reserves are now declining about 4 to 6 percent a year worldwide. He
says 18 large oil-producing countries, including Britain, and 32 smaller
ones, have declining production; and he expects Denmark, Malaysia,
Brunei, China, Mexico, and India all to reach their peak in the next few
years. “We should be worried,” he told the Guardian in 2005.19 “Time is
short and we are not even at the point where we admit we have a problem,”
he says. “Governments are always excessively optimistic. The
problem is that the peak, which I think is 2008, is tomorrow in planning
terms.” Bill Powers, editor of the Canadian Energy Viewpoint, an investment
journal, adds: “There is a growing belief among geologists who
study world oil supply that production is soon headed into an irreversible
decline. . . . The U.S. government does not want to admit the reality of
the situation. Dr. Campbell’s thesis and those of others like him are becoming
the mainstream.”20
Thus what seems to be indisputable is the fact that world oil demand is
growing while supply isn’t growing as fast. In the long term, the International
Energy Agency (IEA), a Paris-based energy watchdog for rich countries,
which also collates national figures and predicts demand, says
developing countries could push demand up 47 percent to 121 million barrels
per day by 2030, and that oil companies and oil-producing nations must
spend about $100 billion per year to develop new supplies to keep pace.
The IEA reckons that demand rose faster in 2004 than in any year since
1976; that may be due to additional demand growth from China and India.
China’s oil consumption, which accounted for a third of extra global
demand last year, grew 17 percent and is expected to double over 15
years to more than 10 million barrels a day, half of current U.S. demand.
India’s consumption is expected to rise by nearly 30 percent in
the next five years. If world demand continues to grow at 2 percent a
year, then almost 160 million barrels per day will need to be extracted
in 2035, twice as much as today. That kind of demand is almost impossible
to satisfy.
According to industry consultants IHS Energy, 90 percent of all
known reserves are now in production, suggesting that few major discoveries
remain to be made. Shell says its reserves fell last year because it
found only enough oil to replace 15 to 25 percent of what the company
produced. BP said recently that it replaced only 89 percent of its production
in 2004. And Repsol downgraded its reserves estimate in early 2006
because of political problems in Latin America, where it has many assets.
THE END OF AN ERA? 39
Sunday, April 19, 2009
current high oil prices, the debate has intensified and probably shifted
significantly from “if’ there is actually going to be a global oil peak to
“when” there will be one.
Wall Street should get concerned. Energy consultants John S. Herold,
Inc. recently compared the stated reserves of the world’s leading oil companies
with their quoted discoveries and production levels, and predicted
that the seven largest oil companies will all begin seeing production declines
within four years. Deutsche Bank reported recently that global oil
production could peak in 2014.
In 2005, The Guardian newspaper in London wrote about a U.S. government
report on oil shale and unconventional oil supplies that seems to
indicate concern among some government officials. The Guardian story
quoted the report:
World oil reserves are being depleted three times as fast as they are
being discovered. Oil is being produced from past discoveries, but
the reserves are not being fully replaced. Remaining oil reserves of
individual oil companies must continue to shrink. The disparity
between increasing production and declining discoveries can only
have one outcome: a practical supply limit will be reached and future
supply to meet conventional oil demand will not be available....
Although there is no agreement about the date that world
oil production will peak, forecasts presented by USGS geologist
Les Magoon, the Oil & Gas Journal, and others expect the peak
will occur between 2003 and 2020. What is notable ... is that
none extend beyond the year 2020, suggesting that the world may
be facing shortfalls much sooner than expected.18
I find it more useful to approach this global peak debate from a different
angle, by looking at different producing regions, or oilfields, and
when they are likely to peak individually. We know that by the same
Hubbert analysis, the U.S. production, both onshore and offshore, has
peaked. Similar patterns of peak discovery and production have been
found throughout all the world’s main oilfields, including in the North
Sea. The first North Sea discovery was in 1969, discoveries peaked in
1973, and the British portion of the basin passed its production peak in
1999. The British portion is now in serious decline, while production
from the Norwegian portion has leveled off.
Chris Skrebowski, editor of Petroleum Review, a monthly magazine
published by the Energy Institute in London, says that conventional oil
38 THE END OF OIL
significantly from “if’ there is actually going to be a global oil peak to
“when” there will be one.
Wall Street should get concerned. Energy consultants John S. Herold,
Inc. recently compared the stated reserves of the world’s leading oil companies
with their quoted discoveries and production levels, and predicted
that the seven largest oil companies will all begin seeing production declines
within four years. Deutsche Bank reported recently that global oil
production could peak in 2014.
In 2005, The Guardian newspaper in London wrote about a U.S. government
report on oil shale and unconventional oil supplies that seems to
indicate concern among some government officials. The Guardian story
quoted the report:
World oil reserves are being depleted three times as fast as they are
being discovered. Oil is being produced from past discoveries, but
the reserves are not being fully replaced. Remaining oil reserves of
individual oil companies must continue to shrink. The disparity
between increasing production and declining discoveries can only
have one outcome: a practical supply limit will be reached and future
supply to meet conventional oil demand will not be available....
Although there is no agreement about the date that world
oil production will peak, forecasts presented by USGS geologist
Les Magoon, the Oil & Gas Journal, and others expect the peak
will occur between 2003 and 2020. What is notable ... is that
none extend beyond the year 2020, suggesting that the world may
be facing shortfalls much sooner than expected.18
I find it more useful to approach this global peak debate from a different
angle, by looking at different producing regions, or oilfields, and
when they are likely to peak individually. We know that by the same
Hubbert analysis, the U.S. production, both onshore and offshore, has
peaked. Similar patterns of peak discovery and production have been
found throughout all the world’s main oilfields, including in the North
Sea. The first North Sea discovery was in 1969, discoveries peaked in
1973, and the British portion of the basin passed its production peak in
1999. The British portion is now in serious decline, while production
from the Norwegian portion has leveled off.
Chris Skrebowski, editor of Petroleum Review, a monthly magazine
published by the Energy Institute in London, says that conventional oil
38 THE END OF OIL
U.S. oil supply was about to peak. Soon, U.S. petroleum reserves would
reach an all-time maximum. Then they would begin to shrink as oil companies
extracted crude from the ground faster than geologists could find
it. That was all right.
Hubbert knew that some oil fields, especially the big ones, were easier
to find than others. Those big finds would come first, and then the pace
of discovery would decline as the remaining pool of oil resided in progressively
smaller and more elusive deposits. The production figures followed
a similar pattern, but it looked as if they would peak a few years
later than reserves. That also was convincing. In any case, oil can’t be
pumped out of the ground the instant it is discovered. Lease agreements
have to be negotiated, wells drilled, pipelines built; the development
process can take about 10 years or more.
When Hubbert extended the production curve into the future it
looked as if it would peak about 1969 or 1970. Every year after that, the
United States would pump less oil than it had the year before. If that prediction
wasn’t daring enough, Hubbert had yet another mathematical
trick up his sleeve. Assuming that the reserves decline was going to be a
mirror image of the rise, geologists would have found exactly half of the
oil in the Lower 48 when the curve peaked. Doubling that number gave
Hubbert the grand total of all recoverable oil under the continental
United States: 170 billion barrels.
At first, critics objected to Hubbert’s analysis, arguing that technological
improvements in exploration and recovery would increase the
amount of available oil. They do, but not enough to extend production
beyond the limits Hubbert had projected. Even if you throw in the unexpected
discovery of oil in Alaska, U.S. petroleum production history has
proceeded almost exactly as Hubbert predicted it would. Contemporary
critics of Hubbert dismiss the oil peak at their peril. “Even in 30 to 40
years there’s still going to be huge amounts of oil in the Middle East,”
said Daniel Sperling, director of the Institute of Transportation Studies
at the University of California, Davis.17
Yet the critics are missing the larger point. A few years ago, geologists
began applying Hubbert’s methods to the entire world’s oil production.
Their analyses indicated that global oil production would peak some
time during the first decade of the twenty-first century. And so in the
wake of China’s robust demand growth, signs of global warming, and
THE END OF AN ERA? 37
reach an all-time maximum. Then they would begin to shrink as oil companies
extracted crude from the ground faster than geologists could find
it. That was all right.
Hubbert knew that some oil fields, especially the big ones, were easier
to find than others. Those big finds would come first, and then the pace
of discovery would decline as the remaining pool of oil resided in progressively
smaller and more elusive deposits. The production figures followed
a similar pattern, but it looked as if they would peak a few years
later than reserves. That also was convincing. In any case, oil can’t be
pumped out of the ground the instant it is discovered. Lease agreements
have to be negotiated, wells drilled, pipelines built; the development
process can take about 10 years or more.
When Hubbert extended the production curve into the future it
looked as if it would peak about 1969 or 1970. Every year after that, the
United States would pump less oil than it had the year before. If that prediction
wasn’t daring enough, Hubbert had yet another mathematical
trick up his sleeve. Assuming that the reserves decline was going to be a
mirror image of the rise, geologists would have found exactly half of the
oil in the Lower 48 when the curve peaked. Doubling that number gave
Hubbert the grand total of all recoverable oil under the continental
United States: 170 billion barrels.
At first, critics objected to Hubbert’s analysis, arguing that technological
improvements in exploration and recovery would increase the
amount of available oil. They do, but not enough to extend production
beyond the limits Hubbert had projected. Even if you throw in the unexpected
discovery of oil in Alaska, U.S. petroleum production history has
proceeded almost exactly as Hubbert predicted it would. Contemporary
critics of Hubbert dismiss the oil peak at their peril. “Even in 30 to 40
years there’s still going to be huge amounts of oil in the Middle East,”
said Daniel Sperling, director of the Institute of Transportation Studies
at the University of California, Davis.17
Yet the critics are missing the larger point. A few years ago, geologists
began applying Hubbert’s methods to the entire world’s oil production.
Their analyses indicated that global oil production would peak some
time during the first decade of the twenty-first century. And so in the
wake of China’s robust demand growth, signs of global warming, and
THE END OF AN ERA? 37
pretty much acknowledge the fact that we may be on the homestretch
as far as oil supply is concerned. The main points they make are that
they are doing something, they are concerned about oil depletion and
global warming, and they are looking for new production as well as trying
to come up with alternative fuels.
The interesting thing about this debate is that it’s become political.
Where you stand depends very much on which forces you consider dominant
in controlling the oil markets. Is discovering more oil the only way
to increase production capacity? And what about the fact that not much
remains to be discovered, besides a few areas in arctic Russia, offshore
West Africa, and Brazil. “The economists all think that if you show up at
the cashier’s cage with enough currency, God will put more oil in
ground,” Deffeyes told the Associated Press a while ago.16
One of the reasons this debate has become more intense is the fact
that oil prices are high, which is a warning sign of what is to come, and it
won’t be pretty. Prices will rise dramatically and become increasingly
volatile. And with little or no excess production capacity, minor supply
disruptions—political instability in Venezuela, hurricanes in the Gulf of
Mexico or labor unrest in Nigeria, for example—will send the oil markets
into a panic buying and the prices will shoot into the stratosphere.
So will periodic admissions by oil companies and petroleum-rich nations
that they have been overestimating their reserves.
Here’s the good part: oil producers—companies and countries—won’t
lose out. Instead, their boom will grow. On the other hand, because the
price of oil ultimately affects the cost of just about everything else (and
the economy in general), inflation like the kind we saw in the 1970s will
return. If you’ve been paying close attention to the news lately, you may
be feeling a little nauseated already. Does that mean that $6-per-gallon
gas is right around the corner? You bet. We saw $5 gas already in the
wake of Katrina in some parts of the country such as Georgia and the
Midwest.
During Hubbert’s time, he started his analysis by collecting data on
how much oil had been discovered and produced in the Lower 48 states,
both onshore and offshore, between 1901 and 1956. Alaska’s oil wealth
was still not known to petroleum geologists at the time. His data showed
that U.S. oil reserves had risen rapidly between 1901 and 1930, then
more slowly after that. When he graphed that pattern it appeared that
36 THE END OF OIL
as far as oil supply is concerned. The main points they make are that
they are doing something, they are concerned about oil depletion and
global warming, and they are looking for new production as well as trying
to come up with alternative fuels.
The interesting thing about this debate is that it’s become political.
Where you stand depends very much on which forces you consider dominant
in controlling the oil markets. Is discovering more oil the only way
to increase production capacity? And what about the fact that not much
remains to be discovered, besides a few areas in arctic Russia, offshore
West Africa, and Brazil. “The economists all think that if you show up at
the cashier’s cage with enough currency, God will put more oil in
ground,” Deffeyes told the Associated Press a while ago.16
One of the reasons this debate has become more intense is the fact
that oil prices are high, which is a warning sign of what is to come, and it
won’t be pretty. Prices will rise dramatically and become increasingly
volatile. And with little or no excess production capacity, minor supply
disruptions—political instability in Venezuela, hurricanes in the Gulf of
Mexico or labor unrest in Nigeria, for example—will send the oil markets
into a panic buying and the prices will shoot into the stratosphere.
So will periodic admissions by oil companies and petroleum-rich nations
that they have been overestimating their reserves.
Here’s the good part: oil producers—companies and countries—won’t
lose out. Instead, their boom will grow. On the other hand, because the
price of oil ultimately affects the cost of just about everything else (and
the economy in general), inflation like the kind we saw in the 1970s will
return. If you’ve been paying close attention to the news lately, you may
be feeling a little nauseated already. Does that mean that $6-per-gallon
gas is right around the corner? You bet. We saw $5 gas already in the
wake of Katrina in some parts of the country such as Georgia and the
Midwest.
During Hubbert’s time, he started his analysis by collecting data on
how much oil had been discovered and produced in the Lower 48 states,
both onshore and offshore, between 1901 and 1956. Alaska’s oil wealth
was still not known to petroleum geologists at the time. His data showed
that U.S. oil reserves had risen rapidly between 1901 and 1930, then
more slowly after that. When he graphed that pattern it appeared that
36 THE END OF OIL
will increase drastically and major oil-consuming countries will experience
crippling inflation, unemployment, and economic instability.
According to these scientists (and now a very few economists), it will
take a decade or more before conservation measures and new technologies
can bridge the gap between supply and demand, and even then the
situation will be touch and go. Of course, none of this will affect vacation
plans this summer, so Americans shouldn’t fret much—you can plan
beach weekends for a little while. Though gas prices are up, they are expected
to remain relatively affordable to middle class Americans if incomes
keep rising, at least for the next decade. Accounting for inflation,
current gasoline prices, at an average of $2.50 per gallon, are pretty comparable
to what motorists paid in past decades; it only feels expensive because
gasoline was unusually cheap between 1986 and 2003.
