Deutsche Bank’s important new report, The Peak Oil Market: Price dynamics at the end of the oil age begins with a quote that is one of my pet peeves:

“The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil.”  Sheikh Yamani, Saudi Oil Minister, 1962-1986.

Great quote in a peak oil report except for one tiny point — we still use a lot of stones.  In fact, given that we have 6.7 billion people on the planet, I’m quite certain that we use a lot more stones than we did in the Stone Age.  I’m almost as certain that, as the DB report says, we will be using a lot less total oil in a few decades.  So the quote doesn’t work, and the report, while dead on in many parts, is still a tad off.

SUPPLY:  We expect increasingly chronic under-investment in new oil supply capacity. We believe that concentration of remaining oil reserves into OPEC government hands will lead to under-investment in new supply and higher volatility in regulatory and fiscal regimes, and more volatile pricing. Consumer governments are adding to uncertainty with total lack of clarity on environmental legislation/regulation outcomes. That deep uncertainty in supply and demand will likely disincentivise private sector oil supply investment, exacerbating overall oil under-investment, and leading to peak oil supply within the next six years. We see market maximum capacity at 90mb/d in 2016 – just 5% above 2009….

After a final price peak implied at $175/bbl in 2016….

Hmm.  The price spike sounds right.  But I don’t think the ultimate reason will be inherently chronic underinvestment — there’s simply too much money to be made at projected oil prices for producers.  And I don’t think the reason will be uncertainty surrounding regulation — again, there’s simply too much money to be made of projected oil prices and, over at least the next decade, climate regulations will focus more on coal than oil.

The reason for the price jump is that we’re running out of the easy supply.  That’s certainly the view of all the peakers I know.  And it’s the view of the International Energy Agency (IEA) and its chief economist, Dr. Fatih Birol (see World’s top energy economist warns peak oil threatens recovery, urges immediate action: “We have to leave oil before oil leaves us”):

Dr. Birol said that the public and many governments appeared to be oblivious to the fact that the oil on which modern civilisation depends is running out far faster than previously predicted and that global production is likely to peak in about 10 years – at least a decade earlier than most governments had estimated.

The IEA’s work makes clear that for oil to stay significantly below $200 a barrel (and U.S. gasoline to be significantly below $5 a gallon) by 2020 would take a miracle — or rather 6 miracles see “Science/IEA: World oil crunch looming? Not if we can find six Saudi Arabias!”  See also “Merrill: Non-OPEC production has likely peaked, oil output could fall by 30 million bpd by 2015,” which noted,

Steep falls in oil production means the world now needed to replace an amount of oil output equivalent to Saudi Arabia’s production every two years, Merrill Lynch said in a research report.

I agree with DB report that hybrids and battery-powered cars are the big game changer (see “Climate and hydrogen car advocate gets almost everything wrong about plug-in cars“):

DEMAND:  We now have a “disruptive technology” in the shape of the hybrid and electric car, that will very likely have a far greater positive impact on oil efficiency than the market currently expects. There are two major issues that lead us to believe that oil demand peaks with lack of available supply within six years:

1. With reasonable assumptions, we find that by 2020 the global average MPG of newly purchased light vehicles will have increased by a bit more than 50% compared to 2009, from roughly 29 mpg to about 44 mpg. The impact will be concentrated in US gasoline, the largest single element of global oil demand (12%), and will be dramatic enough in its own right to cause the peak of global oil demand around 2016. We forecast US gasoline demand to fall to 4.9mb/d – about 46% from its 2009 level – by 2030.

2. Also undermining oil demand is a switch to $30/boe natural gas. Unlike oil, natgas is abundant, accessible, and cheap to develop; huge current price discounts caused by OPEC and under-investment will cause major switching away from oil.

That seems plausible.  Certainly, I have been arguing that natural gas supply appears to be much larger than people realized, and quite separate from petroleum supplies (see “Game Changer Part 1:  There appears to be a lot more natural gas than previously thought“).

But natural gas doesn’t substitute straightforwardly for oil in most applications, whereas it does substitute directly for coal, so I expect most demand growth to go into the electric sector.  Even DB writes (their headline, not mine):

Why no natgas vehicles? A dinosaur invents a meteorite?

Quite simply, our auto team, reflecting auto industry trends, see little significant penetration of natgas vehicles over the forecast period. The infrastructure required is excessively costly and time consuming to construct, the cost of that construction falls to energy supply companies who cannot develop the cars to use it, and the benefits in terms of efficiency are too little to attract consumers. Natgas vehicles are a red herring, in our opinion.

Similarly, electricity doesn’t substitute straightforwardly for oil in most applications.  It can substitute for oil in one or two relatively specific, albeit large, applications — short and perhaps medium-distance transportation.

So these DB conclusions are a bit puzzling:

PRICE DYNAMICS: as oil supply peaks, so oil demand will peak. But the fundamental mismatch in elasticities of supply & demand, time cycles of supply & demand and price mechanics of supply & demand will likely require a final upward price spiral that will serve to break US oil consumption short term, and shift it long term toward greater efficiency. US demand is the key. It is the last market-priced, oil inefficient, major oil consumer. We believe Obama’s environmental agenda, the bankruptcy of the US auto industry, the war in Iraq, and global oil supply challenges have dovetailed to spell the end
of the oil era.

After a final price peak implied at $175/bbl in 2016, we forecast oil prices will be under fundamental long-term downward pressure. This pressure will be potentially exacerbated by a reversal in OPEC strategy, away from supply limits, towards market share gains. We suggest $70/bbl oil in 2030 in a market that has shrunk to around 79mb/d – 8% lower than its current level, and 40% below consensus (IEA/ExxonMobil/NPC) forecasts.

