NYT On Peak Oil, And The Skeptics Response

I've had several commenters over the recent days point out this long New York Times piece on peak oil by Peter Maass. In it, readers of this blog will likely learn nothing new, as it touches on Matt Simmons' groundbreaking (and, probably, during the process of his investigations, backbreaking) work piecing together Saudi Arabia's oilfield production by reading technical journals and reassembling them to form a coherent whole view, as if a jigsaw puzzle. And then the predictable denials by Saudi higher-ups, and so on. One interesting angle I haven't seen anyone else bring up, though, is that a sudden downward revision in claimed reserves could be taken as a kind of mass fraud, which, since the Kingdom is so heavily petro-dependent, could have bloody ramifications:

The mere admission that Saudi reserves are not as impressively inexhaustible as the royal family has claimed could lead to hard questions about why the country, and the world, had been misled. With the death earlier this month of the long-ailing King Fahd, the royal family is undergoing another period of scrutiny; the new king, Abdullah, is in his 80's, and the crown prince, his half-brother Sultan, is in his 70's, so the issue of generational change remains to be settled. As long as the country is swimming in petro-dollars -- even as it is paying off debt accrued during its lean years -- everyone is relatively happy, but that can change. One diplomat I spoke to recalled a comment from Sheik Ahmed Zaki Yamani, the larger-than-life Saudi oil minister during the 1970's: ''The Stone Age didn't end for lack of stone, and the oil age will end long before the world runs out of oil.''

Of course, if you believe Simmons -- and yes, I do, else why bother with the blog? -- the situation for the Saudis becomes rather dire. Before, they could just open the spigots and drive down the price of oil. With the spigots operating night and day at top capacity, there's no room left for such manipulations, and so here we are:

Without the ability to flood the markets with oil, the Saudis are resorting to flooding the market with promises; it is a sort of petro-jawboning. That's why Ali al-Naimi, the oil minister, told his Washington audience that Saudi Arabia has embarked on a crash program to raise its capacity to 12.5 million barrels a day by 2009 and even higher in the years after that. Naimi is not unlike a factory manager who needs to promise the moon to his valuable clients, for fear of losing or alarming them. He has no choice. The moment he says anything bracing, the touchy energy markets will probably panic, pushing prices even higher and thereby hastening the onset of recession, a switch to alternative fuels or new conservation efforts -- or all three. Just a few words of honest caution could move the markets; Naimi's speeches are followed nearly as closely in the financial world as those of Alan Greenspan.

And thus to the retired Sadad al-Husseini, former head executive of Saudi Aramco, and probably the man who knows the most about Aramco's situation not actually in the company at the moment. He's a worried man:

We spoke for several hours. The message he delivered was clear: the world is heading for an oil shortage. ... ''You look at the globe and ask, 'Where are the big increments?' and there's hardly anything but Saudi Arabia,'' he said. ''The kingdom and Ghawar field are not the problem. That misses the whole point. The problem is that you go from 79 million barrels a day in 2002 to 82.5 in 2003 to 84.5 in 2004. You're leaping by two million to three million a year, and if you have to cover declines, that's another four to five million.'' In other words, if demand and depletion patterns continue, every year the world will need to open enough fields or wells to pump an additional six to eight million barrels a day -- at least two million new barrels a day to meet the rising demand and at least four million to compensate for the declining production of existing fields. ''That's like a whole new Saudi Arabia every couple of years,'' Husseini said. ''It can't be done indefinitely. It's not sustainable.''

...

Although Matthew Simmons says it is unlikely that the Saudis will be able to produce 12.5 million barrels a day or sustain output at that level for a significant period of time, Husseini says the target is realistic; he says that Simmons is wrong to state that Saudi Arabia has reached its peak. But 12.5 million is just an interim marker, as far as consuming nations are concerned, on the way to 15 million barrels a day and beyond -- and that is the point at which Husseini says problems will arise.

Well, of course, and those problems we know about: depletion, reservoir damage from overproduction, and so forth.

Not everyone is so convinced, of course; we have Daniel Yergin at Cambridge Energy Research Associates, who has recently predicted an increase in productive capacity to a worldwide level of 101 Mbpd by 2010, pointing to SEC rules that are based on 30-year-old technology and which fail to count things like Canadian tar sands and other nonconventional oil sources. In his recent Financial Sense interview, Matt Simmons called Yergin's work "a really flawed piece of analysis", which should maybe tell you something.

And no doubt that we're going to hear in the not too distant future a counterattack of a number of debunkers hoping to provide a counterpunch to this Times article. One such came in my inbox today, pointing to this Freakonomics article. Levitt and Dubner come out swinging, calling Peak Oil "the media's new version of shark attacks":

Oops, there goes the whole peak oil argument. When the price rises, demand falls, and oil prices slide. What happened to the "end of the world as we know it?" Now we are back to $10 a barrel oil. Without realizing it, the author just invoked basic economics to invalidate the entire premise of the article!

Well, sure, but then the Great Depression was just an "adjustment", too! Have the authors forgotten that just because supply and demand meet that it could still be a hardship? As odograph wrote in the comments,

Be careful that your prediction of optimism doesn't come to match someone else's prediction of pessimism!

Along these same lines, the other stalwart bear of oil prices, Michael Lynch, has bravely come out predicting $40/bbl oil by the end of the year, citing large numbers of new projects coming onstream, and -- hold on -- declining demand:

Lynch expects prices to drop to $40 a barrel by the end of the year, if not sooner. He's not alone: The Russian government has drafted its 2006 budget assuming that's all it will get for its oil. That would bring gas prices down in the range of $2 a gallon.

Well, bully for them, and I'm hoping they're right, sort of. But the bad news is that ultimately the oil will run out, something even CERA concedes, suggesting that peak production will hit around 2020. Whatever happens, though, you can be certain that the markets will let us know where the bottlenecks are. If allowed to function properly, alternatives will arise -- or else.