Oil Peak in 4 Years?

[Nicodema]

I also recommend the DVD release of "The End Of Suburbia", which goes into the collapse of oil stocks and the possible social consequences resulting.

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Running on empty

The leading energy analysts who foretold Enron's demise have an alarming new claim: The world's major oil companies are almost tapped out.

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By Robert Bryce

March 15, 2005 | Four years ago, the analysts at John S. Herold Inc. were the first to call bullshit on Enron. On Feb. 21, 2001, three Herold analysts issued a report that said Enron's profit margins were shriveling, the company had too few hard assets, and its stock price was way too high. Less than ten months later, Enron filed for bankruptcy.

Today, the analysts at Herold -- a research-only firm that issues valuations on several hundred publicly traded energy companies -- are making predictions even bolder than their call on Enron. They have begun estimating when each of the world's biggest energy companies will peak in its ability to produce oil and gas. Herold's work shows that the best minds in the energy industry are accepting the reality that the globe is reaching (or has already reached) the limit of its own ability to produce ever increasing amounts of oil.

Many analysts have estimated when the earth will reach its peak oil production. Others have done estimates on when individual countries will hit their peaks. Herold is the first Wall Street firm to predict when specific energy companies will hit their peaks.

Since last fall, Herold has done peak estimates on about two dozen oil companies. Herold believes that the French oil company, Total S.A., will reach its peak production in 2007. Herold expects 2008 to be critical, with Exxon Mobil Corp., ConocoPhillips Co., BP, Royal Dutch/Shell Group, and the Italian producer, Eni S.p.A., all hitting their peaks. In 2009, Herold expects ChevronTexaco Corp. to peak. In Herold's view, each of the world's seven largest publicly traded oil companies will begin seeing production declines within the next 48 months or so.

Executive vice president Richard Gordon, who heads Herold's global strategies team, says the firm's goal in doing peak-production estimates for individual oil companies is simple: "If the dinosaurs are going extinct, we are trying to figure out which ones are going to go extinct the soonest."

Herold's projections have enormous ramifications both for stockholders in the major oil companies and for every energy consumer on the globe. If Herold is correct, and the world's biggest oil companies cannot increase their production in the coming years, then several things appear certain:

• Oil prices -- which are already at record levels -- will continue rising as demand outstrips supply. In a few years, gasoline prices of $2 per gallon could seem like a bargain.

• State-owned oil companies like Mexico's Pemex, Venezuela's PDVSA (Petroléos de Venezuela) and Saudi Arabia's Saudi Aramco may be unable to increase their production enough to meet burgeoning global demand.

• The producers who belong to the Organization of the Petroleum Exporting Countries, and Saudi Arabia in particular, may have even more leverage over the global oil market in the coming years.

• The United States will be ever more reliant on oil imported from countries filled with people who don't like George W. Bush or his policies.

While Herold's projections provide ammunition to the growing chorus of analysts who believe peak oil is imminent, they are not being welcomed by the oil companies. Last month, when I asked ChevronTexaco's chairman and CEO, David J. O'Reilly, to respond to Herold's projection that his company would reach its peak production in 2009, he replied snappishly, "I'm not going to comment on that."

A spokesman for Royal Dutch/Shell in London was similarly coy, saying in an e-mail that the company had "no comment" on Herold's projection. However, the company's spokesman, Simon Buerk, pointed to a September 2004 report published by Shell that predicts the company will be producing the equivalent of 4.5 million barrels of oil per day by 2014, not the 4 million barrels per day that Herold foresees for that time frame.

Charley Maxwell, an analyst at Weeden & Co., a Connecticut brokerage, says oil industry officials are loath to discuss Herold's projections because doing so would "circumscribe their future prospects and the future growth of their stock, and executives have no interest in doing that since so much of their compensation is tied to their stock options." Maxwell, one of the most respected stock pickers in the energy business, believes the non-OPEC oil producers will hit their peak oil production in the next five years. And he applauds Herold's research, saying that no other reputable firm "has been willing to make this type of prediction."

Another energy industry veteran, John Olson, co-manager of Houston Energy Partners, an energy hedge fund, agrees. Olson believes that Herold's predictions about peak production are "very significant. It is perhaps the first cannon ball over the bow of a big tanker."

