Peak Oil Forecasters Win Converts on Wall Street to $200 Crude

Bloomberg
By Deepak Gopinath

Aug. 31 (Bloomberg) -- On a sweltering Tuesday in mid-July, in the fields outside Pisa, Italy, Willem Kadijk scribbles notes as a ragtag troupe of doomsayers predict the end of the Oil Age.

With his shaved head, jeans and sandals, Kadijk, 48, blends into a crowd gathered under a white tent to hear of the coming calamity. The death of cheap, abundant crude, the forecasters warn, might unleash war and plunge the world into a second Great Depression.

That's not the prophecy of some apocalyptic cult. Kadijk, a hedge fund adviser, had flown from Amsterdam to attend a conference on a geologic theory known as peak oil.

Proponents of this controversial idea say global oil production is now at or near its zenith. Once the flow crests and starts to decline -- and some geologists say it already has -- oil will no longer be able to slake the world's growing thirst for energy. The result will be the oil shock to end all oil shocks. The price of a barrel of crude will spiral to $200 -- and keep rising. To the peaksters, today's energy crunch is nothing next to the pain that will follow.

``Peak oil is a reality,'' says Kadijk, a senior equity salesman at Kepler Equities, an Amsterdam-based brokerage. He plans to start a fund to capitalize on what he sees as a looming crisis for the world's fossil fuel-based economy and the ultimate bull market in oil.

As energy prices soar and violence convulses the Middle East, the peak-oil movement -- an unlikely alliance of geologists, physicists, oil industry consultants and environmental activists -- is winning converts. Peak-oil ideas are bubbling up from scientific journals and offbeat Web sites, much the way warnings of global warming did a decade ago. For the first time, the peaksters have begun to grab the attention of Washington and Wall Street.

Congressional Caucus

U.S. Energy Secretary Samuel Bodman, former boss of Boston- based Cabot Corp., an oil and chemicals company, has asked the National Petroleum Council, which advises him, to investigate whether oil supplies can keep pace with demand. The U.S. Government Accountability Office, the nonpartisan congressional watchdog, is due to release a study on peak oil this November. Rep. Roscoe Bartlett, a Maryland Republican, has formed the Congressional Peak Oil Caucus to sound the alarm.

``The world has never faced a problem like this,'' Bartlett says.

Everyone agrees we'll run out of crude eventually. Oil, after all, is a finite resource: The Earth holds only so much of it. The controversial issue is when a global peak will occur -- and what will happen then.

Colin Campbell, a British geologist who popularized the peak- oil theory in his book ``The Coming Oil Crisis'' (Multi-Science Publishing Co. and Petroconsultants SA, 1997, 210 pages) says world production of conventional oil, the kind that comes from gushing wells, is reaching its apex.

End of Oil Age

Society isn't prepared for the consequences, Campbell, 75, says. It's too late to develop alternative sources of power, such as solar cells, nuclear reactors and windmills, to fill the oil gap before energy prices soar, says Campbell, who has a doctorate in geology from the University of Oxford and more than 40 years of experience in the oil industry.

``We have come to the end of the first half of the Oil Age,'' Campbell says.

Nonsense, says Russ Roberts, a spokesman for Exxon Mobil Corp., the world's largest oil company. Exxon Mobil, which has reaped record profits as the price of oil has surged, has taken out ads dismissing peak oil in U.S. newspapers such as the New York Times.

The Irving, Texas-based oil giant says the peaksters are being alarmist. In all, the world probably has 4 trillion barrels of oil left, four times the amount we have used so far, the ad says.

Time to Think

``The world is nowhere near running out of oil,'' Roberts says. Exxon Mobil geologists believe global oil production will keep rising through 2030, he says.

Cambridge Energy Research Associates, whose chairman, Daniel Yergin, is a leading peak-oil critic, says production will reach an ``undulating plateau'' sometime in the future.

``Our outlook goes to 2020, and we see no evidence of a peak,'' CERA geologist Peter Jackson says. ``Eventually, we will start to see a decline. There is still time to think about alternatives.''

Predictions of an imminent oil famine are as old as the industry itself. When production at the first U.S. wells, located in western Pennsylvania, began to decline in the late 19th century, some people predicted the country would soon run out of oil. Then crude was discovered in east Texas, whose oil fields yielded so much black gold that the Texas Railroad Commission capped production to support prices.

Peak Moment

In the past, Campbell or his disciples have forecast the oil peak down to the year or even the day only to push back the fateful moment. In 1997, Campbell said it would occur in 2001. Now, he says total production, which includes oil from deep-water wells and fuel derived from natural gases, will reach its height sometime after 2010.

