Crude awakening

The name most associated with ‘peak oil’ is King Hubbert, who became an internationally recognised name when he worked for Houston-based Shell Oil Company from 1943 to 1964. His theory was based on the premise that oil is a finite resource. Peak oil, or Hubbert’s peak, is the point at which maximum world production is reached, after which its rate terminally declines.

Hubbert predicted a worldwide peak in “about half a century” that would progress in a bell-shaped curve fashion, now called ‘Hubbert’s curve’. Hubbert’s curve is symmetrical, peaks when half of all oil (or other fossil fuel) has been produced, and there’s only a single peak until oil production is exhausted.

Matthew Simmons, the non-executive chairman and founder of Simmons and Company International (SCI), one of the largest investment banking practices serving the energy industry, is today’s strong proponent of the dangers of peak oil, and believes that the peak oil problem is poorly understood.

“It is no secret that the price of oil has fluctuated over the years, ‘we’re going to have low oil prices forever’ – people used to say, but only when the embargo of 1973 happened and prices went through the roof, did it allow a myriad of service companies to see the beginning of offshore oil get very serious,” says Simmons.

“Peak-oil is a reality, and it makes global warming look like a trivial problem. The immediacy of peak oil takes so long before we can do anything to prepare for how to go about using less oil – we might be lucky enough to have it 4/5 years away but it isn’t decades away – I say the likelihood of that is 1%,” he adds.

Trends and patterns

Claiming that the world’s data on production, demand and inventories is alarmingly inaccurate, Matthew Simmons says the concept of peak-oil is closer than we think, and there are a number of trends and patterns evident in the past that will continue to dominate the present and future.

“We’re not going to find much oil,” says Simmons. “We’re not going to have very many projects go on-stream. Projects are going to get a lot more expensive, and we’re having a very difficult time worldwide recruiting enough people to offset the number of people that are to retire, and are already retiring,” says Simmons.

“Our infrastructure ranging from casing and tubing, to gathering lines, to tank farms to tankers and pipelines to refineries and drilling rigs are all far too old and rusting away, and demand is still growing which is a very bad set of ingredients,” he adds.

So, as oil prices continue to rise, Simmons believes that people worldwide should look to, and encourage it to create a positive impact towards the issue of peak oil.

He claims that the supply of oil and gas is headed south whilst trying to keep up with growing demand, and will continue to do so if nothing is done to prevent it.

“Demand can’t obviously exceed supply, so we’re going to have to come up with some very important demand management tools. At the same time we have to go on the worlds biggest and most extensive construction programme to try to totally rebuild the infrastructure so that its lifecycle isn’t overextended and doesn’t rust away.”

“A real lights out issue would be to find ourselves in 2015, not in a world where we are using 110 million barrels per day (bpd), having a crude supply of 60 million bpd, but only being able to deliver 30 million bpd because the pipelines have collapsed, and the refineries all keep blowing up – not because of poor maintenance, they’re just too old. If oil prices went up another 50% or doubled, we would have the money to pay for that construction programme easily,” he added.

Tipping-point

As Simmons suggests, massive global investment in infrastructure is required to maintain supply at existing levels before the ‘tipping point’ – a moment of critical mass, where everyday things – in this case, oil – demand is reached.

“I think we’re at a tipping-point with oil prices – there is no evidence that US $100 oil is having any significant impact on any part of our global economy. Conversely, there are some booming aspects of our economy that’s a direct result of US $100 oil. High-prices are doing more good for the economy by a long shot than they did when they were at low prices,” says Simmons.

However in terms of oil supply and demand, Simmons believes that the tipping point is going to be when we start having a clash between supply and demand, and that is on its way.

“The biggest risk is that demand doesn’t know supply, by that I mean demand is what consumers do when they purchase energy. We don’t have any early warning system that the tanks are getting really low,” says Simmons.

“For example, we have around 280 million vehicles in the US, 230 of them are passenger cars and light trucks. Our average car stays around 40 % full, and it can go under a quarter full before people go and fill up. If you took those numbers and vehicles – and had a headline scarcity – all vehicles will top up there tanks, and all service stations would top up there tanks – and it would probably take around two and a half days to drain our pool – after that we’d have to take a two week holiday to replenish it,” Simmon’s added.

Opposing views

While his views on the peak oil situation are popular, there remains a significant body research analysts and industry experts whose findings couldn’t be any further from the Simmon’s school of thought.

Cambridge Energy Research Associates’ (CERA) Daniel Yergin is one who disagrees with peak-oil. CERA’s analysis finds that “the remaining global oil resource base is actually 3.74 trillion barrels – three times as large as the (claimed) 1.2 trillion barrels by (peak oil) proponents.”

CERA argues further that peak oil reasoning is faulty and, if accepted, may distort critical policy and investment decisions and cloud the debate over the energy future.
 

It also states that the global resource base of conventional and unconventional oils is 4.82 trillion barrels and likely to grow. CERA says that its analysis is based on fields already in production and those “yet-to-be produced or discovered”.

“This is the fifth time that the world is said to be running out of oil. Each time technology and the opening of new frontier areas has banished the specter of decline,” says Yergin. “There’s no reason to think that technology is finished this time.”

Prosperity in the Middle East

Despite his facts and theories on peak-oil, Simmons does believe that there could be a turning point where countries in the Middle East may well be one of the only regions able to resolve the problem, even if only for a short while.

“Looking under the sheets, you must see how realistic things really are. Unless the Middle East, particularly Saudi Arabia, could expand 20-25 million bpd, there is no place else that could vaguely take their place.”

When Saudi Arabia peaks and starts to decline, Simmons asserts, at that point it is “clear as a bell that world supply has peaked.”

“We’re sitting on an illusion that their (Saudi Arabia) oil isn’t gone. But the possibility that they could grow another 30-40% and stay there very long is really low, yet the whole world assumes it’s possible.”

Which direction?

It is clear that we may have come to a point in history that will be viewed by future historians as a critical juncture in time because the age of easy and cheap oil is over.

It may also be that there will be new forms of energy or revolutionary new oil finds that will allow continued economic growth, or it may be that the world will have to adjust to a very different energy climate.

The current instability in energy markets ensures that how the future of energy is perceived (accurate or not), will certainly affect the industry climate in the days to come.