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Financial Times: ‘Oil and Money’ discusses the limits to oil production

Posted by Ed Crooks on October 31, 2007 in Peak Oil

Peak oil – the prospect that global oil production is close to or even past its peak – turned out to be the dominant theme of the first day of the 2007 Oil & Money conference in London. With prices close to $90 a barrel – even though they fell sharply on Tuesday – the threat of oil shortages seems much more pressing than it did a year ago.

Plenty of speakers showed versions of a chart showing investment into upstream projects – finding and producing oil – soaring in the past five years, while total output remains almost flat. There was a lot of talk about the battle against the brutal logic of decline rates – the rate at which production declines from mature fields – and how today’s oil finds were smaller, more challenging to produce and generally of lower quality than the finds of past decades.

Shokri Ghanem, Libya’s oil minister and chairman of the National Oil Company, observed that he did not expect world oil production to get much higher than 100m barrels a day, plus or minus 5 per cent. That is well up on today’s 85m b/d or so, but a long way short of the 116m b/d that the International Energy Agency expects for 2030.

Mr Ghanem was responding to a question from David Strahan, a writer and TV producer who is the author of “The Last Oil Shock”, a well-written exposition of the peak oil case.

On the other side of the argument, representatives of the industry including Andrew Gould of Schlumberger, the world’s biggest oil services company, and Thomas O’Malley, chief executive of Petroplus, who is a US oilman now running Europe’s biggest independent refiner, argued that higher prices would ultimately draw out more supplies.

As Mr O’Malley put it:

“You get $30 crude oil, you’re not going to have enough crude oil. You get $50 crude oil, you’re going to get more crude oil. You get $75 crude oil, I wouldn’t worry so much. And if it’s where it is today… The greatest reserves of oil in the world do not exist in Saudi Arabia, they exist in oil shale deposits in North America. At 90 bucks a barrel, you can recover oil from oil shale, and indeed your great Canadian oil sands projects are moving forward. I believe that the amount of crude oil we have available is a function of the price.”

However, another issue was highlighted by Nobuo Tanaka, the head of the IEA, and Matthew Simmons of Simmons and Co, author of the much-debated “Twilight in the Desert”, about “the coming Saudi oil shock”. They pointed out that, whatever you think about the geology and the existence of the reserves claimed by the optimists (Mr Tanaka believes they are there, Mr Simmons, broadly, does not), the industry has huge problems in getting the oil out of the ground fast enough to meet growing demand, because of shortages of equipment and skilled staff.

However compelling their arguments may be, though, one should be wary of extrapolating ever-higher prices from what does, admittedly, look like a tight balance of supply and demand over the next few years.

When oil broke through $40, in the 1979-81 oil shock, people started saying “next stop $100”. As it happened, oil got to $10 long before it hit $100. Now $100 is in sight, people are saying $200 is approaching. To predict that we will see $20 before $200 would be very brave, but it is not at all courageous to suggest we could have a sharp downward move when some of the speculative excitement goes out of the market. Goldman Sachs is thinking about that possibility already.

The oil industry, like many others, has always been through cycles in the past. Investment cycles, created by the lags between the money being committed and the production starting to flow, create a predictable dynamic. The time people start saying: “This time it’s different; this cycle is not going to turn down” is exactly when you should start looking out for that downturn.

FOOTNOTE: In the projections for oil supply and demand, there is often confusion about whether the figures being quoted are simply for conventional crude, or include syncrude from oil sands operations, gas to liquids production, biofuels and so on. Michael Klare at the Nation argues that the shift from talking about “oil” to talking about more broadly defined “liquids” is a “fundamental, near epochal shift in US and indeed world history.” (Thanks to the Oil Drum for the pointer.) That seems perverse to me: if the stuff, whatever it is, makes your car go, it does the job you need oil to do. The other considerations of the “unconventional” sources of fuel – cost, carbon dioxide emissions and so on – may be very important, but they are secondary to the question of whether the world can supply all the fuel it needs.

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