Kenneth Deffeyes, a geologist and professor emeritus at Princeton University, first pinpointed Nov. 24, 2005, as the peak- oil date and then revised it to Dec. 16, 2005.

Campbell says the exact day or year isn't important. What matters is that peak oil is coming, and soon. Almost a century and a half after the first U.S. wells were drilled in Titusville, Pennsylvania, production has begun to decline in more than a dozen countries, including the U.S., according to the BP Statistical Review of World Energy. Production at the giant Cantarell oil field in Mexico is likely to decline 8 percent this year, according to Mexican state oil monopoly Petroleos Mexicanos.

U.S. Addiction

At a time when U.S. President George W. Bush has urged the country to break its addiction to foreign oil, the fact is, the U.S. is becoming ever more dependent on overseas crude. U.S. oil production peaked 36 years ago, in 1970, at 11.3 million barrels a day. Since then, output has fallen 39 percent, to 6.8 million barrels a day, or 8 percent of the world total, in 2005, according to BP.

Investors have started to listen to the peaksters. Billionaire Boone Pickens says he's a peak believer. So does Peter Thiel, who co-founded PayPal Inc. and now runs Clarium Capital Management LLC, a $2.1 billion hedge fund firm. Pickens, Thiel and other investors are positioning themselves to profit from what they say will be the biggest oil squeeze of all time.

Even some oil companies and industry veterans sound nervous. Chevron Corp. has run a series of full-page ads in U.S. newspapers that highlight surging oil consumption and declare, ``The era of easy oil is over.''

Chicken Littles

Thierry Desmarest, chief executive officer of Paris-based Total SA, told the World Gas Conference in Amsterdam in June that global oil production would peak in 2020. Matthew Simmons, whose Houston-based investment bank, Simmons & Co., trades oil and gas stocks, says Saudi Arabia's production may decline soon.

Alex Cranberg, chairman of Denver-based independent oil company Aspect Energy LLC, calls the peaksters Chicken Littles -- misguided souls who think the sky is falling.

In fact, Cranberg hired two people to dress in chicken costumes and hand out fliers dismissing peak oil at the conference Kadijk attended in July.

Like many oil-industry vets, Cranberg, 51, says market forces and technological advances will ultimately cure our energy ills. As oil prices rise, companies will be more willing to hunt for crude and extract it. They'll invest in expensive deep-water wells and new technologies to wring more oil from existing fields. Consumers will start conserving energy. Even now, stock market investors and Silicon Valley venture capitalists are pouring billions of dollars into companies developing ethanol, solar power and other alternative sources of energy.

$3-a-Gallon Gas

More and more, however, the peaksters are drowning out everyone else, Cranberg says. ``You can't turn around without seeing or hearing these ideas,'' he says. ``I think they are gaining.''

You don't have to be a geologist to understand why. The price of crude has tripled since 2000. In the U.S., $3-a-gallon gasoline has sapped consumers' confidence. Nearly half of Americans believe the economy is doing poorly, according to a July 28-Aug. 1 Bloomberg/Los Angeles Times poll. Fifty-nine percent of Americans expressed a negative view of Bush's handling of the economy.

``If oil was still at $20, no one would be talking about peak oil,'' says Manouchehr Takin, senior petroleum upstream analyst at the Centre for Global Energy Studies, a London-based consulting firm.

High oil prices are only part of the story, however. The world is straining to feed its energy habit. Today, we consume 85 million barrels of oil a day, according to the U.S. Energy Information Administration (EIA). By 2030, the world will devour 118 million barrels a day, as China and India emerge as economic superpowers.

Big Question Mark

No one knows for sure how much oil the world has. That's a big question mark because the peaksters say production will max out once half of the oil has been pumped. So far, we've extracted about 1 trillion barrels in all. In 2000, the U.S. Geological Survey estimated global resources at 3 trillion barrels, enough to push peak production out to 2037, according to the EIA. Campbell puts the total lower, at 2.5 trillion barrels.

Oil is certainly getting harder -- and more expensive -- to find and extract. Oil discoveries plummeted to 5 billion barrels in 2005 from 90 billion barrels in 1964, according to Campbell.

``Discovery is in long-term decline, and spending more money won't increase it,'' says Chris Skrebowski, editor of the London- based Petroleum Review, an industry journal.

OPEC's Stash

Oil companies have to find enough crude to offset dwindling production at existing fields, which can decline by more than 8 percent a year, and to keep pace with rising demand. Most of that increase will have to come from members of the Organization of Petroleum Exporting Countries, which are often cauldrons of discontent, war and terror.

