Do you feel lucky?

It’s a notable event when oil hits over $90 per barrel. Taking a moment to reflect on the occasion could be of some value.  Only a year ago, we saw a price of $55 dollars.  Simple logic of supply and demand would indicate that supply is very tight at this moment.

Back in 2005, surplus capacity had declined to roughly a million barrels a day, a very thin margin when dealing with daily production of 85 million barrels. Today, Saudi Arabia claims to have spare capacity of over 2 million barrels / day but has effectively cut production by 1 million barrels over the past two years, perhaps to support prices. OPEC has not yet used that capacity to push oil fluctuations downward but promises some production increases starting in November.

Saudi Arabia might be able to lower prices on a short-term basis. But, are higher prices a bad thing? The answer is mostly no. Naturally high prices affect people and business temporarily, but they also drive conservation, energy efficiency and ultimately greater independence that is greatly needed to reduce consumption. What are the prospects for our long-term supply of oil?

The editor of the UK Petroleum Review, Chris Skrebowski sees it as a problem of “oil flow.” If you can’t get enough product out of the ground or through the refinery to the market, then reserves mean nothing. With his megaprojects database, he has been tracking increased supply (oil flow), subtracting expected depletion rates of fields (roughly 4 million barrels / day) and comparing the result with projected demand since 2003. Since the time line from discovery of oil to commercial production averages 6 years, a prediction of new production till 2012 can be made. The result of his analysis shows a peak for oil production in 2011. “Peak oil” is considered to be when flows are inadequate to meet demand after which supply will start its natural decline. “It’s real, it’s imminent and it’s going to be unpleasant” he indicates.

An optimistic view has been usually provided by the International Energy Agency (IEA). The IEA, in a recent report expects world spare oil production capacity will shrink after 2010, and a “supply crunch” is likely. Fatih Birol, the chief economist, indicated in an interview in Le Monde that ” if the production in Iraq doesn’t increase exponentially from now to 2015 we have a very large problem, even if Saudi Arabia fulfills its promises.. of 3 Mb/d. The numbers are simple..… it will not be sufficient to meet the Chinese demand.” Queried on the growth of demand – “Unfortunately, there are lots of words but few actions. I hope that the consuming nations understand the gravity of the situation and put in place very strong and radical policies to slow the growth of oil demand.” The IEA has been predicting an increase of 2 million barrels a day in 2008 and an output level of 120 million barrels a day by 2030.

This month saw the release of an interesting report by the research organization Energy Watch Group (EWG) on the world supply of oil. A member of the German Legislature Hans-Josef Fell founded EWG. The report was based on the production records of oilfields around the world. A number of the key findings were that:

  • Peak oil is now. It is expected that world production will initially decline by several percent a year and by 2030 will be 39 million barrels per day – half of today’s figures.
  • Global proven reserves are smaller than believed by others – 854 Gb as opposed to the IHS Energy database figure of 1255 Gb. The area of difference being the numbers related to the Middle East.
  • The major international oil companies, in aggregate, have not been able to increase their production in the last ten years.
  • A growing supply gap has been caused by the decline of the North Sea fields and the Canterell Fields in Mexico. Additionally, Saudi production has been reduced by a million barrels a day – either a choice of the kingdom or as a result of declining production.

What are we to believe? IEA, an official energy-monitoring agency that has been predicting no problems to 2030 now shows doubts on capacity. Will they soon disavow the optimistic reserve pronouncements of the US Geological Survey? The size of discoveries has been shrinking since the 1960’s and we now use more than is being discovered. And we expect to increase the flow by 50% when the cheap and easy to find oil is gone?

A number of independent scientists and geologists have been forecasting declines based on the data that they see and the fear that the promises of Saudi Arabia are hollow. They see severe economic storms that threaten the very nature of our society in coming years.

George W. Bush, the geopolitical genius of our time, went to war in Iraq to conserve US control over Middle East oil and probably to have the “majors” develop the higher potential of the Iraqi oil fields, something not possible with Saddam Hussein in place. Alan Greenspan, the former chairman of the Federal Reserve said in his memoirs “the Iraq war is largely about oil.” Former US General John Abizaid also recently confirmed this. Based on recent posturing, it appears that a second oil war is possible with Iran. The official charge of “wanting to manufacture nuclear weapons” seems a bit thin given that Pakistan next door is a notoriously unstable state, possessing multiple atomic bombs. At the moment, Pakistan is a useful and pliable ally of the US and doesn’t have any oil. Iran is guilty of the crime of “having an independent foreign policy” in the same way that Cuba does. Should the US decide to bomb Iran we should expect the removal of 4 million barrels from world markets with huge increases in the price of oil. When Iran then retaliates on Saudi facilities or blocks the Strait, the damage to the world economy would be irreparable.

We now have George W playing Dirty Harry with his 44 magnum confronting the next bad guy – Iran and asking him “Do you feel lucky?”

Are we lucky to have governments without adequate energy policies determining our future? The Canadian Defence and Foreign Affairs Institute just released a report by Annette Hester entitled “Canada as an emerging superpower – Testing the case”. She notes we are only a small exporter of oil despite Harper’s spin and make some interesting points. “The relevant question is not whether Canada is an energy superpower, but how Canadian energy resources can be used to turn the country into a powerful modern nation, an example of capitalism done right.”

The cost of a deficient energy policy for Canada is high prices, lost opportunities, and eventually an unstable supply. If there is lots of oil, why are China and the US, the two major users, each going after control of supplies in a panic mode? Put on your seat belts. This could be a rough ride.


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