Economies stare down $105 barrel
I WROTE a letter to a newspaper recently in response to an article it published reporting that either the United States or Israel would start bombing Iran if it did not stop its uranium enrichment program.
According to the Iranians, this enriched uranium is to be used for producing electricity, not an unreasonable objective given that we do it ourselves, as do the Americans and Israelis.
The point of my letter was that to threaten Iran with bombing, whatever the reason, was tantamount to economic suicide for the Americans, because Iran is the world’s number four oil producer.
Were it to shut its oil taps, the price of crude oil would rocket - from its already historically high price at the moment - sending the American, and global, economy into turmoil. The problem is global oil production is now peaking. If the peak does not occur this year, we’ll be lucky.
The first person to warn of a peak in global oil production was an American called M King Hubbert. In 1956 he predicted that US oil production would peak in about 1970. He was castigated for suggesting anything so outrageous, but by 1973 it had become apparent that he was correct.
In the late 1960s Hubbert went further and predicted that global oil production would peak in about 2000. He was about five years too early.
After Hubbert’s eerie predictions, all went quiet until a British gentleman - Colin Campbell - who had spent his whole life trying to find new oil for the big oil companies re-ignited the subject about 15 years ago. He is convinced global production will peak within the next two years.
There are two reasons why I think that a peak in global oil production is imminent.
Firstly, the top seven oil producing nations (in order: Saudi Arabia; Russia; the US; Iran; China; Mexico; Norway) are all either in decline or close to peak.
Secondly, the big new oil projects are not kept secret.
It takes on average six to seven years from finding a new "mega-field" to producing oil from it. Since we know all the pending big projects, we can predict reasonably accurately the maximum amount of oil that can be produced for each of the next six to seven years. Oil production will peak within the next two years.
However, oil prices are at record levels now, and yet no-one mentions peak oil, so why are prices so high?
At this moment we are producing enough oil to meet demand, just. But later this year it is predicted that demand will outstrip supply. That is why oil prices are high now, in anticipation of a shortage later this year. It is also the reason why, just over a week ago, Goldman Sachs, one of the world’s largest investment banks, issued a report stating that oil prices have entered a "super-spike" period that could reach $105 a barrel (about double the current price). The fear is that such high oil prices will bring on high inflation and high interest rates at a time when so many people are heavily in debt.
In December, Deutsche Bank issued its own report that warned: "The end-of-the-fossil-hydrocarbons scenario is a view of scarcity in the coming years and decades that must be taken seriously."
On March 7, the International Energy Agency convened a private conference to discuss the looming oil crisis. The results are due to be published later this month and will include suggestions such as driving bans and shorter working weeks.
THE event that convinced me peak oil is upon us happened on Wednesday, March 16, but no one seemed to notice. Opec (the Organisation of Petroleum Exporting Countries) announced it was to raise production by 500,000 barrels per day. At any other time in recent history, this would have sent oil prices down, but not this time - they went up even further.
The reason was partly that Opec was overproducing its quotas by more than this amount, so in effect they were not increasing production at all. Moreover, an increasing number of oil analysts now believe Opec has little or no spare capacity left. In which case, no one has.
But if global oil production is reaching its peak, then this is just the beginning of high oil prices and high inflation.
We need to be asking our politicians why they plan to spend billions of pounds on new roads, airports and rail links to airports when the oil to supply the transport is running out. The era of cheap transport is nearing an end.
Iran, by the way, produces about four million barrels of oil a day out of a world total of about 84 million, more than twice as much as the UK.
The last time it cut its oil supply to the world’s markets (1979 - the Iranian revolution), oil prices doubled and shortly after we had interest rates of about 15 per cent.
Douglas Low is a member of Depletion Scotland, an Edinburgh-based group with the aim of raising awareness of the imminent peak in global oil production. A conference, Peak Oil UK: Entering the Age of Oil Depletion, will be held at the Royal Museum of Scotland, Edinburgh, on Monday, April 25. See www.depletion-scotland.org.uk for more information