As anyone would expect, the analysis by Campbell and Deffeyes is way
off the much more optimistic official figures. The U.S. Geological Survey
states that reserves in 2000, the year of its latest figures, of recoverable
oil were a lot, and that peak production will not come for about 30
years. The International Energy Agency (IEA) believes that oil will peak
between “2013 and 2037,” and Saudi Arabia, Kuwait, Iraq, and Iran, four
countries with much of the world’s known reserves, report little if any depletion
of reserves. Meanwhile, the oil companies (which do not make
public estimates of their own peak oil) say there is no shortage of oil and
gas for the long term. These conflicting views show that nobody knows
the answer. “The world holds enough proved reserves for 40 years of
supply and at least 60 years of gas supply at current consumption rates,”
according to BP.12
The industry is asking the public to trust it, arguing that every year
for more than 100 years it has produced more than it did the year before,
and predictions of oil running out or peaking have always been
proved wrong. Today, the industry says, global production has hit 84
million barrels per day, with big new fields in Azerbaijan, Angola, Algeria,
Nigeria, and the deep waters of the Gulf of Mexico and elsewhere
soon expected to be onstream. But as everyone knows, the business of
estimating oil reserves is contentious and political. According to Campbell,
companies seldom report their true findings for commercial reasons,
and governments, which own 90 percent of the reserves, often lie.
Most official figures are grossly unreliable: “Estimating reserves is a scientific
business. There is a range of uncertainty but it is not impossible
34 THE END OF OIL
crippling inflation, unemployment, and economic instability.
According to these scientists (and now a very few economists), it will
take a decade or more before conservation measures and new technologies
can bridge the gap between supply and demand, and even then the
situation will be touch and go. Of course, none of this will affect vacation
plans this summer, so Americans shouldn’t fret much—you can plan
beach weekends for a little while. Though gas prices are up, they are expected
to remain relatively affordable to middle class Americans if incomes
keep rising, at least for the next decade. Accounting for inflation,
current gasoline prices, at an average of $2.50 per gallon, are pretty comparable
to what motorists paid in past decades; it only feels expensive because
gasoline was unusually cheap between 1986 and 2003.
As anyone would expect, the analysis by Campbell and Deffeyes is way
off the much more optimistic official figures. The U.S. Geological Survey
states that reserves in 2000, the year of its latest figures, of recoverable
oil were a lot, and that peak production will not come for about 30
years. The International Energy Agency (IEA) believes that oil will peak
between “2013 and 2037,” and Saudi Arabia, Kuwait, Iraq, and Iran, four
countries with much of the world’s known reserves, report little if any depletion
of reserves. Meanwhile, the oil companies (which do not make
public estimates of their own peak oil) say there is no shortage of oil and
gas for the long term. These conflicting views show that nobody knows
the answer. “The world holds enough proved reserves for 40 years of
supply and at least 60 years of gas supply at current consumption rates,”
according to BP.12
The industry is asking the public to trust it, arguing that every year
for more than 100 years it has produced more than it did the year before,
and predictions of oil running out or peaking have always been
proved wrong. Today, the industry says, global production has hit 84
million barrels per day, with big new fields in Azerbaijan, Angola, Algeria,
Nigeria, and the deep waters of the Gulf of Mexico and elsewhere
soon expected to be onstream. But as everyone knows, the business of
estimating oil reserves is contentious and political. According to Campbell,
companies seldom report their true findings for commercial reasons,
and governments, which own 90 percent of the reserves, often lie.
Most official figures are grossly unreliable: “Estimating reserves is a scientific
business. There is a range of uncertainty but it is not impossible
34 THE END OF OIL
as better technology reduces the cost of producing energy from nonconventional
sources, alternative fuels will gradually become economically
viable and may present investment opportunities. But until we
reach that point, oil will continue to drive the planet. So if there’s anything
you’d want to get from this book, it is this: Tightening supply
and demand for oil and other fossil fuels will nudge oil prices ever
higher, creating perhaps the greatest opportunity for investors to acquire
wealth in the new millennium—the equity ownership of the
world’s dwindling hydrocarbon.
“Saint” Hubbert to Disciples: Go Ye and Spread the Gospel
The current debate about oil peak is quite interesting. Because Hubbert’s
prediction came to pass, he became a patron saint among oil peak advocates.
But most of his opponents have switched their argument. It’s now
not a question of whether he was right, but of how his theory applies in a
global context. Does Hubbert’s Curve matter in the wider global oil production
matrix, and even if so, have new technologies not made his theory
irrelevant?
Yet, some experts now agree that even taking all these issues into consideration
does not change the central basis of Hubbert’s argument: that
oil is a tangible, finite commodity that must come to an end some day.
What’s really hard to pin down is when exactly we may run out of oil.
There are many wild guesses that fall into two categories: Most economists
who dispute the oil peak theory present the best case scenario, arguing
that if it happens at all, then it could be 30 or 40 years away. On
the other hand, independent geologists who support the theory, the socalled
disciples of Hubbert, present a very bleak scenario, suggesting that
the peak could be as early as 2008.10
The two most prominent disciples of Hubbert are Colin Campbell
and Princeton University geologist Kenneth S. Deffeyes. The oil industry
calls them pessimists because they are predicting “a permanent state
of oil shortage.” Of the two, Deffeyes is the greater pessimist because he
argues that maybe in 2007—almost certainly by the end of the decade—
the world’s oil production, having grown exuberantly for more than a
century, will peak and begin to decline.11 Matt Simmons, a banker in
Houston who knows much about the oil business, believes we are at peak
already in 2006. After that, it really will be all downhill. The price of oil
THE END OF AN ERA? 33
sources, alternative fuels will gradually become economically
viable and may present investment opportunities. But until we
reach that point, oil will continue to drive the planet. So if there’s anything
you’d want to get from this book, it is this: Tightening supply
and demand for oil and other fossil fuels will nudge oil prices ever
higher, creating perhaps the greatest opportunity for investors to acquire
wealth in the new millennium—the equity ownership of the
world’s dwindling hydrocarbon.
“Saint” Hubbert to Disciples: Go Ye and Spread the Gospel
The current debate about oil peak is quite interesting. Because Hubbert’s
prediction came to pass, he became a patron saint among oil peak advocates.
But most of his opponents have switched their argument. It’s now
not a question of whether he was right, but of how his theory applies in a
global context. Does Hubbert’s Curve matter in the wider global oil production
matrix, and even if so, have new technologies not made his theory
irrelevant?
Yet, some experts now agree that even taking all these issues into consideration
does not change the central basis of Hubbert’s argument: that
oil is a tangible, finite commodity that must come to an end some day.
What’s really hard to pin down is when exactly we may run out of oil.
There are many wild guesses that fall into two categories: Most economists
who dispute the oil peak theory present the best case scenario, arguing
that if it happens at all, then it could be 30 or 40 years away. On
the other hand, independent geologists who support the theory, the socalled
disciples of Hubbert, present a very bleak scenario, suggesting that
the peak could be as early as 2008.10
The two most prominent disciples of Hubbert are Colin Campbell
and Princeton University geologist Kenneth S. Deffeyes. The oil industry
calls them pessimists because they are predicting “a permanent state
of oil shortage.” Of the two, Deffeyes is the greater pessimist because he
argues that maybe in 2007—almost certainly by the end of the decade—
the world’s oil production, having grown exuberantly for more than a
century, will peak and begin to decline.11 Matt Simmons, a banker in
Houston who knows much about the oil business, believes we are at peak
already in 2006. After that, it really will be all downhill. The price of oil
THE END OF AN ERA? 33
newable energy. As the cost of conventional fuels continues to rise,
more attention will inevitably be paid to alternative forms of energy,
all of which currently suffer from a combination of economic and
technical drawbacks. Fossil fuels account for approximately 89 percent
of world energy consumption, nuclear and hydroelectric account for
about 10 percent, with wind, solar, and biomass accounting for about 1
percent. None of these alternative fuels represents a threat to the
dominance of fossil fuels—at least not yet.
However, over the coming decade, as hydrocarbon fuel costs rise and
32 THE END OF OIL
US–48
Europe
Russia
Other
M. East
Heavy, etc.
Deepwater
Polar
Natural Gas Liquids
Billions of Barrels per Year
1930
1940
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
35
30
25
20
15
10
5
0
FIGURE 1.1 In the fashion of Hubbert, Dr. Colin J. Campbell, of the
Association for the Study of Peak Oil and Gas in Sweden, has
produced the above graph showing his estimate of the peak
production year at 2008. Most economists think somewhere in 2035
to 2045 is the likely time for the oil peak. My estimate is about 2015
to 2020, which I got by simply calculating the midpoint of the
predictions by geologists and economists.
Source: The Association for the Study of Peak Oil and Gas, C.J. Campbell,
June 2004.
more attention will inevitably be paid to alternative forms of energy,
all of which currently suffer from a combination of economic and
technical drawbacks. Fossil fuels account for approximately 89 percent
of world energy consumption, nuclear and hydroelectric account for
about 10 percent, with wind, solar, and biomass accounting for about 1
percent. None of these alternative fuels represents a threat to the
dominance of fossil fuels—at least not yet.
However, over the coming decade, as hydrocarbon fuel costs rise and
32 THE END OF OIL
US–48
Europe
Russia
Other
M. East
Heavy, etc.
Deepwater
Polar
Natural Gas Liquids
Billions of Barrels per Year
1930
1940
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
35
30
25
20
15
10
5
0
FIGURE 1.1 In the fashion of Hubbert, Dr. Colin J. Campbell, of the
Association for the Study of Peak Oil and Gas in Sweden, has
produced the above graph showing his estimate of the peak
production year at 2008. Most economists think somewhere in 2035
to 2045 is the likely time for the oil peak. My estimate is about 2015
to 2020, which I got by simply calculating the midpoint of the
predictions by geologists and economists.
Source: The Association for the Study of Peak Oil and Gas, C.J. Campbell,
June 2004.
surge in alternative fuels. Further, the Hubbert Curve would suggest
that at some point in the next few years the oil peak will occur whatever
the price of oil, meaning that year-over-year declines of production are
on the horizon.
The Hubbert Curve
As a framework for thinking about the world’s oil production and supply,
it is useful to understand the work of Hubbert, the Shell geologist who in
1956 correctly predicted that U.S. oil production would peak around
1966–1972. Oil analysts have applied Hubbert’s methodology to world
oil production and are predicting that world oil production will peak
within the next several years, though they disagree on the precise timing.
Essentially, Hubbert’s technique was based on the prediction that the
production level for oil as it was utilized would follow a normal distribution.
Thus, if the United States had 200 billion barrels of reserves when
100 billion barrels had been extracted, U.S. production would begin to
decline.
Assuming that the world originally had three trillion barrels of oil reserves,
if two trillion has been discovered thus far and one trillion has already
been consumed, then one trillion barrels would remain to be
discovered. A peaking of oil production would occur after another onehalf
trillion barrels had been consumed, and this would probably occur in
about 15 years, according to this analysis.
It is worth noting that Hubbert’s methodology is based on a purely
statistical analysis of exploration and production data. It does not take
into account new developments like tar sands, which could potentially
prolong oil supplies for a few decades, nor does it take into consideration
emerging advanced production technologies. Still, Hubbert’s theory is
important because it provides a road map for the oil market; if demand is
set to rise to 100 million barrels per day and there isn’t the production
capacity to match, oil prices can only move in one direction: up.
THE FUTURE OF ENERGY
As the world faces dwindling supply—and higher prices—for oil, there
is a tremendous appeal to the idea of inexpensive, nonpolluting, re-
THE END OF AN ERA? 31
that at some point in the next few years the oil peak will occur whatever
the price of oil, meaning that year-over-year declines of production are
on the horizon.
The Hubbert Curve
As a framework for thinking about the world’s oil production and supply,
it is useful to understand the work of Hubbert, the Shell geologist who in
1956 correctly predicted that U.S. oil production would peak around
1966–1972. Oil analysts have applied Hubbert’s methodology to world
oil production and are predicting that world oil production will peak
within the next several years, though they disagree on the precise timing.
Essentially, Hubbert’s technique was based on the prediction that the
production level for oil as it was utilized would follow a normal distribution.
Thus, if the United States had 200 billion barrels of reserves when
100 billion barrels had been extracted, U.S. production would begin to
decline.
Assuming that the world originally had three trillion barrels of oil reserves,
if two trillion has been discovered thus far and one trillion has already
been consumed, then one trillion barrels would remain to be
discovered. A peaking of oil production would occur after another onehalf
trillion barrels had been consumed, and this would probably occur in
about 15 years, according to this analysis.
It is worth noting that Hubbert’s methodology is based on a purely
statistical analysis of exploration and production data. It does not take
into account new developments like tar sands, which could potentially
prolong oil supplies for a few decades, nor does it take into consideration
emerging advanced production technologies. Still, Hubbert’s theory is
important because it provides a road map for the oil market; if demand is
set to rise to 100 million barrels per day and there isn’t the production
capacity to match, oil prices can only move in one direction: up.
THE FUTURE OF ENERGY
As the world faces dwindling supply—and higher prices—for oil, there
is a tremendous appeal to the idea of inexpensive, nonpolluting, re-
THE END OF AN ERA? 31
To illustrate this point, you simply need to examine the potential for
growth in the Chinese automobile industry. At the moment, domestic
Chinese automobile demand is rising rapidly toward two million vehicles
per year. There is a remarkable parallel between U.S. automobile demand
in 1910 to the Chinese automobile demand today. Here are some
statistics: China is producing one car for every 600 people, which equates
to the U.S. automobile penetration in 1910. By 1920, U.S. car production
and consumption jumped tenfold to one car per 60 Americans. If
China’s car production follows that same trajectory, it would equate to 21
million additional cars per year in a decade’s time. That means China’s
automobile ownership would be about 210 million by 2015, and approaching
the number of vehicles owned by Americans at 217 million.
Given that U.S. gasoline consumption is about nine million barrels per
day, it is easy to see how China’s consumption can rise dramatically.
Based on 2005 data, the world is consuming approximately 83 million
barrels of oil per day, with production at about 84 million barrels per
day. That leaves a cushion of one to two million barrels per day, which
typically gets lost in the event of a supply disruption, like the Venezuelan
strike in 2003, the Yukos-Kremlin problem in 2004, and the Hurricane
Katrina impact in 2005. I think that oil consumption worldwide, at
current price levels, will reach at least 100 million barrels per day in 20
years. In fact, if my view of an increase in demand from Asia alone in the
next 17 years will add an additional demand of 27 million barrels per
day, then the daily demand will equate to 107 million barrels per day
without any increase in demand from the rest of the world. The question
is whether production will be able to keep up with that kind of demand.
Not surprisingly, capacity can increase not only as prices rise to
support additional production, but also as demand for oil slows with the
30 THE END OF OIL
TABLE 1.1 Oil Demand Growth
Year China Asia exChina Rest of World Total World
2005 4.10% 0.79% 1.23% 1.39%
2004 16.88% –2.90% 4.61% 4.40%
2003 13.84% –4.50% 2.32% 2.01%
2002 5.78% –0.74% 0.54% 0.65%
2001 1.58% 0.24% 1.11% 1.00%
Source: Oil Market Intelligence Numerical Data Source.
growth in the Chinese automobile industry. At the moment, domestic
Chinese automobile demand is rising rapidly toward two million vehicles
per year. There is a remarkable parallel between U.S. automobile demand
in 1910 to the Chinese automobile demand today. Here are some
statistics: China is producing one car for every 600 people, which equates
to the U.S. automobile penetration in 1910. By 1920, U.S. car production
and consumption jumped tenfold to one car per 60 Americans. If
China’s car production follows that same trajectory, it would equate to 21
million additional cars per year in a decade’s time. That means China’s
automobile ownership would be about 210 million by 2015, and approaching
the number of vehicles owned by Americans at 217 million.
