Sunday, May 18, 2008

Stop me before I fill up again!

It is a supreme irony that a wealthy Bedouin should be playing the role of a tough-love drug counselor to the world's oil-addicted consumers even as he continues to be the globe's biggest pusher. It was not the intention of Saudi Arabia's King Abdullah to take on such a role, but merely the bizarre consequence of his consent to plans by his oil minister to limit the country's oil production to no more than about 12.5 million barrels per day from 2009 onward.

It's a move that should have been on the front page of every newspaper and that should have led every news broadcast the day it was announced. The world's largest exporter, an exporter that every major oil-consuming nation had been counting on to boost production to at least 15 million barrels per day over time, had just told the world that it wasn't likely to get what it wanted. Since most of the public still has no inkling that we are approaching the peak in world oil production, the announcement came and went with little notice.

The U. S. Energy Information Agency still projects 16.4 million barrels per day of production for Saudi Arabia by 2030, though it had projected 23.8 million barrels per day in 2025 as recently as 2003. Expectations have come down to match reality, but perhaps not by quite enough.

The king's ostensible reason for the move was that he wanted to leave some oil in the ground for the benefit of future generations. It is a move long anticipated by resource economist Douglas Reynolds who told me in 2004 that government-controlled oil companies such as Saudi Aramco would increasingly see little point in generating oil revenues beyond their immediate needs for funding defense and social programs.

In Russia where production unexpectedly declined in the past year, the Putin government has been levying exorbitant taxes on oil extraction--in some cases in excess of 80 percent. The effect has been to slow extraction and save the oil for a later time. Whether the Putin government intended to do this, we cannot know for sure. But taxation is an easy way to accomplish such an objective where the government does not have direct control of all oil resources.

The practical effect of such policies by the world's two largest oil producers is to bring the peak in world oil production closer. But with supplies being held back for later development, the downslope on the production curve should be much more gradual than many expect, according to Reynolds. That suggests that our withdrawal symptoms may not be overwhelmingly severe as the oil economy wanes, possibly giving us a bit more time to adjust to a lower energy world and to find alternatives to oil. Once again the accidental drug counselors in Russia and Saudi Arabia are doing us a favor even if we don't appreciate it now. (If they were my parents, they would be telling me that I'll be thanking them for this when I get older.)

But the ranks of the accidental drug counselors don't end there. The lack of investment in Venezuela and Iran has limited production in both countries. This is true even though Venezuela is thought to have heavy oil deposits which rival the deposits of Canada's tar sands. Of course, it didn't help that the country's president, Hugo Chavez, essentially chased away private investment when he unilaterally altered contracts with major international oil companies. Beyond this, both countries have made spending on various social programs and subsidies a priority.

There is also the trouble in Mexico whose government-owned oil company, PEMEX, supplies about 37% of government revenues. The constant call on PEMEX's profits has led to severe underinvestment in oil production. And now, as production falls rapidly in Mexico's largest field, Cantarell, there is little other new production to replace that lost production.

The fear, of course, is that this lack of investment and self-imposed limitation on production will lead to a huge crisis in the not-too-distant future. I would contend that the crisis would come in time anyway and that our current path actually offers some hope that oil production will not collapse as we make our way through a very difficult energy transition. Such a path actually seems somewhat better than having cheap, plentiful supplies now that lull us into complacency for a while longer after which we might face a rapid decline in oil production. (Economists generally believe that this could not happen because prices would forecast shortages and adjust markets accordingly. For an explanation about why mineral markets do not forecast future supplies correctly, see my piece from 2004 entitled "Faith-based economics II: The case of oil's sudden scarcity.")

Also acting as a drag on current and future oil production is the lack of investment in the oil and gas infrastructure generally. Two years ago the International Energy Agency called for more than $20 trillion to be invested in the world's energy infrastructure through 2030 with about $3 trillion of that devoted to oil and gas infrastructure. Energy investment banker Matthew Simmons, who has been traveling the globe sounding the alarm about peak oil, recently produced a rather grim assessment of the state of the world's oil and gas infrastructure. He says the worst case scenario is a drop of 10 to 20 percent in oil production by 2013.

The geologic limits to oil production are now converging with economic and political constraints to bring energy stringency to the planet sooner than many had anticipated. No one, of course, knows for sure whether the scenario I suggest above is actually starting to play out. It's always possible that we could face steep production declines soon. But it's also possible that production could actually climb modestly or at least plateau after an initial drop as prices finally provide the needed incentive to invest in new capacity in those oil exporting nations that have been lagging in that investment to date. In addition, the oil that has been held back by such countries as Russia and Saudi Arabia would start to flow tending to keep production level for a time.

These latest developments should serve to remind us that we need to learn to set limits on ourselves if we expect to make it through the emerging energy transition. The fact that some inadvertent tough love from some unlikely characters is doing the job for us now strikes me as not being as bad as it seems.


Anonymous said...

doing my daily rounds here. . . keep up the good work!

Anonymous said...

best blog! gonna visit here always.

Karen Dayle said...

First time to visit here i just want to say your blog is so cool! :) Great Job