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Daniel Yergin and Peak Oil - Prophet or Mere Historian?

By John Daly | Mon, 19 September 2011 20:54 | 9

On 17 September The Wall Street Journal published a fascinating article on “peak oil,” “There Will Be Oil,” written by Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, an energy research and consulting firm and deserved recipient of Pulitzer Prize for his 1991 book, The Prize: The Epic Quest for Oil, Money and Power.

According to The Wall Street Journal, “There Will Be Oil” “is adapted from his new book, The Quest: Energy, Security and the Remaking of the Modern World.”

The essay will doubtless have widespread influence amongst prosperous The Wall Street Journal readers, but in his glib dismissal of “peak oil” theory advocates, Yergin glosses or ignores a number of issues fundamental to the larger picture, for whatever reason, and these oversights should be considered in any evaluation of the piece and the peak oil “specter.”

Yergin notes, “Just in the years 2007 to 2009, for every barrel of oil produced in the world, 1.6 barrels of new reserves were added.” But this fails to take into account the following points.

First is that for oil producing nations reserves are like money in the bank and inflated reserve figures are common. Even with the newest technology oil reserve figures remain at best “guesstimates” and should not be taken as hard and fast figures.

Secondly, while the Middle East for the foreseeable future will remain the world’s top producing area, it is unhappily also one of the most politically unstable regions of the world. The “Arab Spring’s” impact is still playing out, much less potential impact of Palestine’s incipient bid at the United Nation’s for recognition, both of which could yet still throw a major spanner in the works.

To recap briefly:

Saudi Arabia, the world’s first or second-largest producer, vying with the Russian Federation for top position, is not immune from either of the two aforementioned effects. Saudi Arabia does not allow foreign oil companies concessions and has adopted a strict conservation policy, so don’t expect to see a massive rise in production there anytime soon. As for Palestine’s impact, last week former head of Saudi Arabian intelligence and ex-ambassador to Washington, Prince Turki al-Faisal in an essay in the New York Times warned that an American veto of Palestinian U.N. membership would end the ''special relationship'' between the two countries, and make the US ''toxic'' in the Arab world.

As for Iraq, eight years after the U.S.-led invasion, holder of massive amounts of untapped reserves, the country remains mired in a low-grade civil war and unresolved political issues between its oil-rich northern Kurdish region and Baghdad. Further east, Iran is most unlikely to boost production significantly anytime soon because of U.S. sanctions imposed in 1979.

Libya remains the wild card, with only 25 percent of the country’s oil potential explored, but it has been wracked by six months of civil unrest, and the irredentist cadre of Gaddafi supporters could easily target the country’s oil infrastructure in the future.

In the Western Hemisphere, OPEC recently announced that Venezuela’s potential reserves could top those of Saudi Arabia, but the deteriorating relations between Caracas and Washington make an increase here unlikely anytime soon.

Many optimists pin their hopes on increased offshore production, from Brazil through Western Africa, the Mediterranean and the Caspian to the South China Sea but these regions’ output will suffer from the twin curses of both greatly increased “lifting costs” in the billions as well as political instability. West Africa is synonymous with corruption and civil war; Lebanon, the Republic of Cyprus, Israel and Turkey are sparring over eastern Mediterranean hydrocarbons; two decades after the collapse of the USSR Azerbaijan, Iran, Kazakhstan, the Russian Federation and Turkmenistan have yet to reach a definitive agreement on the division of the Caspian’s offshore waters and tension is rising markedly in the South China Sea, where China, the Philippines, Taiwan, Vietnam, Malaysia and Brunei are all pursuing contesting claims.

Of the aforementioned areas only Brazil has uncontested national sovereignty claims over its offshore deposits, and the government is sufficiently concerned about their security that it is considering building a nuclear submarine to patrol its offshore oil platforms. As for the rest, it is difficult to see how the nations involved will be able to attract large-scale investment into potential conflict zones.

Furthermore, quite aside from political wrangles, offshore drilling is both extremely expensive and comes with increased environmental risks.