Given that U.S. gasoline consumption is about nine million barrels per
day, it is easy to see how China’s consumption can rise dramatically.
Based on 2005 data, the world is consuming approximately 83 million
barrels of oil per day, with production at about 84 million barrels per
day. That leaves a cushion of one to two million barrels per day, which
typically gets lost in the event of a supply disruption, like the Venezuelan
strike in 2003, the Yukos-Kremlin problem in 2004, and the Hurricane
Katrina impact in 2005. I think that oil consumption worldwide, at
current price levels, will reach at least 100 million barrels per day in 20
years. In fact, if my view of an increase in demand from Asia alone in the
next 17 years will add an additional demand of 27 million barrels per
day, then the daily demand will equate to 107 million barrels per day
without any increase in demand from the rest of the world. The question
is whether production will be able to keep up with that kind of demand.
Not surprisingly, capacity can increase not only as prices rise to
support additional production, but also as demand for oil slows with the
30 THE END OF OIL
TABLE 1.1 Oil Demand Growth
Year China Asia exChina Rest of World Total World
2005 4.10% 0.79% 1.23% 1.39%
2004 16.88% –2.90% 4.61% 4.40%
2003 13.84% –4.50% 2.32% 2.01%
2002 5.78% –0.74% 0.54% 0.65%
2001 1.58% 0.24% 1.11% 1.00%
Source: Oil Market Intelligence Numerical Data Source.
sumption quite dramatically. In addition, that guess is based on an estimate
of known oil reserves, which is still suspect because oil producers—both
companies such as Royal Dutch Shell Group and countries such as Saudi
Arabia—have an incentive to overstate their reserves. On the other hand,
the estimate does not take into account undiscovered or unproven reserves
because it’s simply unrealistic to assume that everything will be fine at a
time when we have real problems. Exploration and advances in production
technology will obviously bring to light additional reserves, but those new
reserves may also just replace what is being depleted, and in some cases,
the high cost of drilling in the offshore deep waters or Arctic areas may be
prohibitive. In fact, even some economists admit that OPEC reserve estimates
would have to be significantly inflated and new reserve discoveries
surprisingly low for my estimate to be an overstatement.
While oil is the most known form of fossil fuel, coal and natural gas
are part of the same group, and all can be measured in terms of barrels of
oil equivalent (boe). One boe equals six thousand cubic feet of natural
gas, or 0.2 tons of hard coal, or 0.4 tons of light coal. There are an estimated
two trillion barrels of oil equivalent (boe) in proven reserves
around the world today, including 885 billion boe of natural gas.
For natural gas, by some estimates, the supply at present rates of consumption
would be exhausted in about 60 years, while the current known
supply of coal would last 180 years.
Energy Economics
I have talked to many economists on this oil issue, and despite their
claims to the contrary, there’s a wide belief that energy is an elastic commodity,
meaning consumption and production behaviors change in response
to price changes. There is normally a lag in consumption change
as a result of price changes. For instance, it takes time for car owners to
shift to more energy-efficient vehicles in response to higher fuel prices. A
similar lag can occur in other conservation efforts because manufacturing
plants require time to change production methods or shift to alternative
sources of energy. And despite the spike in the price of oil and the claims
by some analysts that it has reached an all-time high, viewed on an historic
basis, oil is not exceptionally expensive.
Since 1972, the inflation-adjusted price for a barrel of oil has averaged
$34, and while higher oil prices will depress demand, even in classical
THE END OF AN ERA? 27
of known oil reserves, which is still suspect because oil producers—both
companies such as Royal Dutch Shell Group and countries such as Saudi
Arabia—have an incentive to overstate their reserves. On the other hand,
the estimate does not take into account undiscovered or unproven reserves
because it’s simply unrealistic to assume that everything will be fine at a
time when we have real problems. Exploration and advances in production
technology will obviously bring to light additional reserves, but those new
reserves may also just replace what is being depleted, and in some cases,
the high cost of drilling in the offshore deep waters or Arctic areas may be
prohibitive. In fact, even some economists admit that OPEC reserve estimates
would have to be significantly inflated and new reserve discoveries
surprisingly low for my estimate to be an overstatement.
While oil is the most known form of fossil fuel, coal and natural gas
are part of the same group, and all can be measured in terms of barrels of
oil equivalent (boe). One boe equals six thousand cubic feet of natural
gas, or 0.2 tons of hard coal, or 0.4 tons of light coal. There are an estimated
two trillion barrels of oil equivalent (boe) in proven reserves
around the world today, including 885 billion boe of natural gas.
For natural gas, by some estimates, the supply at present rates of consumption
would be exhausted in about 60 years, while the current known
supply of coal would last 180 years.
Energy Economics
I have talked to many economists on this oil issue, and despite their
claims to the contrary, there’s a wide belief that energy is an elastic commodity,
meaning consumption and production behaviors change in response
to price changes. There is normally a lag in consumption change
as a result of price changes. For instance, it takes time for car owners to
shift to more energy-efficient vehicles in response to higher fuel prices. A
similar lag can occur in other conservation efforts because manufacturing
plants require time to change production methods or shift to alternative
sources of energy. And despite the spike in the price of oil and the claims
by some analysts that it has reached an all-time high, viewed on an historic
basis, oil is not exceptionally expensive.
Since 1972, the inflation-adjusted price for a barrel of oil has averaged
$34, and while higher oil prices will depress demand, even in classical
THE END OF AN ERA? 27
everywhere, including the comedian Bill Maher, who urges us to trade in
big sport utility vehicles for smaller ones. Others say you should move
closer to your job or car-pool to work. Or don’t buy a bigger house than
you need; use public transport if you can. The truth is these are small solutions
to a much bigger problem. Many have observed that, unlike Europe,
the United States has been trapped in a pattern of suburban living
tied to the highways since the 1950s, which is supported by tax incentives
and cheap fuel. Long Island is a typical example and it will be hard to reverse
course. High oil prices may well be the shock we need to change
course.
THE FUTURE OF OIL AND THE AMERICAN DREAM
Although oil is known mostly for producing transportation fuels, it’s not
an exaggeration to say that it literally drives our planet. It’s the key source
of heat and a critical component of virtually millions of products, from
clothing to construction materials. But given that the supply is finite,
there are two inescapable facts about oil and other fossil-based fuels: The
supply eventually will be depleted, and at some point in the not too distant
future demand will outstrip production capacity.
Increasing demand, along with supply problems, has already begun to
drive energy prices upward. Recent oil price volatility serves as a warning:
Just as we’ve seen in the past two years, the price of energy, in particular
the price of oil, will increase as time goes by. Consumers should
expect to pay substantially more at the pump in coming years, while investors
should consider the pain at the pump an opportunity to profit on
energy equities.
How soon the world’s supply of oil and oil equivalents will be exhausted
is open to debate. There are a number of economic, political,
and environmental factors at play, including global economic growth,
Middle East violence, terrorism, and conservation efforts. Moreover, as
prices rise, new supplies of oil emerge as do efforts to reduce consumption.
At current consumption levels, experts say, the world’s known oil
supply could be exhausted within the next 30 years, but my guess is that
the oil peak could come in the next 15 to 20 years.
My 15- to 20-year estimate may even be optimistic as demand from
emerging markets, particularly China and India, is driving up global con-
26 THE END OF OIL
big sport utility vehicles for smaller ones. Others say you should move
closer to your job or car-pool to work. Or don’t buy a bigger house than
you need; use public transport if you can. The truth is these are small solutions
to a much bigger problem. Many have observed that, unlike Europe,
the United States has been trapped in a pattern of suburban living
tied to the highways since the 1950s, which is supported by tax incentives
and cheap fuel. Long Island is a typical example and it will be hard to reverse
course. High oil prices may well be the shock we need to change
course.
THE FUTURE OF OIL AND THE AMERICAN DREAM
Although oil is known mostly for producing transportation fuels, it’s not
an exaggeration to say that it literally drives our planet. It’s the key source
of heat and a critical component of virtually millions of products, from
clothing to construction materials. But given that the supply is finite,
there are two inescapable facts about oil and other fossil-based fuels: The
supply eventually will be depleted, and at some point in the not too distant
future demand will outstrip production capacity.
Increasing demand, along with supply problems, has already begun to
drive energy prices upward. Recent oil price volatility serves as a warning:
Just as we’ve seen in the past two years, the price of energy, in particular
the price of oil, will increase as time goes by. Consumers should
expect to pay substantially more at the pump in coming years, while investors
should consider the pain at the pump an opportunity to profit on
energy equities.
How soon the world’s supply of oil and oil equivalents will be exhausted
is open to debate. There are a number of economic, political,
and environmental factors at play, including global economic growth,
Middle East violence, terrorism, and conservation efforts. Moreover, as
prices rise, new supplies of oil emerge as do efforts to reduce consumption.
At current consumption levels, experts say, the world’s known oil
supply could be exhausted within the next 30 years, but my guess is that
the oil peak could come in the next 15 to 20 years.
My 15- to 20-year estimate may even be optimistic as demand from
emerging markets, particularly China and India, is driving up global con-
26 THE END OF OIL
vestments have been a profitable component for any portfolio and I believe
that soon people are going to see them as a must,” says Mike Swanson,
a fund manager who also writes a regular online column on energy
investment.9
So, whom should you believe if we are really running out of oil? You
should know from the outset that whenever experts talk of an oil peak,
what they generally mean is that from then on, production will gradually
slide down the slope toward the last drops at the rate of about 2 percent
annually. Those who reject the oil peak theory have a lot of faith in technology;
they argue that new technologies—and higher prices—are going
to make it possible to suck oil out of unconventional places. For instance,
they say, extracting oil from tar sands was once thought to be prohibitively
costly, but today oil from Canadian tar sands sells for $20 per barrel
or more. Indeed, Canada puts its reserves at 300 billion barrels, higher
than even Saudi Arabia, but much of that is unrecoverable. That’s a fair
point. But in my view, there is no denying that oil is a finite commodity,
and even new sources would only prolong the downward slide for so long.
That’s why along with debate about oil peak, there should be proposals
to promote renewable fuel sources—the so-called “green energy.” As anyone
might expect, wind and solar power are the darlings of people who
are environmentally conscientious. But they only provide supplemental
solutions that have limited impact at a time when we need adequate and
lasting solutions. We could line the Atlantic coast with windmills and still
not make much of a dent in electricity demand. Solar and wind power are
unreliable sources. If we were to switch en masse to hybrid cars, the cut in
oil consumption would be dramatic. But those vehicles are not in large
supply and are relatively expensive. Biofuels—diesel-like liquids from
corn or garbage—are promising, but would require a mass switch to
diesel car engines and a new distribution infrastructure.
Should we revisit nuclear power? That may be necessary. Europe and
Japan, where oil products are more expensive, produce most of their
electricity from nuclear power plants. The United States, where people
are averse to nuclear power, produces less than 20 percent of its electricity
from it. Although modern nuclear designs have few safety problems,
the disposal of spent nuclear fuel is a political hot potato. There is currently
a very strong opposition to dumping nuclear wastes in the Yucca
Mountains of Nevada.
What is the way forward? There’s no shortage of advice on that from
THE END OF AN ERA? 25
that soon people are going to see them as a must,” says Mike Swanson,
a fund manager who also writes a regular online column on energy
investment.9
So, whom should you believe if we are really running out of oil? You
should know from the outset that whenever experts talk of an oil peak,
what they generally mean is that from then on, production will gradually
slide down the slope toward the last drops at the rate of about 2 percent
annually. Those who reject the oil peak theory have a lot of faith in technology;
they argue that new technologies—and higher prices—are going
to make it possible to suck oil out of unconventional places. For instance,
they say, extracting oil from tar sands was once thought to be prohibitively
costly, but today oil from Canadian tar sands sells for $20 per barrel
or more. Indeed, Canada puts its reserves at 300 billion barrels, higher
than even Saudi Arabia, but much of that is unrecoverable. That’s a fair
point. But in my view, there is no denying that oil is a finite commodity,
and even new sources would only prolong the downward slide for so long.
That’s why along with debate about oil peak, there should be proposals
to promote renewable fuel sources—the so-called “green energy.” As anyone
might expect, wind and solar power are the darlings of people who
are environmentally conscientious. But they only provide supplemental
solutions that have limited impact at a time when we need adequate and
lasting solutions. We could line the Atlantic coast with windmills and still
not make much of a dent in electricity demand. Solar and wind power are
unreliable sources. If we were to switch en masse to hybrid cars, the cut in
oil consumption would be dramatic. But those vehicles are not in large
supply and are relatively expensive. Biofuels—diesel-like liquids from
corn or garbage—are promising, but would require a mass switch to
diesel car engines and a new distribution infrastructure.
Should we revisit nuclear power? That may be necessary. Europe and
Japan, where oil products are more expensive, produce most of their
electricity from nuclear power plants. The United States, where people
are averse to nuclear power, produces less than 20 percent of its electricity
from it. Although modern nuclear designs have few safety problems,
the disposal of spent nuclear fuel is a political hot potato. There is currently
a very strong opposition to dumping nuclear wastes in the Yucca
Mountains of Nevada.
What is the way forward? There’s no shortage of advice on that from
THE END OF AN ERA? 25
be catastrophic. “In my opinion, unfortunately, there will be no linear
change,” says Bakhtiari. “There will only be sudden explosive change.”8
All of this debate misses the point. As Simmons told me during an interview
on February 28, 2006, the issue of reserves is too complex for any
meaningful discussion here, because proven reserves are known in a field
only when its last barrel of produced oil is removed. “From the time an
oil and gas field is first discovered, the process of guessing what amount
of hydrocarbon can be recovered waxes and wanes,” says Simmons. “As
more knowledge of the field is gained, it sometimes leads to seeing that
the field is much larger than first thought. As more wells are drilled, the
opposite can also happen and does all too often.”
The amount of oil that is recoverable under normal conditions also
varies by each type of field. Some fields end up recovering as much as 65
to 80 percent of oil in place, while others get as little as 10 to 20 percent
recovery. The total reserves also include high-quality light, sweet oil
commingled with low-quality heavy, sour oil. In a way, it’s like commingling
wines ranging from jug wine to extremely expensive merlots.
Since the mid-1990s, most oil and gas companies have tended to add
more than 100 percent reserves each year compared to what they produce,
meaning they have been able to more than replace what they take
out of their reserves. That’s important because Wall Street values oil
companies based on their reserves as well as their earnings. “BP, for instance,
had a five-to-seven-year period when its reserves additions were
150 percent of production. But few of these companies found a way to
grow production. This raises a serious question as to whether the industry
systematically overbooked proven reserves,” Simmons told me.
