Feedback Loops, Forecasting and Peak Oil

One of the most important things to consider when developing a forecast is feedback loops. These are reactions to an event that either enhance or buffer the event’s impact.

Feedback loop impacts often cause unexpected results, unintended consequences and failed forecasts.

The debate around Peak Oil is an interesting example. According to Wikipedia, peak oil “is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline.”

Depending on which source you reference, peak oil has: (1) already occurred; (2) will occur in the next few years; (3) will occur roughly in the 2020 time frame; or (4) will occur later than 2020.

There are many forecasting that in the next few years post peak oil declines in oil supplies will lead to substantial economic dislocation. For example, most of 2010′s top 10 peak oil books forecast major problems in the next couple of years.

Some of the forecasts are quite dire. My favorite comes from Wikipedia. One of their scenarios is:

“… a global depression is predicted, perhaps even initiating a chain reaction of the various feedback mechanisms in the global market that might stimulate a collapse of global industrial civilization, potentially leading to large population declines within a short period.”

But a funny thing is happening on the way to the end of civilization as we know it. Technology is improving energy production.

The AP’s New drilling method opens vast oil fields in the U.S. covers the use of horizontal drilling techniques to substantially improve oil field recovery rates. Key quote:

“This new drilling is expected to raise U.S. production by at least 20 percent over the next five years. And within 10 years, it could help reduce oil imports by more than half …”

This is the same technology that recently more than doubled the world’s natural gas reserves, turning an expected U.S. natural gas shortage into a natural gas glut.

While peak oil will happen some day, it now seems unlikely the world will see a peak oil scenario come true for many decades.

The doomsday peak oil forecasts failed to consider feedback loops. In this case, rising oil prices encouraged the development of new and innovative drilling and energy production methods.

Rising prices also resulted in increased energy conversation and greater investments in alternative energy sources. These also push out when peak oil is going to happen and reduce its impact.

Hopefully well before peak oil really does happen, feed back loops caused by environmental, sustainability and climate concerns will result in a shift to cleaner, renewable energy sources.

So remember when doing a forecast – or evaluating a forecast – to think through the potential feedback loops and how they may impact the forecast.

For those interested in learning more about peak oil and energy, my favorite sites are The Oil Drum and The Energy Collective.

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