While I think this scenario is possible, it just doesn’t strike me as likely.  The notion “as oil supply peaks, so oil demand will peak” is clever, but I think mostly a tautology.  There simply are far too many uses for oil and far too much growth in the developing world for latent demand to crash as fast as supply — in the absence of a steadily rising price.  I do expect peaks and valleys, with higher highs and higher lows, and the lows could certainly reach current levels again if we had another major economic crash in a decade.  But this forecast seems downright perverse:

I’d be happy to bet with anybody at DB the price trajectory after 2017 doesn’t look anything like that.

I agree with DB that technology will change the price point at which efficiency and alternative technologies make sense:

Right now hybrids make sense economically when oil is at about $100/bbl, or gasoline at about $2.75.  By 2020, those numbers will fall to $85/bbl, $2.30/gal

And I agree that the elasticity for demand will change as a result of technology in repeated price shocks:

In the future, lower oil prices will not encourage demand

A key conclusion from our estimated elasticities is that the line of demand growth becomes increasingly steep over time, essentially implying that there is increasingly little price elasticity of demand at low prices. This is a fundamental concept related to “disruptive technology,” whereby a move to a superior (more efficient) product is not reversed by the collapse in price of the former product. We believe that hybrid cars will be superior to combustion-only vehicles and consumers will be reluctant to switch back because of price volatility – i.e., they will fear, even if prices are low, that prices will rise again in the future….

The point here is that when the oil market breaks, the downward pressure on prices from a realisation that the market is contracting regardless of price, and abundant undeveloped oil preserves in major oil dependent producer economies, will exert further downward pressure on oil prices as the market contracts.

But hybrids and plug ins still use oil — as do jet planes and lots of other parts of the economy.  I’d love to believe, as DB projects, that new light duty vehicle MPG hits 95 (!) in this country, 106 in China, and 88 globally in 2030.  But that’ll only happen if the whole planet gets very serious about global warming  — which DB tends to dismiss, writing “We believe that CO2 limitations will be too economically challenging to fully progress globally” — not because oil peaks just once more in price and then spends the entire 2020s declining back to current levels.

Let me end, where I began, with our tremendous use of stones even though the stone age is long gone.  DB offers this flawed analogy early on its report:

The problem with this analogy is that kerosene was a terrific, versatile, abundant and direct substitute for whale oil in pretty much every major application.  Neither electricity nor natural gas have that kind of substitutability for oil

Perhaps oil prices won’t hit, say, $300 a barrel (in 2008 dollars), for a long, long time.  But they are far more likely to spend the 2020s well above $100 a barrel than below it.

You might call those investors speculators — if speculation can be based on marketplace reality.  The UK’s Independent opens its interview with Dr. Fatih Birol, the chief economist at the International Energy Agency (IEA):

Dr. Birol said that the public and many governments appeared to be oblivious to the fact that the oil on which modern civilisation depends is running out far faster than previously predicted and that global production is likely to peak in about 10 years – at least a decade earlier than most governments had estimated.

The warning is double worrisome because until the last year or two, the IEA had been a bastion of relatively staid and conservative and hence useless energy prognostication (like the U.S. Energy Information Administration still is).  Now the IEA and Birol have joined the fact-based alarmists, warning in its World Energy Outlook 2008, “Without a change in policy, the world is on a path for a rise in global temperature of up to 6°C” and proposing aggressive clean energy solutions.

The IEA’s work makes clear that for oil to stay significantly below $200 a barrel (and U.S. gasoline to be significantly below $5 a gallon) by 2020 would take a miracle — or rather 6 miracles see “Science/IEA: World oil crunch looming? Not if we can find six Saudi Arabias!” and “IEA says oil will peak in 2020“).  As the Independent reports today:

But the first detailed assessment of more than 800 oil fields in the world, covering three quarters of global reserves, has found that most of the biggest fields have already peaked and that the rate of decline in oil production is now running at nearly twice the pace as calculated just two years ago. On top of this, there is a problem of chronic under-investment by oil-producing countries, a feature that is set to result in an “oil crunch” within the next five years which will jeopardise any hope of a recovery from the present global economic recession, he said….

The IEA estimates that the decline in oil production in existing fields is now running at 6.7 per cent a year compared to the 3.7 per cent decline it had estimated in 2007, which it now acknowledges to be wrong….

In its first-ever assessment of the world’s major oil fields, the IEA concluded that the global energy system was at a crossroads and that consumption of oil was “patently unsustainable”, with expected demand far outstripping supply….

Oil production has already peaked in non-Opec countries and the era of cheap oil has come to an end, it warned.

In short, peak oil is nigh.

As a result of this analysis, Birol has gotten very blunt:

“One day we will run out of oil, it is not today or tomorrow, but one day we will run out of oil and we have to leave oil before oil leaves us, and we have to prepare ourselves for that day,” Dr Birol said. “The earlier we start, the better, because all of our economic and social system is based on oil, so to change from that will take a lot of time and a lot of money and we should take this issue very seriously,” he said.

“The market power of the very few oil-producing countries, mainly in the Middle East, will increase very quickly. They already have about 40 per cent share of the oil market and this will increase much more strongly in the future,” he said.

If you thought OPEC and the Persian Gulf producers were powerful before, wait until they control most of the oil market and have more than double their current revenues:

“If we see a tightness of the markets, people in the street will see it in terms of higher prices, much higher than we see now. It will have an impact on the economy, definitely, especially if we see this tightness in the markets in the next few years,” Dr Birol said.

So $4 and $5 gasoline — here we come.

