2010 - Predictable and Inevitable Surprises

During my sabbatical from blog writing, I read several books about the financial collapse and confirmed a long held belief that everything that happened was predictable and  inevitable. There were warning signs for all to see and the collapse was predicted by many. 

My only surprise was that anyone was surprised. The global financial crisis, with all its grave consequences, was a pervasive failure of the world’s most powerful institutions and leaders.

The end of cheap oil – like the global financial meltdown - is also predictable, inevitable and being missed.  The only question is timing - that which can't continue forever won't. There will be enough oil until there is not. The job of a supply chain leader is to keep his/her organization from being overwhelmed by these predictable and inevitable events. 

As I have said before, the end of the oil age is not the end of the world but it will be the end of the world as we know it. The global economy depends on cheap oil for inexpensive transportation and there are still no readily available substitutes for oil for transportation in the near or intermediate future. So if the world as we know it is ending and that ending is predictable, where are we now?

Peak Oil shares many similarities with the financial crisis: there is a problem that is recognized by many; it is getting worse over time; it will not solve itself; and not much is being done to mitigate the impact. However, the 2010 message from the recent  World Economic Forum in Davos, Switzerland was soothing. (Many of those attending this elite event are the same people that missed the global financial collapse.)  

The Wall Street Journal reported that Daniel Yergin, the founder of Cambridge Energy Research Associates and moderator of the Forum's energy panel, was bringing good news to Davos.  His message, “…the awful day of ‘peak oil’ production…is still a long way off”.  On the panel, Khalid al Falih, the head of Saudi Aramco, told the audience, “There is too much rhetoric in the public domain about moving away from oil”.

I am not soothed. I get the same queasy feeling  I got listening to Ben Bernanke and Hank Paulson say that the sub-prime crisis was contained.

As Matt Simmons has been saying for years, no one even knows how much oil the world really has or how healthy the fields are. The global economy continues to operate without an accurate fuel gauge for its most important input..

The Organization of Petroleum Exporting Countries (OPEC) supposedly holds over 60% of oil reserves. However they will not allow independent third party verification of their fields and few know the true condition of reserves and reservoirs.

On demand side, the International Energy Agency (IEA) says the demand for oil may have peaked in the developed world. Nonetheless they estimate that 2010 global oil demand will be 86.5 million barrels a day — 1.8% higher than 2009 levels.

The new demand is coming entirely from emerging markets and the trend is unstoppable. The global middle-class will continue to pursue a better life and oil will lubricate the pursuit. As an example, China is now the world’s largest auto market and will sell over 15 million cars in 2010 ( 3 million more than the U.S.) while less than 5% of the population has a car vs. 75% in the U.S.

On the supply side, the world still uses 30 billion barrels a year and finds about 1/3 that much while the world’s major oil fields continue to deplete 5% per year.

The cost of finding oil has almost tripled over the last decade even though the rate of discovery has barely changed. Global exploration and production spending declined over 15% in 2009— the first decline in a decade.

There is not much chance of finding any significant quantity of new cheap oil. Only higher prices will encourage production of the more difficult recent finds e.g. deepwater  Brazil and the Gulf of Mexico or the Canadian tar sands. 

More worrisome to the United States but far off the radar of most analysts and policy makers is a burgeoning export crisis. The United States imports over 60 percent of its oil  but exporters like Iran, Mexico, Nigeria, Saudi Arabia and Venezuela are using more of the oil they produce at home and exporting less.

Events in Mexico and Venezuela should be high on any early warning system.  From 2005 through 2009, the combined imports to the U.S. from Mexico and Venezuela, our number 2 and 3 suppliers, declined over 1 million barrels per day - about 8% of total imports.

Much attention is directed to Mexico’s drug wars while little attention is given to the 2005 collapse of Mexico’s super-giant Cantarell oil field. Oil revenues provide 40% of the revenue for the Mexican government. With the current state of its oil industry, the country will struggle just to keep production at current levels.  In 2008, a Pentagon study suggested that Mexico was on the way to becoming a “failed state”.  The possibility that Mexico’s oil exports could go to zero within the next five are very real.

In Venezuela, oil production has fallen 25% since Hugo Chavez was elected President in 1998. Oil revenues make up 90% of Venezuela’s foreign earnings, so dependence on oil exports is more extreme than Mexico’s.

Net exports have fallen 38% from the peak in 1997. Exports to the U.S. are down 50% from the peak. Many think exports to the U.S. are on a path to zero.