But Herold has its critics. Brian J. Jennings, the chief financial officer of Oklahoma City's Devon Energy Corp., which Herold believes will hit its peak in 2009, says that Herold's analysis is "a truncated look at the company. It assumes that nothing we are going to do over the next five years will increase our production." Jennings says Devon expects to increase its oil production by 25 percent over the next five years -- and that figure does not include fields that the company is developing in the Gulf of Mexico.

Of course, scientists, pundits and oil men have been predicting that the world will run out of oil ever since the gusher blew at Spindletop in Texas in 1901. Despite those predictions, the last century has been one of unbroken increases in supply. Each year, the oil industry has produced more oil than it did the year before. Today, the industry is producing about 83 million barrels of oil per day. New oil fields in the deep-water Gulf of Mexico, in the Caspian Sea and in Saudi Arabia will soon begin pumping oil onto the global market. Plus, huge deposits of oil are available in the Canadian tar sands and American oil shale.

But turning tar sands and shale into motor fuel is a very expensive proposition. And those new, unconventional oil sources may be insufficient to replace the decline in production from existing fields, which deplete by about 6 percent per year. Further, they may be too small to quench the demand from the developing world -- China in particular. Last month, at a conference in Houston, Zhu Yu, the president of China's Sinopec Economics and Development Research Institute, said that between January and September of 2004, motor fuel use in his country soared by 20 percent. Yu also predicted that China's oil consumption will double over the next 15 years to more than 10 million barrels of oil per day. Meanwhile, the Energy Information Administration expects India's oil consumption to increase by nearly 30 percent over the next five years.

The oil industry has plenty of other reasons to be nervous. The royal rulers of Saudi Arabia, the world's biggest producer, appear vulnerable to terrorist attacks and civil unrest. The Saudi government's biggest enemy, Osama bin Laden, has focused his ire on both the Saudi royals and the oil infrastructure in the Persian Gulf. And his loyalists are eager to attack both of those targets.

In Iraq, insurgents are continually attacking that country's oil infrastructure -- thereby crippling the war-torn nation's economy and its future prospects. In Venezuela, which has the biggest oil deposits in the Western hemisphere, president Hugo Chavez has threatened to cut off the flow of oil to the United States if the Bush administration continues its efforts to undermine his government. In Russia, president Vladimir Putin's brazen, state-sponsored theft of Yukos, one of that country's biggest oil companies -- and his jailing of the company's CEO, Mikhail Khordokovsky -- is likely to slow investment in Russian oil fields for years.

Furthermore, spare oil-production capacity has largely disappeared. Oil producers are running their wells at maximum capacity. Indonesia, a member of OPEC, cannot meet its OPEC quota of 1.4 million barrels per day. In February, Indonesia was able to produce only 942,000 barrels per day, its lowest level of production in 34 years. And last week, Algeria's energy minister, Chakib Khelil, said that OPEC "does not have the production capacity to increase its quotas."

All of these factors are sending oil prices to record highs. Monday's NYMEX closing price for light sweet crude was $54.95 per barrel. Last week, the Department of Energy issued a report saying that it expects prices to stay near or above $50 per barrel for the rest of this year. That's a big change for an agency that has always been conservative in its price projects. At about this same time last year, the agency was predicting that oil would cost about $29 per barrel throughout 2005.

Whatever price projections are used, it's increasingly clear that the era of cheap oil is over and that oil companies are having a harder time finding new oil to replace the oil they're pumping. In short, it appears that the late M. King Hubbert, a geophysicist who worked for Shell in Houston, is being proved right. In the 1950s, Hubbert used mathematical models to predict that American oil production would peak in the early 1970s. That's exactly what happened. Now, Hubbert's theories are being tested on a global scale.

Herold's owner and CEO, Art Smith, is a believer in Hubbert's work. Smith and his fellow analysts at Herold have been building their peak production databases since 1996. About 10 months ago, Herold began publishing what it calls "strategic evaluations" of specific companies, which include graphics showing when that company will reach its peak production. Herold does not do geologic analysis. Instead, its analysts mine the company's filings with the Securities and Exchange Commission. It also looks at the oil properties that the company has acquired or sold, along with new projects being drilled, and older oil fields in the company's portfolio. "We look at this data, put it into a financial model, and start asking questions," says Herold analyst Gordon.

