Peak Oil News: 06/01/2007 - 07/01/2007

Thursday, June 28, 2007

Rejecting the Real Snake Oil

Huffington Post

By Steve Andrews

Last Friday I spent three or four minutes on CNBC's Morning Call explaining what the concept of "peak oil" is to their viewers and arguing a bit with Raymond Learsy about the cause of our growing troubles with oil. Mr. Learsy, not content with that sound bite, wrote "Peak Oil is Snake Oil!" for this site on Monday to expand his attack on the logical notion of oil resource constraints.

It seems Learsy thinks small non-profit groups like ours -- the Association for the Study of Peak Oil and Gas/USA -- are in cahoots with the oil companies, joined at the hip in a conspiracy to hype the "fabricated drama of peak oil" in order to drive up oil prices and profits. This is a delusional notion with zero substance that deserves no further comment.

Except for those in extreme denial about our oil problems, even casual observers looking at the facts and trends listed below should see that we're on the front edge of an enormously challenging energy transition:

1. Some 20 nations around the world produce 83% of the world's oil. In half of those, production is either flat (Iran, Iraq, Venezuela) or permanently declining (the USA, Mexico, the UK, Norway and Indonesia, among others).

2. World oil production outside of OPEC and the former Soviet Union (FSU) grew for many decades until 2002. Since then, it has declined slightly for four straight years, during an era of unprecedented high oil prices.

3. Oil production in the FSU collapsed from 1990-96, then rocketed back and should match their previous high oil mark (1987) this year. But Russia's production growth trend has slowed dramatically and will probably peak soon.

4. Roughly two-thirds of the world's oil lies in the Middle East -- a cauldron for geopolitical, religious, cultural and military conflict. This obviously reduces the security of long-term supply, which drives up prices.

5. Over 90% of the world's oil is owned by government-controlled oil companies. ExxonMobil only ranks #13 in size, dwarfed by Saudi Aramco. On a daily basis, the Saudis produce much more oil from the world's largest single oil field -- Ghawar -- than ExxonMobil produces from its many multi-billion-dollar projects scattered worldwide.

As a retiree from Saudi Aramco wrote recently, those government-controlled oil producers "are no longer inclined to rapidly exhaust their resource for the sake of accelerating the misuse of a precious and finite commodity." That's our new reality, Mr. Learsy.

6. Resource nationalism is rearing its ugly head around the world, especially in Russia and Venezuela. During the last 12 months, Russia and Venezuela expropriated oil producing assets developed and paid for by the world's major investor-owned oil companies. Expect slightly tighter supply and higher prices from this trend.

7. New oil discoveries listed by Mr. Learsy are fine and dandy for both oil companies and consumers, but new discoveries peaked during the 1960s and are down substantially since that oil heyday. Further, those new discoveries are increasingly located in deeper water and colder climates that add to cost and are prone to delays and weather-related shut-downs.

8. Depletion of aging oil fields is relentless. The world's largest oil fields -- all of which once produced at least one million barrels of oil/day -- are all in permanent decline. The smaller new fields brought into production can't offset the declines in the old war horses. It's like being on a treadmill that is both speeding and ramping up, where you work harder and harder just to stay in place.

9. New technology isn't saving the day. In the US, where we've applied the best technology available, production has slowly declined since the late 1970s.

10. Oil exports are riding for a fall. In exporting countries like Mexico, where production slips while domestic consumption grows, exports will shrink at an accelerated rate. China, the UK and Indonesia, oil exporters during the 1990s, are now importers. World oil exports will peak before world oil production peaks.

Highly hyped liquid substitute fuels, such as ethanol from corn and liquids from coal or oil shale, come with their own unique baggage. They can't be scaled up quickly, require huge energy and water inputs, and pose a range of environmental problems.

Given the above facts and trends, ASPO-USA and a growing list of respected energy analysts anticipate a peaking in world oil production soon, most likely between 2010 and 2015. Such a turning point in world energy consumption and production patterns will undoubtedly have serious consequences on the world's economy. Those possible consequences should be anticipated and acted upon by decision makers at every level. Those who deny this looming reality are part of the problem, not part of the intelligent response.

Life After Oil Is Coming... But Will We Be Ready?

Vue Weekly

By Murray Sinclair

The coming 'post-carbon' economy doesn't have to be the end of Alberta's prosperity

The year is 2040. Symbolic of Edmonton’s rust-belt economy, electric cars whiz by an abandoned, derelict Refinery Row, although there are plans to turn part of the old complex into a petroleum heritage site. In a nearby run-down café, Chad and John talk about the boom years of their youth. They recall the time before Alberta got left behind, as governments and consumers worldwide turned away from dwindling oil and coal energy sources in a mass response to global warming and other environmental concerns. They discuss the time before downtown Calgary became an abandoned shell of empty buildings, before Fort McMurray turned into a ghost town, before so many of Alberta’s youth moved to Atlantic Canada to take plentiful jobs in the red-hot tidal-power industry. “We never thought Alberta’s boom would end,” says John. “Yeah,” replies Chad, looking philosophical. “But the Stone Age didn’t end because we ran out of stones.”

This future shock scenario may sound far-fetched, especially with all the hype about Alberta’s current petroleum-driven boom and seemingly unending supply promised by the province’s oil sands.

But environmentalists are predicting a post-carbon or “carbon-constrained” future, when the world will use significantly less fossil fuels to the point where they will no longer be a main source of energy.

“We’re at the very beginning of the end of the oil age,” said Lindsay Telfer, director of the Sierra Club of Canada’s prairie chapter. “Our own government’s trying to struggle with it.”

After hearing the fictional dystopia described above, an analyst with the Pembina Institute replied “I don’t know if things would happen that dramatically.”

Jaisel Vadgama said the more likely conversation would be “if we had started planning, we could still have a vibrant economy, or a boom based on something else.

“We are certainly at risk of being left behind on new technologies,” Vadgama admitted. “Alberta could shoot itself in the foot.”

Carbon-based fuel sources like oil and coal are fingered for warming the climate when they are burned and release greenhouse gases, named for their environmental effect on the atmosphere.

Much of the discussion about dealing with global warming has centred around 1997’s Kyoto Protocol, ratified by 173 countries, which commits Canada to cut its greenhouse-gas emissions to six per cent below 1990 levels.

Telfer said many European countries are well ahead of that goal, with the UK exceeding its Kyoto target and Sweden massively investing in alternative fuels.

“There’s an acknowledgement of serious problems and repercussions” related to global warming, she said.

But Kyoto is considered just a first step, and many US states and European Union countries are targeting greenhouse-gas emission cuts of 60 to 80 per cent from current levels in the next 40 years.

“By 2050, global emissions must be reduced by up to 50 per cent compared to 1990, implying reductions in developed countries of 60 to 80 per cent by 2050,” specifies a document approved in January from the EU, which cites “considerable scientific evidence from the Intergovernmental Panel on Climate Change” to back this goal.

“Many developing countries will also need to significantly reduce their emissions,” Telfer said. “It’s critical that the quickly developing countries of India and China start to face reductions for the post-Kyoto period of 2012-20, which will be globally negotiated next.”

The Europeans have backed the cuts scientists have said are a needed step to stabilize the climate at two degrees Celsius above pre-industrial levels, to ultimately deal with global warming.

“Now people are thinking more long-term,” said Vadgama. “It’s certainly not too late to be doing something about it.”

Japan is also asking the world to take its lead on the Cool Earth 50 plan, which aims to halve the country’s greenhouse gases by 2050, but from current instead of Kyoto’s 1990 levels.

“The 50 per cent off 1990 works out about the same as 60 per cent off 2006,” explained Lynn Brunette, a spokeswoman’s for Canada’s environment ministry.

In this country, greenhouse-gas cuts have continued to be a hot political potato, with the former Liberal government that signed Kyoto accused of doing nothing to implement it, while the country's emissions grew to the current 30 per cent above 1990 levels.

Prime Minister Stephen Harper’s minority Conservative government pulled out of Kyoto, but in its Clean Air Act targeted greenhouse emissions cuts between 45 and 65 per cent by 2050, using 2003 levels as a baseline.

The act was heavily rewritten by the opposition parties, which have a majority in the House of Commons, while an opposition bill asking the government to implement Kyoto became law last week.

But the Tories say the law lacks teeth, as it prescribes no funding, and the government has not acted on the rewritten Clean Air and Climate Change Act that sets 60 to 80 per cent reductions by 2050, based on Kyoto’s 1990 levels.

Harper has instead introduced a set of regulations, which are silent on the 2050 target, but aim to cut Canada's greenhouse gases by 20 per cent by 2020, this time compared to 2006 levels.

While Parliament plays with the numbers, the City of Toronto announced in March it was going much further, targeting an 80 per cent reduction from the 1990 emission level by 2050.

