Oil Trends Blog

Although we continue to maintain that the world is in no immediate danger of suffering oil shortages, it is clear that world wide oil production will eventually peak.

The following bell shaped graph based on the technical analysis by the association for the Study of Peak Oil and Gas (ASPO) shows we are reaching a production maximum:

As you can see, discoveries have been dropping off since the 1960s and projected production is expected to peak around 2010. One of the problems with projecting a peak oil date is the ambiguous definition of oil reserves and the politically motivated reporting of oil reserve data. As mentioned in William Clark’s book, “Petrodollar Warfare” and citing Jean Laherrere of APSO, “the pessimists use technical data, whereas, the optimists use political data.” He goes on to say “oil is so important the publishing of reserve data (even production) data has become a political act.”

According to Clark, from 1985 to 1990 the aggregate proven oil reserve data for six OPEC members went from 379 billion barrels of proven reserves to 693 billion barrels. However, the actual discoveries during this time period were around 10 billion barrels. Despite these reported reserves appearing to be blatant political figures, the US government and the media continued to report these fantastic numbers as if they were factual.

In this regard there is considerable evidence to suggest that Saudi’s oil reserves have been exaggerated for several years, perhaps by as much as 40 percent. As pointed out by Matthew Simmons, a key advisor to the Bush Administration, Saudi Arabia’s ability in oil production provides evidence that casts doubt on their ability to effectively serve as a swing producer in the global market.

The above graph showing where we are with oil production makes it clear why Bush and Cheney was secretively willing to risk so much in terms of America’s standing in the world, both geopolitically and economically, and move to invade Iraq under the guise of war on terrorism. The peaking of domestic oil production in the UK may have provided one of the reasons PM Blair endorsed the Iraq war.

In light of the real concern of limited oil output, the US desperately needs a viable national energy policy that involves peaceful negotiations with other user/producer nations. There is time to correct the misguided direction of Bush and Cheney. Our failure to do so earlier was perhaps the greatest mistake since the end of the Cold War. The time is long overdue to address the upcoming peak oil issue with the people of the United States and frame the issues realistically and peacefully in terms other than the “war on terrorism.”

We will have more to say regarding the impact of world oil supply and demand on the US government’s political policies in the upcoming blogs.

Much political discussion has addressed the fact that oil companies have not been drilling for oil on leases they presently have available. Despite the efforts of many politicians, such as, Sarah Palin who consistently urge companies to “drill baby drill” there has not been a significant move to drill on these leases.

As we have noted in earlier blogs the difficulty lies in the fact that the easily produced, high quality crudes have already been produced. Remaining oil reserves require much more effort and expense and will only result in the production of undesirable heavy-high sulfur crude oil. Additionally, decline curves of newly produced discoveries are quite step and production lasts for only a short time. As a result, without unrealistic price increases for crude oil the historical Return on Investments (ROI) do not warrant developing many of these leases.

More importantly, what is happening in many cases is the energy spent to extract a barrel of oil exceeds the energy provided by that barrel. This concept, as discussed by William R. Clark in his book “Petrodollar Warfare” is called Energy Return on Energy Invested (EROEI). As he points out, years ago super-giant oil fields were still being discovered and could produce EROEIs of 200, or energy returns 200 times greater than the energy actual expended to extract the oil. Comparatively, oil wells in deep water, such as, the Gulf of Mexico, currently incur EROEIs of less than 5. The Canadian tar sands, while having vast reserves, have an EROEI of 1.5. If these numbers are accurate, we will eventually reach a point when all remaining oil reserves will require more energy to produce than the energy returned. In other words it will no longer be logical to expend the energy to extract this oil. In such a scenario, the EROEI for those oil fields becomes an energy sink and the oil will simply remain in the ground. Unlike the traditional Return on Investment (ROI) calculations, the amount of money invested in a mature oil field is completely irrelevant if the energy required to extract the oil is greater than the return. In these cases increasing oil prices to improve ROI is just a short term fix.

Despite the social, economic, and geopolitical implications of global Peak Oil many governments, including the Cheney consortium, are reluctant to address or publish information regarding EROEI and continue in the unfounded belief that more drilling will result in satisfying increased demand to further economic growth.

Our newly elected officials need to aware of the fallacy inherent in the “drill baby drill” philosophy and begin to develop an oil policy which makes more long range sense.