But the companies are not alone. In the 1980s, OPEC members almost
doubled their reported proven reserves in a burst of revisions, without
any new discoveries. Then the numbers didn’t change for the next 15
years. Canada also revised upward its reserve numbers by adding unconventional
oil reserves—the tar sands—so it could brag that it was the
Saudi Arabia of heavy oil; that’s to say, Canada is the king of low-quality
sour crude. Does the data mean much? “I argue not much,” says Simmons.
Does the data prove that peak oil will not happen for decades?
“The data is meaningless as a guide to addressing when oil supply peaks
and when it begins to decline,” adds Simmons.
But to investors, the dire scenarios and the higher oil prices present an
opportunity to get a piece of the boom for the next few years. “Oil in-
24 THE END OF OIL
change,” says Bakhtiari. “There will only be sudden explosive change.”8
All of this debate misses the point. As Simmons told me during an interview
on February 28, 2006, the issue of reserves is too complex for any
meaningful discussion here, because proven reserves are known in a field
only when its last barrel of produced oil is removed. “From the time an
oil and gas field is first discovered, the process of guessing what amount
of hydrocarbon can be recovered waxes and wanes,” says Simmons. “As
more knowledge of the field is gained, it sometimes leads to seeing that
the field is much larger than first thought. As more wells are drilled, the
opposite can also happen and does all too often.”
The amount of oil that is recoverable under normal conditions also
varies by each type of field. Some fields end up recovering as much as 65
to 80 percent of oil in place, while others get as little as 10 to 20 percent
recovery. The total reserves also include high-quality light, sweet oil
commingled with low-quality heavy, sour oil. In a way, it’s like commingling
wines ranging from jug wine to extremely expensive merlots.
Since the mid-1990s, most oil and gas companies have tended to add
more than 100 percent reserves each year compared to what they produce,
meaning they have been able to more than replace what they take
out of their reserves. That’s important because Wall Street values oil
companies based on their reserves as well as their earnings. “BP, for instance,
had a five-to-seven-year period when its reserves additions were
150 percent of production. But few of these companies found a way to
grow production. This raises a serious question as to whether the industry
systematically overbooked proven reserves,” Simmons told me.
But the companies are not alone. In the 1980s, OPEC members almost
doubled their reported proven reserves in a burst of revisions, without
any new discoveries. Then the numbers didn’t change for the next 15
years. Canada also revised upward its reserve numbers by adding unconventional
oil reserves—the tar sands—so it could brag that it was the
Saudi Arabia of heavy oil; that’s to say, Canada is the king of low-quality
sour crude. Does the data mean much? “I argue not much,” says Simmons.
Does the data prove that peak oil will not happen for decades?
“The data is meaningless as a guide to addressing when oil supply peaks
and when it begins to decline,” adds Simmons.
But to investors, the dire scenarios and the higher oil prices present an
opportunity to get a piece of the boom for the next few years. “Oil in-
24 THE END OF OIL
production positions. More recently, Kenneth S. Deffeyes, a Princeton
geologist who worked at Shell with Hubbert and later became a disciple
of the man who has become the patron saint of “global peak oil” proponents,
joined the debate as a pessimist.
A few years ago, these followers of Hubbert did what has become
common in our troubled world. They formed a lobbying group, the Association
for the Study of Peak Oil (ASPO), to create public awareness of
the impending problem and convince everyone that we have reached a
fork in the road and must decide which way to take. Campbell, an Irishman
with a doctorate from Oxford, chairs the group, with Kjell Aleklett,
a Swede who is a professor at Uppsala University, acting as president.
Also joining the group were American professors Deffeyes, David Goodstein
of California Institute of Technology, Brian J. Skinner of Yale, and
Houston-based energy banker Matt Simmons.
Those who have tried to understand the processes involved in determining,
indeed predicting an oil peak, know just how scientific it is.
Hubbert used a great deal of intricate mathematical formulae, which no
one understood at the time and economists have struggled to disprove,
not so much with any new scientific evidence as by arguing that rising
demand would prompt scientists to come up with new technologies that
would get more oil. That’s hardly a thoughtful approach; it’s more like
relying on hope. One of Hubbert’s critics, American economist Michael
C. Lynch, has argued that oil is not a finite resource and that recoverable
reserves can be expanded by using better technology, if the price is right,
by which he meant that higher oil prices would prompt producers to use
advanced technology to increase oil supply. Although some writers have
misunderstood Lynch, his position is actually quite simple, as it is based
on nothing more than demand and supply principles of economics.
Lynch, who runs his consulting firm, Strategic Energy and Economic
Research, Inc. (SEER) in Winchester, Massachusetts, told me during an
interview on February, 28, 2006, that peak oil proponents “ignore most
of the data and the reality” that disprove their point of view. The data
Lynch was referring to are those published by industry publication Oil &
Gas Journal that revised global reserves upward some years ago on the
basis of better technology. While agreeing with oil peak proponents that
reserves recovery was declining at an increasing rate, the journal argued
that better technology would eventually enhance the recovery factor of
existing reserves. “They pretend that revisions don’t exist, but they [revi-
22 THE END OF OIL
geologist who worked at Shell with Hubbert and later became a disciple
of the man who has become the patron saint of “global peak oil” proponents,
joined the debate as a pessimist.
A few years ago, these followers of Hubbert did what has become
common in our troubled world. They formed a lobbying group, the Association
for the Study of Peak Oil (ASPO), to create public awareness of
the impending problem and convince everyone that we have reached a
fork in the road and must decide which way to take. Campbell, an Irishman
with a doctorate from Oxford, chairs the group, with Kjell Aleklett,
a Swede who is a professor at Uppsala University, acting as president.
Also joining the group were American professors Deffeyes, David Goodstein
of California Institute of Technology, Brian J. Skinner of Yale, and
Houston-based energy banker Matt Simmons.
Those who have tried to understand the processes involved in determining,
indeed predicting an oil peak, know just how scientific it is.
Hubbert used a great deal of intricate mathematical formulae, which no
one understood at the time and economists have struggled to disprove,
not so much with any new scientific evidence as by arguing that rising
demand would prompt scientists to come up with new technologies that
would get more oil. That’s hardly a thoughtful approach; it’s more like
relying on hope. One of Hubbert’s critics, American economist Michael
C. Lynch, has argued that oil is not a finite resource and that recoverable
reserves can be expanded by using better technology, if the price is right,
by which he meant that higher oil prices would prompt producers to use
advanced technology to increase oil supply. Although some writers have
misunderstood Lynch, his position is actually quite simple, as it is based
on nothing more than demand and supply principles of economics.
Lynch, who runs his consulting firm, Strategic Energy and Economic
Research, Inc. (SEER) in Winchester, Massachusetts, told me during an
interview on February, 28, 2006, that peak oil proponents “ignore most
of the data and the reality” that disprove their point of view. The data
Lynch was referring to are those published by industry publication Oil &
Gas Journal that revised global reserves upward some years ago on the
basis of better technology. While agreeing with oil peak proponents that
reserves recovery was declining at an increasing rate, the journal argued
that better technology would eventually enhance the recovery factor of
existing reserves. “They pretend that revisions don’t exist, but they [revi-
22 THE END OF OIL
was right, for his prediction was confirmed in 1972 when the Texas Railroad
Commission abandoned rationing oil production. The commission
had been mandated from the time of the Great Depression to ration how
much oil would be transported, which meant that production in the Gulf
Coast was also rationed. Now, there was no longer any need to do that
because production was on the decline. Proving that nothing is as good
as success, the confirmation of the U.S. oil peak, which was now narrowed
to 1970, vindicated Hubbert—who became a celebrity—and gave
birth to what is now known as the “Hubbert Curve” theory.
The current oil peak debate started around 1995 but stayed off the
radar because it was drowned by the tech boom of that decade. It was
started by geologists who used Hubbert’s theory to determine global oil
peak, something far more difficult than what Hubbert did. It was difficult
because it depended on a larger volume of data, some of which are either
difficult to find or are unreliable, especially data from the Organization
of Petroleum Exporting Countries (OPEC).
For the most part, these geologists and energy economists fought it out
in the pages of scientific journals—Nature, Science, and Scientific
American—before they found publishers willing to give them a larger audience
through books. First to fire a salvo was Craig Bond Hatfield, who
in 1997 published in Nature a commentary article entitled “Oil Back on
the Global Agenda,”3 which argued that “a permanent decline in the
global oil production rate is virtually certain to begin within 20 years,”
adding that “serious planning is needed to deal with the economic consequences.”
A year later, Richard A. Kerr published an article in Science entitled
“The Next Oil Crisis Looms Large—and Perhaps Close,”4 which
pretty much made the same points, although in much more alarming language.
Kerr was the first to brand the debate as a conflict between economists,
who argue that technological advances would expand production
for another 40 or 50 years, by which time alternative fuel sources would
have matured, and geologists, who warn that oil will begin to run out
much sooner than we expect because there’s just no more oil to be found
even with advanced technology. Kerr’s 1998 prediction for peak oil was 10
years, which would be in 2008. The debate took off in earnest after Colin
Campbell and Jean H. Laherrère wrote a joint article in Scientific American
arguing for the end of cheap oil.5 The article touched off a huge debate in
the oil industry because Campbell and Laherrère are both highly respected
geologists and have worked for major oil companies in senior
THE END OF AN ERA? 21
Commission abandoned rationing oil production. The commission
had been mandated from the time of the Great Depression to ration how
much oil would be transported, which meant that production in the Gulf
Coast was also rationed. Now, there was no longer any need to do that
because production was on the decline. Proving that nothing is as good
as success, the confirmation of the U.S. oil peak, which was now narrowed
to 1970, vindicated Hubbert—who became a celebrity—and gave
birth to what is now known as the “Hubbert Curve” theory.
The current oil peak debate started around 1995 but stayed off the
radar because it was drowned by the tech boom of that decade. It was
started by geologists who used Hubbert’s theory to determine global oil
peak, something far more difficult than what Hubbert did. It was difficult
because it depended on a larger volume of data, some of which are either
difficult to find or are unreliable, especially data from the Organization
of Petroleum Exporting Countries (OPEC).
For the most part, these geologists and energy economists fought it out
in the pages of scientific journals—Nature, Science, and Scientific
American—before they found publishers willing to give them a larger audience
through books. First to fire a salvo was Craig Bond Hatfield, who
in 1997 published in Nature a commentary article entitled “Oil Back on
the Global Agenda,”3 which argued that “a permanent decline in the
global oil production rate is virtually certain to begin within 20 years,”
adding that “serious planning is needed to deal with the economic consequences.”
A year later, Richard A. Kerr published an article in Science entitled
“The Next Oil Crisis Looms Large—and Perhaps Close,”4 which
pretty much made the same points, although in much more alarming language.
Kerr was the first to brand the debate as a conflict between economists,
who argue that technological advances would expand production
for another 40 or 50 years, by which time alternative fuel sources would
have matured, and geologists, who warn that oil will begin to run out
much sooner than we expect because there’s just no more oil to be found
even with advanced technology. Kerr’s 1998 prediction for peak oil was 10
years, which would be in 2008. The debate took off in earnest after Colin
Campbell and Jean H. Laherrère wrote a joint article in Scientific American
arguing for the end of cheap oil.5 The article touched off a huge debate in
the oil industry because Campbell and Laherrère are both highly respected
geologists and have worked for major oil companies in senior
THE END OF AN ERA? 21
to align themselves with the oil industry—no surprise. There are many
other characters with less than adequate understanding of the issue, particularly
journalists and other think-tank paid commentators, who have
also chosen to partake in the debate and they are spread all over the map,
with nothing much to offer but their own political ideologies.
We have to be careful and say this debate isn’t new, but its intensity is.
The first phase of it started in the United States during the First World
War, in which the allied victory became known as the victory for oil.
That probably was a better way to put it because, given the heavy casualties
on both sides, the actual victory was pyrrhic, and it was achieved
mostly through the use of army trucks following the discovery of petrol,
or gasoline. As Pulitzer-Prize-winning energy writer Daniel Yergin tells
us in his seminal 1991 book, The Prize: The Epic Quest for Oil, Money and
Power, the fuel shortage in 1917 came in the middle of the war and
caused a great deal of panic, particularly in Britain, but that was caused
by nothing more than the ability of the German forces to block supplies
to Britain. During the Second World War, for which oil remained crucial,
U.S. officials became more concerned about a dwindling supply of
its oil reserves. Yergin makes it clear that, even then, U.S. officials had
come to recognize oil as the most critical resource that would separate
top dog from underdog in international politics.2
Yergin writes: “The precipitous decline in new discoveries transfixed
and frightened those responsible for fueling a global war,” and goes on to
quote senior U.S. government officials as saying, “The time will come
sooner or later when the supply is exhausted.... If there should be a
World War III it would have to be fought with someone else’s petroleum,
because the United States wouldn’t have it. America’s crown, symbolizing
supremacy as the oil empire of the world, is sliding down over one
eye.” The allied military strategy in the Second World War was guided
by oil more than anything else. As the U.S. almost alone fueled the allied
war effort, using most of its own oil supply, fear of a shortage grew with
each passing day. To skeptics, these fears might have had no legs to stand
on, but government officials considered them real and justified, because
the U.S. became a net importer of oil rather than an exporter some 30
years later.
Along the way, in 1956, Shell geologist Marion King Hubbert mathematically
calculated a U.S. oil peak production in 1969, angering his employers
and sparking an even greater debate on “oil peak.” In any case, he
20 THE END OF OIL
other characters with less than adequate understanding of the issue, particularly
journalists and other think-tank paid commentators, who have
also chosen to partake in the debate and they are spread all over the map,
with nothing much to offer but their own political ideologies.
We have to be careful and say this debate isn’t new, but its intensity is.
The first phase of it started in the United States during the First World
War, in which the allied victory became known as the victory for oil.
That probably was a better way to put it because, given the heavy casualties
on both sides, the actual victory was pyrrhic, and it was achieved
mostly through the use of army trucks following the discovery of petrol,
or gasoline. As Pulitzer-Prize-winning energy writer Daniel Yergin tells
us in his seminal 1991 book, The Prize: The Epic Quest for Oil, Money and
Power, the fuel shortage in 1917 came in the middle of the war and
caused a great deal of panic, particularly in Britain, but that was caused
by nothing more than the ability of the German forces to block supplies
to Britain. During the Second World War, for which oil remained crucial,
U.S. officials became more concerned about a dwindling supply of
its oil reserves. Yergin makes it clear that, even then, U.S. officials had
come to recognize oil as the most critical resource that would separate
top dog from underdog in international politics.2
Yergin writes: “The precipitous decline in new discoveries transfixed
and frightened those responsible for fueling a global war,” and goes on to
quote senior U.S. government officials as saying, “The time will come
sooner or later when the supply is exhausted.... If there should be a
World War III it would have to be fought with someone else’s petroleum,
because the United States wouldn’t have it. America’s crown, symbolizing
supremacy as the oil empire of the world, is sliding down over one
eye.” The allied military strategy in the Second World War was guided
by oil more than anything else. As the U.S. almost alone fueled the allied
war effort, using most of its own oil supply, fear of a shortage grew with
each passing day. To skeptics, these fears might have had no legs to stand
on, but government officials considered them real and justified, because
the U.S. became a net importer of oil rather than an exporter some 30
years later.
