Peak Oil: Caused by Geology, Politics or Infrastructure Issues?

by: Larry Bellehumeur

First, many thanks for the kind words that I received. It has been an awfully long time since my last article, due to opening up a new business.

I was reading the article on the “IEA Whistleblower” who claims that the IEA has been intentionally “underplaying” the onset of Peak Oil, and that the likelihood of the world’s Oil Supply keeping up with the upcoming demand is small. Most of this demand will come from the developing world, including countries such as India and China, but also Africa, the Middle East and Latin America.

I started to wonder... if we are indeed entering a period of Peak Oil, is it truly being caused by strictly Supply/Demand numbers, or is there more than meets the eye? There are a few reasons why we could be entering Peak Oil… Here is a closer look:

1) Not Enough Oil to Meet Demand

The Theory of Peak Oil (namely based on Hubbert’s Peak) had little to do with the actual amount of Oil in the ground (whether Proven or Probable reserve levels), but rather the production level itself. Hubbert correctly called US Peak Oil almost 40 years ago, but the US is still producing Millions of barrels of Oil daily… it simply was not able to increase/maintain its production to meet the demand.

Is there enough Oil to meet the demand, putting aside Political Motivations? I would say undoubtedly yes. If places such as the Alberta Oil Sands, ANWR and Saudi Arabia were ever able to fully “open things up”, we would see a dramatic spike in Supply for many years. This leads to the next point.

2) Not enough Political or Financial Motivation to Allow for the Required Production Increases

Ok, so if my theory is that we are entering Peak Oil, yet there is likely enough places to increase production to hold this off, there must be something holding this up, and that is Political pressures. Pressures can come for a variety of reasons:

Environmental Concerns

The Alberta Oil Sands (with the right amount of Capital investment) would be able to produce 10+ Million barrels a day… so why aren’t we doing it? Well, first, it would burn so much natural gas that most of us couldn’t be able to afford to heat our homes. Next, the Environmental impact would be staggering (incredible drain on the Water supply in Canada, off the charts level of Greenhouse gas production and huge impact on the Natural habitat). The same can be said for increased drilling in places like ANWR. Politicians simply could not let that happen.

Capital Investment

In the ideal world, Oil would flow cheaply like it does in Saudi Arabia, and the cost to pull a barrel out of the ground would be sub-$10. Now, the reality is that the costs for many Offshore and Oil Sands projects often only make sense with a long-term Oil price that is north of $80 to $100 a barrel, and even then the Return on Capital might not be spectacular. With the current capital environment, and the instability of the Oil price, it doesn't make sense for Oil Companies to make the investment. The same holds true for National Oil Programs.

Political Motivation

As weird as it may sound to some, there isn’t a lot of motivation for many State owned Oil companies to greatly increase the flow of Oil. Simply, their main goal is not to create extreme wealth for their residents, but rather to maintain a consistent level of tax revenue. As well, it is also a fact that as a country increases its Production Output, their own Internal usage tends to climb at a pace that is higher than the rate of the increase in output… so, the more they produce, the more they use themselves (defeating much of the purpose). As well, while the purpose of this article is not to introduce Political opinions, it likely goes without saying that many countries enjoy the Political control that their Oil has over many nations... opening up the taps wouldn’t help that situation.

3) Insufficient Infrastructure Will Limit Supply Increases, Regardless of Point 1 or 2

When speaking with a Senior Oil Operations Director, I heard a unique way to describe the world’s Energy Infrastructure. When I asked him if we were in Peak Oil, he said “I have no way of knowing the production side, but it doesn’t matter anyways… We’re using Bubble gum to stop the leaks on the flow that we have now, what makes you think we can handle more production even if it was available?”

Many of today’s refineries have very old technology and are in desperate need of overhauls. As well, much of the World’s pipeline infrastructure is in serious decay. Even if we were to have unlimited funding and manpower to fix these issues (and add more capacity), would we even have the capacity in Steel production to handle the trillions of dollars in repairs that are needed? What would the impact be on the price of things such as Cars? What about the other infrastructure projects, such as Bridge repairs, that also need the same materials?

So, to recap, are we entering Peak Oil? The answer is undoubtedly yes, we’ll just never know the true reason why…

Disclosure: Very long on Oil (many holdings in Oil Producers, Pipelines and Service companies).