This month, the Saskatchewan government said it will cut the province's greenhouse gas emissions 80 per cent by 2050, using a 2004 baseline instead.

But the biggest obstacle worldwide to greenhouse-gas cuts has been the administration of American President George W Bush, who pulled his country out of Kyoto and rejected firm targets proposed at this month’s G8 summit of industrialized countries.

Still, the US’s largest state, California, has announced plans to reduce the emissions to 80 per cent below 1990 levels by 2050, while New Jersey passed a law to cut emissions by the same amount by then, using a 2006 baseline instead.

Telfer said even presidential candidates for 2008 from Bush’s Republican party, like John McCain, are talking about firm targets restricting greenhouse-gas emissions.

“Carbon will likely be capped globally,” she predicted. “Ultimately, it’s going to be inevitable. These 60 to 80 per cent caps are going to be stringent, and should send a clear signal to energy companies and consumers.”

But consumers have already been buying gas-electrical hybrid and hydrogen-powered vehicles, which have emerged on the market with little or no government incentives.

“In many respects, consumers are going ahead,” said Telfer, who noted declining SUV sales but still predicted that politically imposed carbon caps will come first.

“Citizens are making demands to step up (government action on climate change),” she continued. “You need government to send the signal and significant consumer demand.”

Automotive observers anticipate that hydrogen vehicles will be commercially available within a decade, while a “hydrogen highway” of filling stations has been planned from California to British Columbia.

Bio-fuels like ethanol made from farm crops and fat from livestock and restaurant waste are other emerging oil alternatives to power future vehicles and industry. In April two giants in the oil and meat production fields, ConocoPhillips and Tyson food, announced a joint venture to produce fuel from beef, pork and poultry fat to market to American trucking fleets.

Vehicles running on alternative fuels would have a significant impact, as transportation accounts for 20 per cent of all greenhouse emissions in Canada, while an equal amount is spewed out for fossil fuel production.

Telfer said transportation uses up 75 per cent of the oil derived from the oil sands, which themselves produce 85 tonnes of carbon dioxide per barrel during extraction, three times the amount from conventional oil development.

Globally, fuel oil and gasoline gobble up 84 per cent of petroleum production, with other petrochemical products like plastics using the rest.

But scientists are also seeking alternative feedstock sources for plastic, with one company genetically modifying canola to produce a natural plastic.

Another sign pointing to a post-carbon economy is “peak oil,” referring to the time when all the world’s available oil will be discovered, leading to a gradual fall in petro-production.

The CEO of Calgary’s Talisman Energy recently predicted that global oil production had already peaked, meaning that prices of the non-renewable resource will inevitably climb.

Telfer agrees, but noted that some feel production peaked as far back as 1990, while others say it will arrive later.

“We need to use less carbon. That’s going to hit us” before peak oil arrives, predicted Vadgama.

Conventional wisdom suggests that the post-carbon economy is slated to hit Alberta hard, as Canada’s largest producer of both oil, and coal for electricity.

“It’s a central part of the Alberta economy,” said Alberta Energy spokesman Jason Chance, confirming that one in six Albertans work for the industry directly or indirectly.

He noted the $14.7 billion paid to the treasury for 2005-06 in oil and gas royalties and taxes, a figure that doesn’t include income tax or other economic spin-off effects.

University of Alberta economist Andre Plourde said roughly a third of provincial government revenues come directly from the industry. The sector makes up between 15 to 40 per cent of Alberta’s economy, the professor said, depending on what factors are measured.

“We’re big producers and consumers of hydrocarbons,” said Plourde.

Alberta was a lot less dependent on fossil fuels in the 1980s and ’90s, he said, speculating that the province is now at roughly the same point it was in the early ’70s.

Alberta is responsible for around 40 per cent of Canada’s emissions, with oil and gas spewing 33 per cent of the provincial total, and our mostly coal-based electricity production contributing another 22 per cent.

Nationwide, about 85 per cent of total Canadian greenhouse-gas emissions are “associated with energy consumption, production and distribution,” reads a federal government energy outlook.

In February, former oilfield businessman and provincial Energy Minister Mel Knight said he didn’t see worldwide environmental pressure shaking Alberta’s link to an industry that has provided so much wealth.

Chance said the provincial government does not think a post-carbon economy is imminent, calling the concept speculative, and saying the industry will remain a key part of Alberta’s economy, which he noted benefits Canada as a whole.

Like the spokesman, Plourde rejects the view that peak oil has happened or will soon, arguing there’s “all kinds of places that have not been explored” worldwide.

High gasoline prices equaling more than $1 at the pumps may be attributed to bottlenecks in refining, he said.

The economist agrees with Vadgama that governments should start to put a price on carbon that factors in the environmental harm inherent in its production.

But he noted that the 2050 date for mass greenhouse-gas cuts is far away, leaving much time for a gradual transition.

No government would legislate an abrupt change away from fossil fuels, Plourde predicted, and he doesn’t foresee a similar shock from any sudden shift in consumer preferences.
When asked about the post-carbon economy, Canadian Association of Petroleum Producers (CAPP) president Pierre Alvarez warned to “be careful to say things are necessarily over.”

While hard emission caps “clearly will have an impact if they come,” he pointed to a Shell study showing fossil-fuel production stabilizing due to new demand coming from the developing world, and then declining slightly.

Sure, the day will come when there’s a transition towards more alternative fuels, said Alvarez, but he wondered how ready these alternatives will be for the market in today’s “energy-intensive economy.”

Saying there’s a “great debate” over peak oil, Alvarez admitted conventional oil extraction has “certainly” peaked, leaving harder-to-extract oil like that found in Alberta’s oil sands.

The technology and labour intensity needed to get this oil can drive up the price, making alternative fuels more attractive to develop, and Alvarez acknowledged oil could start to price itself out of the market.

“That’s what markets do,” he said, noting how the oil industry has a long history of weathering upheavals. “Everybody has to adapt to this.”

Alvarez added that the province is aware of the changing dollar figures and related royalties involved as the ways of getting fossil fuels out of the ground change.

“Financially, there’s a crunch coming,” warned Vadgama, who lamented Alberta’s lack of a long-term energy strategy in favour of mass extraction as soon as possible. “The money coming in (now) isn’t going to be coming in over 20 years.”

Earlier this month, Alberta’s Energy and Utilities Board announced its belief that the province’s production of natural gas, a top government royalty-earner, peaked in 2001 and will continue to drop.

Chance acknowledged Alberta’s need to take into account the changing landscape.

“We’re also looking to the future,” the spokesman said.

He called Alberta a national leader by producing Canada’s highest amount of wind power per capita, while the province is supporting bio-fuels and more efficient coal plants.

Chance also touted Alberta’s climate-change legislation, which includes a carbon-trading system but has been panned by opponents for being “intensity-based,” meaning greenhouse emissions could go up as companies expand their output.

“The government is trying to shelter the industry from the world market,” said Vadgama.

He said when the government, which rallied hard against Kyoto, sets up a doom-and-gloom scenario warning that new green laws will destroy the economy, environmentalism gets blamed when there’s an economic downturn.

“People have a vested interest in a global economy that requires a lot of petroleum,” said the analyst, adding that dealing with a post-carbon economy is an interesting question in Alberta.

“Does Alberta say ‘let’s get ready, and make sure it’s not a sudden shift that takes us by surprise?,” he asked. “It makes more sense to adapt to change than plugging our ears.

“In Alberta, there’s a lot of potential to decouple economic growth and greenhouse-gas intensity,” he continued. “Alberta is energy-rich in fossil fuels, but also abundant in solar and wind resources. Everyone can have solar panels on their houses.”

Conservation and efficiency can be tied-in to better design of communities, Telfer added, to make them less vehicle-dependent.

Vadgama agreed with Alvarez that wind-power reliability is literally linked to how often the wind blows, but he said better battery technology could solve this problem.

“There are these major technologies that will come over the next 40 years,” predicted the analyst. “We could put into place all of [these technologies]].”

In line with the idea of putting eggs in different baskets, Vadgama listed knowledge as a new technology Alberta could develop, perhaps with money saved from the present petro-based boom.

“It doesn’t happen overnight,” he warned, “and it’s going to be more expensive.”

New environmental technologies developed in Alberta could be exported, he said, noting Denmark’s industry spreading the nation’s know-how from its well-developed wind-power industry.

Economic diversification has long been a political dream in Alberta, but Plourde warned that developing an alternative economy isn’t as simple as having some sort of Plan B to be easily pulled out when Plan A fizzles.

CAPP wants developing new technology instead of a carbon-trading system, but Alvarez said the new technology could be combined with fossil-fuel extraction, suggesting the oil sands could be tapped to help produce hydrogen.

