Category: peak oil

In an article dated 18 August 2008, “As Oil Giants Lose Influence, Supply Drops,” New York Times reporter Jad Mouawad again pooh-poohs the idea of peak oil while presenting recent evidence of it.

(If you’re looking for an explanation of peak oil, an excellent place to start reading is Benjamin Kunkel’s article “World without Oil, Amen,” which appeared in the August issue of GQ.)

Mouawad admits that demand has been exceeding supply. “Oil production has failed to catch up with surging consumption in recent years, a disparity that propelled oil prices to records this year,” he writes. And he admits that few expect the situation to get better over the next decade. But in his attempts to explain this phenomenon, he has no truck with the idea that humans may already have found most of the world’s oil and may already have taken about half of it out of the ground.

His article focuses rather on the especially low output of the Western oil companies: Exxon Mobil, BP, Royal Dutch Shell, Chevron, Conoco Phillips, Total of France, and Eni of Italy. Once they were giants, he writes, dominating the industry, but now they are responsible for just 13 percent of the world’s oil production. And that’s the problem. The oil has been taken away from them!

Sluggish supplies have prompted a cottage industry of doomsday predictions that the world’s oil production has reached a peak. But many energy experts say these “peak oil” theories are misplaced. They say the world is not running out of oil—rather, the companies that know the most about how to produce oil are running out of places to drill.

“There is still a lot of oil to develop out there, which is why we don’t call this geological peak oil, especially in places like Venezuela, Russia, Iran and Iraq,” said Arjun Murti, an energy analyst at Goldman Sachs. “What we have now is geopolitical peak oil.”

Third World nations have had the gall to nationalize their oil—taking it out of the deft and expert hands of the West and fumbling at it with their own dirty fingers instead. “Countries like Russia, Algeria, Nigeria and Angola have recently sought to renegotiate their contracts with foreign investors to capture a bigger share of the profits,” Mouawad writes.

This is a clever explanation, but it would only have a chance of being a true one if nationalization of oil assets were a new factor in world affairs. And it is not—by a long shot. Consider Mouawad’s own admission that the Western companies today control just 13 percent of the world’s oil. If their share is so low, why on earth would anyone think that their control over oil assets is essential? It’s entirely possible for the terms of oil’s ownership to change without any change in the company that handles the drilling and refining, after all. But even if the drilling and refining, too, change hands, all need not grind to a halt. Oil’s new owners have as great an interest in getting it to market as its old ones did.

Consider, too, a few moments in history:

1938	Mexico nationalizes its oil industry
1943	Venezuela demands 50 percent of the profits of oil produced there
1950	Saudi Arabia demands 50 percent of Aramco’s profits
1972	Iraq nationalizes its oil
1973	Libya nationalizes its oil

This is not an exhaustive list, just a sampling from notes I took recently while reading of Karen R. Merrill’s The Oil Crisis of 1973–1974 (Bedford St. Martin’s, 2007). But I think the list suffices to put paid to the idea that nationalization of oil assets is a new phenomenon. It has been around too long to be the cause of low oil production a decade from now. The industry has had more than half a century to adjust to the fact that sometimes countries decide they want a bigger piece of the pie.

Merrill, by the way, reprints a transcript of a 1972 meeting during which OPEC nations demanded equity in—that is, a share in the ownership of—the Western companies pumping oil of their wells. It’s pretty hilarious. The Westerners try valiantly to argue that the Arabs have already signed away their oil and can’t get any more for it.

A. C. DeCrane (Texaco): If a country has exercised its sovereignty by granting concession rights, why shouldn’t the party who has relied on the agreements feel that he has a right to question nationalization? You cannot ignore legal rights given by contract.

A. Z. Yamani (Saudi Arabia): You are exaggerating your rights. An agreement with the Government does not give immunity from nationalization and a state cannot bind its successor not to nationalize—even if they have promised not to do so. The International Court of Justice has given many decisions recognizing the right to nationalize. The U. N. resolution recognizes the right to natural resources. However we are not here to discuss nationalization. . . . We are reasonable and responsible. Circumstances of thirty years ago have changed. There are hundreds of cases justifying the doctrine [of changing agreements once circumstances have changed]. It is not just something in our imagination that we wish to discuss.

Hassan Kamel (Qatar): The principle allowing a nation to nationalize its natural resources is well recognized and reaffirmed by the UN. OPEC Resolution 90 of 1968 established a principle of acquiring a reasonable participation [in ownership of oil companies]. . . .

DeCrane: An OPEC resolution cannot create a legal right. Changes may be give rise to discussions and to changes to agreements, freely negotiated but not from any legal right. There is no legal right in our opinion to force us to agree. . . .

Yamani: I don’t care about your legal views provided you are prepared to discuss in a reasonable and practical manner. If you say there is no right to ask for participation then that is the end of the matter. If you are prepared to discuss, then we will. We have the power to move in other directions.

DeCrane: It is very important to distinguish between a right and a power.

Yamani: Good, I am glad we understand each other. For example, I own this glass and I have the right to break it. Don’t make me nervous or I will use my power.

A. R. Martin (Gulf): I would like to clarify our views on sovereignty over your resources. You used it to enter into agreements and you do not have the right to take the right you have granted back again. International law does not recognize such a right.

Yamani: Now I am using my right. If you get stubborn, I may use my power. [Merrill, The Oil Crisis, pp. 44–47.]

One can’t help but think that if the American Indians had had a Yamani on their negotiating team, perhaps the political geography of the United States would have turned out differently.

