Peak oil: Is the global economy going to run out of gas?

As the global community focuses on righting the economic ship of state, it seems worthwhile to take another peek at the "peak oil" debate. The basis of considerable controversy, peak oil is the theoretical point at which global oil production will plateau, and then irreversibly decline. Geologists and veteran oil industry analysts have varying forecasts as to when peak oil will occur, with several arguing that the concept itself is flawed, and that crude will remain abundant through the 21st century.

Still, the forecasters all agree on one point: if global oil production peaks, the price of oil will quickly rise to unprecedented levels. For example, given current demand conditions, if peak oil occurred today, oil would quickly rocket to $100, then $150 per barrel, creating the world's fourth oil shock.
Lynch: Peak Oil Is a Chimera

For the individual investor, the question of peak oil and its effect upon investing largely boils down to a matter of position. For example, Energy Consultant Michael Lynch, former director for Asian energy and security at the Center for International Studies at the Massachusetts Institute of Technology, denies the existence of peak oil and suggests that investors don't need to prepare for it.

According to Lynch, a motivated group of scientists and laymen are basing their peak oil conclusions on poor analyses of data and misinterpretations of technical material. "A careful examination of the facts shows that most arguments about peak oil are based on anecdotal information, vague references and ignorance of how the oil industry goes about finding fields and extracting petroleum," Lynch said.

Lynch goes on to argue that, contrary to peak oil theorists' main points, new oil discoveries are keeping pace with production. The "easy oil" to extract is not running out, and geopolitical risk is not greater today than in was in the 1930s or 1900s, when a man named Josef Stalin was a Communist organizer in the Baku oil fields. Moreover, Lynch stresses that the Earth does not contain merely 2 trillion barrels of recoverable oil, but about 10 trillion barrels.

Concerning recoverable oil, he points out that a century ago, only 10 percent of oil was considered recoverable; improvements in technology have increased that to 35 percent today - adding 2.5 trillion barrels to the recoverable category. With this in mind, Lynch points out, it is likely that oil will remain abundant, and the price will eventually drift back down to the historical, real price of $30 per barrel. Given that oil traded Wednesday up 78 cents to $71.87 per barrel, this would be a highly significant development for investors.

Simmons: peak oil is real

Veteran oil analyst Matt Simmons, founder of Simmons & Co., a Houston-based investment bank, holds a different view.

In his 2005 book, Twilight in the Desert, Simmons argues that oil output from Saudi Arabia, holder of the largest proved reserves in the world, is reaching an apex and will soon decline. The resulting realization of first a top to oil production and then emerging scarcity ends forever the era of cheap oil.

The Kingdom of Saudi Arabia has strongly disagreed that its fields, including the massive Ghawar oil field, are approaching a production peak. The Kingdom does not publish production and reserve results for individual oil fields.

Further, Simmons, in a September 4 article in Foreign Policy, also disagreed with Lynch that new technology will enable oil producers to extract a vastly larger amount of oil. "In fact, the seeds of this so-called technological revolution - the ability to exploit oil from deep water or drill horizontally - were first developed 40 years ago. I personally raised a great deal of the venture capital that helped implement some of the most important technical advances in the industry, " Simmons wrote. "None of this technology is new - in fact, it is now quite mature. Sadly, there are few new ideas in the oilfield pipeline to replace advances that were made decades ago."

Simmons added that, "it would be comforting if some vast new oil frontier existed that would recreate the 20th century's oil miracle, but almost five decades have now elapsed since the last great super-giant oil fields were discovered and the last frontier basins were found."

Energy Analysis: Once again, the elephantine oil analysts are wrestling, and as a Kenyan friend says, "When elephants are wrestling, it's best to stay out of the way." The oil analyst community remains divided over the issue of peak oil. Perhaps a better tack is to continue a move away from oil for all uses - residential, commercial, automotive - to lessen dependency on volatile, economic shock-inducing, and uncertain crude. I've noted the many benefits of increased natural gas use in the United States; after all, no one ever talks about "peak natural gas."

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