Along the way, in 1956, Shell geologist Marion King Hubbert mathematically
calculated a U.S. oil peak production in 1969, angering his employers
and sparking an even greater debate on “oil peak.” In any case, he
20 THE END OF OIL
projects over the next several years both in production as well as in refining.
However, these projects will take time to come onstream. In the
meantime, the world is becoming not only less safe, but also “flat,”1 or
smaller, so that political and security problems in one part of the world—
like Venezuela, Nigeria, Russia, and Iraq—affect people elsewhere. The
global nature of the oil market makes it even more susceptible to geopolitical
tension, and that typically adds something like a 15 percent premium
to the actual oil price.
Just about everyone I know believes that high oil prices are here to
stay because world oil production may be nearing its peak, after which
we shall see a decline of about two percent per year for the foreseeable
future. That’s unfortunate because demand for oil, meanwhile, is traveling
the other direction—rising. The signs are everywhere of a potential
huge problem in the near to long term: Our fuel supply system is already
failing to keep up with demand, a situation that, as every economist
knows, could lead to a total breakdown of free market economy. Since
supply represents how much the market can offer, the quantity supplied
refers to the amount of a certain good producers are willing to supply
when receiving a certain price. In basic economics, the correlation between
price and how much of a good or service is supplied to the market
is the supply relationship, and so price is a reflection of supply and demand.
The relationship between demand and supply underlies the forces
behind the allocation of resources. In a market economy like ours, therefore,
we depend on demand and supply of commodity goods like oil to
allocate resources in the most efficient way possible.
A bigger debate is raging on how fast oil deposits around the world are
getting depleted, and increasingly that debate is getting politicized.
Broadly speaking, that debate pits geologists, who have been dubbed pessimists,
against economists, who are seen as optimists. I’m not sure if
these labels help the debate, but here’s what I have to say: By the very nature
of their profession, traditional free market economists are an optimistic
lot, and often their views are in conflict with traditional scientists,
who, by the nature of their professions, aren’t as optimistic, though not
necessarily pessimistic. It might be more accurate to call most scientists
cautious. This debate, now dubbed the “peak oil,” has drawn a fault line
between the business community, particularly the oil industry, and the
environmental community, particularly geologists. The stakes are huge
and, since most governments don’t know what to do, some have chosen
THE END OF AN ERA? 19
However, these projects will take time to come onstream. In the
meantime, the world is becoming not only less safe, but also “flat,”1 or
smaller, so that political and security problems in one part of the world—
like Venezuela, Nigeria, Russia, and Iraq—affect people elsewhere. The
global nature of the oil market makes it even more susceptible to geopolitical
tension, and that typically adds something like a 15 percent premium
to the actual oil price.
Just about everyone I know believes that high oil prices are here to
stay because world oil production may be nearing its peak, after which
we shall see a decline of about two percent per year for the foreseeable
future. That’s unfortunate because demand for oil, meanwhile, is traveling
the other direction—rising. The signs are everywhere of a potential
huge problem in the near to long term: Our fuel supply system is already
failing to keep up with demand, a situation that, as every economist
knows, could lead to a total breakdown of free market economy. Since
supply represents how much the market can offer, the quantity supplied
refers to the amount of a certain good producers are willing to supply
when receiving a certain price. In basic economics, the correlation between
price and how much of a good or service is supplied to the market
is the supply relationship, and so price is a reflection of supply and demand.
The relationship between demand and supply underlies the forces
behind the allocation of resources. In a market economy like ours, therefore,
we depend on demand and supply of commodity goods like oil to
allocate resources in the most efficient way possible.
A bigger debate is raging on how fast oil deposits around the world are
getting depleted, and increasingly that debate is getting politicized.
Broadly speaking, that debate pits geologists, who have been dubbed pessimists,
against economists, who are seen as optimists. I’m not sure if
these labels help the debate, but here’s what I have to say: By the very nature
of their profession, traditional free market economists are an optimistic
lot, and often their views are in conflict with traditional scientists,
who, by the nature of their professions, aren’t as optimistic, though not
necessarily pessimistic. It might be more accurate to call most scientists
cautious. This debate, now dubbed the “peak oil,” has drawn a fault line
between the business community, particularly the oil industry, and the
environmental community, particularly geologists. The stakes are huge
and, since most governments don’t know what to do, some have chosen
THE END OF AN ERA? 19
rise. For an answer, they should look no further than economics, geology,
and politics.
As everyone is aware by now, there has been a tremendous increase in
oil demand—and ultimately fuel consumption—since 2003, primarily
from China and India, but also from the United States. Oil demand is
tied to economic growth, which has been going from strength to
strength in the years since the September 11 terrorist attacks on the
United States. The explosive economic growth in China has proved
more of a shock to the oil markets because as late as the early 1990s
China was self-sufficient in oil. But its gross domestic product (GDP)
rate took a flight by the end of that decade and doubled to about 9 percent
by 2005—the fastest of any country. China’s economic boom is still
on track and it has to import more oil to support that rate of growth,
with construction projects—hotels, bridges, and apartment buildings—
going up every day ahead of the 2008 Olympic Games in Beijing. China’s
demand for oil products is only going to increase as its large population
gets more motorized. Ditto India, Asia’s other economic powerhouse.
And while all that oil demand is rising, supply is struggling to keep
pace. The availability of cheaply exploited oil has been reduced. Of
course, there are still a lot of oil reserves in some parts of the world, like
in the deep waters off West Africa, in arctic Russia, and in the Middle
East, but there are problems as well: The cost of drilling in unreachable
areas like the offshore Black Sea, the Gulf of Guinea, and the Gulf of
Mexico is sometimes prohibitive and superior technology is required; security
is tenuous at best in places like Iran, Iraq, and Saudi Arabia; and
most of the readily available oil is of the low-quality heavy, sour type,
which is expensive to process into gasoline and other products. Highquality
light, sweet oil, which yields more gasoline, is in short supply, and
most of the old refineries we have around the world have not been fitted
with coking units that can process heavy, sour crude.
Moreover, since the early 1990s, oil companies have not invested
enough in expanding their infrastructural capacity, both in oil production
and in refining. Oil executives say they couldn’t invest because they had
no money, as oil prices were low until the shock demand of 2004 boosted
prices. They say the high oil prices have, in fact, given them a shot in the
arm, and a number of projects are in the pipeline. Most of these projects
started in early 2006 in the United States, in Asia, and in the Middle
East. Saudi Arabia, for example, plans to invest $50 billion in various
18 THE END OF OIL
and politics.
As everyone is aware by now, there has been a tremendous increase in
oil demand—and ultimately fuel consumption—since 2003, primarily
from China and India, but also from the United States. Oil demand is
tied to economic growth, which has been going from strength to
strength in the years since the September 11 terrorist attacks on the
United States. The explosive economic growth in China has proved
more of a shock to the oil markets because as late as the early 1990s
China was self-sufficient in oil. But its gross domestic product (GDP)
rate took a flight by the end of that decade and doubled to about 9 percent
by 2005—the fastest of any country. China’s economic boom is still
on track and it has to import more oil to support that rate of growth,
with construction projects—hotels, bridges, and apartment buildings—
going up every day ahead of the 2008 Olympic Games in Beijing. China’s
demand for oil products is only going to increase as its large population
gets more motorized. Ditto India, Asia’s other economic powerhouse.
And while all that oil demand is rising, supply is struggling to keep
pace. The availability of cheaply exploited oil has been reduced. Of
course, there are still a lot of oil reserves in some parts of the world, like
in the deep waters off West Africa, in arctic Russia, and in the Middle
East, but there are problems as well: The cost of drilling in unreachable
areas like the offshore Black Sea, the Gulf of Guinea, and the Gulf of
Mexico is sometimes prohibitive and superior technology is required; security
is tenuous at best in places like Iran, Iraq, and Saudi Arabia; and
most of the readily available oil is of the low-quality heavy, sour type,
which is expensive to process into gasoline and other products. Highquality
light, sweet oil, which yields more gasoline, is in short supply, and
most of the old refineries we have around the world have not been fitted
with coking units that can process heavy, sour crude.
Moreover, since the early 1990s, oil companies have not invested
enough in expanding their infrastructural capacity, both in oil production
and in refining. Oil executives say they couldn’t invest because they had
no money, as oil prices were low until the shock demand of 2004 boosted
prices. They say the high oil prices have, in fact, given them a shot in the
arm, and a number of projects are in the pipeline. Most of these projects
started in early 2006 in the United States, in Asia, and in the Middle
East. Saudi Arabia, for example, plans to invest $50 billion in various
18 THE END OF OIL
CHAPTER 1
The End of an Era?
“I once set up a debate between the geological optimists and pessimists
for the IEA with Morie Adelman, Mike Lynch and Peter
O’Dell on the one side, and Colin Campbell and John Laherrere on
the other. The optimists won.”
—David Knapp, senior editor,
Energy Intelligence Group
AN OIL CRISIS CREATES DEBATE THAT
MAY DETERMINE WHO IS THE TOP DOG
With oil prices on a stratospheric flight, many traders and investors are finally
taking notice. The stock market already is: Oil stocks are higher
than other equities in 2006. In 2005, oil stocks rose while the rest lagged.
Oil has had a negative effect on the market ever since it went above $35 a
barrel just two years ago. Since then, on days when oil has risen, the stock
market has dropped, and on days that oil has fallen, stocks have gone up.
The oil stock gains have been seen all around the world, not just in the
United States alone. Last year, one hedge fund manager who has benefited
from higher oil prices by purchasing oil stocks was among those
touting investments in refiners as well as Canadian oil royalty trusts.
Everyone, from professional economists on Wall Street to ordinary consumers,
has been wondering why oil prices are so high and continue to
17
The End of an Era?
“I once set up a debate between the geological optimists and pessimists
for the IEA with Morie Adelman, Mike Lynch and Peter
O’Dell on the one side, and Colin Campbell and John Laherrere on
the other. The optimists won.”
—David Knapp, senior editor,
Energy Intelligence Group
AN OIL CRISIS CREATES DEBATE THAT
MAY DETERMINE WHO IS THE TOP DOG
With oil prices on a stratospheric flight, many traders and investors are finally
taking notice. The stock market already is: Oil stocks are higher
than other equities in 2006. In 2005, oil stocks rose while the rest lagged.
Oil has had a negative effect on the market ever since it went above $35 a
barrel just two years ago. Since then, on days when oil has risen, the stock
market has dropped, and on days that oil has fallen, stocks have gone up.
The oil stock gains have been seen all around the world, not just in the
United States alone. Last year, one hedge fund manager who has benefited
from higher oil prices by purchasing oil stocks was among those
touting investments in refiners as well as Canadian oil royalty trusts.
Everyone, from professional economists on Wall Street to ordinary consumers,
has been wondering why oil prices are so high and continue to
17
now, because we have many years ahead of us to enjoy the boom. The
question is whether you—as an investor—are going to be part of that
blessed group of people. Oil stocks, whether you invest in oil exploration
or refining companies, are doing so well that market analysts discount
any possibility of a meltdown.
Wall Street has re-rated the oil sector, suggesting that this rally has a
staying power and is a good buy. Current and future supply-demand fundamentals
support this bullish view. Big oil investors need a sector large
enough for them to invest in, and they don’t get any bigger than oil.
Large institutional investors, as well as hedge funds and private equity
firms, have piled into oil.
For a start, listen to this: Goldman Sachs, the scion of Wall Street investment
banking, has teamed up with a private equity firm, Kelso & Co., to acquire
Coffeyville Resources LLC, which owns a 100,000-barrels-per-day
refinery in Kansas. This action is part of a recent trend of Wall Street banks
to buy physical energy assets, because they believe energy markets will remain
stout for a while.
Goldman Sachs also has an investment commodity index, which
means it manages a pool of money from ordinary investors by buying and
selling energy stocks as well as trading energy futures. Energy futures are
paper contracts or agreements to buy or sell physical oil and gas cargoes
in the future, but the cargoes are never actually delivered. Instead, the
traders buy and sell those contract instruments, making a profit on the
price differential between the contracts.
For instance, if I buy a prior contract between A and B to sell one cargo
(300,000 barrels) of oil at $18 million, and then proceed to sell that same
contract to C for $20 million, the price difference between those two
transactions—$2 million—is my profit. Taken together, all of the energy
futures contracts traded in New York and London by commodity indexes
like Goldman Sachs Commodities Index (GSCI) and Dow Jones AIG
Commodities Index (DJAIGC) amount to $1 trillion.
Finally, exchange-traded fund securities, which track the price of light
sweet oil on the New York Mercantile Exchange (Nymex), the commodities
trading floor in lower Manhattan, have also proved very rewarding.
They can buy and sell an oil contract on behalf of an investor when the
price is right, and then sell that contract at a profit, which goes to the investor,
whose only obligation is to pay a transaction fee.
14 INTRODUCTION
question is whether you—as an investor—are going to be part of that
blessed group of people. Oil stocks, whether you invest in oil exploration
or refining companies, are doing so well that market analysts discount
any possibility of a meltdown.
Wall Street has re-rated the oil sector, suggesting that this rally has a
staying power and is a good buy. Current and future supply-demand fundamentals
support this bullish view. Big oil investors need a sector large
enough for them to invest in, and they don’t get any bigger than oil.
Large institutional investors, as well as hedge funds and private equity
firms, have piled into oil.
For a start, listen to this: Goldman Sachs, the scion of Wall Street investment
banking, has teamed up with a private equity firm, Kelso & Co., to acquire
Coffeyville Resources LLC, which owns a 100,000-barrels-per-day
refinery in Kansas. This action is part of a recent trend of Wall Street banks
to buy physical energy assets, because they believe energy markets will remain
stout for a while.
Goldman Sachs also has an investment commodity index, which
means it manages a pool of money from ordinary investors by buying and
selling energy stocks as well as trading energy futures. Energy futures are
paper contracts or agreements to buy or sell physical oil and gas cargoes
in the future, but the cargoes are never actually delivered. Instead, the
traders buy and sell those contract instruments, making a profit on the
price differential between the contracts.
For instance, if I buy a prior contract between A and B to sell one cargo
(300,000 barrels) of oil at $18 million, and then proceed to sell that same
contract to C for $20 million, the price difference between those two
transactions—$2 million—is my profit. Taken together, all of the energy
futures contracts traded in New York and London by commodity indexes
like Goldman Sachs Commodities Index (GSCI) and Dow Jones AIG
Commodities Index (DJAIGC) amount to $1 trillion.
Finally, exchange-traded fund securities, which track the price of light
sweet oil on the New York Mercantile Exchange (Nymex), the commodities
trading floor in lower Manhattan, have also proved very rewarding.
They can buy and sell an oil contract on behalf of an investor when the
price is right, and then sell that contract at a profit, which goes to the investor,
whose only obligation is to pay a transaction fee.
