Over A Barrel  

There seems to be a steady stream of peak oil related news in the mainstream media this week.

The Guardian has an article by Paul Roberts about the rising oil price, in which he speculates that even a recession may not get the oil price to fall.

Predictably, oil's jump above the psychologically important $100 mark last week unleashed a fresh wave of gloomy prognostication.

Mainstream economists, already anxious over the global credit squeeze, fear pricy oil will make it even harder for America (and thus, Europe and even Asia) to recover from the subprime collapse. Those of a more apocalyptic mindset, meanwhile, go considerably further: $100 oil, they contend, offers still more proof that global oil output has "peaked," and that the number of barrels that oil companies like BP and oil countries like Saudi Arabia can squeeze from the ground will begin a swift and devastating decline.

The truth is bit more complex. Much of oil's dizzying rise (it was $25 as recently as 2002) has been driven by what analysts call "above ground" risks - that is, factors that have little to do with how much oil is left in the ground. Oil speculators, for example, have goosed the price well above what is justified by supply and demand. Fadel Gheit, a veteran oil analyst in New York, points out that, historically, oil prices have run roughly triple what it costs to physically extract the crude from the ground. With extraction costs now averaging $15 to $18 a barrel globally, Gheit reckons we're paying a "speculative premium" of as much as $57 a barrel. A weakening dollar is also to blame. Because oil is priced in greenbacks, the value of which has plummeted since 2001, surging crude prices at least partly reflect an ailing dollar. According to an analysis in the Wall Street Journal, if the dollar had instead remained as stable as gold since 2001, the price of oil would be just $39.

Lastly, demand for oil jumped far more swiftly than at any time in history - in large part because Asian economies are booming and Asian governments, desperate to keep the golden goose quacking, are subsidising oil consumption, thus muting pricing signals that would ordinarily curb demand. Such rapid increase in demand essentially caught the oil industry by surprise, and the big producers are now struggling to close the gap.

Yet not all of oil's price rise can be explained by such above-ground factors. Oil output truly is flagging. Petro-states and oil companies are struggling to discover new oil fields as fast as they are depleting existing fields. To be sure, there is no consensus as to why discoveries are flagging: peak-oil proponents say it's because there's less and less oil to find; optimists, by contrast, say discoveries are being delayed by political barriers.

Yet on one point, both optimists and pessimists are in agreement: in the near-term, and probably the medium-term, the only thing that could possibly cure high oil prices is a recession, which kills demand for all commodities. And to judge from recent economic data, a recession is exactly what we may be getting - due to in part to those same high oil prices. In fact, for all the focus on the credit crunch, high energy prices are having a massive recessionary impact as well: not only must consumers spend more of their discretionary income at the gas pump, but the cost of necessities such as food, whose production is energy intensive, are also rising. All told, says investment banker Morgan Stanley, energy and food price increases since June have wiped $45bn from consumers' discretionary spending in the US alone.

Among policymakers, particularly those running for election, fear of a recession trumps fear of an oil peak, so there is even less incentive to talk about the potential of a peak in oil output. But if recession fails to "cure" high oil prices - and if the world finds itself in the double fix of an economic slowdown and expensive oil - even optimistic leaders may have to confront the possibility that speculators and a weak dollar are not alone in driving oil prices and that the real problems are indeed "below ground".

Reuters also had an article out this week looking at the peak oil case.

Oil at $100 a barrel should give exporters every incentive to pump more, but their difficulty in doing so shows the world is struggling to sustain production.

A growing number of leading industry figures -- the CEOs of Total and ConocoPhillips among them -- now question mainstream forecasts for supply, suggesting the era of "plateau oil" is nearer than many in the business have admitted While global oil demand is projected to grow to more than 100 million barrels per day later this century, some argue it may not be possible to boost flows beyond the current rate of some 86 million bpd.

Supply still falls short even after so-called unconventional oils extracted from tar sands and converted from natural gas are taken into account, said Sadad al-Husseini, a former top official at state oil giant Saudi Aramco. "Today's oil prices are high because there are limited new supplies," Husseini, who ran exploration and production at the Saudi state oil company from 1986-2002, told Reuters. "There's a history now. We're several years into level production."

In 1980, when crude first hit an inflation-adjusted high of $100, the pace of drilling by producing countries and major oil companies became fast and furious, leading to rising output and a price collapse in 1986. It remains to be seen whether they will respond the same way this time, even after a six-year price rally that sent crude through $100 for the first time last week.

