Peak Oil and the IEA

Keith Kohl

Written By Keith Kohl

Posted November 10, 2008

"The global peak in oil production will be the single greatest event of our generation. And I’m still surprised to find that some people fail to believe that peak oil is right around the corner."

That’s what I told my Energy and Capital readers in 2007. Interestingly, that was right about the time the Saudis believed that $50 per barrel was an "optimal" price.

Since then, we’ve followed oil’s unprecedented rise to $147 per barrel last July and subsequent fall due to the financial crisis. The turmoil has caused oil prices to plummet back to $60 a barrel. Now, whenever I hear people say that cheap gas prices are back for good, I can’t help but sigh. They just don’t understand the impact that peak oil will have on our society.

Named after geophysicist M. King Hubbert, peak oil refers to the point when global oil production reaches a peak. I’d also like to take a moment to reiterate another point I’ve made over and over again to readers: Peak oil is not about how much oil is left in the ground, but rather the rate at which we can produce that oil.

I’m pretty sure my readers have seen the classic bell-shaped curve at one point or another, even if you’ve never taken a Peak Oil : 101 class. Fifty-two years ago, Hubbert delivered his famous speech to the American Petroleum Institute, accurately predicting the year that U.S oil production would peak.

Let’s fast-forward to 2005, when the Hirsch Report was released. The report, created for the U.S. Department of Energy, presented another dire warning that peak oil was upon us. The Hirsch report came to several conclusions on peaking oil production. In essence, it will take an enormous amount of time and money to mitigate the effects of peak oil, which can take up to two decades.

On Wednesday, you can tack on another date to remember after peak oil.

Peak Oil and the IEA

In two days, the International Energy Agency will release their annual energy report.

So what can we expect from the IEA this year?

For starters, we can say goodbye to cheap oil again.

Despite cutting their forecast for global oil demand by 10 million barrels per day in 2030, triple-digit oil prices are in our near future. The IEA expects prices will remain above $100 per barrel through 2015, rising to $200 in the next two decades.

The problem comes down to supply as oil producers fail to make up the shortfall of global demand. As expected, most of the supply growth will come from OPEC, which controls roughly 40% of the world’s oil production.

The part we’ll be paying particular attention to, however, will be the rate of decline in existing fields. Two weeks ago, information on the upcoming report was leaked, which said fields were declining at a rate of 9.1%. The IEA was swift to react to the leak, dismissing the news as "misleading" and saying that the figures have been revised.

Don’t forget that we were told by CERA that the average rate of field decline 4.5%, which means producers need to find over 3 million barrels per day just to maintain production levels.

Even if you don’t see the seriousness of field decline, take a note from Pemex’s latest woes.

If Cantarell has taught us anything, it’s that peak oil is a reality. Output at the once-massive Mexican oil field fell 14% in September, producing 2.7 million barrels per day that month. Three years ago, production from Cantarell made up 65% of Pemex’s total output.

Today, Cantarell’s share in total output has dropped to 35%.

Playing Peak Oil

Don’t let the doom and gloom get to you too much.

People keep saying that renewables and alternative energy sources will succeed oil for the world’s energy throne.

I completely agree.

Unfortunately, I don’t see that happening overnight. The hard fact to swallow is that our world is still hung up on fossil fuels. It would be foolish to ignore this simple truth: Approximately 86% of the world’s energy comes from oil, coal and natural gas.

For investors, Wednesday’s energy report will represent a turning point in peak oil awareness. From here on out, the energy game will change forever, and those of you savvy enough to recognize that will be envied by the panicked sellers of today’s market.

People constantly ask me why I haven’t sold off my energy companies yet. When I explain my long term positions to them, all they can do is nod and rush to cancel a few of their trading orders. Over the next few weeks, we’re going to take a closer look at exactly how peak oil will affect your investments.

Until next time,

keith kohl

Keith Kohl

Energy and Capital

P.S. As I mentioned, renewable energy will have to fill oil’s void over time. Not overnight, but through years of transition and billions of dollars of investment.  

Incidentally, my colleague, Nick Hodge, has discovered three wind stocks that will take off when the IEA releases its report. Here’s the full report on how you can properly position yourself to take advantage. But you have to hurry, the IEA is releasing its damning evidence in just two days!

Also, for those of you who are history buffs (like myself), I’ve tracked down Hubbert’s original 1956 presentation to the American Petroleum Institute. If you’re interested in reading it, you can find it here.

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