14 INTRODUCTION
executive shows that the executive trusts the reporter, but he wouldn’t be
giving his time to a scoundrel bent on making things tough for him.
Meanwhile, I started to do more research on the issue, asking hard
questions, and privately investigating what industry leaders knew, when
they knew it, and what they intend to do. It didn’t take long before I
found out part of the answer.
A senior editor told me about a meeting he had with oil executives
where that topic was discussed, and their consensus was that global oil
output would soon be peaking. The meeting was private and no one
wrote about it, but it showed rare candor by the industry executives.
On hearing that, I immediately became skeptical of anything oil executives
said. Their primary goal is to protect themselves and their shareholders.
This book is a product of my eight-year experience covering and
talking to some of the industry’s leaders and experts, among them: British
Petroleum chairman and chief executive John Browne; Royal Dutch
Shell chairman and chief executive Jeroen van der Veer; Premcor chairman
and chief executive Tom O’Malley; and former Halliburton chief
executive and current U.S. vice-president Dick Cheney.
While shedding some light on the prospects for global oil peak, in this
book I have devoted more time to discussing the consequences to our lifestyle
and what we could do to prepare ourselves. In addition, I have discussed some
investment choices for investors to investigate in the wake of the oil boom.
Anyone who follows Wall Street (even a little) knows that oil and refinery
stocks have been rising like there’s no tomorrow. Even the worst
performers among oil stocks are making huge profits. Oil companies
now occupy a lofty perch that would have been impossible just a few
years ago. If the 1990s was the decade of technology, the first decade of
the new century is one of oil boom.
Major oil companies such as Exxon Mobil, BP, and Valero have displaced
Microsoft, AOL Time Warner, and General Electric from the
high table of capitalism. For instance, Valero’s outlook for 2005 was even
better than the previous year, when many refiners posted record profits.
Valero’s stock price increased by more than 50 percent in 2005 to $80 per
share. Like other refiners, Valero’s earnings have exceeded expectations
every quarter for the past two years. “The best is yet to come,” is how
Valero’s senior vice-president for refining operations put it.
You already know that the oil boom coicides with debate about “oil
peak oil,” but my view is that instead of mourning the impending tight
market, investors like you and me should actually embrace it, at least for
INTRODUCTION 13
giving his time to a scoundrel bent on making things tough for him.
Meanwhile, I started to do more research on the issue, asking hard
questions, and privately investigating what industry leaders knew, when
they knew it, and what they intend to do. It didn’t take long before I
found out part of the answer.
A senior editor told me about a meeting he had with oil executives
where that topic was discussed, and their consensus was that global oil
output would soon be peaking. The meeting was private and no one
wrote about it, but it showed rare candor by the industry executives.
On hearing that, I immediately became skeptical of anything oil executives
said. Their primary goal is to protect themselves and their shareholders.
This book is a product of my eight-year experience covering and
talking to some of the industry’s leaders and experts, among them: British
Petroleum chairman and chief executive John Browne; Royal Dutch
Shell chairman and chief executive Jeroen van der Veer; Premcor chairman
and chief executive Tom O’Malley; and former Halliburton chief
executive and current U.S. vice-president Dick Cheney.
While shedding some light on the prospects for global oil peak, in this
book I have devoted more time to discussing the consequences to our lifestyle
and what we could do to prepare ourselves. In addition, I have discussed some
investment choices for investors to investigate in the wake of the oil boom.
Anyone who follows Wall Street (even a little) knows that oil and refinery
stocks have been rising like there’s no tomorrow. Even the worst
performers among oil stocks are making huge profits. Oil companies
now occupy a lofty perch that would have been impossible just a few
years ago. If the 1990s was the decade of technology, the first decade of
the new century is one of oil boom.
Major oil companies such as Exxon Mobil, BP, and Valero have displaced
Microsoft, AOL Time Warner, and General Electric from the
high table of capitalism. For instance, Valero’s outlook for 2005 was even
better than the previous year, when many refiners posted record profits.
Valero’s stock price increased by more than 50 percent in 2005 to $80 per
share. Like other refiners, Valero’s earnings have exceeded expectations
every quarter for the past two years. “The best is yet to come,” is how
Valero’s senior vice-president for refining operations put it.
You already know that the oil boom coicides with debate about “oil
peak oil,” but my view is that instead of mourning the impending tight
market, investors like you and me should actually embrace it, at least for
INTRODUCTION 13
cheaper to produce than oil in the Gulf of Mexico. But Iraq is a mess right
now, unable even to police itself, let alone move ahead with reconstruction.
Oil facilities there are dilapidated after 20 years of neglect, and Iraq
needs about $30 billion to put things back together. When all that is
done, nationalism will ensure continued problems with the private industry
that is expected to help develop new oilfields.
A CHANCE ENCOUNTER AND A TOUGH
QUESTION TRIGGER A SEARCH FOR THE TRUTH
I started thinking about writing this book in late 2004 after a chat with
my neighbor, Madeline Brainard—one of those scholars who read The
Nation regularly. She was thin and looked worried most of the time, just
like most intellectuals, but she was brainy. Although she has a doctorate
degree from Princeton, she quit teaching at a college in upstate New
York to devote herself full time to teaching yoga in New York City.
One evening I was picking up my mail in the lobby of my apartment
building when she came in and we started chatting. It was our first meeting,
and after I told her that I was an oil markets reporter, she asked what
I knew about the coming peak in global oil production. I told her that
was a lie, that we always have and always will have oil. She refused to accept
my explanation. She had read an article in The Nation suggesting we
were on the verge of running out of oil.
I knew at once where she was heading, so I politely disagreed, but I
promised to investigate the issue later. Up to that point, I had depended
pretty much on sanitized information provided by oil companies about
their assets and reserves. It didn’t occur to me that the industry could
keep secret the fact that they had less oil reserves than what they were actually
telling the public. Neither did I expect the industry’s media to let
that happen.
However, in much of the news media these days, there’s a symbiotic
relationship between the seekers of news and the suppliers of news (in
this case, oil industry leaders and the reporters who cover them), so adequate
scrutiny is lacking. The problem with modern media is that they
consider themselves part of the establishment, and they generally don’t
want to bite the hand that feeds them.
After all, in today’s journalism few reporters get promoted for not seeking
the truth (whatever that means), but for getting exclusive interviews
and keeping everyone entertained. A regular interview with a company
12 INTRODUCTION
now, unable even to police itself, let alone move ahead with reconstruction.
Oil facilities there are dilapidated after 20 years of neglect, and Iraq
needs about $30 billion to put things back together. When all that is
done, nationalism will ensure continued problems with the private industry
that is expected to help develop new oilfields.
A CHANCE ENCOUNTER AND A TOUGH
QUESTION TRIGGER A SEARCH FOR THE TRUTH
I started thinking about writing this book in late 2004 after a chat with
my neighbor, Madeline Brainard—one of those scholars who read The
Nation regularly. She was thin and looked worried most of the time, just
like most intellectuals, but she was brainy. Although she has a doctorate
degree from Princeton, she quit teaching at a college in upstate New
York to devote herself full time to teaching yoga in New York City.
One evening I was picking up my mail in the lobby of my apartment
building when she came in and we started chatting. It was our first meeting,
and after I told her that I was an oil markets reporter, she asked what
I knew about the coming peak in global oil production. I told her that
was a lie, that we always have and always will have oil. She refused to accept
my explanation. She had read an article in The Nation suggesting we
were on the verge of running out of oil.
I knew at once where she was heading, so I politely disagreed, but I
promised to investigate the issue later. Up to that point, I had depended
pretty much on sanitized information provided by oil companies about
their assets and reserves. It didn’t occur to me that the industry could
keep secret the fact that they had less oil reserves than what they were actually
telling the public. Neither did I expect the industry’s media to let
that happen.
However, in much of the news media these days, there’s a symbiotic
relationship between the seekers of news and the suppliers of news (in
this case, oil industry leaders and the reporters who cover them), so adequate
scrutiny is lacking. The problem with modern media is that they
consider themselves part of the establishment, and they generally don’t
want to bite the hand that feeds them.
After all, in today’s journalism few reporters get promoted for not seeking
the truth (whatever that means), but for getting exclusive interviews
and keeping everyone entertained. A regular interview with a company
12 INTRODUCTION
they are hurting most of us nonetheless, and we have to do something
about it. The biggest change in the oil market over the last 20 years or so
is a steady shift to a seller’s market.
Demand is outpacing supply and sellers dictate prices. Those sellers are
producers such as Saudi Arabia, Iran, and Libya, among others. We in the
United States are the buyers—meaning the oil market is skewed against us.
We have to pay more to get a barrel of oil from the Middle East, for example,
and that additional expense translates into a cutback on our other budgets
or savings. You would think that a simple solution to that problem would
be for us to start using natural gas, say, to power our electric generators.
However, natural gas prices also spiked nearly three times in the past
decade and they will continue to soar. The reason is that natural gas now
accounts for 22 percent of U.S. energy use, but its supply is limited—
mostly from domestic production, with no imports. Natural gas is a difficult
commodity to import, unless you liquefy it first.
None other than Alan Greenspan, the recently retired chairman of the
Federal Reserve Board, has expressed concerns that continued high
prices are a “very serious problem” that could hurt the economy, singling
out natural gas for his worries.
There is no easy answer for all these problems right now. All major
systems that depend on oil here and abroad are expected to be destabilized
a little. In fact, that process may already have begun, as oil price and
demand data appear to have become incongruent in recent years.
The oil industry depends on reliable data on expectations and actual demand
and supply and on reliable prices as well. But because the world is
headed down the path of oil supply tightness, geopolitical fights and culture
wars are frequently going to interrupt fuel supply in the coming years.
Eventually, economic growth as we know it will stall. We can push back
these problems for a while by militarily taking control of oil producing
Middle East and West Africa, but I wonder whether we can afford to do
that. It will require a lot of financial and military capital, something the
United States doesn’t have enough of right now.
As everyone knows, the Middle East is a geopolitical minefield, as the
Iraq war shows. In fact, some believe the Iraq war was part of a struggle to
ensure we have access to one of the world’s largest oil reserves, currently
estimated at 112.5 billion barrels, or about 11 percent of the world’s total.
With time Iraqi reserves, when fully developed, may actually rival Saudi
Arabia’s. What’s more, Iraq’s oil is of high quality for gasoline and is
INTRODUCTION 11
about it. The biggest change in the oil market over the last 20 years or so
is a steady shift to a seller’s market.
Demand is outpacing supply and sellers dictate prices. Those sellers are
producers such as Saudi Arabia, Iran, and Libya, among others. We in the
United States are the buyers—meaning the oil market is skewed against us.
We have to pay more to get a barrel of oil from the Middle East, for example,
and that additional expense translates into a cutback on our other budgets
or savings. You would think that a simple solution to that problem would
be for us to start using natural gas, say, to power our electric generators.
However, natural gas prices also spiked nearly three times in the past
decade and they will continue to soar. The reason is that natural gas now
accounts for 22 percent of U.S. energy use, but its supply is limited—
mostly from domestic production, with no imports. Natural gas is a difficult
commodity to import, unless you liquefy it first.
None other than Alan Greenspan, the recently retired chairman of the
Federal Reserve Board, has expressed concerns that continued high
prices are a “very serious problem” that could hurt the economy, singling
out natural gas for his worries.
There is no easy answer for all these problems right now. All major
systems that depend on oil here and abroad are expected to be destabilized
a little. In fact, that process may already have begun, as oil price and
demand data appear to have become incongruent in recent years.
The oil industry depends on reliable data on expectations and actual demand
and supply and on reliable prices as well. But because the world is
headed down the path of oil supply tightness, geopolitical fights and culture
wars are frequently going to interrupt fuel supply in the coming years.
Eventually, economic growth as we know it will stall. We can push back
these problems for a while by militarily taking control of oil producing
Middle East and West Africa, but I wonder whether we can afford to do
that. It will require a lot of financial and military capital, something the
United States doesn’t have enough of right now.
As everyone knows, the Middle East is a geopolitical minefield, as the
Iraq war shows. In fact, some believe the Iraq war was part of a struggle to
ensure we have access to one of the world’s largest oil reserves, currently
estimated at 112.5 billion barrels, or about 11 percent of the world’s total.
With time Iraqi reserves, when fully developed, may actually rival Saudi
Arabia’s. What’s more, Iraq’s oil is of high quality for gasoline and is
INTRODUCTION 11
Chances are you’ll see China or the Philippines written on the shirt collar.
The United States imports more than it exports. The trade deficit
reached a record $617.1 billion in 2005.
Consumer spending accounts for two-thirds of the nation’s economic
activity. That spending, though, left Americans’ savings rate—savings as
a percentage of after-tax income—at 1.2 percent in 2004, the lowest since
1934. That means an increase in gasoline prices hit most people really
hard in the wallet.
And don’t even think there will be adequate alternative fuel when we
finally run out of oil. We have got used to a type of lifestyle made easier
by cheap oil, and we assume that by the time oil runs out, oil companies
will have found some replacement. The reasoning goes this way, “We are
an innovative people by nature and we always come up with solutions to
the world’s difficult problems.”
Here’s my favorite solution to the problem as espoused by TV experts:
“We can use hybrid cars and hydrogen-powered machines.” I don’t buy
that, and so shouldn’t you. Remember, the previous oil shocks of 1973
and 1979 were man-made crises that had an easy answer—i.e., just pump
more oil supply to the market. Those crises were political to the extent
that Islamic governments in the Middle East were using their oil to score
a political point against the West.
In response, our government started buying oil in the open market and
keeping it in storage for a rainy day. The result was the creation of the US
Strategic Petroleum Reserve (SPR), which is managed by the Department
of Energy. SPR has storage tanks in Louisiana and Texas, but they can only
carry a maximum of 700 million barrels, enough to last us slightly more
than one month in case all other sources of supply are interrupted. We also
have a heating oil reserve in the Northeast—enough to last ten days.
Are you kidding me? That’s not enough in case of a serious long-term
supply problem.
Other countries are doing the same. China has just established an
emergency oil reserve that will store 100 to 150 million barrels by 2008,
enough to cover 30 days of refinery demand. By 2010, China expects that
it will have expanded its SPR capacity to 300 million barrels. That additional
Chinese demand for oil will put extra pressure on the world’s already
thin supply system.
The oil market pressures are also partly fundamentally driven. They
are market-inspired changes that we all appreciate as free marketers. But
10 INTRODUCTION
The United States imports more than it exports. The trade deficit
reached a record $617.1 billion in 2005.
Consumer spending accounts for two-thirds of the nation’s economic
activity. That spending, though, left Americans’ savings rate—savings as
a percentage of after-tax income—at 1.2 percent in 2004, the lowest since
1934. That means an increase in gasoline prices hit most people really
hard in the wallet.
And don’t even think there will be adequate alternative fuel when we
finally run out of oil. We have got used to a type of lifestyle made easier
by cheap oil, and we assume that by the time oil runs out, oil companies
will have found some replacement. The reasoning goes this way, “We are
an innovative people by nature and we always come up with solutions to
the world’s difficult problems.”