“It will be especially important because the global economy will still be very fragile, very vulnerable. Many people think there will be a recovery in a few years’ time but it will be a slow recovery and a fragile recovery and we will have the risk that the recovery will be strangled with higher oil prices,” he told The Independent.

What needs to be done?  The only way to stop oil demand from outstripping the peaking of oil production is massive demand destruction, which is itself possible in only two ways.  The first way, pursued by the Bush administration, albeit (mostly) unintentionally, is to destroy the global economy.  Let’s call that the short-term “non-optimal” approach.

But as IEA has noted, we need to find 4 to 6 Saudi Arabias of oil.  See also “Merrill: Non-OPEC production has likely peaked, oil output could fall by 30 million bpd by 2015,” which noted,

Steep falls in oil production means the world now needed to replace an amount of oil output equivalent to Saudi Arabia’s production every two years, Merrill Lynch said in a research report.

A March McKinsey report concluded, “the potential looms for liquids demand growth to outpace supply creating a new spike in oil prices as soon as 2010 to 2013, depending on the depth of the economic downturn.”

The Obama administration certainly understands that “the equivalent to Saudia Arabia’s production every two years” can’t be found underground.

It can only be found in our grotesquely inefficient oil consumption.  Hence they have advanced the most aggressive increase in fuel economy standards proposed in decades — Obama to raise new car fuel efficiency standard to 39 mpg by 2016 — The biggest step the U.S. government has ever taken to cut CO2. As has the fastest-growing market for cars (see “China plans tougher fuel standards than U.S.”).

Hence the Administration has launched a massive push toward plug in hybrid electric vehicles (PHEVs) and pure EVs in the stimulus, the budget, and the climate bill (see “Why electricity is the only alternative fuel that can lead to energy independence“). As has China (see “World’s first mass-market plug-in hybrid is from … China, for $22,000?“).  No surprise, then, that the major car companies are pursuing PHEVs (see Ford expects 10% to 25% of fleet to be electric by 2020, Toyota plans up to 30,000 plug-ins in 2012, GM to “do the heavy lifting” to help Obama meet goal of one million plug-ins by 2015).

Will all this effort be too little, too late to avoid $200 a barrel oil?  I think so.  But it may get enough technology into the marketplace by, say, 2015 that when we get really desperate and are ready to embrace a WWII-scale deployment strategy, we will have the commercialized solutions we need.  That is the best-case scenario right now.

Much of oil’s rally this year has tracked stock market gains as investors look to equity markets for signs of economic recovery, while a weaker dollar can boost the appeal of oil and other commodities as a hedge against inflation.

“Equity markets are performing well, the dollar is falling, add to that Goldman Sachs and you see why oil has risen,” said Simon Wardell, oil analyst at Global Insight.

Goldman Sachs raised its end of 2009 oil price forecast to $85 a barrel from $65 and introduced a new end of 2010 forecast of $95.

“The recent rally in WTI (U.S. crude) prices is likely to be but the first stage in the oil price rally that we expect will accompany a recovery in economic activity,” Goldman said in a research note.

If oil hits $85 this year, then no doubt it will exceed $100 a barrel some time before my June 2009 prediction (even if it ends 2010 at $95, which I doubt).  And that means some lucky reader is going to win the CP contest “When will oil hit $100 a barrel?“  Just goes to show you, you can’t be sufficiently pessimistic these days about peak oil!

Indeed, as the Miami Herald reported Tuesday, leading forecasters are warning that “low oil prices now may mean higher oil prices later“:

“Energy investment worldwide is plunging in the face of a tougher financing environment, weakening final demand for energy and falling cash flows,” the Paris-based International Energy Agency warned in a report late last month.

The IEA also warned that investment is being curtailed both on the supply side and the demand side, meaning that spending is falling on both drilling of oil and gas wells and on expansion of refineries, pipelines and power stations….

One of the world’s leading voices on energy trends, IHS Cambridge Energy Research Associates, reached a similar conclusion in a private report titled “The Long Aftershock.”

CERA researchers believe that deferred or canceled projects will prevent 7.6 million barrels a day of expected oil growth from coming onto world markets in 2014.

“CERA estimates that 52 percent of the potential net growth in liquids production capacity from 2009 to 2014 is at risk of deferment or cancellation because of poor project economics or investor cash flow difficulties,” CERA’s report said.

The energy research group thinks that the projected additional new oil production capacity of 14.5 million barrels a day coming online through 2014 will be cut in half unless there’s a sudden spurt in demand. This reduced production could spark supply shortages and price spikes.

This is very similar to an analysis that Merrill Lynch did in February (see “Merrill: Non-OPEC production has likely peaked, oil output could fall by 30 million bpd by 2015“), which found, “Steep falls in oil production means the world now needed to replace an amount of oil output equivalent to Saudi Arabia’s production every two years, Merrill Lynch said in a research report.”

In a few weeks I am going to a small conference with some of the leading experts on peak oil, including Kuntsler and Matt Simmons, so I’m sure I will have a more dire news to report in July.

Fortunately, we do have a president who gets this, so the country will be partly prepared for the coming shock (see “Has Obama saved Detroit from itself — or is that simply impossible?“)

Readers of Climate Progress understand two inescapable realities that the overwhelming majority of policymakers, the status quo media, and the car companies (with one exception) do not:

1. Peak oil is inevitably going to drive up gasoline prices to record levels within a few years, driving an inevitable switch to much more fuel-efficient vehicles and non-oil-based alternative fuels, of which by far the cheapest per mile is electricity.
2. Avoiding catastrophic global warming requires sharp increases in fuel economy and a switch to low carbon fuels — of which there is only one available in quantity:  electricity (as explained here).

