x Abu Dhabi, UAETuesday 25 July 2017

Peak oil proponents still dancing around reality

The debate over whether we are running out of oil sometimes resembles the medieval controversy over how many angels could dance on the head of a pin.

The debate over whether we are running out of oil sometimes resembles the medieval controversy over how many angels could dance on the head of a pin. By redefining the size of the pin and the agility of the angels, today’s “peak oil” proponents have managed to continue the argument.

The characters have changed though. Matthew Simmons, author of Twilight in the Desert, casting doubt on Saudi oil production, died in August 2010, and the Oil Drum website closed down last September.

New disputants, including economist James Hamilton from the University of California, and Stephen Kopits, the managing director of the consultancy Douglas-Westwood, argue that oil production is limited by geology and is a severe drag on economic growth.

These factors will ultimately drive up the oil price if they are right. On the other side of the argument, voices such as the Reuters columnist John Kemp, who states that because of shale oil and other unconventional sources, “the supply of liquid transportation fuels is unlimited at prices of $100 per barrel”.

The debate is certainly more sophisticated than in the early 2000s, when the focus was on physical declines in oil production and possible economic and the collapse of civilization.

The new “peak oilers” argue that crude oil production has barely grown globally since 2005, and extra output is increasingly in the form of “low-quality” hydrocarbons that are not real substitutes for oil. All new growth is coming from North America – the United States and Canada.

Actually non-Opec crude oil production has shown signs of revival over the past two years, up 2.3 per cent last year and 2.6 per cent to March this year. Meanwhile, Opec output is down – showing the organisation’s role in balancing the market.

It is remarkable that Mr Kopits, in a 60-page presentation, makes only a single reference to Iraq, Iran and Libya. It is hardly surprising that virtually eliminating two-and-a-half major producers has caused global crude oil output to flatten.

Crises in these countries have removed more than 2.5 million barrels per day from the world market since 2011. Without that, Opec production would be substantially higher or Saudi Arabia would have had to cut back and restore spare capacity – and either way oil prices would be lower.

A few years ago, “peak oil” advocates were claiming that new oil was poor quality because it was too heavy – now they say it is too light, because of condensates from shales. This lightness does require some rebalancing of refineries, but natural gas liquids are relatively easy substitutes for oil in vehicle engines, petrochemical feedstocks and home heating.

It is true that most recent non-Opec growth has come from US shales and Canadian oil sands. The mid-2000s argument that unconventional resources could not be brought on-stream quickly has been quietly forgotten in the face of history’s largest production surge.

Elsewhere, mature areas such as the North Sea have indeed continued to slump, while major frontier projects such as Kazakhstan’s giant Kashagan field have suffered technical delays. Security disruptions the in smaller non-Opec producers Syria, Yemen and South Sudan also contribute.

But it is not surprising that capital is flowing to North America. It offers political stability, moderate taxation, a huge resource opportunity and efficient services. North American shales are simply outcompeting oil reserves holders elsewhere, who have not moved fast enough to open up to investment, improve fiscal terms and unlock their own unconventional resources. Exploration and production companies operating elsewhere are short of capital, while successful North American players such as Occidental, Apache, Murphy and Hess are under shareholder pressure to sell their overseas assets.

By focusing on the head of the pin – the narrow details of what counts as “oil” – and ignoring the grander factors of geopolitics and Opec, it is indeed possible to make it seem that oil prices can only go up. But this latest peak oil debate is unlikely to be the last.

Robin M Mills is Head of Consulting at Manaar Energy, and author of The Myth of the Oil Crisis

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