THE COMING ENERGY CRUNCH (long)

[Susan Gawarecki <loc@icx.net>]

The following is excerpted from

http://www.nypress.com/17/22/news&columns/AaronNaparstek.cfm

This is an excellent discussion on the limits of petroleum production.  

However, supply of oil is somewhat elastic in that at higher prices, 

previously marginal reserves become economical to bring into 

production.  This will help delay the inevitable, but the rise in the 

cost of energy will certainly be a strong force in shaping the world 

economy.  This author doesn't mention the potential of nuclear energy; I 

guess that will be our job.



Susan Gawarecki

 

THE COMING ENERGY CRUNCH      

 A $2 gallon of gas is just the beginning.       By Aaron Naparstek

 

IN 1956, a Shell Oil geologist named M. King Hubbert stood up before a 

meeting of the American Petroleum Institute and, much to the chagrin of 

his bosses, predicted that oil production in the continental United 

States would peak and begin to decline starting in the early 1970s.

 

According to his colleague and author of the book, Hubbert's Peak, Ken 

Deffeyes, "Almost everyone inside and outside the oil industry rejected 

Hubbert's analysis." They simply didn't want to hear it. The 1960s was 

the greatest decade of global oil discovery ever. Vast new reserves were 

found all over the world. Soon all but a faithful few simply forgot 

about Hubbert's forecast.

 

Hubbert arrived at his prediction through an analysis of oil-field 

discoveries. By 1956, after drilling tens of thousands of holes across 

the continental United States, some oilmen had a pretty solid idea of 

what was in the ground. The discovery of new reserves in the lower 48 

had peaked in the 1930s and had been in decline ever since. Hubbert 

noted that, when plotted over time, the rate of discovery formed a 

nearly perfect bell-curve. He theorized that the annual rate of oil 

production would form a similar bell curve, more than a few decades 

later. The highest point of this second curve would be the year that the 

U.S. produced more oil than it ever had before and ever would again. 

That would be the "oil peak."

 

As Deffeyes is quick to tell you, "Old Hubbert was right." America never 

again produced as much as it did in 1970, despite a drilling boom that 

produced four times more oil wells each year. Since then, oil production 

has been in steady, rapid decline-the downhill side of Hubbert's bell 

curve. Today, we extract about 3.4 million barrels per day from the 

lower 48, about one-third of what we were getting at peak.

 

In recent years, scientists have built on Hubbert's techniques in an 

effort to discover how close we are to global oil peak. Though the 

estimates vary, everyone agrees that the question of global peak is not 

"if" it will occur, but "when." Based on 65 studies published over the 

last 50 years, the UK-based Oil Depletion Analysis Center estimates the 

world's original endowment of sweet, crude "conventional" oil to be 

somewhere between 2000- and 2400-billion barrels. As of today, humanity 

has consumed close to half that total.

 

The consequences of this are hard to overstate. Oil fuels 95 percent of 

all transportation and a significant portion of global food production. 

Industrial societies are dependent on a vast, steady flow of inexpensive 

petroleum for just about everything we make and do. Disrupt this flow, 

and modern society as we know it is inconceivable.

 

Global demand for oil has increased sevenfold over the past 50 years. In 

1986 human beings consumed about 54 million barrels of oil each day. 

Today we use about 82 million. Though Americans make up only 5 percent 

of the world's total population, we consume more than one-quarter of 

this energy-about three gallons per person each day. U.S. oil demand 

sets a new record every few months.

 

The developing world, led by China, is catching up to us. In the last 

decade, Chinese oil consumption has doubled, while Chinese car ownership 

has jumped from 700,000 to seven million.

 

"There are basically six and a half billion people on earth today and 

five billion of them barely use energy. They all aspire to," says Matt 

Simmons, chief executive of Simmons & Company, the world's biggest 

energy-industry investment bank.

 

Yet new sources of oil are becoming increasingly difficult to find and 

more expensive to develop. Global discovery peaked in 1964 and has 

declined ever since. In 2000, there were 16 discoveries of oil 

"mega-fields." In 2001, we found eight, and in 2002 only three such 

discoveries were made. Today, we consume about six barrels of oil for 

every one new barrel discovered.

 

The U.S. Dept. of Energy estimates that the world will require 120 

million barrels a day by 2025. To meet that demand we must find the 

equivalent of 10 new North Sea oil fields within a decade. These fields, 

before peaking at the end of the 90s, were producing close to six 

million barrels of oil per day. Today, we are hard-pressed to discover 

one new mega-field, let alone 10 reserves equaling the size of the North 

Sea, which is now in serious decline. This year, 11 new mega-projects 

came online; next year, 18 will start producing. But by 2008 only three 

big new fields are scheduled to start flowing, with no new projects on 

track for 2009 or 2010.