Reality #1 is a more imminent day of reckoning for the car companies.  After all, the only way to stop oil demand from outstripping the peaking of oil production is massive demand destruction, which is itself possible in only two ways.  The first way, pursued by the Bush administration, albeit (mostly) unintentionally, is to destroy the global economy.  Let’s call that the short-term “non-optimal” approach.

But in the medium and long term, for oil to be significantly below $200 a barrel and gasoline to be significantly below $5 a gallon in 2020 would take a miracle — or rather 6 miracles see “Science/IEA: World oil crunch looming? Not if we can find six Saudi Arabias!” and “IEA says oil will peak in 2020“).  See also “Merrill: Non-OPEC production has likely peaked, oil output could fall by 30 million bpd by 2015,” which noted,

Steep falls in oil production means the world now needed to replace an amount of oil output equivalent to Saudi Arabia’s production every two years, Merrill Lynch said in a research report.

A March McKinsey report concluded, “the potential looms for liquids demand growth to outpace supply creating a new spike in oil prices as soon as 2010 to 2013, depending on the depth of the economic downturn.”

Heck we’ve hit $65 a barrel and we’re still in the middle of the worst global economic collapse since the Great Depression.

Detroit has not only willfully ignored the obvious oil and climate trends as evidenced by the cars they sell (or, rather, used to sell) — but they actually joined with conservatives in blocking every major attempt by progressives to help them develop cleaner cars and to require they build more fuel-efficient cars (see “Why bail out the car companies when they bailed out on us?“)

The Obama administration certainly understands that “the equivalent to Saudia Arabia’s production every two years” can’t be found underground.

It can only be found in our grotesquely inefficient oil consumption.  Hence they have advanced the most aggressive increase in fuel economy standards proposed in decades — Obama to raise new car fuel efficiency standard to 39 mpg by 2016 — The biggest step the U.S. government has ever taken to cut CO2. Hence the massive push toward plug in hybrid electric vehicles (PHEVs) and pure EVs in the stimulus, the budget, and the climate bill.

Within a decade, the only growth segments in car business will be highly fuel-efficient cars, PHEVs, and EVs.  Indeed, that isn’t true just of the United States, but also of the biggest new car market — China (see “China plans tougher fuel standards than U.S.” and “World’s first mass-market plug-in hybrid is from … China, for $22,000?“).

And by the 2020s, every major country will be engaged in a dire effort to avert catastrophic global warming, which by then will be painfully obvious to even the most blinkered conservative.  And that in turn will drive enormous but difficult-to-forecast levels of behavior change in the purchase and use of major energy-consuming products — cars being perhaps the most obvious.  Post-2030, after the global Ponzi scheme has collapsed for all to see, after our children are done cursing our myopic greed, gas guzzlers will be genuine dinosaurs.

So what the White House is doing is the only hope of saving Detroit — assuming that is possible.  Chrysler is going to be taken over by a company known for making small cars.  Ford put forward the most realistic bailout plan given oil and climate realities (see “Whose bailout plan is best“), and it is spending $550 million to retool SUV/truck factory to make small cars, electric vehicles.

And, of course, you’re going to own GM and will perhaps make better decisions than their executives.  Indeed, it would be difficult for a group of children using a Ouija board and Magic Eight Ball to make worse decisions than GM over the past four decades — and still today.  GM execs have decided to kill off the Saturn, which was better at making small cars than any other of their brands — I owned one for 10 years until I bought my Prius.  But most of the company always wanted Saturn to fail, to prove that the only way to do things was the traditional GM way.

And that brings us to the very real possibility that General Motors simply can’t be saved from itself, no matter how much progressives desperately try one last time to preserve that one-time bastion of American manufacturing jobs.

What do you think?  Should we have let Detroit fail?  Is wading into GM like sending more troops to Afghanistan?  Or has Obama chosen the lesser of two evils?

The coal reserves estimate for the Gillette coalfield is 10.1 billion short tons of coal (6 percent of the original resource total).

Although the report didn’t get much media attention, it was a shocker because the Gillette field, within Wyoming’s Powder River Basin “is the most prolific coalfield in the United States” and in 2006 provided “over 37 percent of the Nation’s total yearly production.”

Now Clean Energy Action has issued a new report, Coal: Cheap and Abundant … Or is it? that goes beyond the analysis in the USGS study and concludes:

It appears that rather than having a “200 year supply of coal,” the United States has a much shorter planning horizon for moving beyond coalfired power plants. Depending on the resolution of geologic, economic, legal and transportation constraints facing future coal mine expansion, the planning horizon for moving beyond coal could be as short as 20-30 years.

A top priority of Energy Secretary Steven Chu and the Obama Administration must be a detailed mine-by-mine analysis to resolve the issue of the U.S. coal resource. The imminent reality of peak oil production should be clear to all by now (see “Normally staid IEA says oil will peak in 2020“). If we are running short of coal, the urgency of jumpstarting the transition to a clean energy economy is all the greater — and the possibility that coal with carbon capture and storage will be a major contributor to greenhouse gas reductions would be greatly diminished.

Clean Energy Action notes:

The United States uses about 1.1 billion tons of coal a year with over 450 million tons of that coal coming from Wyoming. In 2007, the combined production of the next top six producing coal states (West Virginia, Kentucky, Pennsylvania, Montana, Texas and Colorado) was approximately equal to the coal produced in Wyoming, the top state.

