Looking for Equilibrium in Oil's Hubbert Hysteria
By Tim Wood
NEW YORK (ResourceInvestor.com) -- There are two issues that fire up the readership of this site more than any other. One is the valuation of individual metal stocks and the other is Peak Oil. Peak Oil is the hypothesis that we have already, or are on the verge of reaching the point at which we can no longer increase oil output because it is finite. If true, the consequences are profound because of the recent and projected rate of increase in oil consumption.
The phenomenon is also referred to generically as Hubbert’s Peak, so named for geophysicist Dr. M. King Hubbert who accurately forecast a mid-point for oil depletion in the lower 48 states. The depletion midpoint for the world – when maximum oil output is reached – is now set between 2002-20 depending on which numbers you believe. But the point is that we are apparently somewhere close to the tipping point.
Peak Oil is hardly new, but it has been getting increasingly heavy airplay for the past 18 months or so. So we need to be alert to Time or Newsweek cover stories on the subject to confirm saturation.
The U.S. Geological Survey has a graphical representation of Peak Oil which puts the date for it “within our life times”, calling it the “Big Rollover”. Relatedly, it notes that the Big Rollover in oil exploration occurred in the late 1960s. Since the late 1970s there has been a steady deterioration in the rate of new oil reserve discovery. However, “old” oil reserves have been continually revised higher.
Almost a century ago the USGS said exactly the same thing about Peak Oil.
In 1919 the agency said the United States would run out of oil by 1928. One positive outcome of the alarm was the passing of the Mineral Leasing Act of February 1920 which promoted competitive bidding for mineral rights, and specified federal and state royalties. That was a reasonable market response which rapidly boosted discovery and production.
Yet at the time of all this angst the USGS’s internal signals were pointing toward plentiful oil – its geologists were decamping en masse to the private sector to make their fortunes finding oil. Why would well trained scientists risk their livelihoods looking for something that was running out?
Less positive than the Mineral Leasing Act was the follow-up of December 1924. The Peak Oil warnings remained so dire and the reported risks so grave that President Calvin Coolidge, a man who ordinarily detested government intervention, felt compelled to establish the Cabinet-level Federal Oil Conservation Board. Thus accelerated the command and control policy approach toward energy generally and oil specifically.
Ironically, the USGS was founded in 1879 partly because of a national fear of oil shortages after John Strong Newberry, Ohio’s chief geologist, had forecast in 1875 the imminent desiccation of the oil market. In 1906 the USGS warned car manufacturers that they should be concerned about fuel supplies for the burgeoning industry, something repeated more urgently in 1919 by Scientific American.
As history shows, the pessimistic reserve estimates were repeatedly wrong. The USGS, which can hardly be called a tub-thumper, has in the last two decades issued several large upward revisions in its estimate of world recoverable reserves – from 1.8 trillion barrels in 1987 to just over 3 trillion barrels in 2000. Even Dr. Colin Campbell, an ardent Peak Oil promoter if ever there is one, has issued repeated upward revisions.
Clearly if the present equilibrium remains undisturbed then Peak Oil is a reality. But we have more than a century of confirmation that mineral equilibria are never constant. Demand and supply are in constant flux based on cost, price and technology as the three leading drivers.
There appears to be a heathen haste to isolate oil as the one mineral that escapes market logic. Let’s not forget Jimmy Carter declaring in 1977, with all the conviction a pessimist in a sleeveless sweater can muster, that it was likely that the world’s oil reserves would be gone by the 1990s.
This does not rule out the impact of short-term shocks, such as the 1973 and 1979 market quakes, but in the long-run we are shown over and over that supply and demand problems eventually resolve toward something better. Just consider how oil consumption per dollar of GDP has dwindled over the past three decades.
Last year in Science Leonardo Maugeri wrote an article called ‘Oil: Never Cry Wolf - Why the Petroleum Age Is Far from over’. It was aptly titled given that it hearkened, probably unintentionally, to an April 1973 report in Foreign Affairs entitled: ”The Oil Crisis: This Time the Wolf is Here.'' It was written by Nixon appointee James Akins who was the State Department’s resident oil expert who effectively marked 1975 as depletion mid-point.
Maugeri doesn’t dispute that mineral resources are finite, only that we actually have no idea how finite. He noted that oil doomsayers regularly exclude “non-conventional oil” (remember when oil 1,000 feet below the Gulf of Mexico was unconventional oil…) citing extraction cost and oil quality problems.
The fact is that new reserve discovery is something of a straw man. Yes, it has declined, but reserves at existing fields have continually defied bearish expectations. The problem may be less one of finding fields than encouraging intensive exploration.
And even new discovery may be turning a corner given recent events at the Kashagan field in Kazakhstan where reserve estimates have risen from 2-4 billion barrels in the 1990s to 13 billion barrels by last year – and this is only a fraction of the area presumed to host hydrocarbons.
Likewise global oil reserve life has steadily increased from 20 years in 1948, to 35 years in 1972 and reaching about 40 years in 2003.
Maugeri wrote: “Today, all major sources estimate that proven world oil reserves exceed 1 trillion (1012) barrels, while yearly consumption is about 28 billion barrels. Overall, the world retains more than 3 trillion barrels of recoverable oil resources.”
Maugeri makes an especially good point: “International public oil companies have faced two sets of limits to their expansion in the last 20 years. The first is inaccessibility to foreign investment in the largest and cheapest reserves—those in the Persian Gulf. Second are the demands of financial markets, which for years have insisted that companies provide unrealistic, short term financial returns that are inconsistent with the long-term nature of oil investments. This has compelled private operators to reject opportunities that would normally be deemed economically worthwhile. This financial pressure partly explains recent proven reserve downgrading by some oil companies, starting with the amazing cuts announced by the “supergiant” Shell Group. Indeed, this Anglo-Dutch oil company has not lost its resources. This picture has nothing to do with physical scarcity of oil.”
He is convinced, by history and science, that just as oil displaced coal, which displaced wood as the energy source of choice, so we will see oil displaced. “Oil substitution is simply a matter of cost and public needs, not of scarcity. To “cry wolf ” over the availability of oil has the sole effect of perpetuating a misguided obsession with oil security and control that is already rooted in Western public opinion - an obsession that historically has invariably led to bad political decisions.”
If we’re only half optimistic then we have over a century of oil left at present consumption rates. If we’re half pessimistic then it’s perhaps half that time in which to become less dependent on oil. Whatever your persuasion, let’s not assume the trend is linear. Simply examine the exponential decrease in PGM consumption in auto-catalysts and fuel cells to see that out energy future will not be a linear event.