He pointed out that his association’s energy companies are the biggest users of solar, wind and ethanol fuel, for example with solar panels powering remote wells.

Environmentalists are wary of clinging on to old technologies, with Telfer warning that powering electric vehicles with coal would cut into their ecological benefit.

But Vadgama still foresees a role for some fossil fuels, pointing out how it may be hard to power an airplane with sources other than oil-based fuel.

As supply and demand for oil shrinks, he said Alberta would remain in a good market position as a politically stable supplier that is close to the United States.

But the analyst said the remaining oil produced here would have to be extracted in an environmentally sound way, for instance by capturing and storing the carbon released by the oil sands, at a cost Pembina estimates to be $2 to $3 per barrel.

Even Alvarez speaks about Alberta’s ultimate transition to an “energy economy from an oil-and-gas economy.”

But he said it’s very unlikely that the revenues generated from fossil fuels will be replaced dollar per dollar by what will come in from less lucrative wind or solar power.

The province will remain an energy superpower, the president predicted, but “it won’t be the same superpower.”

Regardless of what happens to the provincial economy, environmentalists say the fight against global warming will continue.

“There’s very little change of the status quo,” said Vadgama. “The effects of global warming are going to be severe. We will experience less predictable weather.”

He added that the rest of the world is feeling the effects now, predicting up to five billion people will be affected, for instance with rising sea levels in heavily populated coastal regions of Bangladesh. The analyst pointed out that the US and British governments are now factoring the security implications of environmentally displaced people into their defence and foreign policy calculations.

Earlier this month, United Nations Secretary-General Ban Ki-moon partly blamed climate change for the conflict in Sudan's Darfur region, noting the area’s droughts and related fighting over water sources.

Vadgama, who spent last year in Africa, said developing-world areas hurt by the sort of pollution Alberta produces are looking at the province and saying in an incredulous tone of voice, “‘you’re telling us you don’t have the economic capacity to change?’”—although he readily admitted that “We don’t hear about that story.”

The Problem's Not Peak Oil, It's Politics

By Stanley Reed

Some "peak oil" cassandras warn that global energy production will soon fall into permanent decline. But a more immediate danger to world oil supplies may be the tempestuous politics of many producing countries. Witness Venezuela's move to wrest control of key oil projects from global companies on June 26. The move echoes steps taken in other nations that will likely either decrease production or slow its growth in coming years. "The oil is in the ground, but serious doubts are being raised about whether countries have the desire and means to produce it," says Leo Drollas, deputy director of the Center for Global Energy Studies, a London think tank.

Right now, Venezuela is creating the biggest doubts. Its output has declined by about 25%, to 2.4 million barrels per day, since populist President Hugo Chávez came to power in 1999. The main reason: Chávez fired 75% of the managers at state oil company Petróleos de Venezuela (PDVSA) after a strike in 2003. That decision left PDVSA overstretched and ineffective. The plunge would have been disastrous had it not been for increased investment by foreigners. Yet Chávez is making life so difficult for the oil majors that two of them—Exxon Mobil Corp. (XOM) and ConocoPhillips (COP)—are now walking away. This latest episode is bound to limit future interest in Venezuela and could well push the country's crude production, which had been recovering, back into decline.

Venezuela is far from the only producer country that's giving Big Oil nightmares. On June 22, Russia forced BP (BP) to sell a controlling stake in a massive east Siberian gas field called Kovykta for around $700 million—a fraction of the project's potential value. Last year, Moscow strong-armed Royal Dutch Shell PLC (RDS) into giving up control of its big Sakhalin II gas project in the Far East, and it's now battling ExxonMobil over a similar field nearby. The Kremlin's energy policies have already contributed to slowing growth in Russian output: Production is rising at 2% annually, down from double-digit rates a few years ago. And the International Energy Agency says Russia's production may top out at about 10.5 million bbl. daily—well below the expected peak output of 12 million bbl. per day that some experts had predicted, though still above today's level of 9.9 million bbl.

Political rivalries and tumult in other nations are also keeping a lid on supplies. Violence in Iraq means production there remains below prewar levels. Iran's exhausted domestic industry faces declines without outside help, but the country's jousting with Washington gives even non-U.S. investors pause. Mexico faces a fall in output because it is starving Pemex, its national oil company, for capital while barring foreign investors from the sector. "You start getting into some really interesting questions [about where future supplies will come from] if countries don't increase investment," says David Kirsch, an analyst at Washington consultants PFC Energy.

Those questions matter for oil producers and users alike. Consumption is growing fast, and without investment in new fields the industry's output would fall by about 3% annually. So every year the world needs new capacity of almost 4 million bbl. per day just to keep up. Western oil companies have the technology and knowhow to help countries with hard-to-tap resources get their crude out of the ground. But with today's high prices, Russia, Venezuela, and others with large reserves don't see the point in ceding profits to the giants. These countries prefer to let national oil companies such as PDVSA, Pemex, and Russia's Gazprom extract the wealth—even if it they're not quite as efficient as the foreigners.

This may make sense for the resource-rich countries. Building up a domestic industry and curbing reliance on outsiders could well serve their national interests. But for oil and gas consumers in the U.S., Europe, and Japan, that means a growing dependence on producers that don't share their interests—and likely more years of high prices due to limited supplies, regardless of whether or not global output has reached its peak.

Monday, June 18, 2007

Energy Alarmism: The Myths That Make Americans Worry about Oil

By Eugene Gholz and Daryl G. Press

Executive Summary (Full Text - pdf)

Many Americans have lost confidence in their country's "energy security" over the past several years. Because the United States is a net oil importer, and a substantial one at that, concerns about energy security naturally raise foreign policy questions. Some foreign policy analysts fear that dwindling global oil reserves are increasingly concentrated in politically unstable regions, and they call for increased U.S. efforts to stabilize—or, alternatively, democratize—the politically tumultuous oil-producing regions. Others allege that China is pursuing a strategy to "lock up" the world's remaining oil supplies through long-term purchase agreements and aggressive diplomacy, so they counsel that the United States outmaneuver Beijing in the "geopolitics of oil." Finally, many analysts suggest that even the "normal" political disruptions that occasionally occur in oil-producing regions (e.g., occasional wars and revolutions) hurt Americans by disrupting supply and creating price spikes. U.S. military forces, those analysts claim, are needed to enhance peace and stability in crucial oil-producing regions, particularly the Persian Gulf.

Each of those fears about oil supplies is exaggerated, and none should be a focus of U.S. foreign or military policy. "Peak oil" predictions about the impending decline in global rates of oil production are based on scant evidence and dubious models of how the oil market responds to scarcity. In fact, even though oil supplies will increasingly come from unstable regions, investment to reduce the costs of finding and extracting oil is a better response to that political instability than trying to fix the political problems of faraway countries. Furthermore, Chinese efforts to lock up supplies with long-term contracts will at worst be economically neutral for the United States and may even be advantageous. The main danger stemming from China's energy policy is that current U.S. fears may become a self-fulfilling prophecy of Sino-U.S. conflict. Finally, political instability in the Persian Gulf poses surprisingly few energy security dangers, and U.S. military presence there actually exacerbates problems rather than helps to solve them.

Our overarching message is simply that market forces, modified by the cartel behavior of OPEC, determine most of the key factors that affect oil supply and prices. The United States does not need to be militarily active or confrontational to allow the oil market to function, to allow oil to get to consumers, or to ensure access in coming decades.

Eugene Gholz is assistant professor of public affairs at the LBJ School of Public Affairs at the University of Texas at Austin. Daryl G. Press is associate professor of government at Dartmouth University.

Oil crisis 'to hit in four years'

Herald Sun

By Mark Schliebs

* Report claim oil production to peak in four years
* Peak could lead to global recession
* Oil company says not to worry

A CRUSHING global recession could be just years away according to a new reports which claim world oil production is set to peak much faster than previously thought.

The Oil Depletion Analysis Centre in London and other scientists from around the world argue that oil production will peak in four years and then rapidly decline due to overwhelming demand.

Head scientist at the centre Colin Campbell told The Independent that the decline would have huge consequences on the way we lead our lives.

“It's quite a simple theory and one that any beer drinker understands,” Dr Campbell said.

“The glass starts full and ends empty and the faster you drink it the quicker it's gone.”

'No need to worry'

But oil companies are downplaying the scientists’ fears, pointing out that a report commissioned by a petroleum giant says depletion rates aren’t as large as was once thought.

The BP Statistical Review of World Energy 2007, released yesterday, said that although consumption was rising more rapidly than production, it would be 40 years before it outstripped it.

BP Group chief executive Tony Hayward said the report was a true recount of the world’s oil usage and availability.

“I believe that decision-makers, businesses and members of the public will all benefit from the unbiased, carefully collected data to be found in this review,” Mr Hayward said.