In 2007, President Chavez nationalized most of Venezuela’s petroleum operations and acrimoniously ousted Western oil companies. Now he is turning to countries like Iran, Russia and especially China for help in developing the nation’s oil and gas resources.

These declining imports from Mexico and Venezuela means the U.S. will increasingly depend on suppliers farther away – the very same suppliers that China has aggressively been courting.

I expect these trends to bring an oil price and supply shock in the next 12 to 18 months. So while Davos says not to worry, supply chain leaders should begin acting as if the end of the oil age is a lot closer than recognized because it  is predictable and inevitable.

 

Done Dithering?

There was "Big" news on the Peak Oil front last week. The UK Guardian published an article to coincide with the release International Energy Agency's (IEA) Annual World Energy Outlook (WEO). The article, "Key oil figures were distorted by US pressure, says whistleblower", quotes two unnamed senior officials – one a present employee and the other retired - who challenge the accuracy and integrity of the IEA's oil supply assumptions and forecasts.

I have discussed the IEA in a previous blog. But by way of review, the Paris based IEA is an intergovernmental organization which acts as energy policy adviser and "watchdog" to 28 member countries, including the United States, to help guide their energy and climate change policies.

This "Big" news will come as no surprise to anyone who has seriously followed the Peak Oil story and recent IEA forecast.One of the unmanned officials says:

"We have [already] entered the 'peak oil' zone. I think that the situation is really bad."

The other says that the IEA:

"...has been deliberately underplaying a looming [oil] shortage for fear of triggering panic buying."

In 2005, Claude Mandil, IEA's then Executive Director, called those who warned of Peak Oil "doom-sayers" and predicted oil supplies could rise as high as 120 million barrels a day (mbpd) by 2030. About that number, the Guardian source says;

 "The 120 mbpd figure always was nonsense but even today's number is much higher than can be justified and the IEA knows this ... Many inside the organization believe that maintaining oil supplies at even 90m to 95m barrels a day would be impossible."

In 2006 and 2007, the 2030 projection was reduced to 116 mbpd and the decline rate in output from the world's existing oilfields was put at 3.7% a year.

The  2008 Outlook (previous blog) was radically different. The 2008 report decreased the 2030 projection to 105 mbpd and increased the projected rate of existing field decline from the 3.7% to 6.7%. They adjusted the decline rate because in 2008 they finally actually studied the behavior of over 800 of the world's largest oil fields and I gave them credit.

The 2009 report released Nov. 10, 2009 retains the 2008 projection of 105 mbpd of oil production by 2030, but advocates for a fossil-fuel demand peak by 2020 because;

"...containing climate change is possible but will require a profound transformation of the energy sector."

So while the 105 mbpd by 2030 remains the named peak for world oil production, the real number is much closer to that 90 mbpd - 95 mbpd mentioned above coming in at 97 mbpd no later than 2020 because of climate concerns. So surreptitiously, the IEA continues to take the peak number down. See below.

Even this 97 mbpd by 2020 is filled with unrealistic assumptions. See Dave Cohen's, "The Oil Situation Is Really Bad.". But as Dave points out in an another good article this week, "Staking Out the Middle Ground.";

"The further forward in time a forecast goes, the more worthless that forecast becomes."

I agree, but let's review the IEA's long term forecast nonetheless because, at least directionally, an organization whose main job is forecasting should have some credibility. Since 2005 the world's energy "watchdog" has officially reduced the 2030 projected daily world oil production from 120 mbpd to 105 mbpd, increased the depletion rate of current fields from 3.7% per year to 6.7% per year and now says that the peak should really be 97 mbpd in 2020 because of climate change concerns. Realistically, how can anyone trust the IEA? Their credibility is falling faster than their estimates of when world oil production will peak.

Dr.Colin Campbell, a father of the modern Peak Oil movement who co-authored of the famous 1998 Scientific American article, "The End of Cheap Oil", drafted a reply to the Guardian and expressed his gratitude for their work. He hopes there will be a "certain awakening" among governments and the media which will, "allow the IEA to come forward with more realistic assessments of the true situation."

I applaud Dr. Campbell for his optimism, but I seriously doubt there will be any awaking by governments or the media. Tragically, the IEA story is just another confirmation that we can no longer trust the authorities and institutions we usually turn to for information and advice e.g. Governments, Central Banks, Wall Street, the Media, IEA, etc.