The cartel's members -- Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela -- together sit atop 75 percent of the world's reserves and account for about 42 percent of total production, according to BP.

OPEC countries are hardly paragons of economic and political stability. Most of the terrorists who attacked the U.S. on Sept. 11, 2001, came from Saudi Arabia. The war in Iraq has hurt that country's ability to pump oil. Bush says Iran is trying to develop nuclear weapons. In Venezuela, President Hugo Chavez has said he wants to diversify oil exports away from the U.S.

In its 2005 Energy Outlook, Exxon Mobil says the combined production of non-OPEC countries will peak sometime from 2010 to 2020. OPEC will be able to fill the gap, the report says. OPEC produced about 30 million barrels a day in 2005; by 2030, OPEC would have to churn out 47 million barrels a day -- almost 57 percent more than it did last year -- to satisfy the world's needs, the report says.

Meeting the Call

``We believe the resource base will support this increase, assuming that investments in development are made in a timely fashion,'' the report says.

OPEC countries will invest a combined $100 billion in the five years through 2010 so they can increase output, OPEC spokesman Omar Ibrahim says. ``We are set to meet the extra call on OPEC to 2030,'' Ibrahim says.

Yet even now, OPEC nations are struggling to keep up. Since 2000, OPEC has gradually lost the spare pumping capacity its members can use as an emergency reserve to moderate prices. The cushion has dwindled to about 1.5 million barrels a day from 6 million barrels a day, Takin says.

What's more, neither the peaksters nor oil industry executives know for sure how much oil OPEC has and how much it can actually produce. OPEC countries haven't been transparent about their reserves or production capacity, says Mike Rodgers, a partner at PFC Energy, a Washington-based oil industry consulting firm. ``OPEC is the big unknown,'' he says.

Overstated Reserves

Many energy analysts believe OPEC nations began overstating their resources in the 1980s, when the cartel linked members' production quotas to the size of their reserves, says Mamdouh Salameh, an independent oil economist. In the late '80s, cartel members raised their reserve estimates by a combined 300 billion barrels even though none of them had actually found much more oil.

In his 2005 book ``Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy'' (John Wiley & Sons, 448 pages, $24.95), Simmons says the Saudis have pumped so much oil so fast that the country's biggest oilfields face declining output.

``Saudi Arabia is keeping everything in the dark,'' Simmons, 63, says.

Saudi officials have dismissed peak-oil theorists and suggestions that their country is running on empty.

Saudi Assurances

``We currently manage approximately 260 billion barrels of oil,'' Abdallah Jum'ah, CEO of Saudi Aramco, the government-owned oil giant, said at an oil and gas conference in June. ``We continue to expand our reserve base, and conservatively estimate our additional potential of recoverable oil to be in the range of 200 billion barrels. At Saudi Aramco's present production levels, that means we will have well over a century's worth of oil to produce.''

Herman Franssen, former chief economist at the Paris-based International Energy Agency, says some OPEC members, such as Iran, Iraq, Kuwait and Venezuela, may be reluctant or unable to produce more oil even as prices soar, largely for political reasons.

``We may never see the volumes of conventional oil production that we see in official forecasts,'' says Franssen, who's now an oil industry consultant in Chevy Chase, Maryland.

Sadad al-Husseini, who spent 35 years working for Saudi Aramco, says Saudi Arabia's reserves are sound but that Kuwait, which says it has reserves of 101.5 billion barrels, probably has half that much. Iran, with official reserves of 132.5 billion barrels, has likewise overstated its reserves, says Husseini, who was an executive vice president at Saudi Aramco before retiring in 2004.

Assume the Worst

``Even with high prices, it will be very difficult for world production of conventional oil to exceed 90 million barrels per day within the next 10 years,'' he says. That's millions of barrels a day short of what the EIA says the world will need in 2015.

Political leaders, business executives and investors should assume OPEC won't be able to satisfy future demand, Rodgers says. ``From an energy-security point of view, if you believe in a non- OPEC peak and OPEC is not being transparent, we have to assume they don't have it,'' he says.

The precarious balance of supply and demand in the oil markets became even clearer in early August when London-based BP Plc announced it would temporarily shut down its Prudhoe Bay oil field on the North Slope of Alaska because of pipeline corrosion. The news drove already-high oil prices up more than $2 to almost $77.

Alaskan Decline

Prudhoe Bay, the largest oil field in the U.S., is part of the peak-oil story. The field was discovered in 1968 and came onstream in 1977. Since then, it has yielded more than 11 billion barrels of oil.

Yet even before the August mishap, this vast field had begun to die. Its output has fallen 73 percent to 400,000 barrels a day from a height of 1.5 million barrels a day in 1989.