Herold isn't the only Wall Street firm considering the issue of peak oil. In early December, Deutsche Bank issued a report that predicted global oil production will peak in 2014. The Deutsche Bank report also stresses political instability and China's surging demand. Those factors, Deutsche Bank believes, "could trigger a shortage shock leading to a price crisis."

And while many analysts in Houston are convinced a peak in global production is in the offing, there are others who believe that today's high prices will trigger a surge in new oil production. David Pursell, a partner at Pickering Energy Partners, a Houston brokerage, says with oil at $50 per barrel, "a whole lot of oil fields that used to be woefully uneconomic suddenly become profitable and that means that any peak projections get delayed." Although Pursell is not ready to agree with Herold's projections about individual energy companies, he -- along with virtually everyone else in the oil industry -- agrees that the era of cheap energy is over and that America must begin adapting to the new geopolitical realities that come with that fact. Alas, it appears the Bush administration hasn't made that same transition.

Last week, President Bush gave a speech on energy policy in Columbus, Ohio, in which he encouraged Congress to pass an energy bill. Once again, he touted his plan to drill for oil in the Arctic National Wildlife Refuge, a move he said would "eventually reduce our dependence on foreign oil by up to a million barrels of oil a day." The key word here is "eventually." Even if approvals for drilling ANWR were granted immediately, the first oil from the refuge would not reach the continental United States for years. Furthermore, as the New York Times reported last month, it appears that the major oil companies may have cooled in their desire to drill in the refuge. During his speech, Bush also talked about efficiency measures that could save homeowners electricity. But during his 4,600-word, 35-minute-long speech, Bush uttered the words "hybrid vehicle" exactly one time.

It's astonishing that Bush, the former Texas oil man, still doesn't understand the fundamental problem of America's imported oil addiction. Nor does he appear to grasp the threat that is posed by the possibility of peak oil.

The majority of the oil that the United States imports from places like Saudi Arabia and Venezuela is used as motor fuel in automobiles. Yet the president conflated the idea that burning more coal and building more nuclear power plants will somehow allow America to reduce its oil imports. In his speech, Bush refused to discuss the obvious: We cannot cut our oil imports (read: gasoline addiction) without dramatic changes to our auto fleet. At some point, the United States will have to force the automakers to build more efficient automobiles. And a key part of that efficiency changeover will mean replacing increasing numbers of America's 200 million cars and trucks with hybrid vehicles.

Even some of Washington's most hawkish neoconservatives are embracing the idea of high-mileage hybrid vehicles. Former CIA director James Woolsey, a key backer of the war in Iraq, is driving a Toyota Prius. Woolsey, along with neocons like Frank Gaffney have begun preaching the Greens' gospel of energy efficiency. The neocons haven't joined the Sierra Club. Instead, they're arguing that energy conservation is simply smart strategy when dealing with the Muslim extremists who reside in the oil-rich countries of the Persian Gulf. But so far, the neocons haven't been able to get Bush's ear.

Remarkably, when it comes to thinking about peak oil and what it means for the future of America, Wall Street analysts and neocons are taking the lead, while the former oil man from Midland keeps his head up his tailpipe.

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About the writer

Robert Bryce, a contributing editor at the Texas Observer, is the author of "Cronies: Oil, the Bushes, and the Rise of Texas, America's Superstate."

[Bravus]

OPEC is the kicker: right now they're artificially throttling production to keep prices high, so they still have lots of capacity. It's not that the world's going to run out of oil as such, it's who is going to control the reserves.

Having said all that, reducing reliance on oil is a Good Idea for all sorts of good reasons.

[Ron Lambert]

From what I have read, it appears that the factor that is driving the rate of consumption of oil higher and higher is China, as its economy rapidly expands since the introduction of capitalist practices, and its need for oil increases dramatically. The world's petroleum industry is near its maximum capacity of rate of output now. There are a few more places to drill new wells, such as where President Bush has proposed drilling, but that would not be nearly enough to make any real difference.

As demand exceeds capacity, there would be pressure for tough competition and even conflict over the oil that is available. Then let something happen to cut back oil production capacity, like if Iran mines the straits of Hormuz like they have threatened to do in the past, that could lead to open war, especially if China allies itself with Iran. China is currently engaged in a program to build up its navy.

