Peak oil hits new heights

There are a few items in the press this weekend worth noting - first off John Garnaut in the SMH with a high profile peak oil article - "Peak oil hits new heights and the view is not pretty". See below the fold for a great interview with Oil Search CEO Peter Botten on peak oil as well.

The problem is simple, there is not enough to go around. China's devastating earthquake gave the people of Sichuan an early taste of a world that is running out of fuel.

Thousands of families slept in their cars outside petrol stations because the province's oil infrastructure had been disrupted and its remaining fuel supplies diverted to the rescue effort. Truck drivers loitered patiently for local officials to raise their diesel rations beyond a paltry 100 yuan ($14), while taxi drivers refused to take reporters from Mianyang city to the earthquake disaster zone because they could not get enough petrol for the ride.

Kevin Tu, an energy consultant in Canada, says the earthquake and Chinese Government efforts to build huge strategic reserves in time for the Olympic Games in August will have a "huge impact" on the international market.

And yet oil demand in China and other developing countries is growing so fast, and the international market is so stretched, that international oil prices smashed through to new records this week. Sydney petrol stations were charging as much as $1.60 a litre, but there may be much worse to come. Australian petrol refineries are yet to receive oil that was bought at the new record prices.

On Thursday the world benchmark oil price hit $US135 a barrel. It has more than doubled in a year and is now higher than during the oil supply shocks of 1974 and 1980, even after adjusting for inflation.

Many politicians and the OPEC cartel of oil-exporting countries blame hedge fund speculators for pushing up the price. But the reality is probably less complicated and more serious.

"The only way to [artificially] drive prices up would be to physically hoard more oil, but stocks are at an all-time low," says Peter Downes, a former Treasury official at the Centre for International Economics in Canberra.

The developed world is adjusting to a world of tight oil supply and high petrol prices. Australians are driving more efficient cars and drifting back to public transport. Even the United States, which consumes a quarter of the world's oil, reduced its oil consumption in 2006.

The International Monetary Fund's World Economic Outlook shows the rich countries that make up the OECD reduced oil consumption in each of the past two years. Japan, the world's efficiency leader, dramatically reduced petrol consumption in the 1970s and still managed to reduce oil consumption by almost 10 per cent over the past decade. But energy efficiency improvements in the rich world are being swamped by the developing world's rush towards rich-country living standards. ...

Traditionally, economists have been sceptical about the idea of "peak oil" - a point at which oil production will necessarily decline - believing that rising prices will drive oil companies to do what ever it takes to extract more oil from previously inaccessible places, such as Canadian oil sands or Brazil's offshore discoveries, kilometres beneath the seabed.

And yet oil prices have risen seven-fold in five years and there is little in new production or discoveries. Existing oil fields, meanwhile, are running out faster than anyone predicted. The further ahead that analysts look, the worse the problem gets. Investment bank Goldman Sachs now expects oil prices to average $US141 in the second half of this year, before rising as high as $US200.

Tellingly, this week the price of oil to be delivered years into the future rose three times as fast as prices for delivery this July. On Friday it cost more than $US145 to buy oil for delivery in 2016 - up an astonishing $US19 in just one week. While OPEC oil producers are deliberately curtailing production, they, too, will face physical limits.

Downes predicts world oil production will peak between 2020 and 2030. Some outlying commentators say the moment will arrive even sooner. Germany's Energy Research Group says the phrase "peak oil" is grammatically misleading because oil production has peaked. ...

The second story worth highlighting is from the "Kohler, Gottliebsen, Bartholomeusz" report at the Business Spectator, which has a long interview with Peter Botten from Oil Search, discussing whether or not production has peaked.

On May 22, oil and gas explorer Oil Search and its partners ExxonMobil, Santos and AGL Energy signed an agreement with the Papua New Guinea government that allows the companies to start engineering work on a $US11 billion liquid natural gas project in that country. While a final decision on whether to go ahead with the project is yet to be made, the agreement with the PNG government is seen as an important milestone for Oil Search.

Robert Gottliebsen: Peter, thanks for joining us. Do you believe that the peak oil forecasts of a looming world oil crisis are now starting to come into play?

Peter Botten: I don’t think there’s any doubt that supply/demand scenarios are extremely tight. For the first time ever you see a significant decline in production out of Russia for this year and you see the Middle East frankly struggling to maintain, let alone, increase its production. Put that against the backdrop of an average decline rate across the world of the world’s oilfield of about 11 per cent and there is no doubt that the fundamentals of supply and demand will remain tight. I do believe that we are going to struggle to continue to materially increase production based on an outlook for demand growth.

RG: So unless demand falls we could see an oil price two and three times the present level.

