Was 'Peak Oil' a Multi-Billion Dollar Hoax?

Crude oil prices started their astonishing price rise in January of 2007 right on cue for a normal seasonal rise into the summer.  By August, prices were accelerating and continued higher going into the end of 2007.  The usual seasonal year-end decline was hardly noticeable. 

As 2008 began, crude prices seemed to be a one-direction trade as prices accelerated even faster. Something unusual was taking place in this market. OPEC and the Saudis claimed there was plenty of supply on the market but prices were being bid up regardless. Many analysts revived earlier predictions about peak oil and the impending decline in production as the justification for higher prices in anticipation of supply shortages in the future. Then in the middle of the summer the selling began.  Was peak oil just a multi-billion dollar hoax?

In Volatility Trading Digest™ Volume 8, Issue 25, Saudi Oil Summit, dated June 23, 2008 we wrote:  

A number of recent events suggest that there may be a coordinated effort underway to lower crude oil prices and the Saudi Summit may mark the beginning of more coordinated actions designed to curb prices. 

After the meeting, we were surprised by the lack of coverage by the financial press. There were hardly any mentions of the event and no details were provided about any agreements that were made.    

Crude Oil basis December 2008 (NYMEX) (CLZ8) 72.13.  

Shortly after the Saudi Oil Summit crude oil peaked on July 11, 2008 at 148.60 per barrel.  No doubt there are many factors contributing to the subsequent decline including the claim made by OPEC and the Saudis of excessive speculation in the futures market. If excessive speculation played a part in the price rise we would expect to see declining open interest in the futures market as long positions are liquidated.  In November of last year, open interest was 1.6 million contracts, by the middle of May when crude prices were still rising it had declined to 1.5 million.  At the price peak on July 11, 2008 the reading was 1.4 million and by this week they have declined to 1.1 million. So in the last 11 months open interest has declined about 31% with half of the decline in open interest occurring in the last 3 months since the peak in prices.  We are seeing long liquidation in the futures market and with hedge funds under redemption pressure we think there could be more to come.  

We are not claiming the entire price increase that began on January 15, 2007 at 57 and accelerated in August of ’07 from 67 was futures related. Nevertheless it must now be obvious to most everybody that it accounted for a substantial portion just as OPEC and the Saudis claimed throughout the entire episode. 

Here is what Abdallah S. Jum’ah, Saudi Aramco’s president and CEO, during his address at the 11th Congress of the World’s Energy Council in Rome last November, as the price of oil was accelerating:

We have grossly underestimated mankind’s ability to find new reserves of petroleum, as well as our capacity to raise recovery rates and tap fields once thought inaccessible or impossible to produce....we still have almost a century’s worth of oil under the conservative scenario…and nearly 200 years’ worth under the target scenario. As a result I do not believe the world has to worry about ‘peak oil’ for a very long time.

Apparently nobody was listening to the Saudis, as everybody was focused on making the case for peak oil production as a justification for higher prices.

While we do not have the analytical resources of the Wall Street investment bank that first produced the $150 per barrel price forecast and then the $200 per barrel forecast, we do think OPEC has regained credibility for knowing something about their market.  Perhaps in the future we should be paying more attention to OPEC and less to Wall Street analysts.  If so, then here is the current OPEC outlook:

Even if governments are successful in calming equity markets and unfreezing credit markets in the near future, the fallout on the real economy from financial market headwinds is expected to be considerable.

The rapid crude oil price rise was like an alarm bell ringing and it was heard.  In a democracy is seems we are only capable of focusing on the crisis of the moment.  There is no doubt the credit market crisis needs attention, but hopefully the US will not allow this opportunity for greater energy independence to be lost even if crude oil prices continue to decline in the near term.

Disclosure: No positions in the sector

Comments

[sikarskie:]

Oil fundametal barely support 50.00 bbl ..everything else it just commodity runup..To prove this move margin requirements up to 50% ..stillallowing investment ..but lowering the manipulation of the curren 20 to one ratio...which favors total manipulation..Lawrence

2008 Oct 20 12:50 PM

[tuj:]

Its Hubbert and The Oil Drum versus Julian Simon and the Cornucopians; one of them will be right...

King Abdullah of Saudi Arabia is quoted as saying: "When there were new finds, I told them, 'no, leave it in the ground, with grace from God, our children need it'."

2008 Oct 20 01:16 PM

[Ferdinand E...:]

I agree with 'anarchist' and Lionel Badai and anyone else who agrees with them. Considering the present and especially the future demand for oil, there is not enough of that precious commodity in the crust of the earth, regardless of what various observers say and/or think. Moreover, forget about peak oil and think about the coming price of oil once the global economy starts its next upswing.

