December 27, 2009

A Slippery Supply

Oil and the market psychology of fear

by Chris Arsenault

The Dominion - http://www.dominionpaper.ca

VANCOUVER—Beyond the accord reached at the climate talks in Copenhagen this month, the world may have to cut its oil consumption, as geological and economic trends limit the availability and affordability of petroleum.

Back in the 1970s, Saudi Arabia's flamboyant oil minister Sheik Ahmed Zaki Yamani articulated what became conventional wisdom for policymakers around the planet: "The Stone Age didn't end for lack of stone, and the Oil Age will end long before the world runs out of oil."

Today, an increasing chorus of voices is challenging that prediction. While the world isn't running out of oil in any absolute sense, a daunting picture is beginning to emerge of the availability—and thus affordability—of supply compared with expected increases in demand. 

"In 2015, the world's consumption of oil will likely be closing in on 100 million barrels per day [bpd], roughly 22 per cent higher than the current level—which is a relatively high annual growth for the oil industry," states a briefing marked confidential from the Royal Canadian Mounted Police (RCMP), obtained by a Freedom of Information request.

The censored briefings, created by the RCMP in collaboration with other Canadian government agencies, paint a troubling picture of future energy security that has recently been corroborated by other sources.

The International Energy Agency (IEA), the Paris-based multinational information centre created after the 1973 energy crisis, predicted in 2005 that world oil production could rise to 120 million bpd by 2030, up from 85 million in 2008.

The IEA "was forced to reduce" its predictions on possible world supply "to 116 million and then 105 million last year," according to a senior official in the organization, who spoke with The Guardian in early November, on the condition of anonymity.

The US Department of Energy, through its International Energy Outlook (IEO), has also been quietly scaling down its numbers on possible supply. In 2007, the agency predicted the world would be able to pump 107.2 million bpd in 2030. This summer, it drastically reduced its supply predictions to 93.1 million.

In its latest forecast, released November 10, the IEA predicted world oil supply would hit 105 million bpd by 2030. Even with those figures, which many analysts, including some inside the IEA, consider overly optimistic, there is likely to be a shortfall of some 11 million bpd by 2030.

"Every year we lose four million barrels a day [of production due to depletion]," said Jeff Rubin, the former chief economist with CIBC World Markets.

"Over the next five years, we are going to have to find 20 million barrels a day of new production, just so that we can [continue to] consume what we consume today," said Rubin in June.

Rubin is a believer in the peak oil theory—the idea that oil production will reach a maximum point and then fall fairly sharply as demand outpaces supply.

Such a lack of supply, if perceived in the market, would drive up the price of oil, creating a positive feedback loop where fear keeps pushing prices higher, destabilizing both general oil and financial markets.

Gasoline and transportation oil can be manufactured from coal and other petroleum sources, meaning the world will not run out in any absolute sense, but the costs—both economic and environmental—will be far higher than those associated with conventional crude.

M. King Hubbert, a geologist formerly with Shell in the United States, correctly predicted that US domestic oil production would peak in the 1970s.

"Shell isn't a believer in the peak oil theory," said Shell spokesperson Janet Annesley during a 2008 interview with IPS at the company's Calgary office tower.

Other multinational oil companies are beginning to disagree with Shell's denial of the peak oil theory.

"Groups and individuals speaking out about forthcoming world oil supply challenges are frequently stereotyped as a fringe element with little knowledge about the oil industry," said the Sweden-based Association for the Study of Peak Oil and Gas in a November 24 news release. "But their warnings are increasingly supported by some surprising allies: senior petroleum industry officials, consultants and analysts."

Christophe de Margerie, CEO of Total SA, Europe's third largest oil company, believes the world will never be able to produce more than 89 million bpd.

ConocoPhillips' CEO Jim Mulva told a conference in London last month that he doubted producers would be able to meet long-term oil demand. Both oil executives challenged IEA predictions.

The senior IEA official who blew the whistle on the organization's tendency to overstate supply says the group is manipulating data in order to placate financial markets.

"Many inside the organization [IEA] believe that maintaining oil supplies at even 90 to 95 million barrels a day would be impossible, but there are fears that panic could spread on the financial markets if the figures were brought down further," a senior IEA official told The Guardian.

According to the confidential RCMP documents, "[censored]... a market psychology of fear will continue to place a 'geopolitical premium' on crude oil, keeping prices for oil products higher than market fundamentals alone would dictate."

It is this fear that the IEA is trying to placate.

However, many believe a binding deal at Copenhagen seems like a more reasonable approach to reducing oil dependency than the current practice of fudging the numbers.

An original version of this article was published by Inter Press Service.

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