PB: Some people would say that’s probably a matter of ‘when’ rather than a matter of ‘if’ and it really is a question of how do we approach energy usage in a slightly different way, more efficient ways. Technology can help, but broadly speaking, unless there are significant discoveries around the world and there are people and money and time to develop those discoveries which I think will be a struggle, certainly there will be continued pressure in the medium and long term on oil prices.

RG: So you believe that the reason OPEC's refusing to lift production is simply that they can’t do it?

PB: I genuinely believe they have no capacity to do it. Based on our information out of the Middle East and from where we work ourselves, they’re struggling. Saudi Arabia has got enormous development programmes planned and in part underway, but like everybody else, they’re struggling to find people, struggling to find equipment and it all takes time.

When you look at production performance out of some of the key fields in the Middle East, you do start to question the potential reserves that may be there. Not in a dramatic way, but certainly the reserve statements that have been done generally by the Middle East countries has been somewhat less than Society of Petroleum Engineers classification. While their fields are giant, I think some of the complexities are coming home now when they try and turn up the production tap. ...

If the Chinese stockpiling theory is correct we might be able to look forward to an oil price drop after the Olympics. For a while at least. I've heard the view that the Olympics will be their last big hurrah and then the Middle Kingdom will go back to secrecy and isolation. There's talk of marathon runners carrying asthma inhalers so it could be a turning point for the games as well, perhaps going the same way as gladiator fights. I'd like the PM to ask the Chinese 'can you please not burn so much frickin' coal as it's changing the climate'. Alas I think as he descends from the post coital afterglow of the games he will send them more coal.

Hmmm - I could have done without the imagery evoked by your reference to Rudd's "post coital afterglow"...

Uh oh, I just visualised Kevin and Therese...

So Downes would consider TODers to be "outside elements" would he?

- I suppose we should lug in a few lumps of that oil shale from the backyard for him while we're out there, and see what he makes of it! ;-)

Actually it's not completely clear what Downes' credentials are to be pontificating on energy supply. He has a macroeconomics background and some involvement in Greenhouse Gas modelling. ( but he doesn't seem to have made any other public statements about Peak Oil. (I did a little search to try and see if he has been backsliding like other economists, to get to his rather unusual 2020-2030 peak date. - Or is he basing his calculations on the date that his Commonwealth Government Super spits out from the Future Fund? ;-)
- Gee I hope the Feds invested the Future Fund in Woodside not Qantas!)

Well - pseudonymous bloggers do have their work cut out for them to be taken seriously.

The various ASPO organisations are a little harder to dismiss so easily, especially when their forecasts (at least in some cases) are proving a lot more accurate than those of the old school industry mouthpieces.

As for the Future Fund, I imagine it would be index linked - so Woodside (and the big miners, including the coal ones) will make up a lot more of it than Qantas.

Actually the weighting of the Future Fund seems rather odd.

Back in January they were congratulating themselves for staying in cash...,24897,23260388-643,00.html
... which was not a bad call, but I wonder if they got in at the bottom of the market in March? For anybody who was PO aware, BHP at $35 was a snack.

Also they have a LOT of Telstra: $9B compared to $5B for the rest of the Oz market, $8B of International shares and $38B of cash (bonds actually, they don't say whose, but presumably they're also subject to bond-pricing losses as interest rates tick up.)

Their Offshore/Onshore balance also seems pretty risky, given that PO is likely to be crueller to offshore markets than it is likely to be for Oz, with our resource weighting...

Christine Milne has another statement on peak oil at the Greens Blog and at Crikey :

I have to confess myself quite flabbergasted by the extent to which our governments, oppositions, economists, planners and media claim to have been caught unawares by the rocketing global oil price and imply that no one could have seen it coming.

Not that I am surprised by their position – after all, they rely on ABARE. I have challenged ABARE at every Estimates hearing for two years and more as to their long-term estimates of oil price, and got the same answer each time - $40-45. Even as the price hit $100 early this year, they stuck firm to their projection. And yet ABARE continues to command more respect than the Association for the Study of Peak Oil (ASPO), which has been spot on in its forecasts.

But, just as the reality of climate change is only now sinking in, years after the science was settled and the urgency unquestionable, no-one can truly claim that they weren’t warned about peak oil.

One of my first actions after being elected to the Senate was to instigate a Senate Inquiry into Australia’s Future Oil Supply and Alternative Transport Fuels. In this Inquiry, everyone from Iranian oil guru, Dr Bakhtiari, to public transport groups, to the Councils of Western Sydney, to ASPO and many more, were all calling for the same thing: a rapid shift to mass transit, higher vehicle fuel efficiency standards, an end to the Fringe Benefits tax concession on motor vehicles and accelerated R&D into second generation biofuels.