2008 Oct 20 01:27 PM

[Ferdinand E...:]

So somebody besides me knows that King Abdullah called for leaving oil in the ground for the children (and grandchildren) of the people in his country. Interesting, because in my first lecture at the Asian Institute of Technology (Bangkok) I informed my students of the position of the king. And by the way, it wasn't just new oil. It was oil PERIOD! .

2008 Oct 20 01:35 PM

[bambooben:]

Don't agree at all. Try as we may to find "conspiracies", the current oil price swing directly relates to current forecasts of a deep and long recession. The fact that this would bring about a significant drop in oil back to the $80 is not at all surprising, nor does it confirm that "peak oil is a hoax". Quite to the contrary -- there is no question that there is a speculative premium out there, but so is there one for ANY commodity that traders touch (corn, silver, titanium etc...). Facts remain facts -- the total amount of oil produced reached a high in late 2005 and, until the current financial crisis, the trajectory of global consumption is what fundamentally drove the surge in prices. For now, possibly for the next 2-3 years, the trajectory is going to reduce consumption and therefore the pressure will ease a bit.

But now we stand at a cross road: do we fall back into old patterns and say "yup, no peak oil, let's consume" or do we seize the opportunity of a recession to revisit our collective consumption patterns, and buy ourselves a few years respite to accellerate the technologies that will reduce our oil consumption total, and thereby change the fundamentals of the collision course between flattening oil output and increasing oil demand which we have been on?

2008 Oct 20 01:40 PM

[longoil:]

The global economy is in the worst shape since the 1930's. Billions are being spent by governments around the world on financial institution bailouts. Therefore, it is not surprising the demand for oil has fallen and oil prices as well.

Peak Oil is real, it just has been granted a temporary reprieve by a crippled world economy.

If Peak Oil is a conspiracy, then why are the following desperate measures still being used to recover non-conventional oil ?

1) Brazil has invested hundreds of billions to recover deep sea oil that is below 2km of sea water, 2 km of hard rock and another 2km of salt.

2) A trillion dollar economy has been created in Alberta to recover oil from the oil sands (a close relative of road asphalt).

3) Saudi Arabia has spent untold billions to construct a huge pipeline from the sea to pump millions of gallons of filtered seawater daily into its dying wells to recover low grade oil (i.e. sour heavy oil).

Conventional oil (sweet light crude) has peaked many years ago.
75% of the oil we pump of the ground today is non-conventional sour heavy crude.

2008 Oct 20 02:03 PM

[akapital:]

great insight by all...I enjoy reading both sides of the argument/discussion.

Some other thigns to consider:

1. Reserves by themselves do not preclude the peak oil theory. In fact, quite the contrary; if certain countries are effectively 'leaving oil in the ground' for prosperity or contingency that is a real price factor (a real supply factor).

2. The geo-political cost of oil is also a very real one that factors into price. The fact that there may be 200 year supply in the ground is vague. Is it accessible? At what cost? Environmental, political, etc.

3. Speculation and uncertainty are also very real price/supply factors. If our primary energy source was solar we would be tracking weather, clouds, etc. and speculating the minutia and exigencies of available sunlight.

2008 Oct 20 02:09 PM

[enviro111:]

this article and most of the comments are PURE nonsense and are based on the opinion of one biased individual in Saudi Arabia.

1. The head of the Saudi Aramco should know what he is talking about and at some level I'm sure he does. However, public statements must be taken with a grain of salt. If the public in Saudi Arabia ever finds out that the kingdom really doesn't have 100 years of reserves, it will be Aramco and the king's head on a platter. Saudi Arabia gets 2/3 of its oil from one oil field "Ghawar" and it is over 60 years old. Elephant oil fields live about as long as people and this one is a senior citizen! The Kingdom doesn't have any other fields that can take place of this one.

2. Peak oil doesn't mean that there will be NO more oil after a certain date. It merely means that production will peak and will slowly decline. At the top this is a slow process with decline of 1 or 2 percent overall. It is hard to clearly see these small declines and most people will 'miss' Peak Oil. It will only be visible in a 'rear view' mirror.

3. Peak Oil doesn't mean that oil prices will always rise forever and ever. Economic variables will play a role too. Peak oil does not repeal the law of supply and demand (many of the left leaning, socialistic commentators like to ignore supply and demand). Demand destruction due to a severe recession will cause the price of oil to decline (temporarily).

4. At some level Peak Oil will produce Peak Oil prices. At this level of production and this time, $140/bbl was the peak price. In the future, it might be higher or lower.