As an example, our top economic leaders, Hank Paulson and Ben Bernanke, assured us in March 2007 that "subprime is contained." The New York Times continues to give press to Michael Lynch and Daniel Yergin, the Paulson and Bernanke of oil supply, while ignoring U.S. Government Reports (Hirsch Report, Army Report, GAO Report), whistleblowers, industry insiders (Campbell, Gilbert, Simmons) and careful analysts (Aleklett, Deffeyes, Koppelaar,Leonard, Skrebowski) who have been warning of the imminent decline in oil for over a decade now.

Most of these analyst are calling for a peak of oil production at around 89 - 92 mbpd sometime between 2012 - 2014. Remember when oil hit $147 a barrel in July 2008, production reached an all time high of 87 mbpd and spare capacity was estimated to be only about 1 mbpd.  It won't take much global recovery to test that 87 mbpd supply/demand number again. I think many will be in for a bad surprise.

For the present, I am sticking with the projections made on October 1st for 2010 oil prices to average $80 a barrel in a $65 to $90 range. Absent a geopolitical catastrophe, there is enough oil in the world to meet demand, at least until growth picks up in earnest and the current 3.5 - 4 million barrel per day estimated excess capacity is reduced. For the next 18 -24 months, the world will have enough oil and many will say that Peak Oil is a canard. This will lead some to think it is business as usual. Nothing could be more dangerous.

We are definitely out of the BAU (Business as Usual) Zone and somewhere between TEOTWAWKI (The End of the World as We Know It) and WTSHTF (When the Stuff Hits the Fan). The "good" news is that when the global recession comes to an end, the evidence for Peak Oil will be overwhelming and TSWHTF.

Even the most adamant deniers will be forced to acknowledge the world faces permanently constrained oil supplies and growth restricting oil prices with no cheap and easy way out of the problem. The accusations and finger pointing will begin about who missed Peak Oil amidst a liquid fuel emergency that only the most strategic and prescient will be prepared for.

While this will be painful, we will finally begin the long, difficult task of rebuilding our country and move slowly away from oil and polluting fossil fuels and toward to a cleaner energy future and healthier world. I wish and hope the transition could be easier, but I don't see it. As James Kuntsler, a noted Peak Oil avocate, says:

"Reality doesn't "spin."...Reality is an implacable force and the only question for human beings in the face of it is: what will you do? In other words, it's not really possible to manage reality, but you can certainly choose to manage your affairs within reality."

Today's reality is that most are almost completely unprepared for an inevitable liquid fuel emergency in the not to distant future and supply chains are particularity vulnerable because there are no readily available substitutes for the oil that powers 98% of all the transportation that supply chains depend on.

The key for supply chain professionals is to not be fooled and lulled into thinking all is well. Now is time to get a jump on reality. Jack Ampuga, President of Supply Chain Optimizers and a good friend, said in an interview last month that he can't see why anyone would still be dithering about going green in their supply chain.

I agree. Jack is a veteran supply chain professional and like most competent supply chain veterans he knows there is still incredible waste and improvement opportunities in most supply chains. Reducing waste and conservation will be a primary transition "fuel' and supply chains are full wells waiting to be pumped. In fact, supply chain improvements are better than new oil fields because they are easier, cheaper and cleaner to find, develop and refine.

As an example, DC Velocity Magazine recently featured Jack in an article titled: "Trimming excess packaging could bring 10% payoff." The author, Peter Bradley, introduced the subject with this statement:

"Packaging may not be the first place logistics professionals look when searching for savings opportunities. Maybe it should."

In a Peak Oil world, no one will overlook a chance for a 10% pay-off and keep their job. In fact, ever supply chain manager should set an aggressive goal today to reduce energy use by at least 5% percent a year for the foreseeable future. If we are to survive intact as a country, I have come to believe that individual actions and courage will have more to do with it than broad institutional mandates because it does seem that our political/economic system is temporarily (I hope) paralyzed and unable to cope with reality.

I will dedicate more of these blogs to identifying and showcasing constructive strategies and tactics, like Jack's, which work to help achieve that 5% goal. My intention is to support, publicize and celebrate those preparing for this very different world. We are at TEOTWAWKI, but it is not the end of the world.

The “Black Eagle” and the Price of Oil.

