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Telling the Truth about Oil

2 November 2007

Telling the Truth about Oil

By Gwynne Dyer

If a diplomat is “an honest man sent abroad to lie for the good of his country” (Sir Henry Wotton, 1612), then oil industry executives used to be the business world’s equivalent of diplomats. The big international companies were chronically optimistic about the extent of their reserves, and state-controlled oil companies were even more prone to exaggeration. But now we have the spectacle of oil companies telling the truth about oil supplies — or at least more of the truth than usual.

The occasion was last week’s Oil and Money conference in London, and the most spectacular truth-teller was Christophe de Margerie, CEO of the French oil company Total, one of the international “big five.” Last year his predecessor, Thierry Desmarest, caused a flutter in the industry by predicting that world oil output would peak around 2020. This year, de Margerie said that “100 million barrels (per day)…is now in my view an optimistic case.”

He was referring to the International Energy Agency’s estimate that world oil output would reach 116 million barrels/day by 2030, and the slightly more optimistic US government prediction that it will reach 118 million b/d by that date. Even these acts of faith are really a forecast of crisis, since calculations based on current trends (like a 15 percent annual growth in Chinese demand) suggest that 140 million b/d will be needed by 2030.

The implication of De Margerie’s remarks is that the crisis is coming a lot sooner than that. World oil output is nearing 90 million b/d now, but it is never going to reach 100 million b/d. “Peak oil” may be just a few years away, or it may be right now. (You will never know until after the fact, since it is the point at which global oil production goes into gradual but irreversible decline.)

Peak oil was first forecast by an American petroleum geologist, M. King Hubbert, who noticed that the curves for oil discoveries and oil production were a very close match, but with a lag of thirty to forty years between the discovery curve and the production curve. At that point, in 1956, Hubbert was the director of research for Shell Oil, and the focus of his research was American oil production, then still the biggest in the world.

At that time, American oil output was still rising rapidly, but Hubbert noticed that the shape of the output curve closely fitted the curve plotting the growth of American oil reserves during the years of the great discoveries in Texas, Oklahoma and California. However, there had been no other huge discoveries since, so the annual amount added to American oil reserves had peaked and begun to decline in the late 1930s.

Hubbert simply assumed that the production curve would continue to match the discovery curve with a three- or four-decade lag, in which case, he predicted, US oil production would peak and start to decline in 1970. That is exactly what it did, and American oil production is now down to about half of output in that peak year. So “Hubbert’s Curve” became famous in the industry, and was duly applied to global discovery and production rates as well.

Oil discoveries worldwide peaked in the 1960s, so Hubbert’s own forecast was that peak oil production worldwide would arrive in the 1990s. The discovery of two giant new oil-fields in the 1970s (probably the last two) in the North Sea and the Alaskan North Slope pushed that date down a bit, however, and one of Hubbert’s successors as chief of research at Shell, Colin J. Campbell, subsequently calculated that peak production globally would not arrive until 2007. Now, in other words.

It is still deeply unpopular in the oil industry to talk about peak oil, but essentially what de Margerie was saying, albeit in a cautious and coded way, is that it is here or nearly here. The same sort of talk is coming from Rex Tillerson, chairman of ExxonMobil, who told the Financial Times earlier this year that he believed oil production from sources outside the Organisation of Petroleum Exporting Countries could see “a little more growth” but would soon level off. And OPEC is generally assumed to be pumping very close to maximum capacity.

The International Energy Agency predicts that demand for oil will rise by 2 percent annually up to 2012, which means that total demand by then will reach around 100 million b/d. De Margerie, Tillerson and other insiders are suggesting that supply will not, which will have a profound impact on the price not just of oil but of practically everything else.

The recent surge in the oil price, which may see it reach $100 a barrel in the near future, is largely a mirage caused by the collapse in the value of the US dollar. (The price of oil is generally quoted in US dollars, but cost of a barrel of oil in euros or yen has risen far less dramatically this year.) But the longer term trend, which saw the price rise fivefold between 1999 and 2005, was driven by the tightening supply situation as demand raced ahead while production did not.

It will get a lot worse if de Margerie is right, and he almost certainly is.


To shorten to 725 words, omit paragraphs 9 and 10. (“It is still…else”)