Tuesday, November 6, 2007

$100/barrel oil? Maybe it isn’t so laughable after all

From my newspaper op-ed column for this week:

Just a few months ago, oil baron and corporate raider T. Boone Pickens was talking about the possibility of oil prices hitting $100 a barrel by the end of this year.

At the time, to the degree his comment got any notice or reaction at all, it tended to be laughter, even derision, especially from “establishment” energy types like the major oil companies, Daniel Yergin and his Cambridge Energy Research Associates, and so forth.

Well, I’ll bet that, after a $20/bbl rise in oil prices in less than two months, nobody’s laughing now.

In terms of inflation, oil prices are now up to where they were in 1979, during the second oil embargo, the Iranian-originated embargo after the overthrow of the Shah of Iran. Gasoline prices at the pump are approaching their late-summer 2005 post-hurricane peak.
But, we haven’t had the same hurricane destructiveness of Gulf of Mexico production as caused by Hurricanes Katrina and Rita two years ago. And, nobody’s embargoing oil production, unlike 1979-80.

So, what’s causing the problem?

Answer below the fold.

Part of it is recent world geopolitical instability. Oil producers wonder if Dick Cheney’s sabers rattling about Iran, or Turkey’s similar stance about the Kurdish portion of Iraq, are real.

However, those worries reflect a deeper problem. World oil supply is straining so hard to keep pace with demand that even small disruptions in output somewhere are feared to have potentially major consequences.

Some people may wonder, “Where’s Saudi Arabia in all this?”

Well, the Saudis have made noise the last couple of years about being ready to pick up any slack in the system, any time, but what if that’s just hot air?

What if Saudi production is at its peak and can’t go up any more?

Years ago, that idea, like Pickens’ prediction, would have been laughed at. Some people still laugh at it.

But, the idea of Peak Oil, like $100/bbl oil, just may not be laughable after all.

The basic concept is that oil, like coal, gold and other extracted minerals, is not a readily renewable resource. Ergo, world production will someday pump out half of the oil that is extractable. This will be less than 50 percent of total oil in the world; drops in wellhead and oilfield pressure, and other geological considerations, mean that 100 percent of the oil is never recovered from any field.

The idea first arose in relation to U.S. oil production in the 1950s. Shell Oil geologist M. King Hubbert started wondering when U.S. oil production would peak. In a 1956 paper, he said that period would be sometime between the late 1960s and early 1970s.

In the early 1970s, it became clear that U.S. production peaked in 1970, and Hubbert was hailed as an oilfield prophet.

The next idea was obvious: extend the specific analytical tools and techniques he applied to U.S. production to world production.

Hubbert did, and came up with the late 1990s. However, that clearly didn’t happen.
Unfortunately, people like the aforementioned Yergin used that fact to pooh-pooh Hubbert’s prediction in particular and the idea of a looming oil peak in general as ridiculous.

In hindsight, it instead appears that the 1973-74 and 1979-80 oil embargos, combined with separate 1979-80 Organization of Petroleum Exporting Countries price hikes, increased U.S. conservation so much as to reset the peak.
Peak Oil naysayers claim that technological improvements in conventional oilfield drilling, such as horizontal drilling, and production of nonconventional oil such as that in Canada’s oil sands, will push the peak back even further. However, Hubbert had factored in technological, exploration site and production improvements as part of his analytical tools.

Is a worldwide peak near?

I’d say it can’t be too far off. OPEC member Indonesia is now, despite the name of OPEC, an oil importer, for example. Another example: The United Kingdom has seen its North Sea reserves decline so rapidly that it is, again, an oil importer, and because of its amount of use, went from hitting its production export to becoming a net importer in just six years. Mexico, due to increasing demand and an apparent peak in its production, is seeing its exports decline by 10 percent a year and could be a net importer in not too many more years.

Dallas petroleum geologist Jeff Brown, with his Export-Land Model, has done extensive research modeling on the double whammy of major oil producers having exploding internal demand even as their production peaks.

And, Peak Oil is different from global warming.

First, with exceptions for faster temperature change in polar reasons, the effects of global warming will equalize around the world.

Not so with Peak Oil. Different countries have different oil dependencies and we are No. 1.

In other words, a country like Afghanistan or Zimbabwe, with little automotive traffic and little jet travel, has little distance to “fall” from its peak oil usage. We, on the other hand, are near, if not at, the edge of an oil consumption Grand Canyon — a precipice that could be more catastrophic than global warming fallout.

For more on Peak Oil, visit the group blog The Oil Drum at www.theoildrum.com.