February 6, 2001

To: The Honourable Ralph Goodale
Minister of Natural Resources
Canada

Subject: The global Hubbert peak of oil production

Dear Sir,

Your vision for Natural Resources Canada, quoted on its web site, sets the goal of "leading the world as a living model of sustainable development".

If a model of sustainable development was ever needed, it's to anticipate the imminent global peak in the daily production of cheap conventional oil.

Hubbert observed in the 1950s that production from a single oil field follows a bell-shaped curve, with the maximum production rate at the half-way point in the life of the field. The total production of all fields follows the aggregate of their bell curves, which happens to be another bell-shaped curve. Again, peak production occurs when we have recovered half of the total of easily recoverable oil. After the peak of the curve, aggregate daily production of conventional oil declines at the rate at which it previously increased.

Hubbert, using this theory, predicted correctly in the 1950s that the oil production of the lower 48 American states would peak in 1970 and decline steadily thereafter. Recently, Campbell and Laherrere employed Hubbert's method to estimate the timing of a global peak of production of conventional oil. They estimated that the peak would occur between 2000 and 2020. Their widely available paper, "The end of cheap oil", was published in Scientific American, March 1998. (Available on several web sites, for example, see http://www.dieoff.org/page140.htm )

The existence and imminence of the peak has startling and unpleasant implications for Canada. Since the beginning of the age of oil, whenever the world asked for more oil, the production of conventional oil would increase, usually with little increase in price, and often with a subsequent price decline. Shortages that did occur, for example the oil shock of the 1970s, were the result of the cartel activities of OPEC--activities that were subject to countervailing financial and political pressures, or were due to easily corrected under-investment in developmental drilling.

When the world can no longer increase the daily production of conventional oil, the price of oil will--for the first time ever--come under the control of a significantly sloped supply curve. At all times, the price of oil is determined by the highest cost source for which significant numbers of people will pay. Now, before the peak, its price is determined by poorly administered attempts to limit a cheap supply which exceeds demand. Demand and production continue to increase. After the peak, the price will be determined by the physical limits and costs of unconventional oil. The result will be a swift, permanent, large, increase of the price of oil.

For me, the suddenness with which oil depletion will grip us was a revelation. It will not come slowly over many years, with prices creeping steadily upward, but will seize us swiftly and soon, even while half of the world's original endowment of conventional oil remains to be pumped from the ground.

If we wait for the market to signal the peak, it will be too late to adapt to higher prices without serious disruption.

The importance of cheap oil to the Canadian economy is such that we face long-term inflation and simultaneous recession when oil becomes expensive. This outcome can be mitigated only by acting before the peak to create incentives to improve efficiency and to develop alternative energy sources.

I would greatly appreciate hearing your view of the timing of the Hubbert peak, and of its consequences for Canadians.

Yours sincerely,

David M. Delaney
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The reply from Mr. Goodale's office:
 

Letterhead:
Office of the Minister of Natural Resources Canada
Ottawa, Canada
K1A OE4

June 28, 2001

To: Mr. David M. Delaney
Apartment 2A
142 Waverley Street
Ottawa, Ontario K2P OV4

Dear Mr. Delaney:

I am replying on behalf of Minister Ralph Goodale, to your correspondence of February 6, 2001. I apologize for the long delay in this response.

The energy sector of Natural Resources Canada is well-informed about the different perceptions of global petroleum supplies. There are a wide range of opinions with respect to the size of world petroleum reserves and their rates of depletion. Statistically, world oil reserves have not shown significant declines during the past few years. The world market has, in fact, experienced an abundance of oil supplies during most of this decade. The current high prices and low supply levels can be attributed to the voluntary production cutbacks by the Organization of Petroleum Exporting Countries (OPEC) producers, not a lack of production capacity.

Although there is a finite supply of conventional oil in the world, new technologies have allowed substantially more oil to be extracted from known reserves. In addition, technological advances have allowed the development of the oilsands and exploration in new frontiers, such as deepwater regions. These advances have added significantly to world oil reserves.

The prospects of a supply shock can never be entirely ruled out, due to the political conditions in the major oil producing countries. However, there has been no significant disruption of supplies in over a decade, and there has never been a disruption of such magnitude as to trigger an activation of the International Energy Agency Emergency Oil Sharing Program. Currently, there is no shortage of oil production capacity and none is expected in the near future.

The oil market continues to experience volatile prices, due largely to the production restraints imposed by OPEC countries since March 1999. Canada and the other member states of the International Energy Agency have continuously urged OPEC members to increase production levels in the interest of oil market stability.

We must indeed create incentives to improve efficiency and to develop alternative energy sources and the Government of Canada' s energy policy is well-suited for such challenges facing Canadians. The department's Office of Energy Efficiency (OEE) has a mandate to renew, strengthen and expand Canada's commitment to energy efficiency, with a particular focus on addressing the Kyoto Protocol. The OEE manages 19 programs aimed at moving the market toward improved energy efficiency. These programs target all energy consumers and emphasize partnerships and economic investments. OEE officials also support the work of the National Climate Change Process and implementation of the Government of Canada's three-year $150-million Climate Change Action Fund.

In addition, through the Renewable Energy Strategy, the government is taking steps to establish a more sustainable energy mix with a larger role for renewable energy sources, such as hydro, biomass, wind, solar, waste material and earth energy. Financial support is provided for research, market development and promotion in co-operation with the renewable energy industry .The Renewable Energy Deployment Initiative, announced in 1998, provides funding to specifically promote the use of renewable energy systems for space and water heating and cooling.

Again, thank you for writing on this important issue.

Yours sincerely,

Marten Burns

Policy Advisor, Energy