“We at BP will continue to provide it as an essential starting point for analysis and discussion.”

Geologist Jeremy Leggett told The Independent that oil companies were choosing the facts they wanted to hear.

“It reminds me of the way no one would listen for years to scientists warning about global warming,” Mr Leggett said.

“We were predicting things pretty much exactly as they have played out. Then as now we were wondering what it would take to get people to listen.”

According to the BP report, the worldwide daily consumption of oil was nearly 83 million barrels in 2006, up 0.7 per cent from the previous year.

But production increased just 0.4 per cent over the same period, rising to 81.7 million barrels a day.

Curtin University’s Robert Kagi said that if oil companies were more careful in the way they extract oil, there would be more oil for consumers.

Professor Kagi said that many companies “vandalise” oil reserves by trying to pump it out too quickly to help profitability.

He said that the pressure of water being pumped into reserves to raise oil higher to the earth’s surface should be slowed.

“If you use a slower water drive, you get a greater recovery of oil,” Professor Kagi said.

Saturday, June 16, 2007

From Peak Oil To Dark Age?

By Eugene Linden

Oil output has stalled, and it's not clear the capacity exists to raise production

With global oil production virtually stalled in recent years, controversial predictions that the world is fast approaching maximum petroleum output are looking a bit less controversial. At first blush, those concerned about global warming should be delighted. After all, what better way to prod the move toward carbon-free, climate-friendly alternative energy?

But climate change activists have nothing to cheer about. The U.S. is completely unprepared for peak oil, as it's called, and the wrenching adjustments it would entail could easily accelerate global warming as nations turn to coal (see, 4/19/07, "Rx for Earth: Sooner Not Later"). Moreover, regardless of the implications for climate change, peak oil represents a mortal threat to the U.S. economy.

Peak oil refers to the point at which world oil production plateaus before beginning to decline as depletion of the world's remaining reserves offsets ever-increased drilling. Some experts argue that we're already there, and that we won't exceed by much the daily production high of 84.5 million barrels first reached in 2005. If so, global production will bump along near these levels for years before beginning an inexorable decline.

What would that mean? Alternatives are still a decade away from meeting incremental demand for oil. With nothing to fill the gap, global economic growth would slow, stop, and then reverse; international tensions would soar as nations seek access to diminishing supplies, enriching autocratic rulers in unstable oil states; and, unless other sources of energy could be ramped up with extreme haste, the world could plunge into a new Dark Age. Even as faltering economies burned less oil, carbon loading of the atmosphere might accelerate as countries turn to vastly dirtier coal.

GIVEN SUCH UNPLEASANT possibilities, you'd think peak oil would be a national obsession. But policymakers can hide behind the possibility that vast troves will be available from unconventional sources, or that secretive oil-exporting nations really have the huge reserves they claim. Yet even if those who say that the peak has arrived are wrong, enough disturbing omens—for example, declining production in most of the world's great oil fields and no new superfields to take up the slack—exist for the issue to merit an intense international focus.

The reality is that it will be here much sooner for the U.S.—in the form of peak oil exports. Since we import nearly two-thirds of the oil we consume, global oil available for export should be our bigger concern. Fast-growing domestic consumption in oil-exporting nations and increasing appetites by big importers such as China portend tighter supplies available to the U.S., unless world production rises rapidly. But output has stalled. Call it de facto peak oil or peak oil lite. It means the U.S. is entering an age when it will have to scramble to maintain existing import levels.

We will know soon enough whether the capacity to raise production really exists. If not, basic math and the clock tell the story. All alternatives—geothermal, solar, wind, etc.—produce only 3% of the energy supplied by oil. If oil demand rises by 2% while output remains flat, generation of alternative energy would have to expand 60% a year. That's more than twice the rate of wind power, the fastest-growing alternative energy. And all this incremental energy would somehow have to be delivered to transportation (which consumes most of the oil produced each year) just to stay even with the growth in demand.

Nuclear and hydropower together produce 10 times the power of wind, geothermal, and solar power. But even if nations ignore environmental concerns, it takes years to build nuclear plants or even identify suitable undammed rivers.

There are many things we in the U.S. can do (and should have been doing) other than the present policy of crossing our fingers. If an oil tax makes sense from a climate change perspective, it seems doubly worthy if it extends supplies. Boosting efficiency and scaling up alternatives must also be a priority. And, recognizing that nations will turn to cheap coal (recently, 80% of growth in coal use has come from China), more work is needed to defang this fuel, which produces more carbon dioxide per ton than any other energy source.

Even if the peakists are wrong, we would still be better off taking these actions. And if they're right, major efforts right now may be the only way to avert a new Dark Age in an overheated world.

Friday, June 15, 2007

The Pentagon v. Peak Oil

The wars of the future may be fought just to run the machines that fight them.

By Michael Klare

Sixteen gallons of oil. That's how much the average American soldier in Iraq and Afghanistan consumes on a daily basis -- either directly, through the use of Humvees, tanks, trucks, and helicopters, or indirectly, by calling in air strikes. Multiply this figure by 162,000 soldiers in Iraq, 24,000 in Afghanistan, and 30,000 in the surrounding region (including sailors aboard U.S. warships in the Persian Gulf) and you arrive at approximately 3.5 million gallons of oil: the daily petroleum tab for U.S. combat operations in the Middle East war zone.

Multiply that daily tab by 365 and you get 1.3 billion gallons: the estimated annual oil expenditure for U.S. combat operations in Southwest Asia. That's greater than the total annual oil usage of Bangladesh, population 150 million -- and yet it's a gross underestimate of the Pentagon's wartime consumption.

Such numbers cannot do full justice to the extraordinary gas-guzzling expense of the wars in Iraq and Afghanistan. After all, for every soldier stationed "in theater," there are two more in transit, in training, or otherwise in line for eventual deployment to the war zone -- soldiers who also consume enormous amounts of oil, even if less than their compatriots overseas. Moreover, to sustain an "expeditionary" army located halfway around the world, the Department of Defense must move millions of tons of arms, ammunition, food, fuel, and equipment every year by plane or ship, consuming additional tanker-loads of petroleum. Add this to the tally and the Pentagon's war-related oil budget jumps appreciably, though exactly how much we have no real way of knowing.

And foreign wars, sad to say, account for but a small fraction of the Pentagon's total petroleum consumption. Possessing the world's largest fleet of modern aircraft, helicopters, ships, tanks, armored vehicles, and support systems -- virtually all powered by oil -- the Department of Defense (DoD) is, in fact, the world's leading consumer of petroleum. It can be difficult to obtain precise details on the DoD's daily oil hit, but an April 2007 report by a defense contractor, LMI Government Consulting, suggests that the Pentagon might consume as much as 340,000 barrels (14 million gallons) every day. This is greater than the total national consumption of Sweden or Switzerland.

Not "Guns v. Butter," but "Guns v. Oil"

For anyone who drives a motor vehicle these days, this has ominous implications. With the price of gasoline now 75 cents to a dollar more than it was just six months ago, it's obvious that the Pentagon is facing a potentially serious budgetary crunch. Just like any ordinary American family, the DoD has to make some hard choices: It can use its normal amount of petroleum and pay more at the Pentagon's equivalent of the pump, while cutting back on other basic expenses; or it can cut back on its gas use in order to protect favored weapons systems under development. Of course, the DoD has a third option: It can go before Congress and plead for yet another supplemental budget hike, but this is sure to provoke renewed calls for a timetable for an American troop withdrawal from Iraq, and so is an unlikely prospect at this time.

Nor is this destined to prove a temporary issue. As recently as two years ago, the U.S. Department of Energy (DoE) was confidently predicting that the price of crude oil would hover in the $30 per barrel range for another quarter century or so, leading to gasoline prices of about $2 per gallon. But then came Hurricane Katrina, the crisis in Iran, the insurgency in southern Nigeria, and a host of other problems that tightened the oil market, prompting the DoE to raise its long-range price projection into the $50 per barrel range. This is the amount that figures in many current governmental budgetary forecasts -- including, presumably, those of the Department of Defense. But just how realistic is this? The price of a barrel of crude oil today is hovering in the $66 range. Many energy analysts now say that a price range of $70-$80 per barrel (or possibly even significantly more) is far more likely to be our fate for the foreseeable future.

A price rise of this magnitude, when translated into the cost of gasoline, aviation fuel, diesel fuel, home-heating oil, and petrochemicals will play havoc with the budgets of families, farms, businesses, and local governments. Sooner or later, it will force people to make profound changes in their daily lives -- as benign as purchasing a hybrid vehicle in place of an SUV or as painful as cutting back on home heating or health care simply to make an unavoidable drive to work. It will have an equally severe affect on the Pentagon budget. As the world's number one consumer of petroleum products, the DoD will obviously be disproportionately affected by a doubling in the price of crude oil. If it can't turn to Congress for redress, it will have to reduce its profligate consumption of oil and/or cut back on other expenses, including weapons purchases.

