Posted by
Pasadena Phil on Sunday, December 09, 2007 1:20:24 AM
Let me state up front that I am not an expert on the science and technology of oil. But as an investment professional, I learned long ago that in a world where the biggest and most important things happen in full view, it is critical to develop a working knowledge of those big things for yourself. And nothing is bigger and more vitally important than oil and how we are inexplicably sleep walking into a crisis despite all of the warnings. The early stages of the economics of scarcity are now upon us. It is critical for otherwise rational people to stop talking foolishly on this subject. Most of the foolishness is rooted in a lack of appreciation for the vast amounts of oil the world currently consumes. This is an attempt to persuade you to accept the reality of the impending crisis by at least understanding its "bigness".
The complexity of this issue makes it very difficult to discuss within the limited confines of a blog. Throw in hyper-political partisanship and it is nearly impossible. I can't think of another topic where possessing just a little information is more dangerous. While everyone seems to be operating on varying amounts of "facts", few have grasped the "bigness" of oil. Unable or unwilling to arrive at a fundamental understanding of the most important, and knowable, point, most then form radical opinions based on a world dominated by "evil" corporations conspiring with totalitarian governments to create an artificial "shortage" for their own wealth and power. Others blame environmentalists. Both represent intellectual laziness and I leave it to you to figure out why. The truth is in plain view. Don't be afraid to see what you see.
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In 1971, American oil production peaked and has been in decline ever since. We didn't run out of domestic oil, we began running out of cheap, domestic oil. Our demand kept growing as it overtook our production which went into decline. We started importing oil because foreign supplies were vastly bigger, of higher quality and could be produced in greater quantities at less cost.
Price control thus shifted away from the Texas Railroad Commission to OPEC, particularly to the largest producer, Saudi Arabia. The oil shocks of 1973-74 were mainly the result of OPEC grappling over control of pricing power. The end result was a long period of historically low and stable prices. There was no fear of running out of oil from one source because there was plenty more available from somewhere else and plenty of big capital available willing to invest in required infrastructure. Those "evil" corporations were conspiring with "evil" governments to deliver the most important commodity on earth to us as the cheapest liquid on earth. So when exactly did they become even more "evil"?
In 1971, just as today, most of the knowledge about the size and quality of oil reserves was held by private corporations and secretive governments. Nevertheless, in 1956, Shell Oil's chief geophysicist, Marion King Hubbert, defied his company's wishes and publicly predicted that the U.S. domestic production would peak in 1970. He was right. In 1976, he further predicted that global production would peak around 2000. He didn't base his projections on science so much as on economics.
In 1971, there was no particular interest or need in having accurate estimates of the world's proven oil reserves. No one could see far enough to envision today's global economy. For various reasons, mainly the increasing vulnerability of the economies of the western world, getting a handle on this issue became important. In 1995, the U.S. Geological Survey, fearful of Hubbert's forecast, commissioned an exhaustive five-year study to come up with estimates for how much oil existed in the beginning and how much remains. This is essential information for "big capital" whose main question can be restated as: "At what point do the economics of scarcity overtake the economics of abundance?" It is a simple formula of projecting the growth of demand into a depleting supply and estimating a mid-point. The numbers are big enough that they don't require pinpoint accuracy.
The USGS report is public information and we can study various books written by the best experts who have analyzed that information for us. But most importantly, we can observe what those secretive governments and "evil" corporations are doing and saying and form very reliable conclusions. So what are the best experts saying? Let's go through the questions.
How much oil is left and what does it mean? The USGS study concluded that there was a 95% probability that there was at least 2.1 trillion barrels of recoverable oil reserves on earth in the beginning and 50% probability that there were at least 2.7 trillion barrels. The oil industry had always used 2 trillion. The USGS decided to now go with 3 trillion barrels (go figure). The American Petroleum Institute decided on 2.1 trillion and Petro-Global 2.3 trillion. Peak oil economics begin when the market perceives that half of all oil reserves have been depleted. Hard to believe, but the differences in these estimates don't matter very much.
It will take about twenty years to implement proper mitigation measures (develop and adapt to alternatives) before peaking at the mid-point. The expert forecasts range from those who think we are already there or past the peak (T. Boone Pickens, Kenneth Deffeyes, Dr. David Goodstein of CalTech, and others) to the rosiest independent estimates of 2020 (Total and Wood McKenzie). All of those who project longer peaks, like OPEC (who rejects peak oil theory) and the major international oil companies, have a vested self-interest in mis-leading the public. Otherwise, they would be more forth-coming with actual information. Therefore, to the non-conflicted experts, we are already in deep trouble.
So what if we found more oil? Ah! That is the key to the whole thing! Keep in mind that all of the big oil fields were discovered more than 40 years ago using outdated technology. Yet despite today's advanced technology, no major discoveries since. Still, let's say they did find more oil. How much oil would it take to make a meaningful difference? If these yet undiscovered fields are so big, why haven't we been able to find them? You have to think on a planetary scale to grasp this. Let's assume that 1.8 trillion barrels remain in known global reserves (the consensus is about 1 trillion) and annual global demand grows at a constant 2% (it is higher than that currently). Peak production would occur in 2020. That is less than 12 years from now. Were we to discover 900 billion barrels of new light sweet crude, which is more than 80% of the amount of oil the world has consumed from the beginning of time, it would merely extend the peak to around 2030, or 22 years from now. That is more oil than Saudi Arabia ever had. Keep in mind that the second biggest known reserves are in Kuwait and amount to 95 billion barrels. But let's assume that these new discoveries are going to happen. Even then, shouldn't we have started investing in proper mitigation strategies by now?
Here is a 2006 statement from J. B. Johnston of the prestigious Aspen Institute:
"It is not a question of what exists below the ground, but the adequacy of the investment environment above the ground and the progress made on demand reduction that will lead to wise choices. As access to resources increasingly is taken out of the control of market forces and placed under the control of governments and government-controlled entities, the ability to supply energy markets increasingly becomes a government decision rather than a market decision."
"Unfortunately, as government decisions often are swayed less by what is best for the market and consumers than by what is in the best interests of individual nations or political ideologies, the collective security of consumers and producers erodes and can fall prey to political whims and disruptive policies based on non-energy goals."
Please don't read that to mean government conspiracies. Governments did not manufacture an energy problem. We were going to have this problem eventually. Oil is a finite resource. But there IS a role for the government of a free capitalistic society to play and that is to create a friendlier, safer and less legally hostile environment for capital. If we expect investors with sufficient capital to invest in these very long-term and capital intensive projects, it is unreasonable to ask them to do so without some protections from the capriciousness of self-serving politicians and lawyers.
This is not a manufactured problem that will go away even if every eco-fascist were jailed or if the so-called "global conspiracy of governments and evil corporations" were broken up. It is a real problem, we saw it coming and the sooner we all accept that, the sooner we can discuss it intelligently and find a solution. Until then, we are ALL part of the problem and are doomed to bounce from one crisis to the next. No one knows for sure how much time is left to act. Most top experts are very pessimistic and believe it may already be too late. In any case, we cannot afford to continue what we are doing. We should have been making the most of whatever time we have left a long time ago.