 

According to Dr. Colin Campbell, a former exploration geologist and oil 

company executive who is generally considered to be the dean of global 

oil depletion experts, "there is no way on Earth" that level of demand 

predicted by the U.S. government and many oil industry analysts "can be 

fulfilled."

 

Just as Hubbert predicted for the U.S., a decline in discovery presages 

a decline in production. Says Campbell: "If you add it all together, you 

get a peak of what I call ordinary oil in 2005 and a peak of 

unconventional oil in around 2007. By 2010 volatility comes to an end. 

Then, terminal decline."

 

Campbell's oil peak prediction is right in line with no fewer than 12 

recent studies, using a variety of different assumptions and demand 

projections. They all foresee accelerating decline in global oil 

production within the coming decade. Even the most conservative studies, 

using highly optimistic estimates of future oil discoveries and low 

estimates of future demand, predict a global oil peak by 2020. No matter 

how you slice it, global oil supply will soon begin a steep, permanent, 

irreversible decline.

 

AS WE APPROACH the global oil peak, the world will grow increasingly 

dependent on Middle Eastern oil supplies. Already, 50 oil-producing 

countries have passed their peak, including the United States, which now 

imports 60 percent of its oil. The only excess production capacity in 

the world-that is, the only countries that are able to meet increasing 

daily demand-resides in the handful of oil-rich Persian Gulf states.

 

The Middle East accounts for nearly one-third of the world's total daily 

oil supply, and as other oil provinces reach their peak and begin to 

decline, that share is growing. Saudi Arabia alone controls one-quarter 

of these reserves. But despite Saudi assurances about the size of their 

future reserves, analysts are increasingly worried about the steady flow 

of Saudi oil that the world so depends upon.

 

First is the problem of security. A coordinated strategy has emerged 

among militants in the Middle East to sabotage oil infrastructure and 

target Western oil workers. In recent weeks, explosives-laden boats 

exploded alongside oil tankers in the Persian Gulf; gunmen burst into 

the offices of an Exxon-Mobil oil refinery in Saudi Arabia and killed 

seven workers; and Iraqi oil pipelines were sabotaged three times, 

disrupting the flow of 1.7 million barrels of oil per day.

 

The specter of increasing chaos in the region makes it difficult for 

Western oil companies to provide Saudi Arabia and other Gulf countries 

with the technological and financial support required to develop the 

reserves that would be necessary to increase its daily production.

 

"Even if the oil is there, is any American firm going to be anxious to 

go into Saudi Arabia and develop it at this point?" asks money manager 

Stephen Leeb and author of The Oil Factor. "You'd have to have rocks in 

your head."

 

The Oil Depletion Analysis Center estimates "the military costs of 

protecting pipelines and tanker routes, borne mainly by US. taxpayers, 

at around $15 to $20 per barrel."

 

A second major problem is the fact that the Saudis will not allow any 

independent third-party observer to examine their reserves, operations 

and books. It's off-limits and "totally opaque," according to Simmons. 

Analysts can't even know for sure exactly how much oil the Saudis 

produce each day. Often, the only way they can begin to divine these 

numbers is by measuring tanker traffic.

 

In general, OPEC numbers are extremely shifty, or as Colin Campbell less 

charitably describes them, "complete rubbish." Each OPEC member's daily 

production quota is based on their total reserves. Since each country 

tends to want to pump more and generate greater revenue, they have a 

history of overstating the estimates of how much oil they actually have 

in the ground. During the 80s, estimates of OPEC's total reserves 

magically jumped from 353 to 643 billion barrels, despite the lack of 

new oil fields or significant improvements in drilling technologies. The 

Saudis themselves jacked up their stated reserves from 170 to 257 

billion barrels.

 

Matt Simmons has personally pored over 40 years' worth of Saudi 

petroleum reservoir engineering reports. A participant in Dick Cheney's 

secret energy taskforce meetings of 2001, he is lobbying for a totally 

new system of corporate disclosure in oil and gas data.

 

"I do data analysis," Simmons says. "And the data analysis is getting 

increasingly scary. We have clearly grossly overstated proved reserves."

 

Many believe the Saudis no longer have the excess production capacity 

necessary to calm global markets. "The good news," says Deffeyes, "is 

that OPEC is no longer in charge of the price of oil. The bad news is 

that nobody is in charge of the price of oil."

