When I began writing about peak oil professionally in 2006, it was generally considered a tinfoil hat theory. The notion that oil production might peak around 2012 (plus or minus) was only taken seriously by a few analysts who were considered extremely pessimistic.
Official forecasts had no cognizance of it whatsoever. All were confident that oil supply would continue to grow steadily to 130 million barrels per day (mbpd) and beyond, at prices that would be considered astoundingly cheap by today's standards. Oil companies rarely mentioned peak oil, and when they did, it was in a casually dismissive way.
But as time marched on, the cornucopian arguments fell one by one. My longtime readers have seen the story unfold, but for the benefit of new readers, here's a quick summary...
Forecasts grew increasingly pessimistic as it became apparent that regular conventional crude supply had peaked at the end of 2004. Even as the biggest oil price spike in history ensued from 2005-2008, crude production remained flat and unresponsive.
OPEC scaled back some of its development plans as costs soared. Non-OPEC production not only failed to deliver any actual increase, but began to decline. Forecasts were revised lower.
Corn ethanol boomed and busted, as it was revealed to be the net energy non-starter that serious analysts always knew it was. It also was suspected of adding pressure to food prices at a most inopportune time.
Unconventional production from oil shale and tar sands failed to grow as expected, as producers shied away from high-cost, low-production projects.
The International Energy Agency (IEA) finally included the depletion of mature fields in its analysis, and became increasingly shrill in its warnings about future supply.
A few current and former oil industry executives began making public statements about the diminishing prospects for new supply, and a few even acknowledged that it would be hard to increase production much beyond current levels.
Then high oil prices proved intolerable to an economy stretched thin by the bursting of the bubbles in the real estate and financial sectors.
Yet official recognition of the peak oil threat remained muted, couched in warnings about "adequate investment" and blithe assertions that demand would soon peak, averting any supply shortage.
All that seems to have changed in the last month. A sudden deluge of reports and summit meetings suggest that the oil industry and energy officials are now taking peak oil very seriously indeed.
The first bombshell was actually dropped on February 10, when the UK Industry Task Force on Peak Oil and Energy Security issued a report called "The Oil Crunch: A wake-up call for the UK economy." I only mentioned it in passing at the time, but it was a stern warning that "oil shortages, insecurity of supply and price volatility will destabilise economic, political, and social activity potentially by 2015."
It only made the news because Sir Richard Branson personally endorsed it; but the fact that the task force comprised top UK executives and energy experts lent it enough weight to be rather widely circulated in the press.
The British government, including energy minister Lord Hunt, responded by staging a closed-door summit meeting with the taskforce on March 22. As the UK's Guardian reported, the government intended to develop an action plan to contend with a near-term peak, and to "calm rising fears over peak oil."
Veteran peak oil analyst and taskforce member Jeremy Leggett explained: "Government has gone from the BP position — '40 years of supply left, the price mechanism works, no need to worry' — to 'crikey'." He urged the assembly to properly assess the risks of peak oil, and to immediately begin preparing for the end of globalization and an era of oil shortages in the West.
According to reports from attendees, the summit yielded some important conclusions:
However, the notion that peak oil will mean the end of economic growth, as I have argued, apparently fell on deaf ears. Still, the very fact that the government has engaged with the peak oil community and formed a parliamentary group to study the issue offers a sliver of hope that, at least in the UK, we'll have some measure of consciousness about the issue and an idea of what to do about it as we drive off the peak oil cliff.
The next was a report that surfaced around March 12. Three authors from the College of Engineering and Petroleum at Kuwait University had applied advanced mathematics to reserve and production data for the top 47 oil producing countries using a multi-cycle Hubbert model, which demonstrated a much better fit to historical data than single-cycle Hubbert Curve analyses.
The model estimates the world's ultimate crude oil production at 2140 billion barrels, with 1161 billion barrels remaining to produce as of the end of 2005. It forecast that world production would peak in 2014 around 79 mbpd. The annual depletion rate of world reserves was estimated to be around 2.1%.
The results weren't really news to the peakists, for they matched up quite well with the models of Colin Campbell, Jean Laherrère, and other analysts who have warned about peak oil since 1995. What made this report interesting was that first, it was from Kuwait; and second, it brought a new level of mathematical rigor to the study.
The model indicated that non-OPEC production peaked in 2006 at 39.6 mbpd. It forecasts that OPEC production will peak in 2026 at 53 mbpd, up from 31 mbpd in 2005, with the majority of the increase coming from Iraq, Kuwait, and the United Arab Emirates. Then OPEC production is expected to decline to 29 mbpd by 2050.
On March 22, another bombshell exploded in the press as former UK chief scientist David King and researchers from Oxford University released a paper claiming that the world's oil reserves had been "exaggerated by up to a third," principally by OPEC.
Their "objective analysis" showed that conventional oil reserves stand at just 850-900 billion barrels — not the 1,150-1,350 billion barrels that are officially claimed by oil producers and accepted by the politically influenced IEA.
They anticipated that demand could outstrip supply by 2014-2015.
In a statement that sounded like a direct echo of what peak oil analysts like me have been saying for years, co-author Dr. Oliver Inderwildi remarked, "The belief that alternative fuels such as biofuels could mitigate oil supply shortages and eventually replace fossil fuels is a pie in the sky. Instead of relying on those silver bullet solutions, we have to make better use of the remaining resources by improving efficiency."
Again, it was hardly a revelation. I detailed the "political reserves" additions of OPEC producers in 2007, when I was writing Profit from the Peak. But the fact that it was recognized widely in the press was a marked change from the past.
The future of fuel will indeed be all about efficiency and alternative energy. This process — whether you've noticed or not — is well underway. Hundreds of billions will be made as a select group of companies slowly eradicate the rampant waste in our electricity distribution system, which has been estimated at upwards of 60% by analysts.
On March 25, ConocoPhillips CEO Jim Mulva admitted that pursuing new oil reserves just doesn't pay. The remaining resources have become too marginal and too expensive, and the competition for them has become too intense.
Rather than keep slugging it out with bigger and better-funded players in pursuit of growth, Conoco has decided to sell $10 billion worth of its assets over the next two years, all of them in the marginal category, and concentrate on producing its core assets.
The proceeds will be used to buy back its stock, reduce its debt, and raise dividends — just as rival ExxonMobil has been doing for the last five years or so.
When I inferred in Profit from the Peak that the oil majors were spending vastly more money on buying back stock than investing in new exploration because reserves were getting too expensive and risky, veterans of the Street greeted the idea with extreme skepticism.
Now it's a plain fact. A Rice University study released in July 2008 found that the five largest international oil companies spent about 55% of their profits on stock buybacks and dividends in 2007, but only about 6% on new exploration and production. "Could we spend $20 billion or $25 billion [on exploration]? Absolutely," Conoco spokesman Gary Russell said at the time. "Could we do it effectively, in a way that provides ultimate value to our shareholders? Probably not."
Those of us who have been observing the trend for years greeted the latest Conoco comments with little more than a shrug, but it did get the attention of the laggard mainstream press.
In my next Energy and Capital column two weeks from now, we'll see how the U.S. Department of Energy is now considering the possibility of a decline in world liquid fuels production by 2015, and pick up a few more clues from the International Energy Forum held this week.
Until next time,