[R-G] Dyer: Telling the Truth About Oil

[Anthony Fenton]

Embassy, November 7th, 2007
COLUMNhttp://embassymag.ca/html/index.php?display=story&full_path=/2007/november/7/dyer/
Telling the Truth About Oil
By Gwynne DyerIf a diplomat is "an
honest man sent abroad to lie for the good of his country" (Sir Henry
Wotton, 1612), then oil industry executives used to be the business
world's equivalent of diplomats. The big international companies were
chronically optimistic about the extent of their reserves, and
state-controlled oil companies were even more prone to exaggeration.
But now we have the spectacle of oil companies telling the truth about
oil supplies–or at least more of the truth than usual.



The occasion was last week's Oil and Money conference in London,
and the most spectacular truth-teller was Christophe de Margerie, CEO
of the French oil company Total, one of the international "big five."
Last year his predecessor, Thierry Desmarest, caused a flutter in the
industry by predicting that world oil output would peak around 2020.
This year, de Margerie said that "100 million barrels (per day)...is
now in my view an optimistic case."



He was referring to the International Energy Agency's estimate that
world oil output would reach 116 million barrels/day by 2030, and the
slightly more optimistic U.S. government prediction that it will reach
118 million b/d by that date. Even these acts of faith are really a
forecast of crisis, since calculations based on current trends (like a
15 per cent annual growth in Chinese demand) suggest that 140 million
b/d will be needed by 2030.



The implication of de Margerie's remarks is that the crisis is
coming a lot sooner than that. World oil output is nearing 90 million
b/d now, but it is never going to reach 100 million b/d. "Peak oil" may
be just a few years away, or it may be right now. (You will never know
until after the fact, since it is the point at which global oil
production goes into gradual but irreversible decline.)



Peak oil was first forecast by an American petroleum geologist, M.
King Hubbert, who noticed that the curves for oil discoveries and oil
production were a very close match, but with a lag of 30 to 40 years
between the discovery curve and the production curve. At that point, in
1956, Hubbert was the director of research for Shell Oil, and the focus
of his research was American oil production, then still the biggest in
the world.



At that time, American oil output was still rising rapidly, but
Hubbert noticed that the shape of the output curve closely fitted the
curve plotting the growth of American oil reserves during the years of
the great discoveries in Texas, Oklahoma and California. However, there
had been no other huge discoveries since, so the annual amount added to
American oil reserves had peaked and begun to decline in the late
1930s.



Hubbert simply assumed that the production curve would continue to
match the discovery curve with a three- or four-decade lag, in which
case, he predicted, U.S. oil production would peak and start to decline
in 1970. That is exactly what it did, and American oil production is
now down to about half of output in that peak year. So "Hubbert's
Curve" became famous in the industry, and was duly applied to global
discovery and production rates as well.



Oil discoveries worldwide peaked in the 1960s, so Hubbert's own
forecast was that peak oil production worldwide would arrive in the
1990s. The discovery of two giant new oil-fields in the 1970s (probably
the last two) in the North Sea and the Alaskan North Slope pushed that
date down a bit, however, and one of Hubbert's successors as chief of
research at Shell, Colin J. Campbell, subsequently calculated that peak
production globally would not arrive until 2007. Now, in other words.



It is still deeply unpopular in the oil industry to talk about peak
oil, but essentially what de Margerie was saying, albeit in a cautious
and coded way, is that it is here or nearly here. The same sort of talk
is coming from Rex Tillerson, chairman of ExxonMobil, who told the
Financial Times earlier this year that he believed oil production from
sources outside the Organization of Petroleum Exporting Countries could
see "a little more growth," but would soon level off. And OPEC is
generally assumed to be pumping very close to maximum capacity. 


The International Energy Agency predicts that demand for oil will
rise by two per cent annually up to 2012, which means that total demand
by then will reach around 100 million b/d. De Margerie, Tillerson and
other insiders are suggesting that supply will not, which will have a
profound impact on the price not just of oil, but of practically
everything else.



The recent surge in the oil price, which may see it reach $100 a
barrel in the near future, is largely a mirage caused by the collapse
in the value of the U.S. dollar. (The price of oil is generally quoted
in U.S. dollars, but cost of a barrel of oil in euros or yen has risen
far less dramatically this year.) But the longer-term trend, which saw
the price rise fivefold between 1999 and 2005, was driven by the
tightening supply situation as demand raced ahead while production did
not.



It will get a lot worse if de Margerie is right, and he almost certainly is.



editor at embassymag.ca