Here’s my favorite solution to the problem as espoused by TV experts:
“We can use hybrid cars and hydrogen-powered machines.” I don’t buy
that, and so shouldn’t you. Remember, the previous oil shocks of 1973
and 1979 were man-made crises that had an easy answer—i.e., just pump
more oil supply to the market. Those crises were political to the extent
that Islamic governments in the Middle East were using their oil to score
a political point against the West.
In response, our government started buying oil in the open market and
keeping it in storage for a rainy day. The result was the creation of the US
Strategic Petroleum Reserve (SPR), which is managed by the Department
of Energy. SPR has storage tanks in Louisiana and Texas, but they can only
carry a maximum of 700 million barrels, enough to last us slightly more
than one month in case all other sources of supply are interrupted. We also
have a heating oil reserve in the Northeast—enough to last ten days.
Are you kidding me? That’s not enough in case of a serious long-term
supply problem.
Other countries are doing the same. China has just established an
emergency oil reserve that will store 100 to 150 million barrels by 2008,
enough to cover 30 days of refinery demand. By 2010, China expects that
it will have expanded its SPR capacity to 300 million barrels. That additional
Chinese demand for oil will put extra pressure on the world’s already
thin supply system.
The oil market pressures are also partly fundamentally driven. They
are market-inspired changes that we all appreciate as free marketers. But
10 INTRODUCTION
Power plants that supply our electricity are run by coal, fuel oil, and
natural gas, and we know that electricity has become so much a part of our
daily lives that without it there would be no civilization as we know it today.
Hospitals wouldn’t function, our military would be immobilized, and
our transport network, including subways and airlines, wouldn’t operate.
Just about everything that depends on electricity, like refrigerators
and telephones, would be rendered useless—at least in the United
States, where hydropower is no longer in much use. Given such potential
problems, think of what our lives will become when we eventually
run out of oil. Unemployment and inflation would follow.
Today’s relentless surge in oil prices because of rising demand and a lack
of spare capacity suggests the tough road ahead. Oil prices soared to $75
per barrel in April of 2006, and the upside remains a possibility. Indeed,
none other than Goldman Sachs, New York’s top investment bank, has
forecast oil prices rising to $100 at some time, which I don’t think is far off.
Oil prices started their steep climb in 2004 because of four factors that
will remain relevant for a while: first, rapidly growing demand from China
and India is putting a strain on the global supply system. What’s happening
in those two Asian powerhouses, with a combined population of 2.3 billion
and oil demand growth rate of more than 6 percent, is a fundamental concern
to the world, especially those who follow the financial markets.
China and India, or Chinindia to some, are thirsty for oil to power their
rapid industrial growth, and they are now competing with the United
States for oil and other scarce fossil fuels everywhere in the world. Little
wonder that last summer the Chinese National Offshore Oil Company
(CNOOC) engaged Chevron in a bid war for California-based oil explorer
Unocal, for which the Chinese company offered to pay $18.5 billion.
Secondly, the world’s major oil producing countries, most of them in
the politically volatile Middle East, have almost maximized their output
and have no spare capacity. The only producer able to flex its muscles is
Saudi Arabia, but it too has only a paltry 1.5 to 2 million barrels per day
of spare capacity, which isn’t worth much. That means they are powerless
to contain any additional oil demand pressures, and the fear resulting
from that situation is fueling even bigger concerns about a future supply
crunch, which in turn pushes up fuel prices.
Third, geopolitical tensions have become common, disrupting supply
from Venezuela, Nigeria, Russia, and the Middle East. All of this started
with a two-month strike in Venezuela in early 2003 that severely crippled
8 INTRODUCTION
natural gas, and we know that electricity has become so much a part of our
daily lives that without it there would be no civilization as we know it today.
Hospitals wouldn’t function, our military would be immobilized, and
our transport network, including subways and airlines, wouldn’t operate.
Just about everything that depends on electricity, like refrigerators
and telephones, would be rendered useless—at least in the United
States, where hydropower is no longer in much use. Given such potential
problems, think of what our lives will become when we eventually
run out of oil. Unemployment and inflation would follow.
Today’s relentless surge in oil prices because of rising demand and a lack
of spare capacity suggests the tough road ahead. Oil prices soared to $75
per barrel in April of 2006, and the upside remains a possibility. Indeed,
none other than Goldman Sachs, New York’s top investment bank, has
forecast oil prices rising to $100 at some time, which I don’t think is far off.
Oil prices started their steep climb in 2004 because of four factors that
will remain relevant for a while: first, rapidly growing demand from China
and India is putting a strain on the global supply system. What’s happening
in those two Asian powerhouses, with a combined population of 2.3 billion
and oil demand growth rate of more than 6 percent, is a fundamental concern
to the world, especially those who follow the financial markets.
China and India, or Chinindia to some, are thirsty for oil to power their
rapid industrial growth, and they are now competing with the United
States for oil and other scarce fossil fuels everywhere in the world. Little
wonder that last summer the Chinese National Offshore Oil Company
(CNOOC) engaged Chevron in a bid war for California-based oil explorer
Unocal, for which the Chinese company offered to pay $18.5 billion.
Secondly, the world’s major oil producing countries, most of them in
the politically volatile Middle East, have almost maximized their output
and have no spare capacity. The only producer able to flex its muscles is
Saudi Arabia, but it too has only a paltry 1.5 to 2 million barrels per day
of spare capacity, which isn’t worth much. That means they are powerless
to contain any additional oil demand pressures, and the fear resulting
from that situation is fueling even bigger concerns about a future supply
crunch, which in turn pushes up fuel prices.
Third, geopolitical tensions have become common, disrupting supply
from Venezuela, Nigeria, Russia, and the Middle East. All of this started
with a two-month strike in Venezuela in early 2003 that severely crippled
8 INTRODUCTION
tion of Petroleum Exporting Countries (OPEC), which accounts for almost
a third of the current global oil supply. Up until that time, the
United States was the world’s leading oil producer, and the nation’s industrial
growth owes much to that locally produced oil and the subsequent
consistently cheap supplies from the Middle East.
In recent years, the oil peak debate has got even louder. But what is
important now is that perception is slowly changing among some of the
industry’s leading experts. Those who still refuse to accept the view that
oil production will start declining at some point are locked in a time warp
and there’s nothing you can do about them. These optimists have marshaled
all sorts of arguments.
The bottom line, however, is that serious people are getting concerned,
and even some people at the U.S. Department of Energy are
paying attention. Dr. Herman Franssen, a former chief economist at the
Department of Energy, has reportedly said that the “concept [of peak oil]
is realistic and most people would agree, but we disagree on the timing.”5
On that one, most geologists say oil will peak in five to ten years, but
most economists give it about 30 years or more.
They both seem to be missing something. I think that the peak could
come in about 15 years from now. I say this not because I have worked
out the intricate mathematical formula the way Hubbert did, but because
as an independent writer I have had time to scrutinize much of the information
available on oil production and projections and the theories advanced
by various oil peak experts. I’m neither a geologist nor an
industry economist, but I have covered the industry for many years and
talked to those who should know.
One of the many tricks I learned in this business is that whenever
there’s an agreement on an issue, the truth always lies in the middle. In
this case, economists are downplaying the problem, while geologists are
overplaying it. It doesn’t mean they are wrong, but literally nobody
knows until it shall come to pass, and that’s the tragedy. There are so
many assumptions built into every argument for or against the oil peak,
in part because both camps represent certain specific interests.
It is essential to understand how important oil is to our way of life. We
know that oil provides gasoline that powers our automobile engines, but
it’s also true that our lives today are dependent on oil for other things as
well. About 90 percent of the organic chemicals we use are made from
petroleum; think of pharmaceuticals, agricultural chemicals, and plastics—
they all are byproducts of oil.
INTRODUCTION 7
a third of the current global oil supply. Up until that time, the
United States was the world’s leading oil producer, and the nation’s industrial
growth owes much to that locally produced oil and the subsequent
consistently cheap supplies from the Middle East.
In recent years, the oil peak debate has got even louder. But what is
important now is that perception is slowly changing among some of the
industry’s leading experts. Those who still refuse to accept the view that
oil production will start declining at some point are locked in a time warp
and there’s nothing you can do about them. These optimists have marshaled
all sorts of arguments.
The bottom line, however, is that serious people are getting concerned,
and even some people at the U.S. Department of Energy are
paying attention. Dr. Herman Franssen, a former chief economist at the
Department of Energy, has reportedly said that the “concept [of peak oil]
is realistic and most people would agree, but we disagree on the timing.”5
On that one, most geologists say oil will peak in five to ten years, but
most economists give it about 30 years or more.
They both seem to be missing something. I think that the peak could
come in about 15 years from now. I say this not because I have worked
out the intricate mathematical formula the way Hubbert did, but because
as an independent writer I have had time to scrutinize much of the information
available on oil production and projections and the theories advanced
by various oil peak experts. I’m neither a geologist nor an
industry economist, but I have covered the industry for many years and
talked to those who should know.
One of the many tricks I learned in this business is that whenever
there’s an agreement on an issue, the truth always lies in the middle. In
this case, economists are downplaying the problem, while geologists are
overplaying it. It doesn’t mean they are wrong, but literally nobody
knows until it shall come to pass, and that’s the tragedy. There are so
many assumptions built into every argument for or against the oil peak,
in part because both camps represent certain specific interests.
It is essential to understand how important oil is to our way of life. We
know that oil provides gasoline that powers our automobile engines, but
it’s also true that our lives today are dependent on oil for other things as
well. About 90 percent of the organic chemicals we use are made from
petroleum; think of pharmaceuticals, agricultural chemicals, and plastics—
they all are byproducts of oil.
INTRODUCTION 7
decline after 30 years of production, while Nigerian oil production is expected
to start falling by the end of this decade.
That will leave us with the Middle East as the sole source of oil in the
future, but already a few Middle East producers, such as Kuwait, have
seen some of their oilfields getting exhausted. No one knows with any
accuracy the situation in Saudi Arabia other than what the government
says. The kingdom has tried to scuttle any such debate, and although
they insist there are more than enough oil reserves, that assessment is
now seriously being questioned.
As a member of the Organization of Petroleum Exporting Countries
(OPEC), the kingdom of Saudi Arabia has been playing politics with its
reserves data. For example, many experts were surprised when OPEC’s
reserves data doubled within a short time during the 1980s. That some
former Saudi Aramco experts are now questioning some of the company’s
own data and the fact that the kingdom’s spare capacity is seriously
restricted—now at 1.5 to 2 million barrels per day—have only added to
speculations that there’s more than the Saudis are publicly saying.
Because reserves outside the Middle East are being depleted much more
rapidly, their overall reserves-to-production ratio, which indicates how long
proven reserves would last at current production rates, is much lower (15
years for the rest of the world compared with 80 years for the Middle East).
If production continues at today’s rate, many of the largest producers
in 2002, such as Russia, Mexico, the United States, Norway, China, and
Brazil will cease to be relevant players in the oil market in less than two
decades, according to the Institute of the Analysts of Global Security
(IAGS), a Washington, D.C., group of former national security officials
who are currently trying to raise awareness about the need for energy security.
At that point, the Middle East will be the only major reservoir of
abundant crude oil. In fact, Middle Eastern producers will have a much
bigger piece of the pie than ever before, the IAGS adds.
Just like now, at the time Hubbert came up with his contrarian forecast,
he found it extremely difficult to get anyone to listen to him. He
was criticized and his employers tried to suppress the publication of his
study. It wasn’t until 1970, when his prediction came true, that some people
began to pay attention. Still, automobile manufacturers and oil executives
mounted counterarguments in the years that followed, supported
by government officials.
His detractors argued that his analysis didn’t account for the growing
production from other producers, especially from members of Organiza-
6 INTRODUCTION
to start falling by the end of this decade.
That will leave us with the Middle East as the sole source of oil in the
future, but already a few Middle East producers, such as Kuwait, have
seen some of their oilfields getting exhausted. No one knows with any
accuracy the situation in Saudi Arabia other than what the government
says. The kingdom has tried to scuttle any such debate, and although
they insist there are more than enough oil reserves, that assessment is
now seriously being questioned.
As a member of the Organization of Petroleum Exporting Countries
(OPEC), the kingdom of Saudi Arabia has been playing politics with its
reserves data. For example, many experts were surprised when OPEC’s
reserves data doubled within a short time during the 1980s. That some
former Saudi Aramco experts are now questioning some of the company’s
own data and the fact that the kingdom’s spare capacity is seriously
restricted—now at 1.5 to 2 million barrels per day—have only added to
speculations that there’s more than the Saudis are publicly saying.
Because reserves outside the Middle East are being depleted much more
rapidly, their overall reserves-to-production ratio, which indicates how long
proven reserves would last at current production rates, is much lower (15
years for the rest of the world compared with 80 years for the Middle East).
If production continues at today’s rate, many of the largest producers
in 2002, such as Russia, Mexico, the United States, Norway, China, and
Brazil will cease to be relevant players in the oil market in less than two
decades, according to the Institute of the Analysts of Global Security
(IAGS), a Washington, D.C., group of former national security officials
who are currently trying to raise awareness about the need for energy security.
At that point, the Middle East will be the only major reservoir of
abundant crude oil. In fact, Middle Eastern producers will have a much
bigger piece of the pie than ever before, the IAGS adds.
Just like now, at the time Hubbert came up with his contrarian forecast,
he found it extremely difficult to get anyone to listen to him. He
was criticized and his employers tried to suppress the publication of his
study. It wasn’t until 1970, when his prediction came true, that some people
began to pay attention. Still, automobile manufacturers and oil executives
mounted counterarguments in the years that followed, supported
by government officials.
His detractors argued that his analysis didn’t account for the growing
production from other producers, especially from members of Organiza-
6 INTRODUCTION
amount of oil we’ll have to depend on is that which is already in the
reserves, which we are now slowly depleting. His whole point is that
oil is finite.
There are an close to two trillion barrels of proven oil equivalent (boe)
stored in rocks around the world, both onshore and offshore.That figure
includes natural gas deposits of about 0.8 trillion barrels, which means
global crude oil reserves are just about 1.2 trillion barrels. However, it is
important to point out from the outset that these reserves data aren’t very
definitive because even the three most respected publications that analyze
global oil reserves—BP’s Statistical Review of World Energy, Oil & Gas Journal,
and World Oil—have different numbers. For instance, BP puts proven
global reserves at 1.188 trillion barrels, while Oil & Gas Journal puts the
figure at 1.29 trillion and World Oil puts it at 1.08 trillion.
Since it is impossible to know who is right among them, I’ve decided
to come up with the average of all these data for the purposes of this
book. That gives us 1.19 trillion barrels, or roughly 1.2 trillion barrels, as
the global oil reserves. Of that, about 6 percent is in North America, 9
percent in Central and Latin America, 2 percent in Europe, 4 percent in
Asia Pacific, 7 percent in Africa, 6 percent in the former Soviet Union,
and about 66 percent in the Middle East, including Libya and Algeria:
Saudi Arabia (25 percent), Iraq (10 percent), Iran (8 percent), United
Arab Emirates (9 percent), Kuwait (9 percent), Libya (2 percent), and
Qatar (1 percent), Algeria (about 1 percent), and Oman, Syria, and Yemen
combined (1 percent).