The rising price of oil is producing what Pentagon contractor LMI calls a "fiscal disconnect" between the military's long-range objectives and the realities of the energy marketplace. "The need to recapitalize obsolete and damaged equipment [from the wars in Iraq and Afghanistan] and to develop high-technology systems to implement future operational concepts is growing," it explained in an April 2007 report. However, an inability "to control increased energy costs from fuel and supporting infrastructure diverts resources that would otherwise be available to procure new capabilities."

And this is likely to be the least of the Pentagon's worries. The Department of Defense is, after all, the world's richest military organization, and so can be expected to tap into hidden accounts of one sort or another in order to pay its oil bills and finance its many pet weapons projects. However, this assumes that sufficient petroleum will be available on world markets to meet the Pentagon's ever-growing needs -- by no means a foregone conclusion. Like every other large consumer, the DoD must now confront the looming -- but hard to assess -- reality of "Peak Oil"; the very real possibility that global oil production is at or near its maximum sustainable ("peak") output and will soon commence an irreversible decline.

That global oil output will eventually reach a peak and then decline is no longer a matter of debate; all major energy organizations have now embraced this view. What remains open for argument is precisely when this moment will arrive. Some experts place it comfortably in the future -- meaning two or three decades down the pike -- while others put it in this very decade. If there is a consensus emerging, it is that peak-oil output will occur somewhere around 2015. Whatever the timing of this momentous event, it is apparent that the world faces a profound shift in the global availability of energy, as we move from a situation of relative abundance to one of relative scarcity. It should be noted, moreover, that this shift will apply, above all, to the form of energy most in demand by the Pentagon: the petroleum liquids used to power planes, ships, and armored vehicles.

The Bush Doctrine Faces Peak Oil

Peak oil is not one of the global threats the Department of Defense has ever had to face before; and, like other U.S. government agencies, it tended to avoid the issue, viewing it until recently as a peripheral matter. As intimations of peak oil's imminent arrival increased, however, it has been forced to sit up and take notice. Spurred perhaps by rising fuel prices, or by the growing attention being devoted to "energy security" by academic strategists, the DoD has suddenly taken an interest in the problem. To guide its exploration of the issue, the Office of Force Transformation within the Office of the Under Secretary of Defense for Policy commissioned LMI to conduct a study on the implications of future energy scarcity for Pentagon strategic planning.

The resulting study, "Transforming the Way the DoD Looks at Energy," was a bombshell. Determining that the Pentagon's favored strategy of global military engagement is incompatible with a world of declining oil output, LMI concluded that "current planning presents a situation in which the aggregate operational capability of the force may be unsustainable in the long term."

LMI arrived at this conclusion from a careful analysis of current U.S. military doctrine. At the heart of the national military strategy imposed by the Bush administration -- the Bush Doctrine -- are two core principles: transformation, or the conversion of America's stodgy, tank-heavy Cold War military apparatus into an agile, continent-hopping high-tech, futuristic war machine; and pre-emption, or the initiation of hostilities against "rogue states" like Iraq and Iran, thought to be pursuing weapons of mass destruction. What both principles entail is a substantial increase in the Pentagon's consumption of petroleum products -- either because such plans rely, to an increased extent, on air and sea-power or because they imply an accelerated tempo of military operations.

As summarized by LMI, implementation of the Bush Doctrine requires that "our forces must expand geographically and be more mobile and expeditionary so that they can be engaged in more theaters and prepared for expedient deployment anywhere in the world"; at the same time, they "must transition from a reactive to a proactive force posture to deter enemy forces from organizing for and conducting potentially catastrophic attacks." It follows that, "to carry out these activities, the U.S. military will have to be even more energy intense.... Considering the trend in operational fuel consumption and future capability needs, this ‘new' force employment construct will likely demand more energy/fuel in the deployed setting."

The resulting increase in petroleum consumption is likely to prove dramatic. During Operation Desert Storm in 1991, the average American soldier consumed only four gallons of oil per day; as a result of George W. Bush's initiatives, a U.S. soldier in Iraq is now using four times as much. If this rate of increase continues unabated, the next major war could entail an expenditure of 64 gallons per soldier per day.

It was the unassailable logic of this situation that led LMI to conclude that there is a severe "operational disconnect" between the Bush administration's principles for future war-fighting and the global energy situation. The administration has, the company notes, "tethered operational capability to high-technology solutions that require continued growth in energy sources" -- and done so at the worst possible moment historically. After all, the likelihood is that the global energy supply is about to begin diminishing rather than expanding. Clearly, writes LMI in its April 2007 report, "it may not be possible to execute operational concepts and capabilities to achieve our security strategy if the energy implications are not considered." And when those energy implications are considered, the strategy appears "unsustainable."

The Pentagon as a Global Oil-Protection Service

How will the military respond to this unexpected challenge? One approach, favored by some within the DoD, is to go "green" -- that is, to emphasize the accelerated development and acquisition of fuel-efficient weapons systems so that the Pentagon can retain its commitment to the Bush Doctrine, but consume less oil while doing so. This approach, if feasible, would have the obvious attraction of allowing the Pentagon to assume an environmentally-friendly facade while maintaining and developing its existing, interventionist force structure.

But there is also a more sinister approach that may be far more highly favored by senior officials: To ensure itself a "reliable" source of oil in perpetuity, the Pentagon will increase its efforts to maintain control over foreign sources of supply, notably oil fields and refineries in the Persian Gulf region, especially in Iraq, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates. This would help explain the recent talk of U.S. plans to retain "enduring" bases in Iraq, along with its already impressive and elaborate basing infrastructure in these other countries.

The U.S. military first began procuring petroleum products from Persian Gulf suppliers to sustain combat operations in the Middle East and Asia during World War II, and has been doing so ever since. It was, in part, to protect this vital source of petroleum for military purposes that, in 1945, President Roosevelt first proposed the deployment of an American military presence in the Persian Gulf region. Later, the protection of Persian Gulf oil became more important for the economic well-being of the United States, as articulated in President Jimmy Carter's "Carter Doctrine" speech of January 23, 1980 as well as in President George H. W. Bush's August 1990 decision to stop Saddam Hussein's invasion of Kuwait, which led to the first Gulf War -- and, many would argue, the decision of the younger Bush to invade Iraq over a decade later.

Along the way, the American military has been transformed into a "global oil-protection service" for the benefit of U.S. corporations and consumers, fighting overseas battles and establishing its bases to ensure that we get our daily fuel fix. It would be both sad and ironic, if the military now began fighting wars mainly so that it could be guaranteed the fuel to run its own planes, ships, and tanks -- consuming hundreds of billions of dollars a year that could instead be spent on the development of petroleum alternatives.

Michael T. Klare, professor of Peace and World Security Studies at Hampshire College, is the author of Blood and Oil: The Dangers and Consequences of America's Growing Dependency on Imported Petroleum (Owl Books).

World oil supplies are set to run out faster than expected, warn scientists

Independent Online

Scientists challenge major review of global reserves and warn that supplies will start to run out in four years' time

By Daniel Howden

Scientists have criticised a major review of the world's remaining oil reserves, warning that the end of oil is coming sooner than governments and oil companies are prepared to admit.

BP's Statistical Review of World Energy, published yesterday, appears to show that the world still has enough "proven" reserves to provide 40 years of consumption at current rates. The assessment, based on officially reported figures, has once again pushed back the estimate of when the world will run dry.

However, scientists led by the London-based Oil Depletion Analysis Centre, say that global production of oil is set to peak in the next four years before entering a steepening decline which will have massive consequences for the world economy and the way that we live our lives.

According to "peak oil" theory our consumption of oil will catch, then outstrip our discovery of new reserves and we will begin to deplete known reserves.

Colin Campbell, the head of the depletion centre, said: "It's quite a simple theory and one that any beer drinker understands. The glass starts full and ends empty and the faster you drink it the quicker it's gone."

Dr Campbell, is a former chief geologist and vice-president at a string of oil majors including BP, Shell, Fina, Exxon and ChevronTexaco. He explains that the peak of regular oil - the cheap and easy to extract stuff - has already come and gone in 2005. Even when you factor in the more difficult to extract heavy oil, deep sea reserves, polar regions and liquid taken from gas, the peak will come as soon as 2011, he says.

This scenario is flatly denied by BP, whose chief economist Peter Davies has dismissed the arguments of "peak oil" theorists.

"We don't believe there is an absolute resource constraint. When peak oil comes, it is just as likely to come from consumption peaking, perhaps because of climate change policies as from production peaking."

