“how our civilis-ation’s addiction to oil
How our civilization is addicted to oil:
How their civilization is addicted to oil:
$$$
Posted on 12/15/2007 8:34:00 PM PST by E. Pluribus Unum
AS everybody who has filled up recently knows, petrol and diesel prices have risen and are staying up. The £1 a litre “barrier” was breached easily.
High oil prices contributed significantly to a 3.4% jump in manufacturers’ input costs last month, a 10.3% rise on a year earlier. Petrol was instrumental in pushing “factory-gate” inflation to a 16-year high of 4.5%. There will be more of this on Tuesday in the latest figures for retail and consumer price inflation.
Oil did not quite make it to $100 a barrel and, for a few days dropped below $90. But last week’s coordinated action by central banks pushed prices back above $90.
So the surge in prices in recent months has revived a familiar question. Is it because oil is starting to run out? Have we reached, or passed, the peak in world oil production?
A new film just out in Britain, A Crude Awakening: The Oil Crash, begins with a sombre Philip Glass soundtrack. Its opening line, “Oil is the excrement of the devil”, tells you where it is coming from. It outlines a vision of a world beyond oil and “how our civilis-ation’s addiction to oil puts it on a collision course with geology”.
Peak oil is a broad church. To be fair to A Crude Awakening, it is hard to argue too much with the definition on its website. “Peak oil doesn’t mean ‘running out of oil’, but rather ‘running out of cheap and plentiful oil’,” it says. The film is directed mainly at an American audience, profligate in its oil use.
But what about the peak-oil “ultras”, who claim world oil production has reached or passed the summit? It has such a widespread following on the internet that surely it must be true. Actually, it is wrong.
The “peak oil has already happened” argument was partly based on the fact that global oil production, on International Energy Agency figures, had never been higher than the 86.13m barrels a day of July 2006.
That, however, is no longer true. World oil output in October was 86.5m barrels a day, 1m more than in October last year and 3m more than in October 2005. It edged up to 86.55m last month.
Even if it was the case that global oil production had been flat over the past couple of years, however, it would prove very little.
Why? During this time the Organisation of Petroleum Exporting Countries (Opec) cut output and only recently started to increase exports again. Less than five years ago Opec was happy with an oil price in the $22-$28 a barrel range. Now it is content with $90. Opec increased output quotas by 500,000 barrels a day this autumn but refused to do so again earlier this month.
Production in many oil-producing countries is constrained, not by geology but by politics. Iraq is producing only two-thirds what it did on the eve of the first Gulf war in 1990. That was no golden age, production running below potential because of weak investment during the Saddam era. Iran is producing well below potential.
The most important reason for rejecting the “peak oil is here” argument, however, is that current production reflects investment decisions taken years ago, when prices were much lower. It was only just over three years ago that oil rose above $40 a barrel. A few years earlier it was $10-$11. Higher prices will bring more output on stream. A new study by Germany’s Energy Watch Group, which said the peak was in 2006, makes the astonishing admission that it took no account of prices.
There is a long history of crying wolf on peak oil, dating back to the 1920s. The patron saint of peak oil, the geophysicist M King Hubbert, predicted in 1956 that oil output from the lower 48 states in America would peak around 1970 and he was right. He also predicted global production would peak in about 1990 and he was wrong.
Colin Campbell, founder of the Association for the Study of Peak Oil and Gas, first called the oil peak in 1990 and then at regular intervals. His view today is that a peak remains imminent.
Peak-oil people get excited about the giant Ghawar field in Saudi Arabia because it is apparently producing water rather than oil. The Ghawar “water cut” has reached 30% and bestselling books have been written on its imminent eclipse.
But, as Michael Lynch, peak-oil sceptic and president of the consultancy Strategic Energy & Economic Research, points out in a paper, Crop Circles in the Desert, this is a low figure. The average water cut throughout the industry is much higher, at 75%. The Ghawar cut rises and falls but the field still churns out 5m barrels a day, even at the age of 50.
Lynch is dismissive of another argument, that no big oilfields are being discovered. That, he said, is the nature of the industry – big fields are easier to find and smaller satellite fields around them come later. Large areas with the oil potential of, for example, Saudi, have not yet been fully explored.
There is, then, plenty of oil in the tank. Opec says additions to recoverable reserves since the early 1980s have been three times cumulative output over the period.
So why are prices so high? I have been taken by surprise and so have the oil bulls. A couple of years ago Goldman Sachs came out with a bullish forecast that the price would average $60 over five years. Today that looks conservative.
Oil is expensive because of geopolitical uncertainty, strong demand from the global economic boom of the past few years and speculative investment. Opec, which has most of the reserves, is happy to extract money from consumers to fund spending programmes. Most oil is in places we would not want it to be.
Demand has responded to higher prices, but not enough. The International Energy Agency’s worry is not that oil has reached a peak – it expects a 50% rise by 2030 – but that demand will rise faster than supply. We will see how much impact next year’s economic slowdown has.
Sheikh Yamani, the former Saudi oil minister, famously said the stone age did not end because the world ran out of stones. How will the oil age end? In a speech to mark the bicentenary of the Geological Society, “Peak Oil – a metaphor for anxiety”, BP’s Michael Daly predicted that we would be debating when the oil might run out in 100 years’ time. Long before then, thanks to high prices, alternative energy sources, climate concerns and technological advances, we will have probably passed the peak – but for oil demand rather than supply.
One is that central banks are abandoning economic purity and taking their eye off the inflation ball, and that they should allow economies to suffer the consequences of past excesses, even if that means a painful recession. The other is that what we are seeing is classic central banking in the Walter Bagehot mode, the first duty of a bank being to keep the system working.
The purists have got it wrong, failing to see that central banks are responding to an economic shock which, if unchecked, would do more than penalise a few irresponsible bankers, borrowers and investors.
They also fail to understand the process through which monetary policy affects inflation – through demand. If inflation were very high you might need a recession to get it out of the system. That is plainly not the case now.
david.smith@sunday-times.co.uk
...and by ‘their’ I mean the Arabs
The Brits just don’t seem to realize gas costs so much there because their taxes are so doggone high!
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