The Inquiry’s conclusion which was tabled well over a year ago, involved Liberal, Labor and Greens in a consensus report making all these key recommendations. Then the old parties buried it. But, just as geosequestered CO2 will, it is now bubbling to the surface.

A few months later, I released a major publication, Re-Energising Australia, which presented a comprehensive policy platform to deal with the twin challenges of climate change and peak oil and build a better, cleaner, cleverer Australia. The considerable discussion this report garnered means it cannot have completely passed everyone by.

During last year’s election campaign, and as oil passed $100 early this year, I and many others repeatedly called for action to deal with peak oil and climate change together. And then, in my Budget Reply last week, I started with a reference to dwindling oil supplies matching the threat of Arctic Ice melt, and repeated my calls made in the 2006 Budget Reply, to use the surplus to oil-proof Australia. ...

I suspect Bob Brown ghost writes some of Ms Milne's press releases. As some Tas Hydro workers told me we coulda used that 500MW or whatever of clean energy from the Franklin dam. It's not like many 4WDs will bash the scrub around with $1.60 fuel. On the other hand Bob Brown said something about nuclear the other day that seemed quite measured. Brown also told Queensland coal miners they should look for other jobs. I'd like to see Rudd take a position, any position, on coal.

You mean when Bob said we need to take measures to deal with the spread of nuclear technology and disease ?

That was quite measured...

I've scrutinised BB's recent press releases so his non-vitriolic comments on nuclear must have been off the cuff. Something about Europe not getting supplies, a rare lapse into realism perhaps. The Franklin dam was a Pyrrhic victory since we now need clean energy. I suspect history could repeat itself if Gunns' pulp mill fails to get bank support. They might turn to cellulosic biofuels instead. Whatever it is no doubt the Greens will disapprove.

There are other clean energy options besides hydro.

And he is at least trying to do something about global warming, unlike almost everyone else in parliament...

For example, forests are carbon sinks:

I'd like to see Rudd take a position, any position, on coal.

He has. Its the same position the Taliban have on opium poppies.

Do you mean he's fighting the americans for control of it ?


No, he's running a country whose economy is completely dependent on exporting a commodity that creates widespread misery and death ... just like the Taliban.

Except when the Taliban were in government (back 6 years ago or so) they banned opium production and caused a worldwide heroin drought.

Afghan opium production didn't restart until after the Taliban were ejected from office.

Rudd doesn't appear to have banned coal mining as far as I can tell.

Rudd doesn't appear to have banned coal mining as far as I can tell.

See, Rudd can learn from the Taliban. The ban drove up the price of opium several fold. Imagine what a ban on Aussie coal exports could do to the price of coal?

I agree, Boof. Sometime in the future I think that the whole Franklin Dam issue could be revived by energy-starved Tasmanians. This raises two interesting questions. First, whether, in the circumstances of that future time, the Australian and international legal system would be able or willing to enforce the World Heritage listing? And, second, in the post-peak world would the economic resources needed to build the dam be available?

There is one thing you forgot to ask...

Would building a dam make any difference?

Also, have a look at the storage levels.

For a dam to be worthwhile, it has to rain.

(For our international readers (and others), the Gordon below Franklin Dam proposal was located in the dark pink/red area to the north of the large bay on the west coast)

My input here could lead some to think that renewables can not sate our energy appetite, and there may be something in that, but I'm reminded of the words, "all", "basket" and "eggs" in this case.

Also, interesting factoid #3, Tasmanians appear to have un-metered water... at least around Kingston!

I've somewhat changed my mind about Global Warming. I do think that putting more CO2 in the atmosphere will increase the global temperature but I'm beginning to think that the peaking of Oil and Gas production will naturally take care of the problem by pricing fossil fuels above the price of alternative energy.

A large fraction of Natural gas consumption is used for electricity production. Now there is quite a bit of daylight between new Nuclear priced electricity and Natural Gas electricity when Natural Gas is priced at European and North American prices. Even unsubsidised Wind is closing in on it.

At $120/tonne coal is now slightly more expensive than Nuclear, depending on how optimistic you are with the Capital cost of a Nuclear Plant.

Clearly this is totally not politically correct in Australia but it seems to be an increasingly likely outcome in other Countries. I read that the new Italian Government is planning a few nukes. I wonder if they can solve the siting problem that destroyed the Nuclear option is Australia?

In any case, one natural way for Australia to adopt a lower CO2 profile would be to simply price Natural Gas and Coal for internal consumption at international prices.

In Italy, the Mafia solves all siting problems! ;-)