[Pen-l] Peak oil

[Louis Proyect <lnp3@xxxxxxxxx>]

NY Times, April 29, 2008
Oil Price Rise Fails to Open Tap
By JAD MOUAWAD

As oil prices soared to record levels in recent years, basic economics 
suggested that consumption would fall and supplies would rise as 
producers drilled for more oil.

But as prices flirt with $120 a barrel, many energy experts are becoming 
worried that neither seems to be happening. Higher prices have done 
little to suppress global demand or attract new production, and the 
resulting mismatch has sent oil prices ever higher.

That has translated into more pain at the pump, with gasoline setting a 
fresh record of $3.60 a gallon nationwide on Monday. Experts expect 
prices above $4 a gallon this summer, and one analyst recently predicted 
that gasoline could reach $7 in the next four years.

A central reason that oil supplies are not rising much is that major 
producers outside the OPEC cartel, like Russia, Mexico and Norway, are 
showing troubling signs of sluggishness. Unlike OPEC, whose explicit 
goal is to regulate the supply of oil to keep prices up, these countries 
are the free traders of the oil market, with every incentive to produce 
flat-out at a time of high prices.

But for a variety of reasons, including sharply higher drilling costs 
and a rise of nationalistic policies that restrict foreign investment, 
these countries are failing to increase their output. They seem stuck at 
about 50 million barrels of oil a day, or 60 percent of the world’s oil 
supplies, with few prospects for growth.

“According to normal economic theory, and the history of oil, rising 
prices have two major effects,” said Fatih Birol, the chief economist at 
the International Energy Agency in Paris. “They reduce demand and they 
induce oil supplies. Not this time.”

With global supplies tight, geopolitics continue to play a big role in 
pushing up oil prices. Oil futures closed at $118.75 a barrel, up 23 
cents, on the New York Mercantile Exchange, after strikes by oil workers 
in Scotland and Nigeria that shut down nearly 1.7 percent of the world’s 
daily production.

Countries outside the Organization of the Petroleum Exporting Countries 
have been the main source of production growth in the past three 
decades, as new fields were discovered in Alaska, the North Sea and the 
Caspian region.

But analysts at Barclays Capital said last week that non-OPEC supplies 
were “seemingly dead in the water.” Goldman Sachs raised similar 
concerns last month, saying that growth in non-OPEC supplies “can no 
longer be taken for granted.”

At the same time, oil consumption keeps expanding. Global consumption is 
forecast to increase by 1.2 million barrels a day this year, to 87.2 
million barrels a day, with much of the growth in demand coming from 
China, India and the Middle East, according to the International Energy 
Agency, a group that advises industrialized countries.

In the United States and through much of the developed world, the higher 
fuel prices have led drivers to reduce their consumption, and gasoline 
demand is expected to drop this year. But that drop will be more than 
offset by the rise in energy demand from developing countries. In the 
next two decades, demand is projected to jump by 35 percent, and 
developing countries will consume more oil than industrialized countries.

Higher oil prices mean record profits for oil companies that have, to 
some extent, masked the supply problems. Exxon Mobil and Chevron are 
both expected to deliver knockout performances when reporting quarterly 
earnings this week, even as they struggle to increase production.

“What is disturbing here is that things seem to get worse, not better,” 
said David Greely, an analyst at Goldman Sachs. “These high prices are 
not attracting meaningful new supplies.”

The outlook for oil supplies “signals a period of unprecedented 
scarcity,” Jeff Rubin, an analyst at CIBC World Markets, said last week. 
Oil prices might exceed $200 a barrel by 2012, he said, a level that 
would very likely mean $7-a-gallon gasoline in the United States.

Some regions are simply running out of reserves. Norway’s production has 
slumped by 25 percent since its peak in 2001, and in Britain, output has 
dropped 43 percent in eight years. Production from the giant Prudhoe Bay 
field in Alaska has dropped by 65 percent from its peak two decades ago.

In many other places, the problems are not below ground, as energy 
executives like to put it, but above ground. Higher petroleum taxes and 
more costly licensing agreements, a scarcity of workers and swelling 
costs, as well as political wrangling and violence, are making it harder 
to raise production.

“It’s a crunch,” said J. Robinson West, chairman of PFC Energy, an 
energy consulting firm in Washington. “The world is not running out of 
oil, but rather it’s running out of oil production capacity.”

Mexico, the second-biggest exporter to the United States, seems 
increasingly helpless to find new supplies to offset the collapse of its 
largest oil field, Cantarell. A combination of falling production and 
rising domestic consumption could wipe out Mexico’s exports within five 
years.

Foreign investment could help Mexico produce oil from deeper waters, but 
that is a controversial proposition in a country where oil has long been 
seen as part of the national patrimony.

Another country, Russia, is also a focus of analysts’ worries. Russia is 
not exactly running out of places to look for oil — a huge chunk of 
eastern Siberia remains unexplored — and the country has been the 
biggest contributor to the growth in energy supplies in the last decade.

But Russian energy officials warned recently that the days of stunning 
growth that followed the collapse of the Soviet Union were over, as the 
country focuses on stabilizing its output. Russia today produces about 
10 million barrels of oil a day, up from a low of 6 million barrels in 1996.

The Russian government has been muscling Western companies to gain more 
control over its energy resources. That rise in energy nationalism could 
freeze new investment and slow any meaningful growth in supplies there 
for years.

As countries like Russia slow output, analysts say OPEC will have to 
pick up the slack. The oil cartel accounts for 40 percent of the world’s 
oil exports and owns more than 75 percent of global reserves. But there 
are serious concerns that OPEC will also find it tough to increase 
production.

Saudi Arabia, the world’s top oil exporter, is completing a $50 billion 
plan to increase capacity to 12.5 million barrels a day, but it signaled 
recently that it would not go beyond that. That means Saudi Arabia could 
fall short of the 15 million barrels a day that most experts had 
expected it to produce in the long run.

OPEC’s 13 members plan to spend $150 billion to expand their capacity by 
five million barrels a day by 2012. But OPEC will need to pump 60 
million barrels a day by 2030, up from around 36 million barrels a day 
today, to meet the projected growth in demand. Analysts say that without 
Iran and Iraq — where nearly 30 years of wars and sanctions have 
crippled oil production — reaching that level will be impossible.

Not everyone is pessimistic about energy supplies. A study by the 
National Petroleum Council, an industry group that provides advice to 
the secretary of energy, concluded that the world still had plenty of 
petroleum resources that could be tapped.

In fact, high prices have set off a global dash for oil. Brazil, for 
example, has struck large offshore fields that could turn the country 
into one of the world’s top 10 producers. But developing new fields can 
take many years.

To make up the shortfall, the world is also increasingly turning to 
fuels from unconventional sources, like biofuels or heavy oil. Canadian 
tar sands, for example, have attracted large investments.

But the International Energy Agency estimates that current investments 
will be insufficient to replace declining oil production. The energy 
agency said it would take $5.4 trillion by 2030 to raise global output. 
Otherwise, it warned that a crisis before 2015 involving “an abrupt 
run-up in prices” could not be ruled out.
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