In West Virginia, we are already destroying 20 tons of mountain to get one ton of coal — up from 10 tons only a short time ago. The CEA report warns Wyoming mines are facing a similar loss of productivity:

The major mines in the Powder River Basin of Wyoming (e.g. the “Fort Knox” of U.S. coal) have less than a 20 year life span, and coal mines in other parts of the United States are also likely to be playing out in the next 20 years. Future coal mine expansions are highly uncertain as these expansions will face very serious geologic, economic, legal and transportation constraints. Importantly, the federal government owns essentially all of the coal in the western United States, and future coal mine expansions in western states will have to comply with a host of federal laws.

As noted in Part 1, the Energy Watch Group, an independent group of scientist who investigate energy issues initiated by a German member of parliament, published a 2007 study that found

The USA, being the second largest producer, have already passed peak production of high quality coal in 1990 in the Appalachian and the Illinois basin. Production of subbituminous coal in Wyoming more than compensated for this decline in terms of volume and — according to its stated reserves — this trend can continue for another 10 to 15 years. However, due to the lower energy content of subbituminous coal, US coal production in terms of energy has already peaked 5 years ago — it is unclear whether this trend can be reversed. Also specific productivity per miner is declining since about 2000.

If the nations of the world get serious about avoiding catastrophic global warming, then we will either need to start reducing global coal use pretty sharply starting around 2020 (if your target is 450 ppm, see Hadley Center: Catastrophic 5-7°C warming by 2100 on current emissions path) or immediately (if your target is 350 ppm, see Hansen et al: We must phase-out coal emissions by 2030). Such sharp reductions, which must begin before coal with carbon capture and storage (CCS) is likely to be practical and affordable on a large scale (see here), would inevitably lead to sharp declines in the price of coal.

But if we are going to see peak coal any time in the next few decades, then, as noted, the entire coal with carbon capture and storage (aka “clean coal”) effort will be fruitless.

Part 3 will look at the recent work of Caltech’s David Rutledge on peak coal and its implication for greenhouse gas stabilization efforts.

Related Posts:

• Is 450 ppm possible? Part 5: Old coal’s out, can’t wait for new nukes, so what do we do NOW?
• In seeming flipflop, Bush drops mismanaged ‘NeverGen’ clean coal project
• Solar baseload outshines ‘clean coal’ — and it always will
• Breaking News: No new coal plants without “Best Available Control Technology” for CO2
• Boxer asks DOJ to force EPA withdrawal of ‘blatantly illegal’ emissions memo
• Revealing comments on coal from Obama
• Is coal with carbon capture and storage a core climate solution?

You might think that the recent collapse in oil demand would put off the peak. But the price collapse and global credit crunch mean the reverse is true:

Non-OPEC crude oil production may have already peaked and international oil companies faced the prospect of both younger and older oil fields declining steeply, the firm said in the report released on Wednesday.

Merrill said “the cumulative decline of global oil production from today could amount to 30 million barrels per day by 2015.” What does world need to do going forward?

Steep falls in oil production means the world now needed to replace an amount of oil output equivalent to Saudi Arabia’s production every two years, Merrill Lynch said in a research report.

This matches what the normally conservative and staid International Energy Agency has been saying in recent months (see “Science/IEA: World oil crunch looming? Not if we can find six Saudi Arabias!” and “IEA says oil will peak in 2020“).

The global economic recession has cut funding for investment in oil production around the globe. Ironically — or tragically — the only thing that can save the world from a return to soaring oil prices by 2010 or 2011 is if economic slowdown turns into “a multi-year event where global oil demand was pushed down structurally for the next five years.”

Obama must keep a laserlike focus on jumpstarting the transition to a clean energy economy if he doesn’t want to be burned by $4+ gasoline as he is running for reelection. Fortunately, he understands that (See Must-read Obama speech: “No single issue is as fundamental to our future as energy”).

My point all along has been those six Saudi Arabias do not exist underground — they can only be found in the nation’s (and the world’s) cars, trucks, buildings, factories, power plants, and farms. America is the Saudi Arabia of wasted energy. And we now know what the winning low-carbon alternative fuel is (see “Why electricity is the only alternative fuel that can lead to energy independence” and “Plug-in hybrids and electric cars — a core climate solution“).

Greenwire (subs. req’d) has a good discussion of the issues raised by Merrill:

Oil production from nations outside the Organization of Petroleum Exporting Countries (OPEC) has probably peaked thanks to the global financial crisis, Merrill Lynch energy analysts told investors today.

The sharp plunge in oil prices and tighter credit have slashed investments in oil production from marginal and difficult-to-manage fields in the United States, the United Kingdom and continental Europe, the investors said.

Spending on efforts to boost output from nontraditional sources like the Canadian oil sands is also sharply lower, with more than $200 billion in project spending already canceled or postponed in Canada because of tight credit.

Overall, output from non-OPEC fields is also probably declining faster than government experts initially believed.

Taken together, these factors probably mean that non-OPEC production has likely already peaked to about 49 million or 50 million barrels a day and could slide to 47 million barrels a day by 2015 at current decline rates.

By contrast, the International Energy Agency (IEA), a Paris-based organization that tracks the global oil market for the major consuming countries, prepared a forecast assuming that production in North America, the North Sea and other areas outside OPEC’s control would rise to 51 million barrels a day by 2015.

But the IEA reached that conclusion by assuming that annual production declines from the largest existing fields outside the OPEC zone would decline by about 4.7 percent. Merrill Lynch analysts say that number is too optimistic, pointing to indicators that suggest the annual decline rates will rise to closer to 6 percent as the credit crunch upsets the industry.

“In our view, the combination of low oil prices and a global credit crunch will prove rather damaging to the oil industry,” warned Merrill Lynch’s U.K.-based chief commodity strategist, Francisco Blanch.

