Is the world feeling peaky?
  from: Offshore Engineer
  by: Jennifer Pallanich
  Monday, April 07, 2008

The analysts may not agree on whether the world has hit peak oil, but they all seem to agree that surviving peak oil won’t be pretty. US editor Jennifer Pallanich sat in on the ASPO-USA World Oil Conference in Houston late October.

Peak oil refers to the maximum rate of production of oil in any area under consideration, recognizing that it is a finite natural resource and subject to depletion, according to Colin Campbell, founder of the Association for the Study of Peak Oil & Gas (ASPO).

‘The consequences of peak oil are very nasty,’ according to John Olson, managing partner for Pool Capital Partners. Peak oil will pit the world in competition for limited resources, he said. ‘There’s going to be a lot of trouble out there.’

Marshall Adkins, managing director of Raymond James Financial, agreed, adding that it was impossible now to prove either way if the world had hit peak oil. He said he believes the world is within five years of the peak.

‘If we have not peaked, we’re very, very close, maybe within the next five years,’ Olson concurred.

The world is in a ‘race between depletion and technology,’ offered Houston’s mayor Bill White.

Jim Baldauf, board member of ASPO-USA, said denial still hits hard when it comes to the topic of peak oil. ‘It may not have a real happy ending,’ he said. ‘I think the peak oil deniers are waning, perhaps.’

Security of supply

According to Matt Simmons, chairman of Simmons & Co International, security of supply must be taken into consideration in terms of how fast most producing fields are declining; whether decline rates are stable or accelerating; how robust the deepwater play is; whether and when new frontiers will be found; the concern that the trend of dwindling find sizes will continue; and whether mature super-giant fields are in decline.

Simmons backed up his concerns about declining output by noting that 78 countries produce the world’s 72.5 million b/d of oil and that 43 countries saw declining output while only 35 countries rose in production levels from 2005 to 2006.

He suggested one way to end the ‘peak oil debate’ is by demanding data, including field-by-field production for the past 15 years, on all oil imports into the OECD, and levying a $20/bbl transparency fine until producers comply. Producers have historically balked at releasing output details, he noted.

Byron King, editor of Outstanding Investments, said demand and politics factor into the oil market. ‘The world markets are saying: “We’d rather have black oil and yellow metal than green paper issued by the American government,” said King.

Rising oil prices continue to be a concern, Adkins said. Years ago, he pointed out, he would have confidently said $50/bbl oil would slow global growth. ‘We blew right past that,’ Adkins said, noting even $70/bbl and $80/bbl oil has not slowed growth. He expects oil to hit a peak price within the next two years. ‘Historically, when energy works, everything else doesn’t.’

In 2002, the world was consuming about 78 million b/d at $24/bbl. In 2007, demand hit 85 million b/d at $80+/bbl and prices continued to rise.

‘Something is very wrong with this picture,’ Olson said of the 9% growth in demand over five years despite over 300% growth in price. ‘It’s going to get worse before it gets better.’

And while some firms forecast 2.4% increase in global demand, Adkins has set his estimate at a more conservative 1.5%, citing lack of resources to support the additional growth that other firms project. ‘We have to see some type of global slowdown,’ Adkins said, although he does call the 2.4% increase projection ‘reasonable.’

Behavior problem

Decreasing demand is a different issue.

‘In some respects, we don’t have an energy problem in the US.We have a behavior problem,’ King said citing lack of mass transportation in many US cities, few carpoolers and urban sprawl.

John Darnell, energy advisor to US House of Representative for Maryland Roscoe Bartlett, said he expects energy disruption in the ‘near future’. ‘The real problem isn’t the belowground limitation. The real problem is the above-ground limitations’ of habits and behaviors, he said.

The analysts seem to agree that underpriced energy promotes such behaviors.

‘How we get from cheap energy to correctly priced energy is going to be a big challenge,’ said Richard Vodra, first vice president of Spire Investment Partners.

The world cannot believe the next 30 years will be like the last 30 years, chipped in John Kaufmann, senior policy analyst at the US Department of Energy.

‘We didn’t take what happened in the 1970s as a wake-up call,’ added Kaufmann.

Mayor White urged companies and individuals to conserve energy through using fuel-efficient vehicles and telecommuting. He called the typical structure of work environments in which employees sit in cubicles for a certain number of hours each day ‘dysfunctional’.

Instead, flexible work schedules and telecommuting would allow pay based on productivity and reduce demand for energy in transportation and powering large buildings, he said.

Adkins noted that the energy industry doesn’t function in the same way as many other industries. ‘In this business, you can throw a whole lot more money at getting more oil and gas out of the ground and not see any difference,’ Adkins said. OE

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