In the last blog I forecasted that oil prices would be in the $65-$75 range until mid- 2010 and end the year in the $80-$90 range. When I wrote that forecast on October 1, oil was trading at around $65 a barrel. Less than a month later, oil topped $81 a barrel, already in the range  predicted for the latter half of 2010. What happened? Did I miss something?

Many would say I am missing the imminent crash of the U.S. dollar or a "Black Eagle". According to the Chicago Mercantile Exchange, October aggregate bets against the dollar rose to the highest levels since July 2008.

Oil is traded globally in dollars and the fate of the dollar is a major factor in the price of oil and consequently the price of transportation. Generally, as the dollar declines, oil prices increase.

The International Monetary Fund estimates that in the long term a 1 per cent depreciation of the dollar correlates to gains of more than 1 per cent for oil. Hypothetically, if the dollar suddenly dropped 25%, oil would surge over $100 a barrel.

There is no oil supply/demand reason for a 25% increase in oil prices in one month. There is plenty of oil in the world right now. The proximate cause of this increase is this extreme negativity about the dollar and speculation it will soon crash and push oil prices much higher.

Granted, it is hard to imagine a happy future for the dollar. Debt, bailouts, deficits, unemployment, bankruptcies and money printing lead eventually to currency depreciation or taking the painful cures of fiscal and monetary discipline.

The Fed views deflation, not inflation as the most immediate danger. Currency depreciation is a powerful and proven way to stimulate the economy out of a liquidity trap e.g. pays the debt off with cheaper currency in the future and makes U.S. exports more competitive.

The U.S. government and citizenry have a low tolerance for the painful, but more effective long term cures. So currency depreciation is the unofficial and unspoken policy of the U.S. Government and the Federal Reserve. It is a risky, but so far successful.

The last time there was this much pessimism about the dollar was right before the world economy began to crash in 2008. In that panic, a "Black Swan" not a "Black Eagle" showed up and the dollar's value jumped 20 per cent between July 2008 and March 2009.

When the world panicked, investors rushed back into the currency of the country with the richest stable democracy and strongest military. They did not demand Rubles, Reals, Renminbi, Rupees or even Euros. They demanded the perceived safety of the dollar. As confidence and risk taking have returned, this has reversed and the dollar is back down to pre-crash levels.

In my opinion, the rumors of the dollar's imminent death are much exaggerated. This perceived "safety", warranted or not, will not change quickly. Asians and the Persian Gulf States will continue to subsidize U.S. debt and growth to maintain their export markets and military protection.

Most recognize that relying on the U.S. and the dollar to ensure global stability is in the long term best interest of no one including the U.S. However, this precarious "balance of terror" of economic mutually assured destruction will continue for now because there is nothing readily available to replace the dollar.

My oil price forecast assumed no sharp declines in the dollar. In fact, I see a strengthening of the dollar through early 2010 which will lower oil prices back to $65 to $75 range. The world economy is not out of danger and the slightest signs that the nascent recovery is faltering will send the dollar higher as investors again seek safety.

The real crisis for the  dollar will come as world petroleum production falters and demand outstrips supply. This will be the topic of my next report.

2010 Oil Price Forecast

Forecasting is hazardous. Just ask Michael Lynch, whose New York Times Op-Ed, "'Peak Oil' Is a Waste of Energy.” was discussed previously. Lynch is an economist with a background in political science and the former director for Asian energy and security at the Center for International Studies at MIT. He is currently an energy consultant.

In April 2004, oil was around $37 a barrel. Lynch predicted a fall to $25 by summer. By mid-August, it was $47. Undaunted, Lynch wrote in September 2004 that by September 2005, the price would be under $30. In September 2005, it hit $67.

In March 2006, with oil at $62 a barrel, he forecast a drop back to the $30 - $40 range before year end where it would remain for at least the next two decades. Instead, oil climbed as high as $76  before finishing 2006 at $61.

In April 2007, Lynch predicted a gradually drop from the current $65 a barrel to the mid-to-low $40's in 2008. It climbed steadily to $147.

He did get short-term vindication when the price hit the mid-$30’s as the world economy ground to a halt in the last quarter of 2008. Now with prices back around $70, he confidently predicts $30 again soon.

My price forecasting history is not as documented, but I always tell audiences that the only thing that will cause a significant downward impact on oil prices is severe and sustained worldwide recession, depression or general economic collapse. My long standing and continuing message is that oil prices are heading inexorably higher with occasional wild price swings as the world attempts to adjust to a growing supply/demand imbalance and the end of the Oil Age.