Among the more ominous signs for the oil industry is that declining production rates in smaller oil fields coming online are much higher than those in older, larger fields like Alaska’s Prudhoe Bay or the giant North Sea fields.

Energy analysts say fields that were brought into production prior to 1998 and have since reached peak production are averaging annual output declines of about 4 percent each year, while the industry is witnessing production decline rates on an average of 18 percent per year for fields tapped after 2002.

Oil production declines in the largest non-OPEC fields are nothing new, but industry watchers worry that the trend could accelerate and spread to other large fields in Mexico, South America and Russia.

North Sea oil output has been falling rapidly since 2000. Oil production from Prudhoe Bay is also declining, and the vast majority of oil fields in the continental United States are considered marginal, with each well producing a few barrels a day. Oil production in Russia will also probably fall by 5 percent this year, analysts say.

Declining investor enthusiasm

Crude oil prices briefly dipped yesterday below $40 a barrel as the onslaught of disappointing economic data continued to weigh down investor and trader enthusiasm. At the start of the year, investment houses projected that cuts in output by OPEC should help lift prices by summer, with the cost of a barrel of oil averaging about $60 to $70 a barrel in 2009.

Although major new finds have been announced, including a giant field located in Brazilian territorial waters, energy industry experts warn that these fields will take several years to develop, with low oil prices and troubled financial markets probably pushing back the dates they come into production.

Experts also expect new production from such finds will not be enough to offset declines elsewhere. The latest report by Merrill Lynch suggests that the world will have to add the equivalent of Saudi Arabia’s entire annual oil production every two years in order to continue expanding global supply.

“OPEC’s market share will likely increase going forward,” Blanch said. “Oil production decline rates in non-OPEC countries are particularly steep, with the United Kingdom and Australia leading the pack.”

He added, “In our view, the credit crunch will only further exacerbate the decline rates.”

The global financial crisis has put a grinding halt to the frenzy in commodity investing seen for most of 2008.

This morning, CME Group — operators of mercantile exchanges in Chicago and New York — reported that trading last month fell 41 percent compared to January 2008 figures. Trading in energy futures and options at the New York Mercantile Exchange fell by 5 percent.

But output cuts by OPEC and the worsening oil production in countries outside the cartel could set the stage for another spike in energy and commodity prices in the years to come, experts say.

Analysts bullish on the long-term prospects of commodity prices say that oil could return to upward pricing pressure by as early as 2010 once demand growth returns to the world economy.

It also turns out that Congress, with simply majorities, can toss any rule within 60 legislative days — and that goes as far back as “May or June 2008.”

Regulation junkies — you know who you are — can read Emanuel’s memo here.

Rahm Emanuel’s memo could lead to the reversal of dozens of energy and environmental measures advanced in Bush’s waning days, including standards addressing mountaintop mining, air pollution permits, logging in the West, an exemption for factory farms from Superfund reporting requirements and endangered species.

The story concludes with background and more details:

Presidents Ronald Reagan, George H.W. Bush, Bill Clinton and George W. Bush all issued similar orders when they took office as a stopgap to review work finished at the tail end of their predecessor’s term. For regulations already in place, the new president has limits on what he can do. Former President George W. Bush, for example, was only able to stop 3 percent of the last-minute Clinton rules, according to the think tank Mercatus Center.

Congress can also step in to halt Bush-era regulations. With a simple majority in both the House and Senate and the president’s signature, lawmakers can toss a rule within 60 legislative days of its submission to Capitol Hill. Because of lengthy congressional breaks in August, October and December, the 60-day window could go back as far as May or June 2008.

The Congressional Review Act has previously only been used once — by Republicans in March 2001 to overturn a Clinton-administration workplace ergonomics rule that was fiercely opposed by business groups. But it could become popular this year, the first time in its short history that a party change in the White House is paired with that party holding significant majorities in both houses of Congress.

Spokesmen for House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Harry Reid (D-Nev.) have said they are also reviewing the law and would consider using it, in consultation with the new Obama administration. And Senate Environment and Public Works Chairwoman Barbara Boxer (D-Calif.) has said she would consider using the law to block Bush’s rules on the Endangered Species Act.

Major rules — those that will cost the economy $100 million or more — go into effect 60 days after publication in the Federal Register, and minor rules go into effect within 30 days. The Bush administration’s Office of Management and Budget judged most of its environmental rules as “economically insignificant.”

Yeah, right. The Bushies wasted their time on “economically insignificant” stuff.

Emanuel’s memo mandates a review by the president or department designee for all regulations not yet published in the Federal Register. For regulations published but not yet in effect, the chief of staff also suggests a 60-day window for review as well as a new 30-day public comment period.

Change begins yesterday.

It’s amazing enough that the normally staid International Energy Agency recently said we’ve run out of time (see IEA says oil will peak in 2020). Now Business Wire reports:

According to a new survey by BDO Seidman, LLP, one of the nation’s leading accounting and consulting organizations, 48 percent of chief financial officers (CFOs) at U.S. oil and gas exploration and production companies agree that the world has reached its peak petroleum (liquid hydrocarbon) production rate or will reach it within the next few years, while another 52 percent disagree with that statement.

I think the headline is wrong, though:

Energy CFOs Are Split on World’s Peak Petroleum Production Rate, According to BDO Seidman, LLP.

Chief Financial Officers at exploration and production companies are arguably the most cautious “show me the money” people the entire energy business. The news is not that they are split. The news is that half think we are peaking or soon will.

