Editorial comment

	Vol. 229 No.3
PERRY A. FISCHER, EDITOR

Peak and ye shall find-it doesn’t have to be so bad

Let’s begin with a silly bet sent out by ASPO (Association for the Study of Peak Oil) to CERA (Cambridge Energy Research Associates, part of IHS). It wasn’t bad marketing: I suspect that some magazine(s) will publish the supposed $100,000 bet. But eventually I came to see it as the publicity stunt that it was. CERA won’t take the bet, and even if they did, money would never change hands from the non-profit ASPO to the profitable CERA in nine years. The bet was whether CERA’s recent forecast of 112 million barrels a day of global “oil” production capacity by 2017 would materialize, up from about 87 million today.

There was a lot of the usual loose language. Besides “oil” production capacity, which isn’t provable, what constituted “oil” wasn’t defined, and a new number for capacity in 2017 was offered based on today’s ratio of production to supposedly unused capacity, which, again, is not provable. Even if “official” IEA numbers were used, the ratio of production to excess capacity has varied widely both up and down in the last six years, so its applicability to 2017 is doubtful.

The worst part of “the bet” was the “Optimists Club-CERA vs. Reality” scorecard, wherein several of CERA’s worst predictions of the past were contrast with what actually happened. What made it so pathetic was the fact that all of the leading Peakers have also made previous predictions that did not come to pass, even King Hubbert himself-the fellow who started the movement. It’s become the custom of Peakers to just add five years to the last failed prediction and continue to sound the alarm.

For CERA’s part, the consultancy hasn’t been too kind either, considering that the title of one of their research pieces is: Why the Peak Oil Theory Falls Down: Myths, Legends and the Future of Oil Resources, as well as the comment by one of its lead researchers to a reporter: “Peak oil theory is garbage.”

It’s worth noting that CERA’s 112 million bpd requires an inexplicable increase (to ~2.3% annually) in the rate of global oil capacity over the coming 9 years, compared to the last 20 years (~1.5%). This is difficult to believe given today’s high prices and increasing efficiencies.

Now after having said all that, it is true that, whatever the level of risk was that global “oil” production would peak, that risk has increased over the past 18 months. Conventional crude (plus lease condensate) production has not increased over the past two years, and various sources, including the international IEA, the US’ EIA, the JODI database and World Oil all show year-to-year average crude production falling a little in the 2006−2007 period, somewhere in the -0.4% to -1.5% range.

For now, depletion is beating conventional oil production. Later this year and next, at least 5 million bpd is scheduled to come online, particularly in Saudi Arabia, where well-drilling rates have been strong while production has declined. But construction delays, Saudi’s desire for unused capacity buildup, or various OPEC decisions could delay some of that production.

Farther down the road, if Brazil’s recently discovered, Ghawar-sized group of oil fields hold up to appraisal, they could be adding 1 million bpd or more in perhaps eight years (confirming the world is virtually unexplored in well depths below 15,000 ft). But that is too long to avoid a production shortfall-unless demand crashes too.

However, IEA says that global demand was up a modest 1.2% last year, and 2008 is forecast to be up 2.3% (although I think that those demand numbers are too high). IEA is increasingly making up for falling conventional oil with all the other liquids that are sometimes called “oil,” including refinery gain. If this continues, it will become increasingly difficult to believe. This is because the liquids that can pass for “oil” cannot grow fast enough in a business-as-usual case, except for Natural Gas Liquids (NGLs), which could add the needed volumes to make the supply/demand equation balance. The problem with relying on NGLs is that it implies a 7−8% annual growth rate in gas production-an unlikely pace. In other words, global “oil” production is becoming increasingly dependent on global gas production.

However, another way to balance falling supply and continue the status quo is to destroy demand. The smart money would bet on history. Try this: Name a commodity that hasn’t eventually gone from boom to bust. Can’t name even one? And if you look back at a 30-year oil price chart, and try to justify every squiggle, you’ll find it is a collection of improbable events. So, if the improbable is the most likely thing to happen, it opens up a wealth of possibilities as to how oil demand could go flat or even crash-and prices along with it.

If anyone had said in the 1980s that the Japanese juggernaut would go into a 12-year recession, he would have been laughed at. Accordingly, it is entirely possible that Chinese and Western demand could flatten and thus, balance the supply equation. Another US Great Depression would also do the trick. There are numerous other ways to get supply and demand to balance: resource wars, cataclysms, mass-extinction meteorites, nuclear Armageddon-so cheer up, an oil supply gap can be averted with falling demand.

Even if oil does peak and demand remains positive, the effects might not be all that bad. Alternatives would begin to come on strong, as market forces, while lagging, would nevertheless kick in with surprising speed. Sure, we might have to get used to “stagflation” again for awhile. And if energy prices go through the roof, and gasoline costs $12 a gallon, that will still be OK to those of us who can afford it. Plus, it will have the highly desirable side effect of keeping the Third World in their...well, let’s just say in third place. (After all, if everybody gets rich enough to buy a car, who will make my $80 tennis shoes for $1 in labor?)

It’s no secret that China, India, Malaysia and Africa, all want all the “stuff” that we oily-field folks have. I don’t blame them. It’s just that, lately, they don’t seem as willing to wait a few more centuries to get it. Really high energy prices can change that. There are many ways to mitigate, even benefit from, a peak in production. So cheer up! And let’s do nothing.

Or better still, take the politician’s cue, and do next to nothing. That way, we can at least feel like we’re minimizing any risk.