Business Blog: Hoover’s Business Insight Zone

As I write this, oil futures are holding steady above $72 per barrel, which continues short-term and long-term trends. Predictable effects: higher prices at the gas pump for drivers, more oil & gas-related IPOs, and . . . a dampening effect on US GDP growth? I’ll pass no verdict on that last point, except to say that I think there are a number of things (starting with debt markets) that could go south in a hurry for the US economy.

But here’s the bigger question: Given the sustained high prices for petroleum goods, and the sustained high profits for big oil producers, why isn’t more oil being pumped to keep up with demand? In part this stems from supply management by OPEC countries (and others) who will try to produce at a sweet spot where they hit the best combination of volume and price. In some cases, new productive areas are being developed, but with long lead times until they come to fruition. But at $72 per barrel, you’d think more reserve production would be brought online now.

Which leads to a highly contentious question: Have we reached a moment of peak oil? This typically thoughtful piece by Slate’s Andrew Leonard investigates that question:

If it smells like peak oil, it probably is

In the piece, Leonard analyzes a cautiously worded new report from the International Energy Agency. A key excerpt:

To drastically summarize the report: The problem is not that the world is running out of oil, but that right now, offshore oil rigs are scarce and expensive, skilled labor is tight, transport infrastructure is limited, and political considerations such as “resource nationalism” in states such as Venezuela and Russia and geopolitical risk in Iran and Nigeria are hampering investment and development. Logistics are the real problem, the report seems to be saying, and not the actual amount of oil in the ground. This leads to the conclusion that even though nearly 3 million barrels of new supply will be needed each year just to offset the decline in established oil fields, “above-ground supply risks are seen exceeding below-ground risks in the medium term.”

This matches the formulation of oil guru Daniel Yergin, author of The Prize and head of Cambridge Energy Resource Associates (a subsidiary of IHS), who has predicted that geopolitics, not geology, will hold more sway over oil production for the foreseeable future.

Leonard’s not so sure, though.

Peak oil does not mean, as has been emphasized a thousand times before, here and elsewhere, that “the world is running out of oil.” It means that “the world is running out of cheap oil.”

And that interpretation seems to be completely justified by the IEA report. [...] New supply is going to be harder to get, posing greater technological challenges and requiring higher levels of investment.

While I’m hardly a doomsayer like some of the more extreme “peakers” are, I’m prone to agree with Leonard: if we’ve reached a point where all of the world’s cheap oil is either (a) used, (b) already being produced, or (c) effectively rendered expensive or unavailable for whatever reason (geopolitical, geological, technological, …) — if that set of conditions is true, then we have effectively reached the moment of peak oil, or at least a moment of peak oil. *

In other words, when it comes to oil, we live in interesting times, whether we like it or not.

~

* Note: There can be more than one moment of peak oil if you look at particular regions or given new developments in production technology. For example, the US hit its domestic peak of oil production around 1970, and plenty of individual fields have temporarily peaked until new production technologies allowed more oil to be extracted from the fields cheaply.