Peak-oil claims rear their head again
Despite signals that the world has plenty of crude to meet demand, the peak-oil theory is back in the headlines
Opec has 6m barrels a day (b/d) of spare capacity in store. Oil demand from OECD countries may have peaked in 2005. Crude oil stocks are sitting at record levels. Iraq aims to add another 4.5m b/d of production within five years. A host of new, large oilfields have been discovered in recent months. And governments will soon gather in Copenhagen to search for an agreement on cutting global emissions of greenhouse gases, with carbon-rich oil one of the culprits.
Despite all this, the peak-oil story is making front-page news again.
The publication this week of the International Energy Agency's (IEA) World Energy Outlook 2009 (WEO 09) seems to have set the peak-oil movement on edge, especially after revelations in one UK newspaper that the agency had massaged its production forecasts under pressure from the US government.
The Guardian newspaper claimed that whistleblowers told it the IEA had deliberately underplayed the rate of reserves depletion because any admission of an approaching supply crunch would send stock markets into a frenzy and damage the global economy.
It was the kind of story that worries those already inclined to distrust governments, companies and international bodies when they talk about oil reserves – or anything else relating to the world economy.
Meanwhile, one leading peak oiler, Swedish physicist Kjell Aleklett, said this week that world oil supply in 2030 would be closer to 75m b/d than the 105m b/d predicted by the IEA. The agency's methodology was based on obscure data, he suggested.
Concerns about oil supply do affect the crude market and the crude market in turn affects the world's economy. Evidence of that came in the recent global recession. The IEA, for one, acknowledged in its WEO 09 that the rise in oil prices from 2006 to the peak in 2008 lowered global GDP by an average of 0.3% a year. Other analysts have also laid some of the blame for the downturn at the feet of the oil market.
The oil industry doesn't much like the peak-oil thesis. Most executives acknowledge that finding new supplies is becoming more difficult and expensive, but tend to say the problem is much political as geological.
And the Guardian's thesis both over-estimates the impact of the IEA and ignores much of the message it has proclaimed, publicly, in recent years. In the first instance, the influence of the agency over crude markets has waned. Its frequent revisions of supply and production have relatively little effect on oil prices, which now move more frequently – and more dramatically – on fluctuations in the equity and currency markets.
At the same time, the IEA has repeatedly told anyone who will listen that heavy upstream investment is urgently needed to maintain output and expand it in line with models predicting the growth in demand over coming decades. It repeated that message again last week. Last year, it also acknowledged that decline rates in producing fields were higher than previously thought.
According to committed peak oilers, the decline rates and the forecasts for rampant new oil-consumption growth in Asia matter because, in their view, both world production and demand are too inelastic to cope. In other words, as supply tightens and prices rise, producers will hit a geological wall and consumers will be starved of their most essential commodity. Ever deeper recessions will follow.
The past two years have weakened these assumptions. Recent finds – from the new oil province offshore west Africa, to Iran, to Brazil's pre-salt, to BP's Gulf of Mexico find – point to the elasticity of production. When prices rise, companies find more oil. Those fields aren't in the same class as Saudi Arabia's Ghawar's (60bn barrels produced so far, with another 70bn available, says Saudi Aramco); but in total they could yield tens of billions of barrels of new oil. On top of Opec's existing spare capacity, that should take some of the sting out of geological peaks in older fields elsewhere.
But better news comes on the demand side. Cambridge Energy Research Associates (Cera), a consultancy, says demand from the OECD – a collection of rich countries – is now in terminal decline. Those countries account for more than half of the world's oil consumption. Falling OECD demand, says Cera, will offset rising demand from developing nations and take some of the heat out of price rises. The rich economies are also using less oil per unit of output – so they will be increasingly insulated from oil market spikes.
High oil prices, combined with the shift to more efficient means of production and transport, are behind this long-term fall in oil consumption in rich countries. Higher prices in future years will only accelerate this. In other words, consumption is also elastic; it does respond to price.
If the IEA, Opec, the oil industry and governments are to assure publics that their energy supply will last, they should also offer more information to justify their claims. The peak-oil movement does everyone a favour when it highlights the kinks in the methodology. Unless those upstream are willing to be more transparent about their reserves, they won't just lose the popular argument about how much oil there is left, they also risk losing market share as energy consumers worry about their crude supply, and switch to alternative fuels.