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Defending Fatih

By chutay | 09/01/2009 | 4:58 PM

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.


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The opinions expressed herein are those solely of the participants, and do not necessarily represent the views of Agile Business Media, LLC., its properties or its employees.

About Chuck Taylor

Chuck Taylor

Chuck Taylor has held senior management positions with Nabisco Brands, Ryder System Inc., Burlington Northern/Santa Fe Railroad, Mercer Management Consultants, Tri Valley Growers, American National Can, ServiceCraft Logistics, and Norbridge Inc. and recently founded an organization called Awake! He founded Awake! out of concern the supply chain profession is not informed about the critical changes facing it with the end of cheap oil. One goal is to raise awareness so supply chain professionals will understand the stakes and take an active role in shaping energy policy.

Video: Chuck Taylor talks about the impact of oil prices on the supply chain.



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