In terms of consumption, the United States uses 20 million barrels per
day, or 25 percent of the world total, and imports about 60 percent of its
oil needs, mostly from Canada, Saudi Arabia, Venezuela, Mexico, and
Nigeria, in that order. That shows how we stack up against others with
regard to demand and supply.
Other geologists have since pointed out that the rate of oil discovery
has been declining for decades. Princeton geologist Kenneth S. Deffeyes,
who worked with and became a friend of Hubbert at Shell, says global oil
production growth has dwindled to 0.6 percent annually since 1998.4 His
point is that production growth has ceased. But because oil is produced
in so many different parts of the world, it’s misleading to talk about a
global oil peak without looking at what’s happening in different regions.
Looking at each region, we see that U.S. production peaked in 1970,
Russia’s in 1999 (except on Sakhalin Island, which is yet to be developed),
and the North Sea in 2000. Mexico’s largest oilfield, Cantarell, is on the
INTRODUCTION 5
reserves, which we are now slowly depleting. His whole point is that
oil is finite.
There are an close to two trillion barrels of proven oil equivalent (boe)
stored in rocks around the world, both onshore and offshore.That figure
includes natural gas deposits of about 0.8 trillion barrels, which means
global crude oil reserves are just about 1.2 trillion barrels. However, it is
important to point out from the outset that these reserves data aren’t very
definitive because even the three most respected publications that analyze
global oil reserves—BP’s Statistical Review of World Energy, Oil & Gas Journal,
and World Oil—have different numbers. For instance, BP puts proven
global reserves at 1.188 trillion barrels, while Oil & Gas Journal puts the
figure at 1.29 trillion and World Oil puts it at 1.08 trillion.
Since it is impossible to know who is right among them, I’ve decided
to come up with the average of all these data for the purposes of this
book. That gives us 1.19 trillion barrels, or roughly 1.2 trillion barrels, as
the global oil reserves. Of that, about 6 percent is in North America, 9
percent in Central and Latin America, 2 percent in Europe, 4 percent in
Asia Pacific, 7 percent in Africa, 6 percent in the former Soviet Union,
and about 66 percent in the Middle East, including Libya and Algeria:
Saudi Arabia (25 percent), Iraq (10 percent), Iran (8 percent), United
Arab Emirates (9 percent), Kuwait (9 percent), Libya (2 percent), and
Qatar (1 percent), Algeria (about 1 percent), and Oman, Syria, and Yemen
combined (1 percent).
In terms of consumption, the United States uses 20 million barrels per
day, or 25 percent of the world total, and imports about 60 percent of its
oil needs, mostly from Canada, Saudi Arabia, Venezuela, Mexico, and
Nigeria, in that order. That shows how we stack up against others with
regard to demand and supply.
Other geologists have since pointed out that the rate of oil discovery
has been declining for decades. Princeton geologist Kenneth S. Deffeyes,
who worked with and became a friend of Hubbert at Shell, says global oil
production growth has dwindled to 0.6 percent annually since 1998.4 His
point is that production growth has ceased. But because oil is produced
in so many different parts of the world, it’s misleading to talk about a
global oil peak without looking at what’s happening in different regions.
Looking at each region, we see that U.S. production peaked in 1970,
Russia’s in 1999 (except on Sakhalin Island, which is yet to be developed),
and the North Sea in 2000. Mexico’s largest oilfield, Cantarell, is on the
INTRODUCTION 5
deed that we personally are needed. . . . To all mankind, they are
addressed, those cries for help still ringing in our ears! But at this
place, at this moment of time, all mankind is us, whether we like it
or not. Let us make the best of it before it is too late! Let us represent
worthily for once the foul brood to which a cruel fate consigned
us! It is true that when with folded arms we weigh the pros
and cons we are no less a credit to our species. The tiger bounds to
the help of his congeners without the least reflection, or else he
slinks away into the depth of the thicket. But that is not the question.
What are we doing, that is the question.2
Why not accept the fact that fossil fuels are not the energy of the future
and start developing alternatives? Oil executives already know this,
but they have chosen to be quiet about it. There are reputations to protect
and shareholders to please. That’s the underlying story about the reserves
scandal—companies depend on their reserves to keep up with
Wall Street expectations. As one expert said, the 2004 reserve scandal involving
the Royal Dutch Shell company was just a tip of the iceberg.
Shell was forced to restate its reserves for several years. Ditto Repsol.
Fortunately, for the investors, there’s a silver lining: There is a lot of
money to be made in this business. If you ever wanted to get a piece of
the oil boom, this is your opportunity.
You shouldn’t depend on oil executives to tell you anything more than
they want you to know. That’s just not going to happen. As a matter of fact,
industry people only talk about “oil peak” when they want to shoot down
the whole idea, but you can read between the lines when they express worries
about maintaining their supply levels and replacing their reserves.
Certainly, the oil peak debate has a long history. It started in 1956
when Shell geophysicist Marion King Hubbert correctly predicted that
U.S. oil production would peak in 1969–1970 and drop rapidly thereafter.
Hubbert used the same theory that was already being used for the
study of population, but he applied it to oil growth.3
The theory is based on how population growth is influenced by the environment.
It argues that when a new population of a species starts growing
in a resource-based area, the rate of growth increases by the same
fraction each year. But once the population gets bigger than the resource
available for its existence, the growth rate of that population starts to slow.
The same is true of oil, Hubbert said, adding that the chance of discovering
new oil decreases when there’s less new oil to find. Based on
that analysis, he added, once we begin to discover less oil, it’s possible
that a time will come when we won’t get any new oil. As such, the only
4 INTRODUCTION
addressed, those cries for help still ringing in our ears! But at this
place, at this moment of time, all mankind is us, whether we like it
or not. Let us make the best of it before it is too late! Let us represent
worthily for once the foul brood to which a cruel fate consigned
us! It is true that when with folded arms we weigh the pros
and cons we are no less a credit to our species. The tiger bounds to
the help of his congeners without the least reflection, or else he
slinks away into the depth of the thicket. But that is not the question.
What are we doing, that is the question.2
Why not accept the fact that fossil fuels are not the energy of the future
and start developing alternatives? Oil executives already know this,
but they have chosen to be quiet about it. There are reputations to protect
and shareholders to please. That’s the underlying story about the reserves
scandal—companies depend on their reserves to keep up with
Wall Street expectations. As one expert said, the 2004 reserve scandal involving
the Royal Dutch Shell company was just a tip of the iceberg.
Shell was forced to restate its reserves for several years. Ditto Repsol.
Fortunately, for the investors, there’s a silver lining: There is a lot of
money to be made in this business. If you ever wanted to get a piece of
the oil boom, this is your opportunity.
You shouldn’t depend on oil executives to tell you anything more than
they want you to know. That’s just not going to happen. As a matter of fact,
industry people only talk about “oil peak” when they want to shoot down
the whole idea, but you can read between the lines when they express worries
about maintaining their supply levels and replacing their reserves.
Certainly, the oil peak debate has a long history. It started in 1956
when Shell geophysicist Marion King Hubbert correctly predicted that
U.S. oil production would peak in 1969–1970 and drop rapidly thereafter.
Hubbert used the same theory that was already being used for the
study of population, but he applied it to oil growth.3
The theory is based on how population growth is influenced by the environment.
It argues that when a new population of a species starts growing
in a resource-based area, the rate of growth increases by the same
fraction each year. But once the population gets bigger than the resource
available for its existence, the growth rate of that population starts to slow.
The same is true of oil, Hubbert said, adding that the chance of discovering
new oil decreases when there’s less new oil to find. Based on
that analysis, he added, once we begin to discover less oil, it’s possible
that a time will come when we won’t get any new oil. As such, the only
4 INTRODUCTION
and natural gas have also been burned to produce electricity, although
historically that had always been mostly coal’s job.
Starting from Pennsylvania in 1859 and later in the Gulf Coast states,
U.S. oil production grew sharply, with supply far surpassing demand during
much of the 1930s, causing prices to fall to as low as four cents per
barrel until the federal government, using its interstate commerce legislative
authority, stepped in. To save the industry from collapse, the government
set production quotas for each state and also instituted tariffs on
imports from foreign suppliers like Venezuela.
Nonetheless, oil was on its way to becoming a global commodity with
a global market, while at the same time, domestically local producers
were in dire need of a stable market. In any case, with so much oil available,
Detroit car makers were spitting out fleets of automobiles at a high
rate, and the automobile began to have an enormous influence across
America by the mid-twentieth century.
A lot has changed since then. The twenty-first century is starting out
with a wake-up call: We must get prepared for an impending catastrophe.
We’ve enjoyed cheap oil for far too long, and now there are signs we may
be headed for a global “oil peak”—the point at which oil production
worldwide will start declining at the rate of 2 percent per year. When the
oil peak will occur is a matter of speculation and there’s already an intense
debate going on, but at least this much is certain: Our lifestyle will
have to undergo drastic changes.
How prepared are we, and what do average investors need to do, are
the subjects of this book. My understanding is that with better technology
we might be able to squeeze some more oil out of old wells, perhaps
through improved water treatment, or we may be able to prospect for oil
in the deep underbelly of the Atlantic off the Gulf of Guinea in West
Africa and in the Russian side of the frigid Black Sea; we may even be
able to increase our use of natural gas to generate power, or churn out
fuel from Canada’s eastern Alberta tar sands and from Venezuela’s heavy
crude oil, found north of the Orinoco River.
However, those would be temporary measures and they wouldn’t
much change the equation. So, we stop here to ponder the issue, and
knowing full well the grave consequences to our civilization, we ask the
same question as Samuel Beckett’s Vladimir:
Let us not waste time in idle discourse. Let us do something, while
we have the chance! It’s not every day that we are needed. Nor in-
INTRODUCTION 3
historically that had always been mostly coal’s job.
Starting from Pennsylvania in 1859 and later in the Gulf Coast states,
U.S. oil production grew sharply, with supply far surpassing demand during
much of the 1930s, causing prices to fall to as low as four cents per
barrel until the federal government, using its interstate commerce legislative
authority, stepped in. To save the industry from collapse, the government
set production quotas for each state and also instituted tariffs on
imports from foreign suppliers like Venezuela.
Nonetheless, oil was on its way to becoming a global commodity with
a global market, while at the same time, domestically local producers
were in dire need of a stable market. In any case, with so much oil available,
Detroit car makers were spitting out fleets of automobiles at a high
rate, and the automobile began to have an enormous influence across
America by the mid-twentieth century.
A lot has changed since then. The twenty-first century is starting out
with a wake-up call: We must get prepared for an impending catastrophe.
We’ve enjoyed cheap oil for far too long, and now there are signs we may
be headed for a global “oil peak”—the point at which oil production
worldwide will start declining at the rate of 2 percent per year. When the
oil peak will occur is a matter of speculation and there’s already an intense
debate going on, but at least this much is certain: Our lifestyle will
have to undergo drastic changes.
How prepared are we, and what do average investors need to do, are
the subjects of this book. My understanding is that with better technology
we might be able to squeeze some more oil out of old wells, perhaps
through improved water treatment, or we may be able to prospect for oil
in the deep underbelly of the Atlantic off the Gulf of Guinea in West
Africa and in the Russian side of the frigid Black Sea; we may even be
able to increase our use of natural gas to generate power, or churn out
fuel from Canada’s eastern Alberta tar sands and from Venezuela’s heavy
crude oil, found north of the Orinoco River.
However, those would be temporary measures and they wouldn’t
much change the equation. So, we stop here to ponder the issue, and
knowing full well the grave consequences to our civilization, we ask the
same question as Samuel Beckett’s Vladimir:
Let us not waste time in idle discourse. Let us do something, while
we have the chance! It’s not every day that we are needed. Nor in-
INTRODUCTION 3
Introduction
“THE WEALTH OF NATIONS” . . . AND OURS
Oil and natural gas are part of what are known as fossil fuels. Scientists
believe they were formed by organisms—plants and animals—that died,
decayed, and were transformed into solid rock thousands, perhaps millions,
of years ago as a result of high level heating. That natural process
took place deep under the earth and resulted in what is now called petroleum,
a finite mixture of hydrocarbon molecules that is not easily replaceable.
Oil and natural gas have high net energy and, beyond the fact
that one is a fluid and the other is vaporous at surface condition, their
only other difference relates to the extent of the heating the rocks endured
and their molecular weight.
Deposits of oil and gas are found in certain parts of the world where
the formation process occurred, and most of these places have extreme
weather conditions. Petroleum is recovered by drilling deep into the
earth, between 7,500 and 15,000 feet down, then processing and transporting
it to storage terminals and eventually to the consumer (though it
first goes to refineries that use it to produce gasoline, diesel, kerosene, and
other products). The first processing typically is done at the well site,
where sophisticated technology separates oil from water and gas. Transportation
is either by underground or above ground pipeline systems, sea
tankers, and road trucks. Natural gas is typically liquefied, or transformed
into liquid form, before being transported in specially designed tankers.
Fossil fuels are the dominant energy source fueling the modern
economy, and at least in the short term they will continue to shape our
society in the new millennium. As we move forward amid concerns about
availability and cost of oil, we must ask some fundamental questions that
will define our future—questions that will touch on economics, politics,
population, philosophy, and even military issues.
1
“THE WEALTH OF NATIONS” . . . AND OURS
Oil and natural gas are part of what are known as fossil fuels. Scientists
believe they were formed by organisms—plants and animals—that died,
decayed, and were transformed into solid rock thousands, perhaps millions,
of years ago as a result of high level heating. That natural process
took place deep under the earth and resulted in what is now called petroleum,
a finite mixture of hydrocarbon molecules that is not easily replaceable.
Oil and natural gas have high net energy and, beyond the fact
that one is a fluid and the other is vaporous at surface condition, their
only other difference relates to the extent of the heating the rocks endured
and their molecular weight.
Deposits of oil and gas are found in certain parts of the world where
the formation process occurred, and most of these places have extreme
weather conditions. Petroleum is recovered by drilling deep into the
earth, between 7,500 and 15,000 feet down, then processing and transporting
it to storage terminals and eventually to the consumer (though it
first goes to refineries that use it to produce gasoline, diesel, kerosene, and
other products). The first processing typically is done at the well site,
where sophisticated technology separates oil from water and gas. Transportation
is either by underground or above ground pipeline systems, sea
tankers, and road trucks. Natural gas is typically liquefied, or transformed
into liquid form, before being transported in specially designed tankers.
Fossil fuels are the dominant energy source fueling the modern
economy, and at least in the short term they will continue to shape our
society in the new millennium. As we move forward amid concerns about
availability and cost of oil, we must ask some fundamental questions that
will define our future—questions that will touch on economics, politics,
population, philosophy, and even military issues.
1
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