2008 Oct 20 03:48 PM

[smurphny:]

"Peak Oil" has much in common with the hypothesis of "Global Warming." It is wonderful that scientists try to connect the dots of evidence for these things but they have very often been very wrong throughout the ages. Data can be misinterpreted or biased very easily. The problem is that many erroneous decisions have been made because politicians and the media believe the theories of academics in universities instead of talking to people in industry.

2008 Oct 20 03:53 PM

[Flip2006:]

What I get from all this is there is 'plenty' of oil for decades, just at different price levels. Clearly at $150 /br more than we can consume for a long time. At $50/br not a whole lot. My guess is it bounces between $80-100 for the next few years. It's in the Arabs best interest to keep us 'addicted' for as long as possible. It's our job to find alternatives that cost less than equivalent of 50/br. Question is - do we as a country have the will power to do that? Sadly, not based on past events (going back to 1973!).

2008 Oct 20 04:17 PM

[NOWHEREMAN:]

Definitions of what Peak Oil is vary widely. The best one, IMHO, is that the Oil which was the Least Expensive to get has peaked. There is plenty of Oil to be had but it is expensive to extract. And on a Catch 22 basis, you aren't going to extract it unless it becomes feasible to extract.

Take Haynesville, the CEO of Devon Energy came on CNBC on OCT.17th and said that you can toss out previous expectations of an increase from that area. It is no longer cost effective to extract NG with prices at these levels. He expected production of NG to decrease by 1/3rd in 2009.

The talk about the "highest levels and new records of" will cease abruptly unless prices rise to exceed the costs of extraction.

Meanwhile, the Middle East is in the midst of a crisis of their own making. Trillions of dollars in spending on construction projects of all sorts, from refineries to aluminum smelters, to steel making plants. The Following Oil prices are what they need from an Economic Breakeven Basis: Iran and Venezeula $95, Russia $70, Saudi Arabia $55.

You can find these estimates on Jim Kingsdales site:
Energy Investment Strategies.

I once saw an estimate that because of all of the Infrastructure buildup, Iraq needed $110 to breakeven.

I doubt very much that they are going to allow oil prices to fall low enough to put themselves into our shoes.

2008 Oct 20 10:02 PM

[markj:]

Many geologic paradigms may be reasonably viewed as myths, but not all myths lack utility and success. Peak Oil may be defined in different ways, but there's little argument that oil production in the USA peaked in ~ the late 1970s. Assuming that the resource is finite, then a rolling type of Peak period will occur on a global scale. In my opinion, Goldman has nothing to do with it, they do try to jerk the markets around and they simply can't be trusted. Simmons' arguments are very rational, so to dismiss them one has to assume that he completely misinterpreted his Saudi-based technical reports. That's possible but if one reads his book (and others by Deffeyes, etc.) it is difficult to dismiss his main points. Only time will tell. The subject makes for good discussion.

2008 Oct 21 08:28 AM

[Fozzie:]

Peak oil, a myth? you have got to be kidding me. here it is in simple terms:

oil supply = limited resource with new discoveries decreasing.
demand = increasing

the debate is still on the table on whether its happened or not, I give you that, but if you are in a house with a limited pantry and you keep having kids, are you going to deny Peak Food, too?

2008 Oct 21 09:15 AM

[kebu77:]

Peak oil is a theory - - like relativity and evolution - - in the scientific sense of "the consensus of informed opinion." But we need to go an extra step and consider the additional issue of declining net oil exports - - what Jeffrey Brown calls the Export Land Model.

Peak oil is about flows (current production) not resources (oil in the ground that can be develped for production under current economic conditions) and ELM is about flows available (from "export land") to be imported (by "import land"). The model says that, typically, exporting countries continue to increase their internal consumption even while they reduce their exports. Look at the very large increase in car sales in Russia and the substantial ongoing investments in KSA on both refineries and petrochemicals. Internal consumption means less for export.

The WSJ recently reported that world oil exports have declined in 2006 and 2007, and look to do so in 2008 (the Saudi oil production burst this summer notwithstanding).

This happened in the US even before the US peaked in 1970. The North Sea peaked in 1999 and UK exports then declined to -0- (happening about now). Mexico peaked in 2004 and their exports are now crashing. It looks like this is just beginning to happen for Russia.

So for all you investors out there, look to ELM as your leading indicator on what is to come... It's oil available to buy, not oil being produced.

As for statements of the Saudis, always keep in mind that they keep oil and gas data as state secrets... more closely held than those in the USSR before collapse. The CIA was able to predict in 1977 that the Soviets would hit peak production in the mid to late 1980s (to date, Russia and the other FSU countries have not exceeded that level since). Does the CIA have a view of KSA's oil and gas profile? Probably, but we aren't going to know that for years.

