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2010 - Predictable and Inevitable Surprises

By chutay | 02/22/2010 | 2:24 PM

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.


 

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