By David Strahan. First published in the Guardian, 3 October 2007.

The Irish chapter of the Association for the Study of Peak Oil could hardly have wished for better. On the first day of its recent conference in Cork, the oil price obliged by striking a new all-time high. And in the following days it struck three more in a row.

This was no mere serendipity. The price has since drifted a little, but remains around $80 per barrel, an eightfold increase in less than a decade, and several analysts now forecast $100 oil by the end of next year. All of which reflects not only the usual short term vicissitudes of the oil market – hurricanes, Iran, trouble in the Niger Delta – but also the gnawing realisation that global oil production is approaching some fundamental geological limits.

For many years the idea that global oil production will soon start to fall with potentially catastrophic economic consequences has languished on the fringes of the environmental debate, with nothing like the recognition of climate change, and shunned by the industry itself. But when the history is written, 2007 is likely to go down as the year peak oil went mainstream. In Cork former US Energy Secretary James Schlesinger used his keynote speech to tell delegates that they were no longer a tiny minority crying in the wilderness: “You can declare victory…and prepare to take yes for an answer”.

It was a bold claim but true. Although most senior oil executives continue to deny publicly what is becoming more obvious by the month, the industry-wide omerta is beginning to crack. Thierry Desmarest, chairman of Total, declared last year that production would peak in 2020, and urged governments to suppress demand to delay the witching hour. In Cork, former Shell chairman Lord Oxburgh told me he also expects demand to outstrip supply within twenty years and that the oil price may well hit $150. He warned “we may be sleepwalking into a problem which is actually going to be very serious and it may be too late to do anything about it by the time we are fully aware”.

It is no surprise that most senior oilmen still refuse to accept their business may soon start to contract, but the evidence is becoming increasingly hard to ignore, as companies struggle to maintain production or adequately replace the oil they do produce with fresh reserves. A recent study by analysts John S Herold showed that the world’s 230 biggest oil companies raised their upstream spending by 45% to over $400 billion in 2006, but that oil and gas reserves inched up by just 2%. There would have been no oil reserve growth at all without the inclusion of hard-to-produce bitumen deposits in Canada. The report concluded that peak oil has become part of the industry’s long term planning, and this would force oil companies to choose from four options: “try to become a dominant participant, find a niche operational talent, harvest assets, or liquidate quickly.”

The international oil companies’ difficulties should come as no surprise since they are largely excluded from the areas with the greatest remaining potential such as the Middle East, and predominantly confined to the most mature regions such as the North Sea, where British production peaked in 1999 and has already plunged by well over 40%. In aggregate OECD oil production has been falling since 1997, and it is now widely agreed that output in the entire world outside OPEC will peak by about 2010. This much is accepted even by those who reject the idea of an impending global peak such as ExxonMobil CEO Rex Tillerson, who told me recently that he expected no further output growth from non-OPEC production beyond the end
of the decade.

This matters because there are severe doubts about the true size of OPEC’s reserves, buttressed last year by the leak of internal documents from the Kuwait Oil Company. The paperwork revealed that although Kuwait has for two decades been telling the world it has about 100 billion barrels of proved reserves, the KOC’s internal assessment in 2002 was just 24 billion, apparently confirming the widely held suspicion that the reserves of many OPEC countries were falsely inflated in the early 1980s when members were vying for larger shares in the new quota system. As I report in The Last Oil Shock, in 2005 the consultancy PFC Energy briefed Dick Cheney that on a more realistic reading of OPEC’s reserves, its production could peak in 2015.

OPEC recently announced a production hike of 500,000 barrels per day, but some analysts doubt the cartel has the capacity to deliver even this modest increase. With the International Energy Agency (IEA) forecasting demand to rise 2 million barrels per day to almost 88 mb/d by the end of this year, the single most important question in the oil market today is whether OPEC’s current production ceiling is entirely voluntary. Even if OPEC can raise its production from current levels, oil consumption in member countries, particularly Iran and Saudi Arabia, is growing so fast that exports may soon start to fall in any case.

The one OPEC member with the capacity to raise its oil production dramatically – in theory at least – is Iraq, where for many years production was held below its natural potential by war with Iran and UN sanctions. The country’s pivotal importance was recently recognized by the IEA’s chief economist, Fatih Birol, who warned “If by 2015 Iraqi production does not increase exponentially, we have a very big problem, even if Saudi Arabia fulfils its promises. The figures are very simple, there’s no need to be an expert”. The war it seems was not just “largely about oil” as even Alan Greenspan now concedes, but all about deferring peak oil. But if so, the strategy has failed miserably. With almost daily attacks on Iraqi oil pipelines, output languishes at about the pre-invasion level, and chances of a significant increase in the foreseeable future are close to zero – with or without the introduction of the long-disputed oil law.

Opponents of the idea claim that peak oil is not imminent because there remains lots of oil to be discovered in areas such as West Africa or the Arctic, where Russia, Canada, Denmark and Norway are now scrambling to establish territorial claims. These views are often justified by reference to a study of the world’s potential oil resources produced by United States Geological Survey in 2000, which concluded the industry could discover another 650 billion barrels of oil by 2025.

Since the amount of oil discovered each year has been falling since the mid-1960s, and now amounts to just 9bn barrels per year, barely a third of annual consumption, this forecast has long been regarded as wildly optimistic by peak oil forecasters. But in another sign of how quickly the debate is moving, the USGS figure has also been discredited by oil industry experts at a private enclave held in Colorado last November.

The Hedberg Research Conference on Understanding World Oil Resources was organized by the American Association of Petroleum Geologists to try to resolve the wide range of estimates of future oil availability. The meeting was a closed-door affair attended by technical experts from all the super-majors – ExxonMobil, Shell, BP, Total and Chevron – along with some of the biggest state-owned oil companies such as Saudi Aramco. According to Ray Leonard, a senior executive with the Kuwait Energy Company, who presented a paper on Russian reserves as the former head of exploration at Yukos, the experts challenged the USGS’s optimistic assessments on the basis of their companies’ more detailed proprietary data. Leonard says the majority opinion at the conference was that future oil discovery will total just 250 billion barrels – little more than a third of the USGS number.

On that basis of that rough consensus, Leonard concludes that global oil production will peak and then plateau at between 95 and 100 million barrels per day, bringing soaring oil prices, in around five years’ time. “If there’s a world recession it could be a little longer, if United States invades another oil producing country it may happen a lot sooner. But it’s going to happen in around five years so we need to make some preparations”. Leonard’s forecast matches that of the International Energy Agency, which predicts a “supply crunch” in 2012.

But we may have left it too late for planning, since a number of oilmen such as James Buckee, CEO of the Canadian independent Talisman, are convinced we have already reached the peak, and with some reason: total liquid fuels production is lower today than it was a year ago. And yet still the British government continues studiously to ignore the issue – at least in public. My own view is that we have a few more years, but with demand forecast to keep rising strongly we will soon find out. It could just be that 2007 is the year peak oil goes mainstream because this is the year it arrives.

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