Interestingly, the word “environment” appears only once in Yergin’s essay, in the sentence, “Environmental and climate policies can alter the timing and scale of development, as can geopolitics and politics within oil-producing countries.”

Given that the majority of the future’s oil production increase will come from offshore developments, the term should have been given greater prominence.

BP’s Deepwater Horizon Macondo oil spill in the Gulf of Mexico began on 20 April and spewed crude for three months in 2010 and was the largest accidental marine oil spill in the history of the petroleum industry, dwarfing the 1979 Gulf of Mexico Ixtoc I oil spill. Since the Deepwater Horizon incident unleashed 4.9 million barrels of oil the Gulf of Mexico suffered another rig explosion and fire at the Vermilion Block 380 A Platform on 2 September 2010.

Across the Atlantic, on 12 August a British subsidiary of Royal Dutch Shell announced a leak at a platform flow line in its Gannet field concession in the North Sea.

As for the BP leak, on 12 May 2010 California Democrat Representative Henry Waxman said that the House Oversight and Investigations subcommittee investigation into the Gulf oil spill revealed that the Deepwater Horizon Macaondo oil platform’s blowout preventer (BOP) did not pass a crucial pressure test just hours before the explosion.

Waxman said, "This catastrophe appears to have been caused by a calamitous series of equipment and operational failures. If the largest oil and oil services companies in the world had been more careful, 11 lives might have been saved and our coastlines protected."

The Deepwater Horizon Study Group of University of California’s the Center for Catastrophic Risk concluded in its “Final Report on the Investigation of the Macondo Well Blowout,” released 1 March 2011, “At the time of the Macondo blowout, BP’s corporate culture remained one that was embedded in risk-taking and cost-cutting…”.

Tracking back the signs of incipient failure, on 28 February 2009 the Department of the Interior exempted BP's Deepwater Horizon drilling operation from a detailed environmental impact study after concluding that a massive oil spill was unlikely.

Four months later, on 22 June 2009 BP engineers warned that the Deepwater Horizon BOP’s metal casing might collapse under high pressure. Seeking to spread the blame, in April 2011 BP sued Cameron International Corp., the maker of the failed Type TL 18¾in 15K double blowout preventer on the Macondo well, Deepwater Horizon drilling rig operator Transocean and Halliburton, the well’s cement contractor, saying they were largely to blame for the accident.

There are 3,800 active oil platforms in the Gulf of Mexico – how long until another major spill?

So, where does all this leave the world? Older producing fields and nations, such as Indonesia and Saudi Arabia’s massive Ghawar superfield have seen their production decline. Indonesia, which had begun producing oil in the early 20th century, saw its production slide so much that it left OPEC in 2008, seemingly confirming Marion King Hubbert’s “peak oil” theory.

While it is true that Hubbert’s predictions, made in the 1950s, took no account of future energy developments such as Africa, the Caspian and offshore, all of these regions and projects come with increased costs, which ultimately will undoubtedly be passed on to the consumers.

Is the world then running out of oil then? No, but the increase in future global oil production will likely be modestly incremental and production could be thrown off course by any number of possible events, from an Israeli attack on Iran to (another, but successful this time) al Qaida attack on Saudi Arabia’s Abqaiq oil refinery.

Accordingly, it is inexpensive oil that is in terminal decline, a development viewed positively by Yergin, who writes, “Activity goes up when prices go up; activity goes down when prices go down. Higher prices stimulate innovation and encourage people to figure out ingenious new ways to increase supply.”

Many American motorists would disagree.

