November of the conversation year.
“November, 2018 world production was somewhere in excess of $100 million barrels a day, 2020, the world fell apart, and the economy was... we had -$37 a barrel per oil price for a while. And we had no place to store oil... production dropped many, many million barrels. And in about mid 2020, we kind of got our act a little bit together, or at least we put some band-aids on it. And since then, oil production has been increasing, and as of November, we're up to $100 million barrels a day.”
Globally, the proportion of natural gas liquids in reported oil production is not quite as high as in the US but is still substantial and rising; the US is a more mature petroleum province and advanced economy, so the rest of the world is progressively moving toward the US composition.
“The world has a slightly different breakdown of those percentages than does the United States. And as it turns out, the percentage of natural gas liquids is not quite as high, but it is high and it's growing. So, again, the United States is just a more mature petroleum province and a more advanced economy, so the rest of the world's getting there.”
Average people and even oil industry professionals have a notional sense that oil quality has degraded but lack detailed quantitative understanding of the magnitude; most oil industry professionals are focused on well drilling and production optimization rather than system-level questions about whether oil production serves civilization and economic growth.
“How many people know that in your field? I think a lot of people have a notional sense that that's true. And I say that because before I made these charts a couple of weeks ago, that's pretty much what I had. I think I had a stronger sense that these numbers were lower than the average person in the oil business. The average person in the oil business is real smart, but isn't focused on this stuff. That person is focused on what he's paid to do, which is where do we drill the next well? How do we optimize production? How do we make the economics work? The stuff you and I are talking about is related to the system.”
The US corn ethanol mandate (approximately 1 million barrels per day of production) could physically be phased out over three years, but political pressure from farmers and their congressional representatives makes reversal extremely unlikely despite widespread recognition that the policy has been harmful.
“Why are we stuck with it? Why couldn't we wind that down with a three-year phase out or something? Oh, we could physically do it, but all the farmers would scream, all the congressmen who support those farmers would scream. We can't do anything unless everybody agrees that it suits their constituents. And so, the likelihood of that happening I think is very close to zero.”
Over the last 15 years, policy makers have attempted to delay energy constraints and peak oil consequences through 'kicking the can down the road' via rule changes, 'too big to fail' doctrine, quantitative easing, artificially low interest rates, and subsidizing the shale experiment, but these measures cannot indefinitely offset the underlying decline rate constraint.
“What's happened the last 15 years is we've kicked a hell of a lot of cans, rule changes, too big to fail, quantitative easing, artificially low interest rates, the larger straw, which is the shale experiment. And this might go on for a while longer, but after it stops, there's, I think, a doozy of a hangover because we've been consuming beyond our means for a long time.”
Peak oil, as a concept, has been on public minds 15 years ago but is now absent from mainstream discourse, despite the underlying phenomenon being a present reality and the decadal observation of the carbon pulse century.
“Peak oil, a phrase that was on a lot of people's minds and lips 15 years ago. We don't hear about it so much anymore.”
If the US stopped all new drilling today, total oil production would drop by 40% in the first year and then another double-digit percentage in the second and third years due to the steep decline rate of tight oil, which is now approximately 60% of total US oil production.
“If we stop drilling in the United States today, our total amount of oil, and I don't know how natural gas liquids fit into that, would drop by 40% in the first year, and then another double digits the second and third year. Because it is truly the Red Queen phenomenon that we have to keep drilling in order to offset the steep decline of the light oil, the tight oil, which is the largest fraction of our oil right now. It's about 60%, yeah.”
The US is in the business of importing heavy crude oil and exporting light crude oil because domestically-produced light shale oil cannot be used effectively in US refineries without blending with heavier imported crude to produce products like diesel; the US exports approximately 3.5-4 million barrels per day of light crude and imports 6.5-7 million barrels per day of heavier oil.
“We have reduced our imports a lot in the last 20 years, but we've reached a level where we just can't use anymore of our light crude oil, we just can't. And so, we send it overseas. We're exporting something like 3.5, 4 million barrels of light crude oil a day because we just don't need it, we can't do anything with it. And we are importing 6.5 Or 7 million barrels a day of heavier oil from, you name your source. But people who produce refinery ready oil, which has higher energy density, and it's thicker oil because we need that in our refineries in order to produce things like diesel.”
Biodiesel, coal-to-liquid conversion, and other renewables comprise such a small percentage of US oil production that they do not contribute meaningfully to the bottom line despite receiving disproportionate media attention and policy focus.
“The renewables, those are things like biodiesel, those are things like, you know, mentioned, you know, can actually create some sort of fuel from coal. It's such a small percentage that I don't really even want to talk about it because it's something that gets a lot of press, but it doesn't contribute hardly anything to the bottom line.”
Propane and butane (NGLs) are used primarily for heating homes and cigarette lighters, not as transportation fuel or electricity generation, limiting their utility in an economy dependent on liquid fuels.
“you go out and you buy a BIC lighter, well, that's butane. Or when you light your gas charcoal grill and you buy something at the supermarket, that's butane. Propane for people like you that live in the country and don't have the benefit of piped methane to your house, a guy comes out and fills a tank with propane and you heat your house with propane.”
In 2019, Hagens publicly stated that there was a greater than 90% probability that the fourth quarter of 2018 represented global peak oil, and as of the conversation date (approximately three and a half years later, mid-2022), charts show the claim is still supported by data.
“Because in 2019, I started publicly stating that there was over a 90% chance that fourth quarter, 2018, will be known as peak oil. And here we are three and a half years later, and you sent me some charts that speak to that, and that's what we're going to talk about today.”
Kjell Aleklett, not King Hubbert, coined the specific term 'peak oil,' though Hubbert's ideas and data about resource depletion predate this terminology by decades
“Actually, I think it was Kjell Alleklet that coined the word peak oil, not the concept, but the term”
Liquefied natural gas (LNG) is created by cooling methane (the main component of natural gas) to approximately -300 degrees Fahrenheit under tremendous pressure, forcing it to become liquid, which is then transported in pressurized tankers and regasified at destination
“We take methane, which is the lightest fraction of natural gas and the part, and that's exactly what we burn in our stoves, and our furnaces, and all of that, and we cool it. We put it under tremendous pressure and drop the temperature to something like almost 300 degrees below zero, and we force that methane to precipitate into a liquid”
Art Berman as a geologist has had fundamental concerns about earth systems constraints on oil depletion for the second half of his 40+ year career, and while tempted by technological solutions, continually returns to the conclusion that basic earth systems constraints are not changing
“I look at peak oil from an earth science perspective, which is to say an earth systems perspective. And I've been in the oil business now for over 40 years, and what I see is that this business has gotten increasingly complex...and as much as I try to get on board with, 'Oh, well, technology will save us,' or 'We're going to find...' I keep coming back to the same conclusion, which is, it's not really changing”
Art Berman's research motivation is driven by fascination with what he does not understand rather than pessimism or doom-seeking; his scientific approach is to describe the current state of energy systems accurately, which he characterizes as neither optimistic nor pessimistic but simply accurate
“somebody thought it was depressing, and he said, 'What motivates you to do this kind of research and give these kind of talks?' And it was a fair question. And the answer I gave him still remains, and that I'm fascinated by what I don't understand. And so, I'm not a doomster, I'm not trying to bring people down. I'm a scientist, I'm describing the state of things, in this case, the state of energy. And to me, it's neither optimistic or pessimistic, it's just what it is”