The point is, it is not just the “peakists” who think we have a big, big problem. And it’s not just the CFO’s. The CEO of Royal Dutch/Shell emailed his employees, “Shell estimates that after 2015 supplies of easy-to-access oil and gas will no longer keep up with demand.” The CEO of French oil company Total S.A., said that production of even 100 million barrels a day by 2030 will be “difficult.” The CEO of ConocoPhillips said, “I don’t think we are going to see the supply going over 100 million barrels a day.”

Remember, the problem is far graver than it appears for one simple reason: Replacing oil in the transportation sector requires strong government action two decades before a peak because of the time needed to replace vehicles and fuel infrastructure. That was the conclusion of a major study funded by the Bush Department of Energy in 2005 on “Peaking of World Oil Production.” The report notes:

The world has never faced a problem like this. Without massive mitigation more than a decade before the fact, the problem will be pervasive and will not be temporary. Previous energy transitions (wood to coal and coal to oil) were gradual and evolutionary; oil peaking will be abrupt and revolutionary.

Ouch! The same point is true about global warming. If we want global carbon dioxide emissions to peak and start declining, the planet must start aggressive mitigation policies two decades in advance — which means now, for the 450 ppm-ers or the 350-ppmers (see “Must-read IEA report explains what must be done to avoid 6°C warming“).

The time to act is now.

Related Posts:

• Contest: When will oil hit $100 a barrel?
• Will we see $3 gasoline before $5?
• Note to media/Bush: Saudis/OPEC don’t control the price of oil any more!
• Note to Bush, media: Opening ANWR cuts gas prices one penny in 2025
• Peak Oil? Bring it on!
• Thirsty oil-rich nations reduce exports
• Why I don’t agree with James Kunstler about the “end of suburbia”
• My 1996 warnings and predictions: “MidEast Oil Forever?” — Part I: Drifting Toward Disaster
• Plug-in hybrids and electric cars — a core climate solution

Please express your wild guess sophisticated prediction in terms of number of days from January 1, 2009.

While I know that each of you has special knowledge and expertise that allows you to make such market forecasts with startling accuracy, I’m really going for a “wisdom of crowds” thing here [yes, I know, recent events in the economy and stock market suggest the crowds don't actually have much wisdom, but stay with me on this]. So I’m planning to come up with a statistical average of all the guesses — and that can’t be done easily if you give me dates.

The winner gets a post on Climate Progress (!) — plus a figurative laurel and hardy handshake, as Mel Brooks would say.

My guess is 545 days, mid-2010 (roughly my 50th birthday — and I do mean roughly).

The price of oil has really been bouncing around in the last week. Here is some useful background from a recent Greenwire article:

NEW YORK — Market experts are predicting that global oil prices will trend upward this year as producers fall into line behind supply cut mandates, and low gasoline prices push demand up.

Barring a much more serious deterioration in the world economy, many analysts suggest that resurging demand for gasoline in the United States, the world’s largest oil consuming country, and falling overcapacity due to production cuts announced by the Organization of Petroleum Exporting Countries (OPEC) will lead oil prices to return to the $70-a-barrel range sometime soon.

Many of those experts have mixed track records. From record highs of just over $147 a barrel for crude last July, many predicted that demand destruction would see the cost per barrel ease somewhat to settle in the $80 to $100 range by the end of 2008.

Instead, the turmoil in financial markets and subsequent bank bailouts caused prices to plummet more than 60 percent in the second half of 2008. Yesterday, crude prices settled at just below $50 a barrel in trading at the New York Mercantile Exchange (NYMEX), spurred upward by political instability in the Middle East.

But most energy analysts say the recent cuts by OPEC are more significant than traders are taking into account. Signs that OPEC members are cooperating better than they have in the past and keeping to their reduced quotas are now leading many to believe that the cartel may be restoring its traditional role in controlling wild price swings.

In the previous strong markets, “OPEC has had no impact on the oil prices since 2004,” said John van Schaik, New York chief of the market information company Energy Intelligence Group Inc. “Now, with spare capacity rising again, yes, now OPEC is becoming more relevant again.”

Van Schaik called the 3.1-million-barrels-per-day cut in output by the cartel “dramatic.” If OPEC members largely meet their targets, total output would be reduced by about 4 million barrels a day from the July 2008 price highs, a roughly 12 percent cut in OPEC output, representing about 4.6 percent of total global supplies.

In a note to clients, Tim Evans, an energy analyst with Citigroup, predicted that the OPEC cuts will result in a demand deficit of at least 1.5 million barrels a day during the beginning of 2009, eventually growing to 2 million barrels a day or higher by the second half of the year, depending on whether oil producers vote for more cuts in production.

“In time, we see prices firming to perhaps the $70-per-barrel mark by the end of the second quarter and a further rally in the second half that could approach $90, a level that would signal OPEC for more production, instead of less,” Evans said.

Investors seem to largely agree with this forecast. In a survey by Barclays Capital taken from a gathering of energy market players last month, most respondents said they believed the current low pricing environment was temporary. Four in five said they expected crude oil prices to average above $75 a barrel for 2009.

There are some dissenters — analysts at Cambridge Energy Research Associates (CERA) believe that spare capacity will continue to rise and could reach 7 million barrels a day, or 8 percent of world demand, by 2010 if market trends hold.

Virtually all energy market players are bullish on oil in the long run, though. Last year’s dismal assessment of future oil production by the International Energy Agency, with data showing that output from the world’s largest fields is falling faster than predicted, only helped to fuel a general consensus that energy prices will rebound so long as oil remains the world’s dominant fuel source.