By. John C.K. Daly of OilPrice.com

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  • Anonymous on September 20 2011 said:
    Yergin is an interesting man. He is wrong a large part of the time, but he is also right a large part. As for oil, he and his ignorant colleagues have decided that claiming that the peak oil concept is "garbage" - as one of those gentlemen put it - is the way to maximize profits, bonuses, and perks for their consulting firm.
  • Anonymous on September 21 2011 said:
    I found this article interesting, but I'm not sure I understand your point. Your list of reasons that oil supply is threatened only ensure that the oil is, in fact, intact, or unused. That seems counter productive in that you intended to poke holes in Yergin's point that peak oil is an obsolete threat.
  • Anonymous on September 21 2011 said:
    also, you also conclude that the world is not running out of oil, but that future production will be incremental. You take that then to suggest,logically, that this will drive up prices long-term. but isn't the more nuanced point to be made the fact that the more incremental the production, the more supply available on the short(er) term- ie the lower the price, relative to if the oil is not produced incrementally, but all at once? so then, since oil is a finite resource so arguably prices will always go up not down in the long-term, you statements only help to support the idea that oil prices will remain lower than they could be- for much longer than without the production issues? I would think motorists would be happy about that- given the other option being higher prices, not lower. so I don't understand what you are hoping to drive home to the reader, and why you glossed over those nuanced points I brought up, which seems relevant to your argument, to me?
  • Anonymous on September 21 2011 said:
    But if those newly discovered reserves have a significantly higher cost to turn into usable product then the consumers have incentives to develop new processes that reduce their exposure to those higher prices. This reduced demand then cuts price and makes development less likely. So we reach the peak- which is a good thing because the area under the curve is the earth's finite resource. Making the curve short and broad suits me better than high but narrow since I would like my grandchildren to have some options.
  • Anonymous on September 22 2011 said:
    Ted Stevens, fully agree with you.The author almost counter-arguments how own idea.Political instability will lead to present-time difficulties in supply - yes, so?The oil will remain there, until when the countries are geopolitically ready to produce it. They will at some point - times and governments change. :)So many concerns about Israel, the Arab countries, Africa - oh, because the oil producing regions have ever been stable?Not sure if the author has ever worked in the industry, but yes, this is exactly the way it goes: higher oil prices -> more profit for selling oil -> larger investment to get oil out of the ground -> technical development, innovation, exploring of hostile areas....I see it on the example of my own company (operator) and all the vendors we deal with: high oil prices = the industry is blooming!Worrying about end-consumer prices is a slightly different aspect.
  • Anonymous on September 22 2011 said:
    Completely disagree with Daniel Yergin. The article says don't worry just do business as usual. This is awful!1, if he is not right; oil peaks today then he is misleading with his data.2, If he is right and oil peaks in 20 years then we cannot afford to do business as usual as we have to prepare to sovle that. (we have to do actions 20 years before the peak). So the article main message: don't worry, do business as usual is the #1 message that all of as should fight against.
  • Anonymous on September 22 2011 said:
    What Yergin is driving at, gentlemen, is that the people paying for the services of his firm want to be told that there is plenty of oil. Not only his present clients but those that might employ his so-called wisdom in the future. I remember when I borrowed a copy of his famous book in Australia. After three or four hours I threw it aside and got into the wine. But what I will not say is that he is a lightweight. He does know a few things, but his opinions about oil strike me as mostly worthless.And yes, Mr Yergin, if you hear that I am lecturing at an institution of higher or lower learning near you, make it your business to show up and tell the folks that I dont know what I am talking about. I dont think that you would show up at any more of my lectures.
  • Anonymous on September 28 2011 said:
    I think Daniel Yergin has the right picture overall. As the price of oil goes up more expensive oil resources can be developed and the demand moderates. Also, substitution from NGV, GTL, CTL, biofuels and EV grows. At some price levels and state of technology development substitution takes all the growth and begins to take away market share from the base demand - that's peak oil.
  • Anonymous on September 28 2011 said:
    Well Armen, I suggest that you start saving your pennies so that you can buy my new energy economics textbook when it is published. As I said above, Yergin is right about fifty percent of the time, but about oil it is much less than fifty these days.Moreover, as I also said, the issue with Yergin is money and not truth. He knows, just as I and other smart people know, that it is only a matter of timg until LIQUIDS peak, but his firm is selling a no-peak-oil package, and he has decided to go along with their program.

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