I do admire Lynch for putting his predictions out there for everyone to see – wrong as they are. Since now is budgeting season for supply chains, I want to do the same. So here is my forecast for the price of oil in 2010.

There are many issues that impact the price of oil, but the two biggest are, as always, supply and demand. Since 2005 world oil supply has been on a plateau of 83 to 87 million barrels per day. The 87 million barrels per day recorded in July 2008 was the highest production ever and the price also hit the all time peak of $147 in the same month.

In July 2008, every oilfield in the world that could produce was producing. Some estimated that the Saudi’s had about one million barrels per day in spare capacity, but that was it. This means that with all out production and the Saudi spare capacity, the world was capable of producing 88 million barrels per day in mid – 2008.

New production in 2009 plus oil flow projected to come on line in 2010 will be slightly less than the estimated 5% depletion in currently producing fields. This then leaves world production capacity through 2010 at 88 million barrels per day.

The financial crisis caused ‘demand destruction', but not as much you might think considering the severity of the meltdown.  Barclays Capital Weekly Oil Review showed 2008 demand at 85.5 million barrels per day down only 500,000 barrels a day from 86 million barrels per day in 2007. The Department of Energy (DOE) estimates world oil demand bottomed at 83 million barrels per day in the first quarter of 2009.

This month DOE reported that United States oil demand is starting to pick up. Also this month, the International Energy Agency predicted an increase in oil consumption by mainly emerging economies of 1.4 million barrels a day increasing projected demand in 2010 to 85 million barrels a day.

Assuming demand in 2010 will reach 85 million barrels per day and potential supply is 88 million barrels per day, the oil market should be well supplied through mid – 2010. Using these assumptions my prediction through mid – 2010 is that oil pricing will remain under OPEC (read Saudi) control in the $65 - $75 a barrel range.

Toward mid - 2010 the picture gets hazy. One can make a case either way on the shape of a global economic recovery. U, L, or W are all possible.  If recent nascent growth turns out to be government sponsored bubbles, then it is unlikely oil demand will increase in 2010 and could fall again.

In this scenario, prices weaken and possibly bring Lynch’s $30 prediction closer to reality. Too bad he is only right if the world economy grinds to a halt. Certainly the world still has a backlog of economic problems, but I don’t see the recovery faltering and oil prices falling for two main reasons.

First, governments around the world will not just stand by; they will stimulate again if needed. Second, the 83% of the world’s population that are just starting up the prosperity ladder have the resources, intelligence and drive to continuing climbing.

These 83% only use 44% of the world’s energy, while the 17% in the developed economies use 56%. They want a life like we have and their energy appetite will only grow. E.g. China is now the world largest auto market.

In my forecast, the second half of 2010 will see continued economic upside led by the emerging countries – Brazil, China, India, Russia and the Middle East – with further stimulus from the developing countries if the recovery falters.

I forecast that oil prices will reflect the demand pickup and steadily increase from the $65-$75 level early in the year and end the year in the $80-$90 range. The average price for the year will be around $80 a barrel.

This assumes no “Black Swan” event e.g.: war in the Middle East; revolution or civil war in a major oil producing country;  excess capacity is over estimated; a successful terrorist attack on a key oil processing facility or transport choke point; collapse of a significant oil field; etc.  Any event like this makes forecasting irrelevant until the situation passes.

In summary, the economic meltdown has bought some time, but we confront a paradox and a cycle that will be repeated until the transition from the Oil Age is well along.

Rising oil prices will signal a return to growth and increased demand. However, depletion of existing fields, like rust, never sleeps and finding and bringing enough new supply to meet increased demand and avoid prices climbing into economy-damaging territory is highly unlikely especially after 2011.

Eighty dollars a barrel is not economy crushing. It gives companies time to begin the serious supply chain changes needed before the next oil crisis arrives.

I have developed a Peak Oil Checklist as a guide for preparing supply chains for the “Inevitable Surprise” of Peak Oil.  If you would like a copy, let me know.

BP's "giant" and Peak Oil

Last blog, the focus was the New York Times Op-Ed by MIT Economist Michael Lynch, "Peak Oil is a Waste of Energy". On September 2, the day this blog appeared, British Petroleum (BP) announced a “giant” oil discovery in the Gulf of Mexico. The discovery inspired several articles like this one in the Guardian, “Giant oil find by BP reopens debate about oil supplies.”