Prudhoe Bay is following the life cycle of oil fields across the U.S. and around the world, a phenomenon known as the Hubbert Curve, which takes its name from M. King Hubbert.

Fifty years ago, Hubbert, then a geologist at Shell Oil Co.'s research lab in Houston, postulated that U.S. oil production would follow a bell-shaped curve.

At the 1956 meeting of the American Petroleum Institute in San Antonio, Hubbert predicted that total annual U.S. output would climb steadily, level off sometime between 1965 and '70 and then decline after about half of the country's reserves had been depleted.

Hubbert's Peak

The U.S. reached what geologists now refer to as Hubbert's Peak in 1970. Hubbert died in 1989 at the age of 86.

It wasn't until the late 1990s when Hubbert's ideas, which had percolated for decades in academia and oil circles, began to reach a wide audience via Campbell, the British geologist.

Now in his eighth decade, Campbell is a grandfatherly man with a shock of gray hair. He hardly comes across as a doom- monger. He works out of a two-story house in Ballydehob, a village on the western edge of Ireland.

Campbell spent 40 years exploring for oil for Amoco Corp. and other companies. He helped Amoco search for oil in Ecuador and then, during the 1980s, led its exploration in Norway. He later joined PetroFina SA, the oil exploration company now owned by Total.

After retiring from PetroFina in 1990, Campbell joined forces with Jean Laherrere, a retired French geophysicist who had spent 25 years working at Total, to analyze production profiles for the world's countries.

Campbell says he and Laherrere, now 75, looked at their data and concluded global oil production was approaching its zenith. In 1998, they co-wrote an article for Scientific American magazine titled ``The End of Cheap Oil'' that helped popularize their cause.

Coming Crunch

``The world is not running out of oil -- at least not yet,'' Campbell and Laherrere wrote. ``What our society does face, and soon, is the end of the abundant and cheap oil on which all industrial nations depend.''

In 2000, Campbell founded the Association for the Study of Peak Oil and Gas, an informal organization for fellow travelers. Now known as ASPO International, the group has sponsored five annual conferences, including the one in Pisa in July, which drew more than 230 people. It's now run by Kjell Aleklett, a physics professor at Uppsala University in Sweden. Twenty independent national ASPO groups have sprung up around the world, from Australia to France, to the U.S.

Many peaksters are driven by a moral imperative to spread the word. Campbell says he's a scientist, not a social or environmental crusader. Even so, he says he's worried that oil has harmed human society and the planet. Since the Oil Age dawned, nearly 150 years ago, the Earth's population has soared six-fold, he says.

Man Alone

``Man is the only animal that uses external energy,'' Campbell says.

Asked why he has championed the peak-oil theory, Laherrere quotes Antoine de Saint-Exupery, author of ``The Little Prince'': ``We don't inherit the Earth from our ancestors; we borrow it from our children.''

Activists have jumped on the peak-oil bandwagon and added their own, often strident, voices to the debate over the future of oil.

Jim Kunstler, a writer-activist who lives in Saratoga Springs, New York, says peak oil will ultimately destroy suburbia and plunge the U.S. into a violent dark age of feudalism.

``The question is, Can we run our shit the way we are running our shit?'' Kunstler, 57, says. In 2005, Kunstler wrote ``The Long Emergency: Surviving the Converging Catastrophes of the Twenty-First Century'' (Atlantic Monthly Press, 320 pages, $23), which warns of the havoc to come.

Dieoff.com

Lifeaftertheoilcrash.net, a Web site run by lawyer and peak- oil entrepreneur Matt Savinar, warns, ``Civilization as we know it is coming to an end soon.'' The site sells peak-inspired books and products, including an investor's guide to peak oil.

Another site, dieoff.com, says wars over oil and other natural resources will eventually erupt and millions of people will be wiped out.

Stephen Andrews, a Denver-based energy consultant who founded ASPO-USA in June 2005, says the alarmists have hurt the peak-oil movement.

``The peak-oil tent has different voices -- some shrill, some more sober -- reaching different conclusions from the same facts,'' Andrews, 59, says.

Andrews has attracted more-sober voices to the movement. Last November, Denver Mayor John Hickenlooper helped co-sponsor a two- day peak-oil conference organized by Andrews.

``I think the people most exuberant about peak oil underestimate how much unconventional sources of oil will help flatten the peak, but to say that there is no peak is shortsighted,'' Hickenlooper says.

Crash Program

The world would have to embark on a crash mitigation program 20 years in advance to prevent peak oil from hobbling the global economy, says Robert Hirsch, a senior energy program adviser at San Diego-based research and engineering firm Science Applications International Corp. ``And I consider myself an optimist,'' says Hirsch, 71, who included his findings in a 2005 study on peak oil for the U.S. Department of Energy and estimates such a program would cost the world $1 trillion a year.