Conventional supply from outside OPEC has missed forecasts in recent years and appears for now to have hit an "effective plateau", according to the International Energy Agency (IEA), adviser to industrialised countries. Non-OPEC countries pump about 60 percent of the world's oil and the 13 members of OPEC make up the balance. OPEC sets output limits for 12 of its 13 members.

Many countries within the Organization of the Petroleum Exporting Countries -- whether for reasons of war or sanctions, lack of investment or falling supply at ageing fields --- are unable to raise output. "OPEC can do little," Shokri Ghanem, the top oil official for OPEC member Libya, told Reuters. "Most OPEC countries are producing at capacity."

FLAT OUT

Many analysts expect prices to rise further unless demand crumbles as a result of a recession -- a gain that believers in peak oil put down to supply constraints. "Every place is more or less running flat out," said Colin Campbell, a former exploration geologist and self-described advocate of peak oil -- where output reaches a high point and then falls rapidly. "They can't pump enough to meet demand, so the price is going up. Assuming no particular economic crash, the only direction is upwards." ...

Global proven oil reserves of 1.208 trillion barrels are enough to sustain current rates of production for 40 years, according to figures compiled by BP in its Statistical Review of World Energy. But Campbell believes supply of oil, including unconventional oil, will peak in 2010.

Husseini says high prices will only sustain a production plateau of 85 million bpd for up to a decade.From then he sees the start of a long, gradual decline sinking the world's supply of oil and natural gas liquids to about 78 million bpd by 2030. His forecast is nearly 30 million bpd below the IEA and the U.S. government. "The industry's ability to deliver more oil, quickly, is no longer there," he said.

HUBBERT'S PEAK

Peak oil, proposed by the late geologist M. King Hubbert in 1956, has its detractors who say technology can help extend the life of reserves.
Some senior industry executives see no need for concern. "I am no subscriber to the theory that oil supplies have already peaked," Tony Hayward, chief executive of BP Plc, said at a conference in November.

But more industry leaders are questioning the conventional wisdom on long-term supply. Libya's Shokri Ghanem said in October it may not be possible to boost supply beyond 100 million bpd as output peaks in some countries and few large new oilfields are discovered.

Christophe de Margerie, head of France's Total, and his counterpart at U.S. ConocoPhillips also questioned whether production would exceed that rate. The Total chief says the problem is not with the amount of oil in the ground, partly because advances in technology had made more sources of oil accessible. Instead, the constraints are with the industry's ability to produce the oil quickly enough and with countries' willingness or ability to develop their reserves.

Whoever proves right, Husseini says there's no need for panic -- oil's decline will spur conservation and alternative fuels. "In the long term, this crisis is probably the only way to to get to a sustainable global economy," he said.

The Economist is also quoting Christophe de Margerie (and steadily changing its tune about peak oil), saying he "thinks that the world's oil production may be nearing its peak".

CHRISTOPHE DE MARGERIE is not exactly a conformist. His family is in the champagne business, but he deals in a much less exalted liquid: oil. Despite his heritage, his favourite tipple is single-malt whisky from Islay, which, a colleague confides, he often requests specially at posh corporate events where champagne is de rigueur. His starburst moustache would look right at home on the face of a British cavalry officer, but is an unusual choice for the chief executive of Total, the most valuable company in France (and, indeed, in the whole of the euro zone). And unlike many French bosses, who shuffle from ministry to moneymaking, he has spent his working life in business.

Mr de Margerie's opinions also stand out, at least within the ranks of senior oilmen. Last year he declared that the world would never be able to increase its output of oil from the current level of 85m barrels per day (b/d) to 100m b/d, let alone the 120m b/d that energy analysts predict will be needed by 2030. That is in stark contrast with the view of Rex Tillerson, the chief executive of Total's larger American rival, Exxon Mobil, who argues that the world is neither short of oil, nor likely to be any time soon. It also contradicts the line of the Organisation of the Petroleum Exporting Countries (OPEC), which claims that the only thing that prevents its members from producing more oil is the fear that no one will buy it. ...

Mr de Margerie is careful to point out that he is not predicting “peak oil” in a geological sense. His definition of peak oil is “when supply cannot meet demand”. He believes that the fuel that the world needs to keep its cars and factories running may well be out there, somewhere. It is just getting harder and harder to extract, for technical as well as political reasons. For one thing, he points out, the output of existing fields is declining by 5m-6m b/d every year. That means that oil firms have to find lots of new fields just to keep production at today's levels. Moreover, the sorts of fields that Western oil firms are starting to develop, in very deep water, or of nearly solid, tar-like oil, are ever more technically challenging. There is not enough skilled labour and fancy equipment in the world, he believes, to ramp up production as quickly as people hope.