Developing truly effective alternative sources of power sufficient to reduce signifantly our need for oil could be vital for preventing global war.

[Bravus]

See, thass why you needed to unelect oil executives... (grinning, ducking and running)

[Ron Lambert]

Yeah, somehow you just know that George Oilman Bush is never really going to push any innovation that would substantially decrease the need for oil. Nor is he going to take any action that would result in a reduction in the price of oil.

[Dr. Shane]

</font><blockquote><font class="small">Quote:</font><hr />

Four years ago, the analysts at John S. Herold Inc. were the first to call bullshit on Enron.

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I am deeply offended at such langage used on a Christian forum. I feel like some gangster has pulled me aside in some back alley and assulted me. I didn't even dare to read the rest of this article. Why are we posting material from potty-mouths?

[aldona]

</font><blockquote><font class="small">Quote:</font><hr />

</font><blockquote><font class="small">Quote:</font><hr />

Four years ago, the analysts at John S. Herold Inc. were the first to call bullshit on Enron.

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I am deeply offended at such langage used on a Christian forum. I feel like some gangster has pulled me aside in some back alley and assulted me. I didn't even dare to read the rest of this article. Why are we posting material from potty-mouths?

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After some of the recent sexually explicit material posted on the "Adultery & Strippers" thread...

and after your response when some members pointed out that they were offended...

this would have to be one of the most blatant examples I have ever seen of "the pot calling the kettle black", Brother Shane.

aldona

[cricket]

Quote:

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I am deeply offended at such langage used on a Christian forum. I feel like some gangster has pulled me aside in some back alley and assulted me. I didn't even dare to read the rest of this article. Why are we posting material from potty-mouths?

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See, Shane?! See! Foul language does stand out when it is written. It can be offensive to some.

I have to believe that you are merely making a mockery of those who have protested your posts not too long in the distant past. I'm sorry that you feel you must resort to "crying wolf" in this instance.

While I did not take offense at the language used in this article, I did take notice of it. For me, it dampens the creditibility I would have otherwise given the author.

[Bravus]

This seems a bit like that old illustration to me: we seem to be more concerned about one little cussword than about the hundreds or thousands of people who lost their retirement savings in the Enron kerfuffle...

[Neil D]

Quote:

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This seems a bit like that old illustration to me: we seem to be more concerned about one little cussword than about the hundreds or thousands of people who lost their retirement savings in the Enron kerfuffle...

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This is a prime example of making mountains out of mole hills....

I remember a speaker on a Christian campus remarking that more people are concerned over the cuss word he used than the 1000 people that were dying of starvation that day...He was complaining about the apathy of Christians....And we have here on c/a a classic example of appathy... Us Christians are more concerned with a swearword than the loss of life, or property.....

AS Christians, I believe that we can call ourselves "pathetic".....Can we truely believe in salvation if we live more for the negitive cuss word than the death of hundreds or thousands that we could have provent from starving or bankruptcy?

That surely must be a God damned irony.....

[bevin]

Quote:

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I am deeply offended at such langage used on a Christian forum.

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ROFLOL

/Bevin

[Dr. Shane]

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I have to believe that you are merely making a mockery of those who have protested your posts not too long in the distant past.

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Thank you. It seems you are getting to know me <img src="/ubbthreads/images/graemlins/grin.gif" alt="" />

Take note that when I offended someone it didn't matter that my remarks were not offensive. It didn't matter if that person was being reasonable in being offended. The only thing that mattered was that someone was offended and I wasn't falling on my face and begging forgiveness.

Look at the double standard. When I offend someone else I needed to fall down in repentance even if what I posted wasn't offensive. When someone else offends me, I am in the wrong for being offended. Hypocrits is what Christ called it.

If I am to walk on egg shells for others, why shouldn't others walk on egg shells for me? I think we all need to get a little thicker skin and be a little more tolerant of one anouther.

[Dr. Shane]

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more people are concerned over the cuss word he used than the 1000 people that were dying of starvation that day...

<hr /></blockquote><font class="post">

More people are concerned about Haliburton making a profit than millions of babies being aborted.