Some investors and analysts see lots of opportunities in a post-peak world.

Charles Maxwell, senior energy analyst at Weeden & Co., an independent research firm based in Greenwich, Connecticut, says high oil prices will spur companies to invest in unconventional sources. Few people, however, realize how much such projects will cost or how long they will take to come onstream, he says.

Take the Canadian oil sands. This region in Alberta holds 175 billion barrels of oil, according to the Canadian Association of Petroleum Producers (CAPP), the world's second-largest reserves.

`Really Big'

``It's big. It's really big,'' Neil Camarta, senior vice president for oil sands at Calgary-based Petro-Canada, says of the region. ``It can keep America going for 25 years.''

The oil sands hold vast stores of bitumen, a tarlike substance that is mined, rather than pumped, and then processed into oil that can be refined. The process is expensive -- and getting more so. Rising operating and capital costs have driven the price of mining and upgrading bitumen to as much as $40 a barrel, Camarta says.

By 2020, Canada's oil sands will yield 4 million barrels a day, almost four times what they do now, according to CAPP. That sounds like a lot until you realize that 4 million barrels is just over a third of what Saudi Arabia produced per day in 2005.

Pickens, who built Mesa Petroleum Co. into one of the world's largest independent oil and gas producers, says he sees trouble -- and opportunity -- in peak oil. Pickens, who collected a degree in geology from Oklahoma State University in 1951, has called for the construction of more nuclear power plants and the promotion of alternative energy. He says he's invested in the Canadian oil sands.

Pickens's Picks

``I'm a disciple of Hubbert,'' Pickens, 77, says. ``I think we've peaked and we are going to see an undersupply of oil.''

Clarium Capital's Thiel says he began thinking about peak oil in 1999. As the Internet bubble grew that year, Thiel, 38, says he started to wonder about other risks that investors might be ignoring and seized on the uncertain future of oil.

``Energy will be systematically undervalued until peak oil is priced in,'' Thiel says. He's bought shares of Calgary-based EnCana Corp., which has invested in exploration and new production, and of oil services companies like New York-based Schlumberger Ltd. and Houston-based Weatherford International Ltd., which stand to profit as explorers hunt for oil and drill wells. Thiel says he's leery of U.S. oil majors, such as Exxon Mobil, because they may become targets of new taxes once the government wakes up to peak oil.

Thiel himself says the peak will come by 2008 -- if it hasn't already. ``Geology will trump technology,'' he says.

Coal, Uranium

Eric Sprott, CEO of Toronto-based Sprott Asset Management Inc., says he became a peak-oil convert after hearing Campbell speak in 2004. Sprott, who helps manage 3.6 billion Canadian dollars (US$3.2 billion), says the bull market in energy has only just begun. He's invested 36 percent of his firm's assets in a variety of areas that could benefit from peak oil. His flagship hedge fund returned 41 percent in 12 months ended July 31, he says.

Sprott's investments include St. Louis-based Arch Coal Inc. and Brisbane, Australia-based Macarthur Coal Ltd. His oil and gas picks include Halifax, Nova Scotia-based Corridor Resources Inc.; Denver- based Delta Petroleum Corp.; and Houston-based Ultra Petroleum Corp. He has also invested in Australian uranium companies Energy Resources of Australia Ltd. and Paladin Resources Ltd.

Midnight Ride

Meanwhile, the peaksters aren't about to let up. They'll convene in Boston on Oct. 25-27 to sound their alarm at a conference called ``Time for Action: A Midnight Ride for Peak Oil.'' The title is a reference to the American patriot Paul Revere, whose horse ride in 1775 warned Massachusetts colonists that British soldiers were advancing. The battle that followed, at Lexington and Concord, marked the beginning of the American Revolution.

It was just 84 years after Revere took his ride, on Aug. 27, 1859, that Edwin Drake struck oil in Titusville, ushering in the Oil Age. Exxon Mobil says the era of oil isn't about to end. In one of its ads, the company says, ``Oil is a finite resource, but because it is so incredibly large, a peak will not occur this year, next year or for decades to come.'' The ad depicts a man looking through binoculars at a snowcapped mountain whose summit is hidden by clouds.

Campbell says the illustration actually drives home the point Exxon Mobil is trying to avoid. ``Even though it is obscured by clouds, we know there is a peak,'' Campbell says. His investor followers are betting he's right.

To contact the reporter on this story: Deepak Gopinath in New York at dgopinath@bloomberg.net .