Now my intention is not to take on the press every week, but when surrounded by a target rich environment one must shoot. My experience is that for the most part the conventional media sticks with the conventional views and avoids the serious, rigorous, non-agenda based analysis found primarily on the internet e.g. The Oil Drum.

Lynch’s article confidently predicts “…the price will likely come down closer to the historical level of $30 a barrel…”  He sounds the all clear on Peak Oil and BP’s find, “…reopens debate about oil supplies”.

Just as the press missed the “it's-all-contained” financial meltdown, they are missing the story on oil depletion. Otherwise you would have heard about the ignored 2005 Department of Energy Report "Peaking of World Oil Production: Impacts, Mitigation and Risk Management," by Robert L. Hirsch known as the Hirsch Report. You should read it.

I am not of the end-of–civilization or die-off ilk. But we are on the clock. When oil production goes into permanent decline, it will be a defining issue for humanity.

My intention for this blog is to present the data, attempt to clarify confusion and offer constructive strategies and tactics in the hope more decision-makers recognize the problem and elevate it to the highest levels of their organizations so serious actions can begin.

Oil by its nature is an unusual resource. It is non-renewable, produced in only two geological periods in a few unique places – most long since explored- where seven very specific geological conditions must be present. It must be found, brought to the surface, refined and moved before used.

It has the highest energy density of any portable energy storage medium making it the perfect fuel for 95% of the world’s transportation and especially important for supply chains now mostly dependant on cheap and abundant oil.

Transitioning from conventional oil sources to unconventional sources — heavy oil, oil sands, oil shale, coal to liquids, biofuels, natural gas etc., takes time, money, work and wisdom. There are no quick fix alternatives to replace oil for transportation.

There are alternative sources of energy, but they will not magically appear. Peak Oil is a liquid fuels problem — not energy in general e.g. electricity does not help without massive, slow and expensive replacement of transportation fleets with battery-operated vehicles.

My hypothesis has been, and remains, that Peak Oil is coming and presents great danger to the United States and the global economy. Forecasts range from 2005 to 2050 — clustering near 2012. The Hirsch Report posits that to avoid severe worldwide pain rapid large-scale mitigation efforts must begin 20 years before peaking.

So what does BP’s giant oil find in the Gulf of Mexico tell us about “the debate on oil supplies” and the peaking of world oil?

The BP Tiber discovery is good news for BP and is tangible evidence that technology for extracting oil is improving, but it does little to “reopen the debate about oil supplies.” If anything, it is a canary in the coal mind. 

The oil will be pulled from deeper in the earth than Mount Everest is tall – six miles. It is 250 miles offshore, 100 miles from the nearest pipeline and in the world’s most active hurricane zone. There is nothing routine about this discovery.

These are unchartered waters and considering the cost of development and production - $3 to $4 billion, oil prices need to be in the $70-100 range (adjusted for inflation when the oil actually starts flowing) for Tiber to be profitable.

 BP doesn’t know how much oil is down there nor how long it will take to see it flow. They are speculating that the total find is about 3 billion barrels with an eventual peak flow rate of around 200,000 barrels per day. That's about one day's supply for the world in a year and 1% of our daily requirement. If history is a guide, no major oil will flow from Tiber for at least a decade.

There are many good things about Tiber- proof of exploration technology, additional reserves for the United States,  potential big benefits for our trade imbalance as we import less and huge taxes and royalty income for our citizens plus sustained employment for many people; but it doesn't change the clock on Peak Oil by any meaningful degree.

If anything, Tiber is proof of how hard it is to find oil, even with the amazing 3-D seismic and drilling technology now available. In order to reach the discovery, it took the deepest well ever drilled in the oil and gas industry.

The need to go this deep is a function of Peak Oil. It signals that the low hanging fruit, like setting up a land rig and poking a hole in the ground in Texas or Saudi Arabia, was picked long ago. Oil patch technology has become very good at revealing how little easy oil is left.

Along with all good things it brings, the Tiber discovery is a sign that we are near the Peak and time is short.

Defending Fatih

On August 24, 2009, the New York Times ran an Op-Ed by MIT economist Michael Lynch, "Peak Oil is a Waste of Energy".

For the last five years, I have tried to educate the supply chain profession about implications of Peak Oil and this week marks my first blog on energy for DC Velocity Magazine. So in view of Lynch’s Op-Ed have I wasted the last five years and should I just forget about the blog? I don't think so.