 

Simmons and others say that the recent Royal Dutch/Shell scandal is just 

the tip of the iceberg. Shell stunned the financial world four months 

ago by revealing that it had overstated its proven reserves by a full 20 

percent. Since then, Shell has cut its reserves four times, wiping 4.9 

billion barrels off of their balance sheet.

 

"Most of us can't believe Shell is the only one," says Deffeyes. 

"Traditionally, they've been very good and conservative in their 

accounting practices. A bunch of us suspect they are probably just the 

first to come clean."

 

Colin Campbell agrees, and sees the Shell case as a watershed event. 

"This really is the moment of truth, because all these games and foolery 

have finally reached their end," he says. "You can't paper over it 

anymore. I'm quite sure that all the major companies will come out with 

similar announcements."

 

Campbell points to mergers of companies like Exxon-Mobil and BP-Amoco as 

more evidence of impending decline. The mergers create growth on the 

companies' balance sheets despite the fact that actual oil discoveries 

are in rapid decline, production is tapering off and reserves are 

probably overstated.

 

The bottom line is that analysts don't have enough data to know what the 

suppliers of the world's most vital economic resource can or cannot 

provide in the coming years. But they know enough to be very worried.

 

As Simmons recently said in an interview with Julian Darley, founder of 

the Post Carbon Institute, "If this were corn flakes, it actually 

doesn't matter because if we ever ran short of corn flakes, then we have 

ample granola. But this isn't corn flakes."

 

His final assessment of the Saudis is chilling. "We could be on the 

verge of seeing a collapse of 30 or 40 percent of their production in 

the imminent future, and imminent means sometime in the next three to 

five years-but it could even be tomorrow. If we need a plan B, it would 

sure be nice to know that with a little bit of advance warning."

 

THE IMPLICATIONS OF the global oil peak could not be more profound. As 

increasing demand exceeds supplies, oil prices will rise substantially 

and international competition for reserves will grow ever more rancorous 

The impact will be felt throughout the global economy and in every 

American's wallet.

 

Today, Americans are panicky over the impact of a $40 barrel of oil. In 

his new book, Stephen Leeb predicts, "Oil prices are likely to rise to 

triple-digit territory-$100 a barrel at a minimum, and probably 

higher-by the end of the decade and possibly sooner." He sees the high, 

unstable price of energy wreaking havoc.

 

"Inflation and deflation will seesaw back and forth in chaotic fashion, 

with inflation generally ascendant but not always."

 

Economic growth, as we have come to know it, is entirely dependent on a 

vast, continuous flow of remarkably cheap oil. As Simmons says, "Peak 

does not mean oil has run dry, it does mean that growth is over. Who 

would like to get on the plane and go tell India and China, sorry guys, 

your spurt is over. We used your energy."

 

Critics of the peak oil theory point out that we have heard these 

Malthusian doomsday predictions before. Ever since Col. Edwin Drake 

drilled the first oil well in Titusville, PA, in 1859, pessimists have 

been predicting the imminent end of oil. But this isn't 1973. We simply 

aren't discovering big new oil fields anymore. The oil crises of the 70s 

were about politics and the holding back of existing supplies. The 

coming crisis is about geology and the unchecked growth of demand.

 

"I have studied the depletion issue intensely for too long now to have 

any remaining doubts about the severity of the issue," Simmons says. 

"Not a soul has been able to produce evidence that the depletion issue 

is not real, nor have I had anyone at any time lay out a credible way 

that the world could actually add so much supply within such a short 

period of time. Sadly, there is no factual data to support the 'sense' 

that the world will be awash in cheap oil and gas forever."

 

Likewise, the U.S. economy has in the past been protected from the 

impact of energy price increases because energy costs have been so low 

and such a small percentage of total economic activity. According to 

Stephen Leeb, those days are coming to an end. "If the price of energy 

is only five percent of the total economy then increases aren't so 

important. When energy costs become 10 percent of the economy, that's 

significant. We're at about eight percent right now That's very close to 

the tipping point."

 

When the tipping point comes, Americans will be compelled to live very 

differently than they do today. One leading American social critic, 

James Howard Kunstler, sees serious political and cultural turmoil up 

ahead as the way of life Americans have built over the last 60 years 

begins to break down. With decreasing access to cheap oil, Kunstler sees 

the fundamentals of industrial agriculture, manufacturing and retail 

trade changing significantly.





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