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     Aug 18, 2007
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A new energy pessimism emerges
By Michael T Klare

When "peak oil" theory was first widely publicized in such path-breaking books as Kenneth Deffeyes' Hubbert's Peak (2001), Richard Heinberg's The Party's Over (2002), David Goodstein's Out of Gas (2004), and Paul Roberts' The End of Oil (2004), [1] energy-industry officials and their government associates largely ridiculed the notion.

An imminent peak - and subsequent decline - in global petroleum output was derided as crackpot science with little geological

foundation. "Based on [our] analysis," the US Department of Energy confidently asserted in 2004, "[we] would expect conventional oil to peak closer to the middle than to the beginning of the 21st century."

Recently, however, a spate of high-level government and industry reports have begun to suggest that the original peak-oil theorists were far closer to the grim reality of global oil availability than industry analysts were willing to admit. Industry optimism regarding long-term energy-supply prospects, these official reports indicate, has now given way to a deep-seated pessimism, even in the biggest of Big Oil corporate headquarters.

The change in outlook is perhaps best suggested by a July 27 article in the Wall Street Journal headlined "Oil profits show sign of aging". Although reporting staggering second-quarter profits for oil giants ExxonMobil and Royal Dutch Shell - US$10.3 billion for the former, $8.7 billion for the latter - the Journal sadly noted that investors are bracing for disappointing results in future quarters as the cost of new production rises and output at older fields declines.

"All the oil companies are struggling to grow production," explained Peter Hitchens, an analyst at the Teather and Greenwood brokerage house. "[Yet] it's becoming more and more difficult to bring projects in on time and on budget."

To appreciate the nature of Big Oil's dilemma, peak-oil theory must be briefly revisited. As originally formulated by petroleum geologist M King Hubbert in the 1950s, the concept holds that worldwide oil production will rise until about half of the world's original petroleum inheritance has been exhausted; once this point is reached, daily output will hit a peak and begin an irreversible decline.

Hubbert's successors, including Professor Emeritus Kenneth Deffeyes of Princeton, contend that we have now consumed just about half the original supply and so are at, or very near, the peak-production moment predicted by Hubbert.

Since the concept burst into public consciousness several years ago, its proponents and critics have largely argued over whether or not we have reached maximum worldwide petroleum output. In a way, this is a moot argument, because the numbers involved in conventional oil output have increasingly been obscured by oil derived from "unconventional" sources - deep offshore fields, tar sands, and natural-gas liquids, for example - that are being blended into petroleum feedstocks used to make gasoline and other fuels.

In recent years, this has made the calculation of petroleum supplies ever more complicated. As a result, it may be years more before we can be certain of the exact timing of the global peak-oil moment.

On tap: The tough-oil era
There is, however, a second aspect to peak-oil theory, which is no less relevant when it comes to the global-supply picture - one that is far easier to detect and assess today. Peak-oil theorists have long contended that the first half of the world's oil to be extracted and consumed will be the easy half. They are referring, of course, to the oil that's found onshore or near to shore; oil close to the surface and concentrated in large reservoirs; oil produced in friendly, safe and welcoming places.

The other half - what (if they are right) is left of the world's petroleum supply - is the tough oil. They mean oil that's buried far offshore or deep underground; oil scattered in small, hard-to-find reservoirs; oil that must be obtained from unfriendly, politically dangerous, or hazardous places. An oil-investor's-eye-view of our energy planet today quickly reveals that we already seem to be entering the tough-oil era. This explains the growing pessimism among industry analysts as well as certain changes in behavior in the energy marketplace.

In but one sign of the new reality, the price of benchmark US light, sweet crude oil for next-month delivery soared to new highs on July 31, topping the previous record for intraday trading of $77.03 per barrel set in July 2006. Some observers are predicting that a price of $80 per barrel is just around the corner; while John Kildruff, a perfectly sober analyst at futures broker Man Financial, told Bloomberg.com, "We're only a headline of significance away from $100 oil." New disruptions in Nigerian or Iraqi supplies, or a US military strike against Iran, he explained, could trigger such a price increase in the energy equivalent of a nanosecond.

A signal of another sort was provided by the government of Kazakhstan in oil-rich Central Asia on August 7. It warned the private operators of the giant offshore Kashagan oil project - in the Kazakh sector of the Caspian Sea - to cut costs and speed the onset of production or face a possible government takeover. In an interview, Prime Minister Karim Masimov said threateningly: "We are very disappointed with the execution of this project. If the operator can't resolve these problems, then we don't exclude their possible replacement."

Kashagan, it must be borne in mind, is not just any oil project: it is the largest field to be developed anywhere in the world since the discovery of Alaska's Prudhoe Bay some 40 years ago. With estimated oil reserves of 9 billion to 13 billion barrels, it is crucial to the hopes of its principal developers - Exxon, ConocoPhillips, Shell, Total (of France), and Eni (of Italy) - to increase their output in the years ahead.

Consistent with the "tough oil" aspect of peak-oil theory, Kashagan is, however, proving dauntingly difficult to turn into a successful font of petroleum. The oil reservoir itself is buried beneath high-pressure strata of gas, making its extraction exceedingly tricky, and it contains abnormally high levels of deadly hydrogen sulfide; moreover, the entire field is in a shallow area of the Caspian Sea that freezes over for five months of the year and is the breeding ground for rare seals and beluga sturgeon.

As a result of these and other problems, the Kashagan operating consortium has seen the price tag for launching the project nearly double - from $10 billion to $19 billion - and has postponed the onset of initial production from 2005 to 2010, infuriating the Kazakh government, which had hoped to be earning billions of dollars in taxes and royalties by now.

A demanding world
And then there are those reports from high-level agencies and organizations on the global energy picture, all coming to the same basic conclusion: whether or not the peak in world oil output is at hand, the future of the oil supply in a world of endlessly growing demand appears grim.

The first of these recent warnings, titled the "Medium-Term Oil Market Report", was released on July 8 by the International Energy Agency (IEA), an arm of the Organization for Economic Cooperation and Development (OECD), the club of major industrial powers. Although filled with statistics and technical analyses, the report, assessing the global oil supply-and-demand equation through 2012, seemed to leak anxiety and came to a distinctly

Continued 1 2 

The 'peak oil' deja vu (May 23, '06)

An oil supply tsunami alert (May 4, '05)

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2. US gambles on Iran's 'soldiers of terror'

3. Missing US arms probe goes global

4. Philippines teeters on brink of total war

5. Panic attack: Asian markets take a tumble 

6. A stumble over the 'W' word in Afghanistan

7. The anatomy of a Thai porn scandal

8. Exit Iran's oil minister, and a pipeline too 

9. US 'surges', soldiers die. Blame Iran

10. Highlights of the (not so) silly season

(24 hours to 23:59 pm ET, Aug 16, 2007)



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