Oil might be a little easier to get at in places like the Middle East or Russia. “But we can't just say we'd like it, we want it, we'll take it,” says Mr de Margerie. Oil-soaked countries, he believes, will not open up their reserves for exploitation just to make life easier for companies like his. All of which leaves Western oil giants in something of a pickle. “We all think the same,” he says of other oil bosses, “it's just a question of whether we say it.”

Arguably, Total's problems in this respect are more severe than those of most of its rivals, since it derives a relatively high part of its output from geologically promising but politically inauspicious spots. That is a plus, insofar as it brings more opportunity for growth. In the third quarter of last year Total was the only one of the “majors” that saw its output rise. It was recently picked to help Gazprom, Russia's state-controlled gas giant, develop Shtokman, a massive offshore gasfield. Total is also involved in big projects in Iran, Kazakhstan and Venezuela. Thanks to such investments, the firm expects its output to grow by 4% a year for the next three years. ...

Even without such troubles, says Fadel Gheit of Oppenheimer, a financial-services firm, oil from such places tends to be less profitable than that produced in North America, since the American and Canadian governments take only a relatively small share of the revenues. But Total, Mr de Margerie argues, has no choice. It has invested in friendly spots, including Britain and Norway, when the opportunity has arisen. But unlike most other big oil companies, it has no backyard, since France has no oil of its own. Since its inception it has been forced to look for oil overseas, often in less than ideal circumstances. It would be wonderful if the world's oil happened to lie under Club Med holiday resorts, Mr de Margerie says, but sadly it does not. The firm's relationship with leaders like Hugo Chávez of Venezuela “is not a love affair”. But political obstacles are just as much a part of the oil business as tricky geology is.

Perhaps the best measure of Mr de Margerie's gloomy outlook for the oil industry is his eagerness to get Total into nuclear power. Though he says he is not about to increase Total's token 1% stake in Areva, France's nuclear-engineering giant, he clearly sees nuclear energy as part of Total's future. Why would an oil firm want to enter such a controversial field, unless it feels that it is already out on a limb?

Resource Investor has a lengthy interview with Matt Simmons.

CASEY RESEARCH: Let’s jump right into it. I’d like to ask your views about peak oil. Are we there now, or is it happening in the next decade? What’s your opinion here?

MATT SIMMONS: My opinion is that it’s increasingly likely that we actually set an all-time record in May 2005 of 74,252,000 barrels per day. And for the first three months of 2007, we’re almost a million barrels per day behind that, and we’re dropping fast. If that record still holds a year from now, I’ll bet someone 10-to-1 that we set peak oil in May 2005 and it’s now past tense. ...

CASEY RESEARCH: Let’s discuss that for clarification. We know that flow rates are what we measure to understand whether we’re at peak or not. In M. King Hubbert’s work, peak oil is calculated using the total resource base, but your point is that we may still have oil that we’re just not able to produce in an economic way.

MATT SIMMONS: If it’s in the ground and you can barely get it out, it’s as irrelevant as me looking out over Penobscot Bay and saying “There’s a vast amount of hydrates about a thousand miles from here, a thousand feet underwater.” Well, so what? That’s not useful energy.

CASEY RESEARCH: If it takes more energy to dig up that last barrel of oil than it produces, then there’s no sense in trying.

MATT SIMMONS: And another important concept is that if you’re lucky enough to find a highly pressurized field and it turns out to be condensate, which is sometimes called natural motor gasoline, you can literally bypass the refinery - because it’s been baked in the ground - and put it right in your car. It doesn’t run perfectly, but it runs. With the heavy oil out of Canada, you have to expend energy to make it ooze out of the ground, and once it’s oozed out of the ground, you still have totally unusable oil.

CASEY RESEARCH: You still have to go through a fairly hefty process....

MATT SIMMONS: …of upgrading, and then finally diluting it with high-quality oil before it can flow. So one is total junk oil, and the other is the Rolls Royce of petroleum.

The Oil Drum has a great history listing oil price predictions by Daniel Yergin and CERA - "Holding Daniel Yergin and CERA Accountable".

It would seem to me that CERA's numerous predictions of the fall of the price of oil have been false every time. The chart below speaks volumes about their inability to foresee even the near-term future. Maybe their view of the world energy situation is flawed, leading them to be overly optimistic about the future price of oil.[sarcastic mode on] nah that couldn't be! They are the CNBC oil analysts![sarcastic mode off] Like many in the peak oil community, I use Yergin and CERA as a contra-indicator for how I should invest. So far, it is working quite well.