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Sunday
Feature
Plenty
of oil left in the global tank
By David
Smith
AS
everybody who has filled up recently knows, petrol and diesel
prices have risen and are staying up. The £1
a litre “barrier” was breached easily.
High oil
prices contributed significantly to a 3.4% jump in manufacturers’ input costs last month, a 10.3% rise
on a year earlier. Petrol was instrumental in pushing “factory-gate” inflation
to a 16-year high of 4.5%. There will be more of this on
Tuesday in the latest figures for retail and consumer price
inflation.
Oil did
not quite make it to $100 a barrel and, for a few days dropped
below $90. But last week’s coordinated
action by central banks pushed prices back above $90.
So the surge in prices in recent months has revived a familiar
question. Is it because oil is starting to run out? Have
we reached, or passed, the peak in world oil production?
A new film
just out in Britain, A Crude Awakening: The Oil Crash, begins
with a sombre Philip Glass soundtrack. Its
opening line, “Oil is the excrement of the devil”,
tells you where it is coming from. It outlines a vision of
a world beyond oil and “how our civilis-ation’s
addiction to oil puts it on a collision course with geology”.
Peak oil
is a broad church. To be fair to A Crude Awakening, it is
hard to argue too much with the definition on its website. “Peak
oil doesn’t mean ‘running out of oil’,
but rather ‘running out of cheap and plentiful oil’,” it
says. The film is directed mainly at an American audience,
profligate in its oil use.
But what
about the peak-oil “ultras”, who claim
world oil production has reached or passed the summit? It
has such a widespread following on the internet that surely
it must be true. Actually, it is wrong.
The “peak oil has already happened” argument
was partly based on the fact that global oil production,
on International Energy Agency figures, had never been higher
than the 86.13m barrels a day of July 2006.
That, however, is no longer true. World oil output in October
was 86.5m barrels a day, 1m more than in October last year
and 3m more than in October 2005. It edged up to 86.55m last
month.
Even if it was the case that global oil production had been
flat over the past couple of years, however, it would prove
very little.
Why? During this time the Organisation of Petroleum Exporting
Countries (Opec) cut output and only recently started to
increase exports again. Less than five years ago Opec was
happy with an oil price in the $22-$28 a barrel range. Now
it is content with $90. Opec increased output quotas by 500,000
barrels a day this autumn but refused to do so again earlier
this month.
Production in many oil-producing countries is constrained,
not by geology but by politics. Iraq is producing only two-thirds
what it did on the eve of the first Gulf war in 1990. That
was no golden age, production running below potential because
of weak investment during the Saddam era. Iran is producing
well below potential.
The most
important reason for rejecting the “peak
oil is here” argument, however, is that current production
reflects investment decisions taken years ago, when prices
were much lower. It was only just over three years ago that
oil rose above $40 a barrel. A few years earlier it was $10-$11.
Higher prices will bring more output on stream. A new study
by Germany’s Energy Watch Group, which said the peak
was in 2006, makes the astonishing admission that it took
no account of prices.
There is a long history of crying wolf on peak oil, dating
back to the 1920s. The patron saint of peak oil, the geophysicist
M King Hubbert, predicted in 1956 that oil output from the
lower 48 states in America would peak around 1970 and he
was right. He also predicted global production would peak
in about 1990 and he was wrong.
Colin Campbell, founder of the Association for the Study
of Peak Oil and Gas, first called the oil peak in 1990 and
then at regular intervals. His view today is that a peak
remains imminent.
Peak-oil
people get excited about the giant Ghawar field in Saudi
Arabia because it is apparently producing water
rather than oil. The Ghawar “water cut” has reached
30% and bestselling books have been written on its imminent
eclipse.
But, as
Michael Lynch, peak-oil sceptic and president of the consultancy
Strategic Energy & Economic Research,
points out in a paper, Crop Circles in the Desert, this
is a low figure. The average water cut throughout the industry
is much higher, at 75%. The Ghawar cut rises and falls
but
the field still churns out 5m barrels a day, even at the
age of 50.
Lynch is
dismissive of another argument, that no big oilfields are
being discovered. That, he said, is the nature of the
industry – big fields are easier to find and smaller
satellite fields around them come later. Large areas with
the oil potential of, for example, Saudi, have not yet
been fully explored.
There is, then, plenty of oil in the tank. Opec says additions
to recoverable reserves since the early 1980s have been three
times cumulative output over the period.
So why are prices so high? I have been taken by surprise
and so have the oil bulls. A couple of years ago Goldman
Sachs came out with a bullish forecast that the price would
average $60 over five years. Today that looks conservative.
Oil is expensive because of geopolitical uncertainty, strong
demand from the global economic boom of the past few years
and speculative investment. Opec, which has most of the reserves,
is happy to extract money from consumers to fund spending
programmes. Most oil is in places we would not want it to
be.
Demand
has responded to higher prices, but not enough. The International
Energy Agency’s worry is not that oil
has reached a peak – it expects a 50% rise by 2030 – but
that demand will rise faster than supply. We will see how
much impact next year’s economic slowdown has.
Sheikh
Yamani, the former Saudi oil minister, famously said the
stone age did not end because the world ran out of stones.
How will the oil age end? In a speech to mark the bicentenary
of the Geological Society, “Peak Oil – a metaphor
for anxiety”, BP’s Michael Daly predicted that
we would be debating when the oil might run out in 100 years’ time.
Long before then, thanks to high prices, alternative energy
sources, climate concerns and technological advances, we
will have probably passed the peak – but for oil demand
rather than supply.
One is that central banks are abandoning economic purity
and taking their eye off the inflation ball, and that they
should allow economies to suffer the consequences of past
excesses, even if that means a painful recession. The other
is that what we are seeing is classic central banking in
the Walter Bagehot mode, the first duty of a bank being to
keep the system working.
The purists have got it wrong, failing to see that central
banks are responding to an economic shock which, if unchecked,
would do more than penalise a few irresponsible bankers,
borrowers and investors.
They
also fail to understand the process through which monetary
policy
affects inflation – through demand. If inflation
were very high you might need a recession to get it out
of the system. That is plainly not the case now.
David
Smith is
the Economics Editor of The Sunday Times (david.smith@sunday-times.co.uk
). Petroleumworld
not necessarily share these views.
Editor's
note: This
commentary was originally published by The
Sunday Times, on
December 16, 2007. Petroleumworld reprint
this article in the interest of our readers.
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