(December 13, 2010)
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Peak Oil, RIP? A Religious View from the Industry that Takes Exception to Gilles d'Aymery's The Economy Is Not Coming Back: Part III: The Reasons it Shouldn't
To the Editor:
The religion of peak oil passed its own apogee in 2010. It has had its last innings. Everywhere peak oil notions are seen to be in decline. The media are all but silent on the subject.
Peakoilism became meta-language for resistance to higher prices for oil, and for concern that oil will be exhausted in our lifetime. Such notions are founded on ignorance concerning oil exploration, of how the oil industry works, and how the price of oil is fixed.
Peakoilism is also a wilful misinterpretation of what its originator, Marion King Hubbert, wrote when he described it in a 1956 paper entitled Nuclear energy and the fossil fuels. He estimated that US oil production would peak in 1965, although in fact it did not. Hubbard also predicted that global oil production would peak in 1995, but his work contained an escape clause: he qualified his opinion with if current trends continued. They did not, so this proviso could be said to show that Hubbert was not wrong. We now know that oil prices were manipulated. When Hubbert did his original work, the price of oil was around $2 a barrel. Hubbert later admitted, in a 1976 video clip, that the global peak he then predicted for 1995 might move to 2005 because of the OPEC "production curtailment." Hubbert's work was US-centric, based on well-explored areas, did not take into account new discoveries, and did not recalculate reserves based on improved recovery technology. His expectation was that nuclear energy would largely replace oil, although this is often overlooked by peakoilers, whose views often exclude such considerations.
Peak oil ideas were resurrected in 2000. Peakoilism is variously seen as a protest movement, a pernicious cult, another doomsday religion concerned with survival, Luddism, anti-capitalism, a conspiracy theory, radical environmentalism, and a refuge for many political and social activists trying to advance their agenda under the cover of peak oil. An important concern of most peak oilers is the price of fuel: it has been seen at the peakoil.com Web site that traffic increased significantly when the price of oil went up -- and dropped when it went down.
There is little doubt that there was a subtext as well: a desire to deflect attention from the enormous profits being made from oil, not just by oil companies, but by those involved in oil services, transport, pipeline building, tanker operators, refining, and distributing. Whether some peak oilers were complicit in spreading alarm, creating smoke, and covering the tracks of those who were making obscene amounts of money from oil is not yet in the public domain. The suspicion lurks, however.
It was said that the late Matthew Simmons, a highly political Mormon banker and peak oil's former proselytiser, campaigner, and advisor to the Bush junior régime, made snake oil respectable. He produced some inexpert and pessimistic predictions about Saudi petroleum reserves after reading a few Society of Petroleum Engineers papers from the 1970s and earlier, which were of no value in assessing Saudi Arabia's present situation. It was quipped that had Simmons looked at papers on neurology, he would have claimed to be a brain surgeon.
The Association for the Study of Peak Oil and Gas (ASPO), a quasi religious organisation, takes as its scripture from Hubbert. Like the Flat Earth Society, ASPO is falling by the wayside. Annual ASPO International conferences have been poorly attended, with that in 2008 attracting only 200 participants, no conference in 2009 or 2010. ASPO-USA has run annual conferences, but these are also in decline. That in Washington in October 2010 boasted some fifty speakers, mostly with something to sell, but their audience was only around 200, compared with 400 the previous year in Denver, and 500 in Houston in 2007. James Schlesinger's 2010 keynote address The Peak Oil Debate is Over was a gentle nailing down of the coffin lid over the corpse of the peak oil myth. He excluded any mention of energy conservation, and alternatives to oil, but he had discovered that production in Iraq "has been held back for a variety of reasons."
David Room, a board member of ASPO-USA, noted that the peak oil narrative is just one of many that he sees breaking down. Sharon Astyk, also on the ASPO-USA board, said that fear can be a valuable tool to reach people with the peak oil message, but warned messengers to avoid using dystopian fantasies: "Fear is an integral part of the story," she said. "We don't have to be truthy." Others seem to have been consulting war manuals: campaigner Tyson Slocum advocated a narrative that the fossil fuel industry is the enemy. Clearly ASPO itself has peaked, and will not be around to record the failure of their doomsday scenario.