Observers admit to a commodities bubble

For the broader energy commodities markets, the past several years have proven a roller coaster in which traditional drivers tell just part of the story. At times, players have insisted that supply-and-demand fundamentals were behind the rapid ascent of oil, driven mostly by rising consumption in China and India. But today many observers admit that a speculative frenzy was behind much of the “commodities bubble” that lasted for most of this decade.

“The tight balance between supply and demand in 2002-08 was not the only factor driving the increase in oil prices,” analysts at CERA acknowledged in a December assessment.

Enthusiasm for commodities helped flood the exchanges with new activity. In 2008, the weakening value of the dollar and fears of a slowing U.S. economy, along with the continuing bear market in equities, drew a whole new class of investors to commodities and to oil in particular.

“There was very little rationality in this market for the past three years, ” said van Schaik.

Despite the ultimate price fallbacks, 2008 was a record year for activity in raw materials, with trading volume on NYMEX 19 percent higher than the previous year, according to data by CME Group.

But trading in the fourth fiscal quarter erased prior price gains. The Dow Jones-AIG Commodity Index was down by more than 8 percent in December and more than 39 percent compared with the end of 2007. The Dow-AIG Crude Oil Index has led the slide, falling by almost 33 percent. Trading volume is way down, due partly to the holiday season but mostly because investors have largely backed out of commodities in the search for safer harbors.

For the record, I am going to use the NYMEX price, which is West Texas intermediate crude.

Related Posts:

• Normally staid IEA says oil will peak in 2020
• Will we see $3 gasoline before $5?
• Note to media/Bush: Saudis/OPEC don’t control the price of oil any more!
• Note to Bush, media: Opening ANWR cuts gas prices one penny in 2025
• Peak Oil? Bring it on!
• Thirsty oil-rich nations reduce exports
• Why I don’t agree with James Kunstler about the “end of suburbia”
• My 1996 warnings and predictions: “MidEast Oil Forever?” — Part I: Drifting Toward Disaster
• Plug-in hybrids and electric cars — a core climate solution

Fatih Birol, chief economist to the International Energy Agency, told the UK’s Guardian today:

In terms of non-Opec [countries outside the big oil producers' cartel],” he replied, “we are expecting that in three, four years’ time the production of conventional oil will come to a plateau, and start to decline. In terms of the global picture, assuming that Opec will invest in a timely manner, global conventional oil can still continue, but we still expect that it will come around 2020 to a plateau as well, which is, of course, not good news from a global-oil-supply point of view.”

That is a triple shocker. First, as a famous 2005 study funded by the Bush DOE “Peaking of World Oil Production,” concluded:

The world has never faced a problem like this. Without massive mitigation more than a decade before the fact, the problem will be pervasive and will not be temporary. Previous energy transitions (wood to coal and coal to oil) were gradual and evolutionary; oil peaking will be abrupt and revolutionary.

The IEA says conventional supply will not be able to meet rising global demand in about a decade, while the DOE makes clear that you need much more than a decade of sustained, “massive” effort to transition away from oil to avoid catastrophic impacts. This looks like a job for a President who plans an activist clean energy agenda (see “A real energy plan for America: Efficiency now, 10% renewables by 2012, and one million plug-in hybrids by 2015“) and who has assembled a really smart energy team (see “A Nobelist for Energy Secretary who gets both climate and energy efficiency?“).

The second shocker is that this warning comes from the IEA, which has, for most of its existence, been a bland and staid reporter of conventional wisdom. When I was at the DOE in the 1990s, no one paid much attention to the latest IEA report that explained how the future would be just like the recent past. So if the IEA is telling the world oil might peak in a decade, the world better listen up.

Third, this is an apparent reversal from their most recent report, which had this figure (see “IEA: Oil price to rebound to $100 when economy recovers, then soar to $200 by 2030“):

I say “apparent reversal” since the report itself painted a far less rosy scenario than some of its figures:

The IEA estimates that by 2010 oil companies will have to commit to projects producing almost as much oil as Saudi Arabia — or about 7m barrels a day — if the world is to avoid a supply crunch by the middle of the next decade…. The stark assessment comes as companies cancel projects from Kazakhstan to Canada because the collapse in oil prices makes them uneconomical.

The industry will have to invest $350bn each year until 2030 to counter the steep rates of decline of existing fields and find enough extra oil to satisfy the growing demand of countries such as China, the report states.

Indeed, Birol was not soft-pedaling the grim reality to anybody who would listen (see “Science/IEA: World oil crunch looming? Not if we can find six Saudi Arabias!“):

“We have found that if we want to stand still–that is, continue producing 85 million barrels per day–for the next 22 years, we need new production of 45 million barrels per day to compensate for the decline. That means four Saudi Arabias.” Add on a demand increase of the sort seen the past couple of decades–equivalent to another two Saudi Arabias–and the world will have to work that much harder to meet rising demand, Birol says.

Those six Saudi Arabias do not exist underground — they can only be found in the nation’s (and the world’s) cars, trucks, buildings, factories, power plants, and farms. America is the Saudi Arabia of wasted energy. And we now know what the winning low-carbon alternative fuel is (see “Why electricity is the only alternative fuel that can lead to energy independence“).

The peak is nigh. The time to act is January 20, 2009.

Related Posts:

• Will we see $3 gasoline before $5?
• Note to media/Bush: Saudis/OPEC don’t control the price of oil any more!
• Note to Bush, media: Opening ANWR cuts gas prices one penny in 2025
• Peak Oil? Bring it on!
• Thirsty oil-rich nations reduce exports
• Why I don’t agree with James Kunstler about the “end of suburbia”
• My 1996 warnings and predictions: “MidEast Oil Forever?” — Part I: Drifting Toward Disaster
• Plug-in hybrids and electric cars — a core climate solution