Why the oil crunch may grow worse

Times Staff Writer

With gasoline and oil costing once-unthinkable barrels of cash, the notion that things in our petroleum-addicted world soon will get worse -- maybe much, much worse -- is spreading fast.

Fear pushed oil to $131.04 a barrel in New York futures trading Monday, closing $2.16 higher after tumbling more than $16 last week. Supply concerns drove the increase as the market fretted about the potential for Tropical Storm Dolly to harm Gulf of Mexico oil operations.

But behind today’s oil mania lies a deeper dread: that the world has found all the easy-to-reach oil, and the daily supply of the essential black goo will fall further and further behind escalating global demand.


“As much as you’re uncomfortable with today’s oil prices, these are going to be the good old days,” oil expert Robert L. Hirsch told a recent Santa Barbara gathering of policymakers and environmentalists. “We’re talking about pain here that is unimaginable.”

The day-to-day cost of oil reflects a sharply weaker dollar, market speculation and geopolitical events such as unrest in Nigeria and other oil-exporting countries. At the same time, producers are barely slaking the world’s energy thirst, and the market increasingly is fixated on the long-term supply picture.

Adding to the angst, several industry heavyweights caution that above-ground issues -- including instability among oil-producing nations and shortages of drilling rigs and engineers -- threaten to impose a “practical peak” on oil output that could be just as wrenching as the geologic peak envisioned by Hirsch and others.

“There are more and more people who believe that oil supply prospects are not very optimistic,” said Fatih Birol, chief economist at the Paris-based International Energy Agency, a watchdog for industrialized nations.

Some argue that drilling in off-limits areas would buy the U.S. time in the race to develop oil substitutes, cut imports and ease economic pain. To that end, President Bush on July 14 lifted a White House ban on new offshore drilling for oil and natural gas and urged lawmakers to rescind the congressional ban.

Still, Birol counts himself among those who believe the world has reached at least “a peak of easily accessible oil.” That alone is cause for worry, because many economies are built around the assumption that oil would continue to be cheap and plentiful.

Birol is leading a groundbreaking reassessment of the worldwide outlook for oil supplies, investment and production that many believe will deliver bad news when it is released in November.

“We are very concerned about future oil supplies,” he said. “We may have difficult days to come in the oil markets.”

In five years, demand for oil may exceed 94 million barrels a day and continue rising, spurred by growth in China and India, the International Energy Agency estimates. Experts put daily global production at between 82 million and 86 million barrels, and even the most optimistic oil authorities can’t see production keeping up with demand without a big boost from unconventional sources such as Canada’s vast oil sands or U.S. oil shale. Getting crude from such sources is more difficult, expensive and environmentally harmful.

“Unconventional oil includes all these things like tar sands . . . and some people count all that stuff as oil,” said Texas oil investor Jim Baldauf, who in 2005 helped found the U.S. chapter of the Assn. for the Study of Peak Oil & Gas, which has affiliates in 22 countries. “If you do that, then you have a much rosier picture to look at.”

Worries that oil production soon will fall short of demand or begin a steep dive aren’t supported by the data his company has compiled, said consultant Daniel Yergin, chairman of Massachusetts-based Cambridge Energy Research Associates and author of “The Prize,” a Pulitzer-winning oil history. But anxiety about long-term supply, he said, has “contributed to this very fevered psychology in the oil market.”

Cambridge researchers acknowledge that the Earth’s oil production eventually will max out. But Cambridge Energy Research Associates director Peter Jackson said that day is continually being pushed back because sizable oil reserves still are being found and technologies are boosting yields and paving the way for deep-sea drilling and other options not previously contemplated.

California’s 108-year-old Kern River oil field, for instance, was read its last rites several times over the years. But the field recently produced its 2 billionth barrel and is still going, thanks to ever-evolving recovery techniques.

Jackson’s conclusion: Don’t panic.

He expects worldwide output -- including the unconventional variety -- to continue rising and satisfying demand until at least 2020. Once production peaks, he believes it will level off in an “undulating plateau” before an irreversible decline sets in.

“The equation is still a little bit tight, but demand is softening,” Jackson said. “We just have to wait and see how those factors play out.”

Hirsch, author of a widely cited 2005 Energy Department report on peaking oil output, sees a more urgent situation.

When he spoke at last month’s energy summit, Hirsch said that large oil fields were emptying faster than expected, remaining reserves were overestimated and new finds and technology would offer only incremental additions.

“There’s no question in my mind that we’re likely to see oil production go into decline somewhere between 2010 and 2012,” said Hirsch, senior energy advisor to Management Information Services Inc., an Alexandria, Va., consultancy.