Peak oilers have mostly been moving on. The excitement for them now is with saving the Earth (although they tend to say "planet" for some reason, as though there were a choice). There is all that global warming, or global cooling, or (to be safe) climate change for their concern. This is also meta-language for protest about environmental degradation by man, using pseudo-scientific claims. The Earth has always had oscillating temperatures, and this will continue: there is nothing much we can do about it except use the sun cream or don the warm clothing. The new racket is to be found in the carbon exchanges, again based on false science, but creating further gambling opportunities for trader and traps for ignorant investors.
One of the difficulties in assessing the true situation is that the data are not merely unreliable; they are politically manipulated, by governments, agencies; and corporations. Oil companies massage data to make their quarterly results look good, then change them when threatened with legal actions that could include jail time for fraud.
The International Energy Agency (IEA) was set up under OECD auspices in 1974, shortly after the oil embargo. It was intended as a counterweight to OPEC, in order to de-Americanise the perception of it being a US versus OPEC confrontation, by making it more an OECD versus OPEC affair. Its real purpose was "to erode the political and economic power of the oil cartel." The IEA is an ardent producer of statistics of very varying quality.
The US Geological Survey is beholden to the US government lest it be privatised, as has been threatened. The US Department of Energy (and its Energy Information Administration) dispenses politically biased data. In nearly all cases, estimates are quoted without probabilities and confidence levels, because the data are often guesses, not known reliably, or fudged; and in not a few cases, they are deliberately false. For example, Caspian Basin reserves were overestimated by a factor of around ten for political reasons, because the US wished to stop Caspian oil and gas being moved northwards through Russia, so persuaded BP to build an expensive and troublesome pipeline from Baku on the Caspian coast of Azerbaijan to Ceyhan on the Turkish Mediterranean coast. More specifically, early data are often not updated as recovery rates from early wells improves. In the 1950s, the average recovery rate from oil reservoirs was 15%, which became 20% by 1980, and is now around 40% of the oil-in-place estimates, because of higher oil prices and improved technology.
OIL PRICES AND POLITICS
Kissinger colluded principally with the Saudis and the Shah to put up the price of oil, providing oil was traded in dollars and the proceeds from oil sales were held in US Treasury bonds or US banks. The fragile US economy absolutely depends on the world trading oil in dollars. The US oil industry also benefited from higher prices, since it immediately increased US reserves as it became economic to undertake secondary recovery on a larger scale. Americans are still inclined to blame OPEC, or Arabs, or Saudi Arabia for high oil prices.
After the U.S. saved Israel by rearming it during its 1972 attacks on Egypt and Syria, the wrath of the Arab members of OPEC resulted in an oil embargo on the US (and others). The United States was humiliated and angry. Ironically, OPEC is a cartel that tries to fix production levels between members (with limited success) to meet demand, and does not itself undertake price-fixing. The dozen OPEC members (five are not Arab) pump less than 40% of the world's oil, but it is the swing producer.
The price of oil is not determined primarily by supply and demand. Speculators reacted to the oil embargo by exploiting an opportunity to manipulate the oil market. They first traded oil on the International Petroleum Exchange (IPE) in London in 1981, followed two years later by a futures market in oil (as well as natural gas, and other energy commodities) at the New York Mercantile Exchange (NYMEX). In 2000, a group of oil companies and financial institutions (including BP Amoco, Shell, TotalFinaElf, Deutsche Bank, SG Investment Bank, Goldman Sachs, and Dean Witter) founded the Intercontinental Exchange (ICE) which undertook over-the-counter trading of US energy commodities. In 2001, ICE purchased the IPE, which was trading crude oil and heating oil futures, and renamed it ICE Futures. The ICE market is a major competitor to NYMEX. Speculators on the ICE are assisted by the possibility of buying a future contract by paying only 3.8% of a margins contract (since increased), which gives great leverage in manipulating the market. This has made it possible for speculators to buy five times the world oil production in a day. These exchanges are essentially trading paper since they hardly ever take delivery.