Last year, the consensus among mainstream journalists seemed against the idea of peak oil—that is, against the idea that the world has a finite supply of oil, that a graph of its production is likely to follow a bell curve, and that we may be within a decade of the peak of that curve. For example, in a 7 March 2007 article, “Oil Innovations Pump New Life into Old Wells,” New York Times reporter Jad Mouawad wrote that “There is still a minority view, held largely by a small band of retired petroleum geologists and some members of Congress, that oil production has peaked, but the theory has been fading.” To maintain his dismissal of peak oil, Mouawad had to walk a fine tightrope. The gist of his article, after all, was that as oil prices rise, it begins to make fiscal sense to use more expensive technologies to extract oil from the earth. In fact this is something that most people concerned about peak oil expect to happen as oil becomes scarcer. True, rising oil prices have reopened wells that were once closed as unprofitable, and they have brought dirty and unwieldy petroleum sources such as tar sands into development, but none of these phenomena suggest that oil is still as abundant as ever. To the contrary.

But it was not until recently that I began to notice mainstream journalists accepting that oil production may be peaking. In a more recent Times article, “Why Is Oil So High? Pick a View,” dated 21 June 2008, Mouawad and fellow reporter Diana B. Henriques don’t actually embrace the idea of peak oil, but they sidle up awfully close to it. They note with puzzlement, for example, that lately “the future price is higher than the spot price” of oil—reversing the offer of Popeye’s friend Wimpy, who will gladly pay you Tuesday for a cheeseburger today. “That development usually signals concerns over future supplies,” Mouawad and Henriques note, “encouraging refiners to stockpile oil, which has not happened yet.” They don’t speculate as to why not. They continue:

Many economists see a straightforward explanation for rising prices: Global oil supplies remain tight and there is a deep-seated fear that demand will outpace new production growth for years to come. In that climate, they say, the price will rise until it reduces global demand. But demand is still rising, even with oil at $134.62 a barrel.

The high price “doesn’t mean we have a shortage today, but it means there is a serious worry about a shortage three to five years from now,” said Adam E. Sieminski, the chief energy economist at Deutsche Bank.

That view — that market fundamentals are responsible for the price rally — is widely held among energy analysts.

In other words, prices may be rising because demand is exceeding supply, and because everyone in the market expects demand to continue to exceed supply, they expect they’ll have to pay more for the Tuesday cheeseburger.

The journalistic consensus may be shifting because a scientific one is coalescing. In “Final Warning,” New Scientist, 28 June 2008, Ian Sample writes, “Most geologists now accept we have reached, or will imminently reach, peak oil,” and backs up his assertion by citing Gideon Samid, head of the Innovation Appraisal Group at Case Western Reserve University in Ohio. Writes Sample:

Most industry experts, including geoscientists and economists, who were polled by Samid in 2007 said that peak production will occur by 2010. This contrasted with a similar survey conducted two years earlier, in which respondents were split, with many of the economists opting for a later date. “Now, a real consensus is emerging,” says Samid.

And in a drive-by Nixon-goes-to-China sort of way, this week The Economist jumped on the bandwagon. In “The Power and the Glory,” dated 21 June 2008, part of a special report on the future of energy, Geoffrey Carr wrote that “Oil is no longer cheap; indeed, it has never been more expensive. Moreover, there is growing concern that the supply of oil may soon peak as consumption continues to grow, known supplies run out and new reserves become harder to find.” Carr continues by unraveling the apparent contradiction that was flummoxing the Times last spring:

“Peak oil,” if oil means the traditional sort that comes cheaply out of holes in the ground, probably will arrive soon. There is oil aplenty of other sorts (tar sands, liquefied coal and so on), so the stuff is unlikely to run out for a long time yet. But it will get more expensive to produce, putting a floor on the price that is way above today’s.

. . . he would probably have written cocktail-party banter along these lines:

"I heard a most interesting broadcast today," Mrs. Kelso said firmly. Fluffy entered the room carrying a dead mouse.

"Funny, I never noticed that place on the ceiling before," Irving said.

"If you’re looking at the place I am," Fabia said, "I think it’s the shadow of the knob on that lamp."

"You look terribly uncomfortable, Mr. Bush," Mrs. Kelso said. "Why don’t you sit on one of the less ornamental chairs. In the broadcast I heard," she went on, "a scientist explained how very close our planet is to being drained of its natural resources. He seemed to think it quite likely we would run out of them before men have learned how to harness solar energy or the tides, in which case we would all either starve or freeze."

"Oh, Mildred," Irving said, "he sounds like that discredited alarmist to me."

"I’m sure it made very good sense as he explained it," Mrs. Kelso said. "The first thing to go will be coal."

"We could all go down South and live, until the food started running low," Alice suggested pleasantly.

"Collard greens with salt pork? Not for me thank you," Fabia said.

"I don’t think it’s a joking matter," Mrs. Kelso said.

"Are these goblets Bohemian glass?" Marshall asked.

"Of course I don’t know why I’m criticizing you," Mrs. Kelso said, ignoring Marshall. "Being an inveterate apartment dweller, I’d be totally hamstrung if the electricity or the gas were to go off."

From chapter 3 of John Ashbery and James Schuyler’s A Nest of Ninnies (1969), which one hopes the NYRB folks will soon restore to print, along with their lovely editions of Schuyler’s sublime Alfred and Guinevere and his silly What’s for Dinner?. (Of course, and for the record, it probably won’t in fact be coal that goes first.)