His views reflect the core principle of “peak oil,” a decades-old doctrine that holds that global crude production will crest sooner than expected and then begin a precipitous decline. Predictions about the timing vary: Some say we’ve already hit the peak, while others posit that it won’t arrive for another decade or more.

Forecasting is a perilous business. Earlier peak oil predictions, including some from the 1970s supply crisis, missed the mark. Non-peakists have erred in production estimates. And nearly everyone failed to predict the leap in oil prices over the last year.

Geologists and others in the oil industry hotly dispute peak oil predictions, but an increasingly alarmed public has injected fresh momentum into the movement.

“Peak oil is percolating all over the place,” a seismic shift from when peak oilists were considered the petro-world’s “lunatic fringe,” Hirsch said.

Websites devoted to the subject, such as the Oil Drum, have been proliferating. You can buy peak oil boxer shorts at one site and laugh at peak oil jokes on another.

Consultant Matthew Simmons, known in some circles as Mr. Peak Oil, said he is flooded with speaking requests and gets up to 30 Google alerts a day when his name pops up in a new item.

The boiling debate, in which peakists and their critics flay one another’s conclusions and intelligence, is fed by imprecise terminology and oil-field data that are questionable or incomplete. For starters, views vary wildly on how much oil remains in Saudi Arabia -- crucial information for projecting worldwide supplies.

Birol, of the international energy group, hopes his November report will “move this debate from having fights in the Internet and e-mail domain, and from a personal domain, to a more objective and data basis.”

Tyson Slocum, director of the energy program at Public Citizen, a Washington-based consumer group, doesn’t care when the peak will come.

“We should be planning as though we’re there,” he said, “because from a national interest standpoint, from an economic standpoint and from an environmental standpoint, our dependence on oil, whether it comes from California or Saudi Arabia, is unsustainable.”




Peak Speak

Here are some key terms in the oil-supply debate.

Peak oil

* Definition: The maximum volume of oil production achievable, after which output begins an irreversible decline. Sometimes called Hubbert’s peak or the Hubbert curve for U.S. geophysicist Marion King Hubbert, who in 1956 theorized that oil production follows a bell-like curve and accurately predicted that U.S. oil production would top out between the late 1960s and early 1970s. Many subsequent peak oil predictions have missed the mark.

* Notable believers: Kenneth S. Deffeyes, author, former Shell geologist and retired Princeton professor; Colin J. Campbell, retired British geologist, author and founder of the Assn. for the Study of Peak Oil; T. Boone Pickens, oilman, hedge fund owner and alternative energy investor; Matthew Simmons, author and chairman of oil investment bank Simmons & Co. International.

Practical peak

* Definition: The belief that factors other than supply will impose a de facto cap on worldwide oil production. “Above-ground” limitations cited include instability in key producing nations, diverging priorities between producers and consuming nations, shortages of qualified workers and key exploration equipment, rising exploration costs and limited refining capacity.

* Notable believers: Tom Petrie, a vice chairman at Merrill Lynch & Co. Inc. and co-founder of energy investment-banking firm Petrie Parkman & Co. Executives at oil giants Total and BP. Others, such as consulting firm Cambridge Energy Research Associates, don’t pinpoint a peak but believe that above-ground constraints are significant obstacles to future oil production.

Peak exports

* Definition: The notion that several of the world’s key oil exporters are gaining economic strength and using more oil at home at a time when their overall production is peaking or in decline. Rising consumption and falling production in exporting nations could quickly erase available oil exports for the United States and others dependent on foreign supplies.

* Notable believers: Jeffrey J. Brown, independent petroleum geologist; Samuel Foucher, a signal processing expert. They created the Export Land Model to illustrate the problem, which is gaining currency in energy circles.

Peak demand

* Definition: The idea that demand for gasoline in the United States probably has peaked. High prices have pushed U.S. gas consumption into decline, and some believe the trend will accelerate because consumers are making fundamental changes, such as buying more fuel-efficient cars, embracing mass transit and focusing on conservation. While higher demand elsewhere in the world will continue to drive prices, a protracted slump in the world’s largest gasoline market is bound to have an effect. A similar theory holds that oil demand will peak in some countries as high prices force their economies to shift toward alternatives.

* Notable believers: Cambridge Energy Research Associates; CIBC World Markets economist Jeffrey Rubin, who predicted last month that unrelenting gas price hikes would create a “mass exodus” from U.S. freeways, taking 10 million vehicles off the road by 2012 and cutting average miles driven per vehicle as much as 15%.

Source: Assn. for the Study of Peak Oil & Gas; Cambridge Energy Research Associates; CIBC; Times research.


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