Sunday, May 28, 2006

Will We Run Out of Oil?

Source: St. Louis Post Dispatch
May 27, 2006

Getting bogged down in the peak oil argument misses the point. Regardless of whether we're in the peak oil period or not, we ought to act the same way.

It was on a 2003 trip to Saudi Arabia and tour of the country's oil fields that curiosity got the best of energy investment banker Matthew Simmons.

For several years after writing a white paper on the world's largest oil fields, Simmons, of Houston, held doubts about OPEC's ability to continually pump more crude, and questions raised on the weeklong trip compelled him to dig deeper.

Over the next year, he pored over more than 200 technical papers from the files of the Society of Petroleum Engineers, all leading him to a startling conclusion: Saudi Arabia may not be able to squeeze more crude from its giant, aging oil fields as the kingdom claims it will. In fact, the country's oil output -- indeed, the world's -- soon may be in decline. And the consequences could be dire.

"For 50 years we just assumed that the Middle East has unlimited supplies of oil," he said in an interview Wednesday in Clayton, where he gave a speech to the St. Louis Society of CFAs. "If we basically blow by this one and say it's not going to happen, we could have the shock of our lives."

Simmons' argument is detailed in his book published last year, "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy." The book has thrust Simmons into the role as de facto champion of the so-called peak oil movement and subjected him to criticism, even ridicule, from some of the oil industry's biggest players, who portray him as a provocateur.

There's been no bigger critic than Daniel Yergin, the author of a Pulitzer-prize winning book on the history of the oil industry and head of energy consulting firm Cambridge Energy Research Associates. Earlier this month, appearing before the U.S. House Energy and Commerce Committee, Yergin told members of Congress that the biggest risk to world oil supplies isn't dwindling reserves underground, but geopolitics and a rebirth of oil nationalism in places such as Bolivia or Venezuela.

"This is the fifth time that we've run out of oil," Yergin told the committee, taking a swipe at Simmons and other peak oil theorists. "The first time was in the 1880s. The last time before this time was in the 1970s. And since then, world oil production has increased by 60 percent."

CERA, in fact, says global oil production capacity could rise as much as 15 million barrels a day by 2010. Other research backs forecasts that the era of plentiful oil isn't ending. The U.S. Geological Survey said there's 3 billion barrels of conventional oil in the ground, of which only 1 billion has been produced. The group puts the peak of production at 2025, even later if Canada's tar sands are included.

The idea that the world's oil production would crest during the first decade of the 21st century isn't new, but it has gained a wider acceptance over the last two years as oil prices have more than doubled to more than $70 a barrel, driving up prices for everything from gasoline to airline tickets to plastic wrap.

The peak oil theory traces its roots to Shell Oil geophysicist M. King Hubbert, who in 1956 predicted that U.S. oil output would reach a maximum in 1970 and worldwide output would peak in 2000. The energy industry was skeptical, but Hubbert was remarkably accurate about America's oil output, which has been falling since 1971 despite a 13-billion barrel discovery at Prud­hoe Bay in Alaska.

Geophysicists and analysts in recent years have applied Hubbert's methodology to the world's oil production and predicted that it will peak sometime this decade. And while Saudi Arabia says it can continue to ramp up production from a current level of about 9.5 million barrels a day to 12.5 million barrels in 2009, data on the kingdom's oil resources is a closely held secret, so no one is certain.

Exactly when the world's oil production reaches a peak

isn't really relevant. And even if it peaks, it doesn't mean the world's oil wells are running dry, Simmons said. What is important is that demand will outstrip supply. And there's an immediate need to reduce energy intensity so that the shock isn't so severe, as well as to explore for oil and natural gas in areas that currently are off limits, such as the Arctic National Wildlife Refuge and the outer continental shelf.

"We've got to reduce intensity of how we transport things, goods, people," he said. "And if we don't, then we ought to get our uniforms on and get in the trenches for a really nasty energy war."

Simmons and his critics can agree on some points. Oil is a finite resource, and a surge in demand has resulted in little, if any, spare production capacity.

The International Energy Agency, based in London, predicts global oil demand will reach 120 million barrels by 2030, led by rapid industrialization in China and India, where millions of new cars are being added to the road and dozens of new factories are being built. An important part of meeting that demand is the Middle East and, in particular, Saudi Arabia, which is thought to hold 22 percent of the world's oil reserves.

It's improbable that Saudi Arabia's oil production will grow from its current 9.5 million barrels a day to 15 million barrels by the middle of the next decade as the country's state-owned oil company has predicted, Simmons said. Further, he suggests that the risk of a drop-off is real. More than 90 percent of the kingdom's oil supply comes from five giant oil fields.

Many energy analysts are reluctant to challenge Simmons outright, but generally they believe that higher prices will help provide the answer to increasingly tight supplies. In short, they have faith that the market will work.

Higher oil prices, for instance, make it profitable to develop unconventional oil resources such as Canada's tar sands or oil shale found in the Rocky Mountains, and provide incentives to develop technology to find new oil fields and squeeze more out of existing ones. For instance, 30 years ago, oil producers couldn't drill in seas deeper than 600 feet. Today, companies are drilling in 10,000 feet of water.

Expensive oil will prompt the government and automakers to improve fuel efficiency and develop renewable fuels such as ethanol and biodiesel.

"We're all economic animals," said Kenneth Crawford, a portfolio manager at Argent Capital Management LLC in Clayton who follows the energy industry. "When we see gasoline prices go up dramatically, we see fewer people buying SUVs."

More important than when the world's oil production peaks is how consumers and policymakers will respond to the current energy crisis, said Bill O'Grady of A.G. Edwards & Sons brokerage in St. Louis.

"I tend to think there's plenty of oil," O'Grady said. "I just think it's in geopolitically hostile areas. But getting bogged down in the peak oil argument misses the point. Regardless of whether we're in the peak oil period or not, we ought to act the same way."

No comments: