Like the TV show Twin Peaks in the 1990s, “Peak Oil” theory also has a cult following. A day doesn’t go by that we do not hear about peak oil, and a lot of time is devoted to these types of conspiracy theories without solid analysis. The message becomes the foundation for erratic thinking, and ultimately erroneous investments. What is sad is that the theory as presented is given validity, and only amounts to -- in a best-case scenario -- intellectual fraud.
The oil peak crowd comes in all shapes and colors, and the late Dr. M. King Hubbert's work is the foundation for such predictions. The website theoildrum.com, with a wide following according to web statistics, is listed as a source according to hubbertpeak.com, the source of the graph below. But before we move on, and to give a taste of what is being written and the nonsense analysis being fed to the masses — and I usually don’t do this — here’s one of the latest excerpts from a theoildrum.com post only two weeks ago, when trying to rationalize a decrease in U.S. imports:
It seems to me that oil imports really depend on what the US can afford for imports -- how high the price is, how much oil for export is on the world market (which helps determine the price), and whether the U.S. is in recession because of high oil prices. Oil imports were increasing up until 2005; now they are decreasing. This decrease in oil imports reflects the fact that oil in the world export market peaked in 2005, as much as anything else. High oil prices (and layoffs indirectly related to high oil prices) have made it difficult for people to afford goods and services that require oil in their production (vacation trips, new homes, new cars, many other types of goods). As a result, U.S. demand for oil products has dropped to the point where our imports have dropped each year since 2005.
But back to our topic. Please note that the forecast as early as 2012 – less than two years away -- reflects a production drop of about 8% from the overall peak in 2008, with the peak value shown as 81.73 million barrels, with the EIA, among others, listed as a source.
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To the average person, and taking into consideration that honesty prevails in our social fabric, the pretty graph above can easily be viewed as the truth, and the need to question the facts behind the picture is not very apparent.
But for starters, world oil production in 2008 was 85,494,789, barrels according to the Energy Information Administration. Although consumption is not available for December 2010 yet, leaving that year incomplete, world production figures are now online, and we have an official new peak in 2010 at 86.344 million barrels, as shown by the graph below. I included the consumption up to 2009 to show the correlation between production and consumption over the last 30 years.
And if some may claim that the data supplied by the EIA is bogus, then one cannot rely on the agency’s projections either. In addition, and despite questionable methods by the oil industry on how the calculations are performed — and I am in no position to override the data — the EIA reported another peak in Proven Reserves.
Where does the “Peak Oil” theory come from? Dr. Hubbert in 1956 predicted that oil production in the U.S. would peak in the 1960s or 1970s, and his prediction proved correct in 1970. Then, in 1974, he once again predicted that global, not U.S., peak oil would hit in 1995. Without dismissing his accomplishments as a geoscientist, one can see where his one-track mind was as far as “peaks” were concerned. The dismissal of a variety of factors, such as technological advancement, contributed to the incorrect forecast.
But in view of recent data, the message has not changed, and the revelation of Wikileaks’ cable regarding Saudi Arabia’s reserves received a lot of attention. The Guardian published “WikiLeaks cables: Saudi Arabia cannot pump enough oil to keep a lid on prices,” with a link to the cable, of which an excerpt follows.
1. (NYSE:C) SUMMARY: On November 20, 2007, CG and Econoff met with Dr. Sadad al-Husseini, former Executive Vice President for Exploration and Production at Saudi Aramco. Al-Husseini, who maintains close ties to Aramco executives, believes that the Saudi oil company has oversold its ability to increase production and will be unable to reach the stated goal of 12.5 million b/d of sustainable capacity by 2009. While stating that he does not subscribe to the theory of "peak oil," the former Aramco board member does believe that a global output plateau will be reached in the next 5 to 10 years and will last some 15 years, until world oil production begins to decline. Additionally, al-Husseini expressed the view that the recent surge in oil prices reflects the underlying reality that global demand has met supply, and is not due to artificial market distortions. END SUMMARY.
But not everything in the cable was convenient, and while I sincerely believe that Dr. al-Husseini provided his honest opinion, the Guardian’s article included the reaction of Jeremy Leggett, convenor of the U.K. Industry Taskforce on Peak Oil and Energy Security. He stated that, "We are asleep at the wheel here: Choosing to ignore a threat to the global economy that is quite as bad as the credit crunch, quite possibly worse."
I understand that oil production will hit a peak sometime in the future, simply because the substance cannot be replenished at the global consumption rate, but Dr. al-Husseini’s opinion is that a production plateau will be reached over the “next 5 to 10 years and will last some 15 years until world oil production begins to decline.” By my calculations, that would put the beginning of the production decline somewhere between 2027 and 2032, using the cable’s 2007 date, and barring any technological developments that may occur between now and then.
But to scream that the end of oil as we know it is very near is synonymous to me calling for an impending global lettuce shortage after my garden was attacked by rabbits. Thus, there is no substitution for the calm and collected informed analysis of the data, and the realization that global economics cannot be forecasted with a simple straight line. Otherwise, why bother with an education, when all we need to teach the new generations is how to obtain the latest data and to draw a 10 degree slope projecting into the future – up or down?
Then, to add some fuel to the fire -- no pun intended -- Exxon Mobil’s (NYSE:XOM) CEO Rex Tillerson stated that “the transition away from oil-derived fuels is probably 100 years away,” as reported by Bloomberg in 2009. I’m certain that Mr. Tillerson didn't mean it and Exxon’s investment in alternative energy sources is living proof of the company’s realization that a shift in energy resources is under way — and shale is only one of them, as I outlined in a previous post.
But the production side of the equation must be balanced with consumption. Despite China’s higher demand, which will be put to the test as economic activity decreases and the forecasted growth rate has already been reduced as I wrote in a previous post about China, consumption in the U.S. and Japan has been declining for the last five years, and only recently has an increase in U.S. demand started to form.
However, considering current economic conditions, a change in trend cannot be baked in just yet; the macro outlying factors still point to a very slow economic expansion or even a contraction. As an example, today’s Existing Homes Sales drop of 9.6%, while home prices declined 5.2% from one year ago, does not add to a very bright outlook. Furthermore, the regional breakdown included in the NAR's press release showed the decline was uniform across the country.
In short, investing in energy must be done by taking into consideration the various economic factors, and a combination of demographics coupled with the theory of an impending resource depletion is hardly a justification to assume that the price of oil will catapult into the stratosphere without consequence, and that one will benefit financially while being insulated from the projected fallout. I will advance that if peak oil theory is the foundation for any investment in energy, the wheel of fortune will deliver the “bankruptcy” slot before the “jackpot.”
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.