In recent years the once-considerable gap between demand and supply has narrowed. Last year that gap all but disappeared. The consequences of a shortfall would be immense. If consumption begins to exceed production by even the smallest amount, the price of oil could soar above $100 a barrel. A global recession would follow.

Jeremy Leggett, like Dr Campbell, is a geologist-turned conservationist whose book Half Gone: Oil, Gas, Hot Air and the Global Energy Crisis brought " peak oil" theory to a wider audience. He compares industry and government reluctance to face up to the impending end of oil, to climate change denial.

"It reminds me of the way no one would listen for years to scientists warning about global warming," he says. "We were predicting things pretty much exactly as they have played out. Then as now we were wondering what it would take to get people to listen."

In 1999, Britain's oil reserves in the North Sea peaked, but for two years after this became apparent, Mr Leggett claims, it was heresy for anyone in official circles to say so. "Not meeting demand is not an option. In fact, it is an act of treason," he says.

One thing most oil analysts agree on is that depletion of oil fields follows a predictable bell curve. This has not changed since the Shell geologist M King Hubbert made a mathematical model in 1956 to predict what would happen to US petroleum production. The Hubbert Curveshows that at the beginning production from any oil field rises sharply, then reaches a plateau before falling into a terminal decline. His prediction that US production would peak in 1969 was ridiculed by those who claimed it could increase indefinitely. In the event it peaked in 1970 and has been in decline ever since.

In the 1970s Chris Skrebowski was a long-term planner for BP. Today he edits the Petroleum Review and is one of a growing number of industry insiders converting to peak theory. "I was extremely sceptical to start with," he now admits. "We have enough capacity coming online for the next two-and-a-half years. After that the situation deteriorates."

What no one, not even BP, disagrees with is that demand is surging. The rapid growth of China and India matched with the developed world's dependence on oil, mean that a lot more oil will have to come from somewhere. BP's review shows that world demand for oil has grown faster in the past five years than in the second half of the 1990s. Today we consume an average of 85 million barrels daily. According to the most conservative estimates from the International Energy Agency that figure will rise to 113 million barrels by 2030.

Two-thirds of the world's oil reserves lie in the Middle East and increasing demand will have to be met with massive increases in supply from this region.

BP's Statistical Review is the most widely used estimate of world oil reserves but as Dr Campbell points out it is only a summary of highly political estimates supplied by governments and oil companies.

As Dr Campbell explains: "When I was the boss of an oil company I would never tell the truth. It's not part of the game."

A survey of the four countries with the biggest reported reserves - Saudi Arabia, Iran, Iraq and Kuwait - reveals major concerns. In Kuwait last year, a journalist found documents suggesting the country's real reserves were half of what was reported. Iran this year became the first major oil producer to introduce oil rationing - an indication of the administration's view on which way oil reserves are going.

Sadad al-Huseini knows more about Saudi Arabia's oil reserves than perhaps anyone else. He retired as chief executive of the kingdom's oil corporation two years ago, and his view on how much Saudi production can be increased is sobering. "The problem is that you go from 79 million barrels a day in 2002 to 84.5 million in 2004. You're leaping by two to three million [barrels a day]" each year, he told The New York Times. "That's like a whole new Saudi Arabia every couple of years. It can't be done indefinitely."

The importance of black gold

* A reduction of as little as 10 to 15 per cent could cripple oil-dependent industrial economies. In the 1970s, a reduction of just 5 per cent caused a price increase of more than 400 per cent.

* Most farming equipment is either built in oil-powered plants or uses diesel as fuel. Nearly all pesticides and many fertilisers are made from oil.

* Most plastics, used in everything from computers and mobile phones to pipelines, clothing and carpets, are made from oil-based substances.

* Manufacturing requires huge amounts of fossil fuels. The construction of a single car in the US requires, on average, at least 20 barrels of oil.

* Most renewable energy equipment requires large amounts of oil to produce.

* Metal production - particularly aluminium - cosmetics, hair dye, ink and many common painkillers all rely on oil.

Alternative sources of power


There are still an estimated 909 billion tonnes of proven coal reserves worldwide, enough to last at least 155 years. But coal is a fossil fuel and a dirty energy source that will only add to global warming.

Natural gas

The natural gas fields in Siberia, Alaska and the Middle East should last 20 years longer than the world's oil reserves but, although cleaner than oil, natural gas is still a fossil fuel that emits pollutants. It is also expensive to extract and transport as it has to be liquefied.

Hydrogen fuel cells

Hydrogen fuel cells would provide us with a permanent, renewable, clean energy source as they combine hydrogen and oxygen chemically to produce electricity, water and heat. The difficulty, however, is that there isn't enough hydrogen to go round and the few clean ways of producing it are expensive.


Ethanol from corn and maize has become a popular alternative to oil. However, studies suggest ethanol production has a negative effect on energy investment and the environment because of the space required to grow what we need.

Renewable energy

Oil-dependent nations are turning to renewable energy sources such as hydroelectric, solar and wind power to provide an alternative to oil but the likelihood of renewable sources providing enough energy is slim.


Fears of the world's uranium supply running out have been allayed by improved reactors and the possibility of using thorium as a nuclear fuel. But an increase in the number of reactors across the globe would increase the chance of a disaster and the risk of dangerous substances getting into the hands of terrorists.

Thursday, June 14, 2007

Securing the future - An oil company perspective

Spero News

BP's group chief executive, gave a speech that discusses some of the 21st century challenges the world faces in the matter of energy and what we as an industry might do to meet the challenge.

By Tony Hayward

Ladies and gentlemen. Good afternoon. It’s a great pleasure to be here today – in some senses returning to my roots. What I would like to do is to step back and reflect on the challenges the world faces in the matter of energy and what we as an industry might do to meet the challenge.

The 21st century dawned with a great sense of optimism. The Cold War, which had dominated the previous half-century, was over and with its end the spirits of the world were lifted. The battle of political ideas had apparently been won - free markets and democracy triumphed over the centrally planned state. A dynamic new information age offered enhanced freedom and prosperity. The revolution in the biological sciences promised health, beauty and longevity. World trade took off and, in the less developed nations, hundreds of millions of people were joining the world economy for the first time, seizing the chance to lift themselves out of poverty.

There was even the hope that the political will of Kyoto could be translated into actions to mitigate the environmental effects of rapid population and economic growth.

Today, seven years on, that euphoric mood is in danger of swinging the other way, towards insecurity. The rise of militant Islamic fundamentalism represents a new challenge to free markets and democracy. The economic miracles of China and India are giving rise to fears of loss of market share and of status among the older industrialised nations. Climate change has become a source of anxiety to many.

And, perhaps most relevant to this conference, a new spectre has been conjured from all these things. This is the fear of insufficient energy supplies, whether due to the self-interested nationalism of some resource-rich countries, or to oil supplies supposedly passing their peak. For those who succumb to these irrational fears it is all downhill from here and only a sinister Petro-Apocalypse lies ahead.

I am glad to say that I regard much of this gloom and doom as vastly overdone. But we should admit that, in the first decade of the 21st Century, those of us who work in the energy industry are at the very centre of the challenges which the world faces. It is not a comfortable position. Yet we should rise to those challenges wisely, confidently and rationally.

We should remember what our purpose is, and has always been: to ensure the efficient development of the world’s oil and gas resources and, through that, to ensure that the demands of consumers - the people of the world - are met.

And we have a moral duty to act in sustainable manner. We must fulfil our purpose in ways that minimise the environmental impact, not only of our own operations, but of the customers who use our products.

If what we do is clear, then how we do it is equally so. Millions of investors entrust us with their capital, and we combine those financial resources with human ones and then deploy them in a world replete with technical, commercial and political risk.

By working in partnership with resource-rich countries we aim to create wealth for them too by providing the energy for the basic things of life, such as heat, light and mobility. I believe that is a noble cause.

And yet, today, we should realise that many of our customers don’t see it that way. They are sceptical. And they believe, falsely, that the energy industry cannot be relied upon to do the right thing.

It is worth examining some of the origins of this insecurity. Only then can we be clear about what actions are required.

I think there are four sources:

First – the oil price. As the price has quadrupled in the last seven years, so people have come to suspect that there is a global shortage of oil and gas.

In the industry we tend to dismiss that concern since most of us believe strongly that there are very large oil and gas resources remaining in the world. We know, from our own experience and own observations – and I speak as a geologist as well as someone who was, for nearly five years, head of exploration and production at BP - that there are major basins as yet unexplored; we know that we have, or can develop, the technology to double the average oil recovery rates from existing fields; we know that there are enormous resources of so-called unconventional oil and gas in heavy oil accumulations, in shale oil, in tight gas, in coal bed methane – the list goes on.