The activities of speculators and hedgers (they like to call themselves energy traders) deliberately cause price instability, which in turn yield very great profits, often as a result of shorting. Oil prices therefore do not much reflect either gluts or shortages of supply, nor high prices by producing countries. Oil-producing countries and oil companies like high and stable oil prices. Consumers like low oil prices, but speculators like fluctuation, so that they can deal in derivatives. An increasing share of the London and New York trading moved off regulated exchanges to unregulated Over-the-Counter (OTC) exchanges. Traders operating on exchanges like NYMEX are required to disclose significant detail of their trades to federal regulators (who it turned out did nothing much about it), but traders in OTC exchanges are not required to disclose such information. The Bank of International Settlements estimated that in 2004 that the global OTC market had grown to over $248 trillion.
The US military presence at some thousand bases around the world results from the decision to attempt to control the oil and gas throughout the world, not just to ensure future supplies on an America-first basis. US antithesis against Iran was initially in response to an Iranian announcement that it would be starting an oil exchange to trade in non-dollar currencies, which concerned the U.S. if it became a Middle East success. The U.S. needed to support the reserve status of the US dollar.
The U.S. has aggressive relationships with oil-rich countries, big oil importers, and strategically-positioned countries, including China, Ecuador, Iran, Iraq, Libya, Russia, Saudi Arabia, Sudan, and Venezuela because they are considered by the U.S. to frustrate US ambitions in various ways. Diplomacy, and the absence of a threatening US military, could improve US oil security. The US military is the biggest consumer in the world, so withdrawing back to the US borders would save an immense amount of oil.
In October 2005, Condoleezza Rice confirmed in testimony to the Senate Foreign Relations Committee that the redesign of the Middle East had been US policy since 9/11. The March 2006 US National Security Strategy ominously stated that "Only a small number of countries make major contributions to the world's oil supply. The world's dependence on these few suppliers is neither responsible nor sustainable over the long term." This sounds like a justification for US invasion.
SO, FAREWELL THEN PEAK OIL...
You don’t often hear about peak coal, despite US coal production having peaked in 1913. The U.S. has more than 200 years of coal reserves (although Russia has more than 400 years). Just under a half of US electricity in 2009 was produced from domestic coal (70% in China), with more than 150 coal-fired plants planned in 42 US states. Oil became the main substitute for coal, not because it is depleted (a fear that started before 1800), but because of transportation by road.
It is clear that the days of gas guzzlers like the ocean liner QE2, which managed to move a metre with each litre of fuel, are finished. Large automobiles are still needed to transport large people, as well as those with a swollen sense of self importance. Cheap fuel is not an American birthright, but it helps to win elections. In addition, dependence on imported oil bothers many Americans.
Many peak oilers take an apocalyptic view of the future, probably unaware of the many failed end-of-the-world predictions. It is an ignominious task to resume an earthly life after a failed prediction of the end of the world -- or of oil supply for that matter. Competent geologists tend not to spend too much time refuting peak oil notions, since to do so would be to engage in a religious debate with believers, rather than to conduct discourse on matters of science and engineering.
In terms of the energy equivalent for oil and gas reserves (converting one trillion cubic feet of gas to 16.6 billion barrels of oil), Russia has twice the energy reserves of Iran, followed by Qatar, with Saudi Arabia in fourth position. In addition, much of Russia has not been explored. Discoveries are shut-in, pending their being linked to pipeline networks. Only a third of the world's sedimentary basins have been reasonably-well explored, so you do not have to be an optimist to expect there to be more than a hundred years supply of oil for the world.
The peak oilers have been a ten-year flash-in-the-pan that is now coming to an end. There is no oil supply crisis looming for the near future. Hearken to Sheikh Ahmed Zaki Yamani, the former Saudi oil minister and OPEC leader, who famously remarked that "The Stone Age did not come to an end because we had a lack of stones, and the oil age will not come to an end because we have a lack of oil."
Rimont, Ariège, Midi-Pyrénées, France - November 25, 2010
[ed. In the spirit of the holiday season Gilles d'Aymery will agree to disagree and leave it at that.]
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