 As introduction, I am a lifelong supply chain practitioner who started railroading at age 16. I am also a native Texan. Transportation and energy have always been important parts of my life.  In 1973, when the Arab oil embargo hit, I was working for a tank truck carrier in Houston. I saw what happens to supply chains  when oil gets expensive and in short supply - plants closing, gasoline shortages, reduced speed limits, rationing of equipment, serious inflation, unemployment and recession.

In 2004, oil prices moved from $20 to $40 a barrel and I noticed. I also noticed the supply chain world was mostly silent on energy and energy prices. Had everyone forgotten?  The more I studied the geological, geopolitical, oil industry infrastructure and political situation the more concerned I became. 

 My goal became to educate the supply chain world about what was coming. Subsequently, I have presented to over 3000 supply chain people, consulted with companies and written several articles including, "The End of Cheap Oil: are you ready?". The subtitle of the article is, “Supply chain managers must take action today to prepare for the end of the Oil Age tomorrow. “

I stand by everything in the article. There are no readily available substitutes for oil for transportation in the foreseeable future and world oil production is close to or past peak. Mr. Lynch would certainly disagree. He sees oil prices returning to $30 a barrel in the future with a virtually unlimited supply. I not only disagree, but I believe Lynch's article is misleading and dangerous. Some may not be familiar with the concept of Peak Oil, so let’s start with a real world example.

Texas has been the most prolific oil producing area in the world.  Texas annual oil production peaked in 1972 at 1.26 billion barrels. In 2008, annual production was down to 351 million barrels. In 1972, there were 167,000 wells each producing 20.6 barrels per day. In 2008, there were 154,000 wells producing 6 barrels per day. 

So  in spite of huge price increases ($3 per barrel in 1972 vs. $147 per barrel in 2008), vastly improved technology, extensive exploration, sustained drilling, massive investments and some of  the best people in the world at finding oil, production declined by almost 75% between the peak in 1972 and now.

This is how all oil fields work. Production increases until a maximum rate of extraction is reached then flow rates start down the slope. When approximately half the oil has been pumped, the field enters a terminal decline rate, exactly what has happened in Texas. This is the definition of Peak Oil.

Many respected geologists, oil industry executives and economists believe that global oil production has already or soon will replicate the Texas model and begin an inexorable decline. One of those is Fatih Birol, the top economist at the International Energy Agency (IEA). Birol recently said that IEA’s analysis shows the world will reach peak production in 10 years.

Lynch attacks Birol  in his article., “Well, just when we thought that the collapse in oil prices since last summer had put an end to such talk, along comes Fatih Birol, the top economist at the International Energy Agency, to insist that we’ll reach the peak moment in 10 years, a decade sooner than most previous predictions (although a few ardent pessimists believe the moment of no return has already come and gone).”

The International Energy Agency is not some radical group. According to their website, “The International Energy Agency (IEA) is an intergovernmental organization which acts as energy policy advisor to 28 member countries in their effort to ensure reliable, affordable and clean energy for their citizens.”  Founded during the 1973-74 oil crisis and long known as the world's energy “watchdog”, the IEA had long been a conservative proponent of a view that world oil supplies would continue to expand.

This changed significantly with their annual 2008 World Energy Outlook Report published last November which stated unequivocally that, “The Era of Cheap Oil Is Over.”  

Here is the lead paragraph from the Executive Summary:

“The world’s energy system is at a crossroads. Current global trends in energy supply and consumption are patently unsustainable — environmentally, economically, socially. But that can — and must — be altered; there’s still time to change the road we’re on. It is not an exaggeration to claim that the future of human prosperity depends on how successfully we tackle the two central energy challenges facing us today: securing the supply of reliable and affordable energy; and effecting a rapid transformation to a low-carbon, efficient and environmentally benign system of energy supply. What is needed is nothing short of an energy revolution.”

Second paragraph:

“Oil is the world’s vital source of energy and will remain so for many years to come, even under the most optimistic of assumptions about the pace of development and deployment of alternative technology. But the sources of oil to meet rising demand, the cost of producing it and the prices that consumers will need to pay for it are extremely uncertain, perhaps more than ever.”

Fatih Birol, far from being someone to be criticized and ridiculed, should be commended for stepping forward and conveying the rapidly deteriorating energy situation to world policymakers. The IEA acceptance that a peak in world oil production is imminent joins  long ignored U.S. Government Reports  and many others to shatter the illusion that oil resources magically turn into cheap oil to keep everything moving as before.