But, for the consumer concerned with high energy bills, the price of oil is a powerful, everyday symbol.

The reality, of course, is that in the oil market, what goes on above ground is as important as what goes on underground. The oil price is an economic function of supply and demand and, for the most part, it is driven by the current available production capacity and not complicated projections of future resources.

Today’s high price is caused by the inability of the industry to easily supply rising demand. This is not because of a lack of available resources, but because of inadequate investment in both production and complex refining capacity. That lack of investment happened gradually over many years, not least during the euphoria of the new Millennium. We just did not predict how fast demand would take off.

The second source of insecurity is political instability in the producing nations. The absence of excess capacity in the global supply system stems from underinvestment forcing more reliance on suppliers in countries which are frequently politically unstable.

Instability in Iraq, Venezuela and Nigeria, and the apparent use of oil as a lever of political influence in Russia and the Middle East all contribute to a feeling of imminent threat. Will the lights suddenly go out? I don’t believe so.

But the feeling is there. Many consumer countries have consequently turned inwards in an attempt to counter these threats by exploiting internal resources. Others, such as China, have embarked on a process of buying up resources overseas.

The world seems to be forgetting Churchill’s adage that, in energy, the best security comes from diversity of supply and a well-functioning, competitive market, rather than a scramble for unilateral deals between countries.

Thirdly – and I think we should be honest about this - the energy industry has failed to live up to its promises.

For many years, we have, as an industry, over promised and under delivered in terms of production. We have made predictions of production growth from the non-OPEC world that have not come to fruition as quickly as hoped. We can all list many reasons for this, such as project complexity, or the extreme technological challenges of operating in deep water, to name two. Many of these problems are political, caused by bureaucracy and corruption, civil strife and war, or changing fiscal and regulatory regimes creating uncertainty.

We also told our customers not to worry about future supply and in so doing inadvertently discouraged OPEC to invest in new capacity by predicting strong growth outside of OPEC.

And fourthly there is a growing concern for the environment. Fears about climate change and its consequences are, in my view both well-founded and are contributing to perhaps the fastest growing international political movements in my lifetime on a par with the civil rights movement in the US in the 1960’s. Many people throughout the world fear that there is an insoluble conflict between the need for energy for the basic things of life – such as heat, light and mobility - and the threat of climate change. They believe they are faced with the choice between two equally unpalatable outcomes – limiting economic growth and prosperity, or ruining the planet.

This is a daunting list of issues and concerns. It is particularly daunting for the energy industry because we find ourselves caught in the eye of the storm.

Yet I am cautiously optimistic and I urge you to be too. History firmly suggests that all these problems are susceptible to action and innovation. This process can be aided or hindered by the way in which governments perform their role of policy making and the enactment of law, but the reasonable position to take is that most problems can be solved by the actions we take now.

So what should we do?

Ours is a business built on technology and human ingenuity. A large part of the solution to the problems of securing the future of oil and gas supply lies, as it always has, with technology. We can all recite the examples from the last 150 years of how technology has created new oil and gas resources, by making what was once impossible into the ordinary, everyday work of our industry.

For instance, we produce on average only one third of the oil in known fields. And we know equally well that it is conceivable to push average recovery rates to 65% or even 80% with the right technology. Indeed, it has already risen by about 10% in the last 30 years.

Another example. We are aware of discovered resources that lie undeveloped because of our inability to access those resources economically. Most of us would predict that there are very large volumes of oil and gas to be found beneath the floating ice of the Arctic and, one day, we will have the technology to exploit those volumes.

And another example. The known mature basins contain large volumes of oil and gas in both discovered and undiscovered small pools. Using new technology we can exploit those pools. Indeed, they are already doing so in North America.

Many of these things need new technology but we should not forget the technology that already exists. I always find it fascinating to look at the US oil and gas business where, largely because of a fiscal environment that for a very long time has favoured and promoted risk taking, small pools are exploited through new technology.

The USA is not geologically unique and it does not, as a nation, have a monopoly on unconventional sources, such as tight gas or coal bed methane or extra heavy oil or shale oil or salt covered deepwater basins. And yet it is there that the industry is pushing the frontier and exploiting such resources. It is clear that fiscal and regulatory policy has an enormous effect on the actions of the industry. But we cannot sit back and blame governments for poor policy. For the fact is that the market, through the high oil price, is already providing a powerful incentive for us to go the extra mile, and push ever further the frontier of our abilities. Do not underestimate the signal the high oil price is sending the industry. There are literally thousands of projects which are not economic at $30 a barrel, but which can be done at $60 a barrel.

Of course, it is not just about operational capabilities, but our philosophical approach. It is the industry’s responsibility to advocate the right policies and to encourage responsible resource exploitation. Co-operation between the industry and both producer and consumer governments is vital if the threat of energy security is to be extinguished. And it is up to the industry, as the operational link between the nations which control resources and the consumers of the world, to lead that dialogue.

But as well as taking clear actions in the short and medium term, we should prepare for the day when production will go into decline. The precise timing of what people call Peak Oil will really be governed by the actions that all parties, producers, consumers and the industry, choose to take over the coming years.

As an industry we must also take action to both limit climate change and to mitigate its effects. We can, for instance, expand technology and investment in decarbonising the products we bring to market, particularly through carbon capture and storage. That will require appropriate incentives, such as carbon trading, to create a suitably level playing field so that investment is directed to the most effective solutions.

We must also lead the way towards the gradual substitution of oil-based fuels in an orderly and planned fashion. We must work closely with the great emerging economies, by allowing them to make the most of their indigenous resources, building their confidence that the global market can fulfil their needs and encouraging the adoption of new technology. And we must continue to lead by example in promoting energy efficiency and the transition to reduced carbon emissions throughout the world.

In summary, when it comes to dealing in a timely and practical manner with the great insecurities of the early 21st century, the energy industry is not just part of the solution, it is the solution. In that respect, we are providing a great service to the world. Through the development of technology, through long term investment and risk taking, through the application of knowledge and by acting as a catalyst for co-operation between producers and consumers, we are making enormous contributions to human progress. I believe that is something to be proud of.

Thank you very much for listening.

Wednesday, June 13, 2007

Crying Wolf or Crying Uncle

Financial Sense Online

Does our dependence on foreign energy and credit really matter?

By Tony Allison

For a country founded on rugged individualism, our current state of affairs is looking a lot less rugged and a lot more dependent. With a massively expanding debt to foreign creditors, and an insatiable appetite for energy, we as a nation become more dependent each and every day. Even if we eventually import fewer Chinese products, the trade deficit may march higher because the percentage of energy (crude, natural gas, and refined products) from overseas sources continues to grow. More ominously, if we are in fact nearing the front door of Peak Oil, the price of energy will be headed in one direction, higher. This will only exacerbate our trade deficit.

Asian demand rising

It’s a tight box we find ourselves in at this stage in history. If Americans conserve and use less energy, they would expect prices to drop. But we live in a time of the greatest Industrial Revolution on record, with China and India coming of age simultaneously. These two countries represent 2.4 billion people, or 40% of the world’s population. The Chinese and Indians are industrializing at a furious pace, and their demands for natural resources, particularly energy, will continue rising for decades. The price of energy is set on world markets, not local markets. So as global demand continues, the price will rise in the US, no matter how frugal we become. Further, Americans will only conserve to a point. They still have to get to work, so belt tightening may have to come from other areas of the family budget.

Mark Kiesel of Pimco made some important observations on rising global demand in an article entitled “Got energy?”

“Demand for energy is also set to take off throughout most emerging market countries. This will materialize when consumer spending naturally picks up as young populations mature and already pent-up demand for consumer durables, such as automobiles and housing, continues to rise. For example, in China, auto sales are growing faster than 20% annually. By the end of the decade, the IMF projects China will be the second largest auto market in the world, with 8 million new car sales per year, compared to 17 million currently in the U.S.

As China and other emerging markets industrialize, the secular increase in demand for energy will only intensify due to these countries’ rising dependency on energy-intensive manufacturing as their main source of economic growth. With respect to growing demand for energy, the U.S. Department of Energy in March of 2005 said simply, ‘The world has never faced a problem like this.’”

Awaiting a Crisis

When the price and availability of energy reaches a crisis stage that must be faced head on, American innovation will help set us on the course toward a new age of alternate energy creation. Unfortunately innovation takes time and resources. In the interim, the process of innovation won’t move the trucks, cars, trains, planes and ships that underpin our economy and way of life. The transition to a mixed energy economy may prove uncomfortable and longer than we hope.

The problem is we must await a crisis to get started. We lack the political will and vision to look over the horizon and realize the time to start is now. Political decisions are made according to election cycles, and unless we face a severe energy crisis, nothing will happen. Energy dependence took decades to reach this level, and becoming independent again will take decades as well, along with some good fortune.