They may say they're saving it for their grandkids, but that's just words. They have consistently refused to let anyone look at their data or inspect their fields. You want to trust your future on that, go ahead...

2008 Oct 21 11:38 AM

[Duude:]

$148 dollar oil was surely futures influenced but only because new world online supplies had not kept pace with world demand during this decade. In years prior, OPEC was often pressed to police suppliers commitments to keep supply down. Cheating was rampant. That's not the problem anymore. Many producers can't even pump their allocation for a variety of reasons. This leaves a smaller margin of error matching world supply and demand. Add to that volatile geopolitical forces such as strikes or rebel actions against production or just the threat of it and you have the perfect setup to run futures up. It has always been about supply and demand. The futures market does tend to exaggerate moves both up and down (consider $12 oil in '98) but it is only a temporary situation leading to corrective measures to both supply and demand.

2008 Oct 21 11:52 AM

[John Paul G...:]

Wake up Jack! We here in the U.S.A. have been strung out by the Saudis for the last 40 years. Every time we have even gotten close to some kind of an energy policy or the price of crude rises to the point where alternatives may be considered, they have been right there to lower the price of oil by flooding the markets with the stuff. It's guys like you, that live in a world of fantasy about never ending fossil fuel supplies that perpetuate our present woeful situation. Yes, until the very recent past their "lip service" has served them quite well. Of course, you have noticed that recently they have not been able to back up their promises of increased supply. The fact is they are running flat out with present crude oil production and they would rather not let the rest of the world in on this fact. The fact is, however, that the price of oil ran up to 148 dollars a barrel even though they were supposedly upping their shipments every month (which they weren't). Can you say "supply and demand" like our inventories were not exactly over flowing. I would imagine that professionals in the oil futures markets would take full advantage of this situation and increase their investments in the commodity. If you are going to increase the supply of anything it sure helps to have a price that would encourage and thereby insure an adequate supply of same. Peak Oil is no Hoax, and the financial world has just suffered the first tremors of an impending crisis that is has no answer for. Your so called "Hoax" is directly responsible for the carnage we have witnessed on Wall Street and it is just the beginning. One hundred and forty eight dollars for a barrel for oil was the "tipping point" of the world's economy. It was the point at which all money lenders throughout the world had to decide whether they where going to control the future or they where going to let "oil" control the future. They took control the only way they knew how. They stopped lending. They froze lending in a single swoop all over the globe. They realized that the money they loaned out was never and could never be paid back, without a never ending increasing flow of oil coming out of the ground. Their whole system of economics has now broken down into nothing but smoke and mirrors. The world has changed, and your "Hoax" is responsible.

2008 Oct 21 11:29 PM

[E.A.:]

This article is classic short-term denial and ignorance. The price of oil falls for just a few months and Peak Oil is suddenly a hoax? Was it also a hoax when the U.S. ran out of cheap oil in the 70s and sought cheaper sources overseas? Global Peak Oil is a matter of WHEN, not IF.

Recent oil price drops seems to be a result of lower demand because of the global economic crisis. In other words, people are conserving oil in unforeseen numbers after being forced to initially by higher prices. The surge we saw in 2008 may have been the leading edge of global peak oil, with a spike caused by futures speculation this summer. But people are sticking with conservation (for the most part) and economic uncertainty is keeping them thrifty.

To assume that these new behaviors and prices mean the "end" of Peak Oil is absurd. How short can one's attention span be? Do you sell off your stock just because they dip for a few months?

The physically finite nature of petroleum is not in dispute, except for crackpots who promote abiotic oil theories.

The big problem is that many people see the world only in terms of money. They reduce physical scarcity to an abstraction that can be deleted from a spreadsheet when inconvenient to their agenda. In the real world, things get scarce and substitutes are never guaranteed.

enough_already.tripod..../

2008 Oct 25 02:53 PM

[Sober Realist:]

Let's have a third party audit done of the Saudi reserves to see how much is really left. Only then will we know. Matt Simmons has called for this for years. We're still driving in the dark.

2008 Oct 26 02:07 AM

[Tim 333:]

My bet is that peak oil has already happened.

When oil production peaked in North America it was because it became cheaper to drill abroad.

As global oil production becomes more expensive and solar and the like drop in price we'll end up driving plug in hybrids and be happier for it!

2008 Oct 27 02:10 PM

[Poptech:]

'Peak Oil' is a Myth...

Myth: The World is Running Out of Oil

www.youtube.com/watch?...

2008 Nov 05 10:13 PM