Why is energy dependence a bad thing? Japan is totally energy dependent and they seem to adjust to rising prices. The difference is Japan is a creditor nation, the US is not. Japanese citizens save a large percentage of their income. Japan runs a large trade surplus. They also have a small military and rely on the US for protection. Japan has over $900 billion in foreign reserves, and has the flexibility to deal with higher prices of energy. However, once we reach Peak Oil and global shortages apply, then Japan will have serious issues. They would be wise to follow China’s lead and begin building nuclear power facilities as rapidly as possible.

Japan is also not a super power, fighting for global influence. The US has joined China in a race for securing energy resources outside our boarders. As we become more energy dependent, our power and influence become more dependent on our ability to access foreign sources of energy. This has been written on extensively, but it is clear that the road to future global conflicts begins with energy. And as world demand inexorably increases over time, the conflicts will increase as well. This does not bode well for energy-dependent America.

Do deficits and reserves matter? Perhaps not today, but a nation living beyond its means must eventually pay the piper. The important questions are when and how much?

Credit Dependence

With increasing energy dependence and a shrinking industrial base, we are not the self -sufficient nation of 30 years ago. We are creating trillions of dollars to pay for entitlement programs that are mushrooming with an aging population and an expanding government sector. We are financing an incredibly expensive war (off-budget of course) by simply printing the money.

Every government needs checks and balances to survive. Without a gold standard to force spending restraint, government spending has accelerated well beyond the means to pay for it. The government must borrow roughly 2.5 billion dollars every day from foreign sources to keep the lights on, and that figure has been steadily rising for years.

Unfortunately, the checks and balances our government faces now come from overseas. We are increasingly dependent on foreign sources of capital. If foreign central banks determine that their trillions of US dollar reserves are at risk of significant devaluation, the money may flow elsewhere, even if it damages their exports temporarily. This is already beginning to happen as China and Middle Eastern countries look to diversify.

Global Money Printing

One plus for the dollar is that many other countries are printing money at an even faster rate, which would help the dollar retain its relative value, except against gold. So there is the possibility that compared to other fiat currencies such as the euro and British pound, the dollar could even strengthen as it inflates. Gold will remain as the sole canary in the inflationary coal mine.

Global interest rates are now starting to rise, including treasury rates. As global debtors, US debt payments will go up as well. This will ultimately mean more debt creation to pay a higher debt service, putting additional pressure on the dollar.

The relationship between supply and demand is a basic economic truth that hasn’t wavered over the centuries of recorded history. Create too much of something and its value goes down. The endgame for all this dollar creation leads in one direction; more inflation.

A Warning from Congressman Ron Paul

Congressman and current presidential candidate Dr. Ron Paul put it very well recently regarding our monetary crisis.

“The financial press sometimes criticizes Federal Reserve policy, but the validity of the fiat system itself is never challenged. Both political parties want the Fed to print more money, either to support social spending or military adventurism. Politicians want the printing presses to run faster and create more credit, so that the economy will be healed like magic, or so they believe. Fiat dollars allow us to live beyond our means, but only for so long. History shows that when the destruction of monetary value becomes rampant, nearly everyone suffers and the economic and political structure becomes unstable."

Until that fateful day when our country adopts a true “pay as you go” system, expect inflation to filter into every aspect of our lives. When one looks at the supply of paper money growth globally compared to the growth in the annual gold supply, one has to believe inflation is here already, but held in check for now by foreign central banks holding onto our dollars.

Seeking Shelter

A more dependent nation requires that investors be more informed and independent to seek out opportunities that present themselves. An independent investor (and citizen) does not panic or become morose. If you believe that real supply and demand factors will ultimately prevail in the markets, then one should not only expect inflation, but invest according to that expectation. As the trillions of depreciating dollars held by foreign central banks and other foreign sources are repatriated (slowly or otherwise), tangible assets will be back in vogue again as the herd desperately seeks a store of value. All the asset classes that were hot in the 1970’s; energy, precious metals, collectibles and real estate, will very likely return for an encore on center stage.

One may think that energy and metals have had a nice run and it’s about over. However, thanks to our friendly foreign central banks funding our debt and keeping their reserves in US treasury bonds, inflation has remained muted relative to the 1970’s. As more dollars are created to feed the insatiable debt structure, the dollar continually loses purchasing power. As it becomes more obvious that no change in policy is forthcoming or even possible, the foreign central banks may just decide to divest themselves of dollars at a more rapid pace. Or perhaps one small central bank will seek the exit door all at once to get out before the others, setting off a dollar crisis. Tangible assets are still an afterthought today because inflation is still in the box. In 1980, the S&P 500 Index was 26 % energy-related at its peak. Today, even after the huge move in energy the last few years, the S&P 500 Index sector weighting for energy is 10.2 %.

Energy and credit dependence are growing challenges that will eventually test us as a nation. We are a resourceful people, but solutions may not be easily found. As individual investors, it is not unpatriotic to seek shelter from the US dollar. If brilliant investment minds such as Warren Buffett and Bill Gross are seeking protection from a depreciating dollar by looking at tangible assets and overseas currencies for diversification, perhaps the rest of us should consider following their lead.

Today’s Markets

The Dow Jones Industrial Average finished nearly flat at 13,424.96, up .57. Other stock indicators were also essentially flat for the day. The Standard & Poor's 500 index advanced 1.45 to 1,509.12, and the Nasdaq composite index lost 1.39, to 2,572.15.

Oil prices, which also stirred inflation concerns last week, rebounded Monday after falling sharply Friday. Iran's oil minister said Monday the Organization of Petroleum Exporting Countries doesn't plan to release more oil into the market ahead of its next policy meeting in September. Light, sweet crude rose $1.06 to $65.82 per barrel on the New York Mercantile Exchange.

Amid an absence of economic and earnings reports, investors will likely focus on moves of individual stocks as they await data on inflation due later in the week. On Thursday, the Labor Department releases its producer price index and on Friday the consumer price index is due.

Gold futures rallied Monday, breaking a five-session losing streak, as physical demand, technical buying and rising crude-oil prices boosted the precious metal. Gold for August delivery closed up $8.70 at $659.0 an ounce on the New York Mercantile Exchange.

Wishing you a good evening,

Tony Allison
Registered Representative

Monday, June 04, 2007

900 miles per gallon

By JC Earle

What if I told you I had invented a vehicle that ran on organic vegetables, got the equivalent of over 900 miles per gallon, was completely carbon neutral, and produced no toxic by products. Would you want one? What if I told you I got the price of this vehicle down to under $500 dollars? Are you reaching for your wallet? What if I told you that using the vehicle would improve your health, reduce your risk of cancer, and make you sexier? If you aren't ready to cut a check, check your pulse!

I set out to invent the next revolution in transportation, only to discover the most elegant, efficient form of human transportation had been invented one hundred and forty six years ago! The evolution of the bicycle was long, but the first one with pedals was invented by Ernest Michaux in 1861.

I'm a peaknik, which means I am one of those people who spends too much time trying to look into the shrouded mist of the future, and knows that whether Peak Oil was in 2005 or it will be in 2010 it doesn't really matter. The second half of the very short era of fossil fuels is essentially here now.

So you say, "Ah, your just one of those crazy people trying to save the world and fossil fuels by riding your bike." Not at all. I'm trying to burn as much fossil fuel, as fast as I can. The problem is I just love riding my bicycle too much! I rode my bike over Cahuenga pass (which in LA is a pretty good size hill) tonight instead of taking the metro home. It was a great work out. I had a wonderful but brief interaction with a young guitarist. I smelled the evidence of a skunk who got startled. I felt the cold breeze of the night air. Sure... a couple cars came pretty close.

"Well there you have it. I could never ride because of the danger," you think to yourself. Well that was part of the fun of it. One of the problems with modern life is people are literally dying of boredom because we've made everything so damn safe. I felt really alive biking home, and it occurred to me how like a coffin a car is. It's plush and comfy, sealed off from the world, and you have no interaction with the environment or anyone else. Some bicycle enthusiasts like to refer to cars as high tech lard generating devices. My favorite are the people who utilize their lard generating devices to get to the gym, just to get on a stationary bike to try to eliminate the lard they just generated!

I realized tonight, I might get hit on my bike, and I could die, but the same could happen in my car. Around 43,000 people die in their cars every year in the US. I would rather have ridden and died than never lived at all!

I'm not up on a moral high horse. In fact, I'm going to book a couple of extra flights this year just to make up for all my miles on my bicycle. For those of you that prefer your cars and SUV's, well thank you for driving, but don't worry... before too long you might be enjoying the benefits of the two wheel velorucion yourself!

JC Earle is a permaculturalist and documentary filmmaker based in Los Angeles.