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CERA's Rosy Oil Forecast - Pabulum to the People

(Note: Commentaries do not necessarily represent ASPO-USA's positions; they are personal statements and observations by informed commentators.)

At a moment when a tank full of gasoline costs $75, the Chinese are eagerly trading bicycles for cars, and Americans are consuming their body weight in petroleum each week, it would be nice to know how much oil will be readily available a decade from now. In a thirsty world, will supply be adequate to satisfy demand?

A new study from Cambridge Energy Resources Associates, a prominent research firm, says not to worry. “Capacity growth will accommodate rising world oil demand so long as there are no major disruptions in the actual flow of oil,” said CERA’s Chairman Daniel Yergin. Global supply could increase 25% by 2015 to 110 million barrels a day, he says. This surge of new oil would meet forecast increases in demand, with a surplus to spare, putting downward pressure on prices, the study notes.

The report might be reassuring if CERA did not have a checkered forecasting record, and if its findings were not hedged six ways to Sunday. “Our focus is on physical capacity, not actual production which can fluctuate for political, economic, or technical reasons,” Yergin explains. In CERA’s feel-good scenario, “there are no problems below ground” and the myriad problems aboveground, although real, are likely to be short-lived, and thus can be ignored in their Reference Case. This is an absurd and dangerous nostrum, false on both counts.

In truth, the energy business is plagued by problems in Nigeria (violent insurgency), Venezuela (Chavez), Alaska (pipeline corrosion), the Gulf of Mexico (hurricane damage), Canada (cost overruns), Iraq (civil war), Sudan (ditto), Mexico (declining production), the North Sea (ditto), and Iran (new project delays, saber rattling). While prices should remain volatile in the short term, it’s exceedingly difficult to foresee a return to anything resembling CERA’s orderly market, abundantly supplied with a surplus of cheap oil for the next decade. Indeed, we think oil will be in shorter supply and much more costly in 2015 than it is today.

For the past decade, CERA, the U.S. Energy Information Administration, and the Paris-based International Energy Agency have produced important forecasts whose predictions would be comic if they hadn’t been so tragically misleading. In an effort to reassure politicians, these groups have become purveyors of petro-prozac.

In 1998, the IEA, struggling to balance its forecasts of future demand with supply, created a mysterious new category of “unidentified unconventional” oil which would supposedly provide 19 million barrels a day by 2020. When independent analysts ridiculed this fudge factor, the agency deleted the category, but continued to insist that the 11 OPEC nations could double supply, a geopolitical improbability and a geological impossibility, since production in half of them has already peaked.

At home, the EIA has surrendered serious credibility since its late 1990s predictions that natural gas would sell for $2.50 +/- in 2015. Tell that to grandma in Duluth, since the futures market expects gas to bring 12 bucks next March. For its part, in 2002 CERA forecast that North American gas supply would increase by 15 percent. In reality, production has fallen by 4 percent, forcing CERA to admit that “gas production in the United States appears to be in permanent decline.”

These erroneous forecasts are not just embarrassments, they have had profound real world impacts, misleading politicians, misallocating capital, and obscuring the growing dangers that energy shortfalls pose to national prosperity. The EIA’s don’t-worry, be-happy forecasts of cheap natural gas prices helped entice independent power producers to spend $150 billion on gas-fired power plants, some of which have now become too costly to operate. IEA and CERA’s forecasts of long-term cheap oil have misled automakers like Ford and GM into believing their markets for gas guzzling SUVs were secure, even as Toyota and Honda hit the market with fuel thrifty, gas-electric hybrids. .

What's going on here, how can so many bright people get it so wrong?

In the EIA’s case, it turns out that the computer model it used to forecast natural gas supplies lacked serious resource constraints. CERA, too, seems to have difficulty grasping the havoc that declines in production are wreaking on aging oil fields. Petroleum engineers are intimately familiar with depletion; it’s what keeps them awake at night. But depletion is inexhaustible; it’s an implacable foe that never sleeps, yet grows stronger each day. Even if CERA’s forecasted 21 million barrels a day of new supply were to appear, world oil supplies might grow only a bit or perhaps not at all due to depletion in existing fields.

Despite a growing body of evidence to the contrary, CERA has concluded that world oil production will not peak until after 2020, that “peak oil remains firmly out of sight.” Meanwhile a long list of informed observers, including T Boone Pickens, Henry Groppe, Charlie Maxwell, Jeremy Gilbert, Tom Petrie and Chris Skrebowski, have come to believe that a peak is likely between now and 2015. The Chinese agree, and there’s nothing inscrutable about what they are doing, in their race to secure petroleum assets all around the world.

At peak, the world will not be “running out.” Indeed, more than half the world’s conventional oil and a larger share of its unconventional oil will remain to be extracted. . What the world is running out of is cheap oil, the $20 oil we built our civilization around. Suggesting that there are no insurmountable problems for the oil industry above or below ground and that a return to inexpensive oil and orderly oil markets is in the cards is a fool’s forecast. Taking such Pollyannish scenarios at face value threatens economic prosperity and national security.

Abe Lincoln once said, “I’m a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis. The great point is to bring them the real facts, and beer."

CERA offers us a stout panacea, but on closer inspection it’s not so much a forecast as a vision in search of reality. Its predictions for Russian additions are larger than those of the Russian government, its forecast for OPEC higher than OPEC's own.

What are the real facts? Today, twenty nations produce 85% of the world’s oil, and production in half of these nations has already peaked, as it did in the United States 35 years ago. Despite new production in places like Angola, Kazakhstan and Brazil, two thirds of the world’s remaining conventional oil is in the tinderbox of the Middle East. Oil is becoming more difficult to find; 2005 was the worst exploration year since World War II. Globally, new discoveries turn up only one barrel for every three barrels we use, which is the reason large oil companies continue doing much of their prospecting on Wall Street. As Chevron notes in its recent ad campaign, “the era of easy oil is over.”

As they struggle to afford the next fill-up, Americans deserve a frank appraisal of our energy circumstances, not pablum and happy talk. With respect to petroleum, America has been sleepwalking toward disaster for twenty years. The nation desperately needs a wakeup call, not a fairy tale masquerading as a forecast.

Randy Udall directs the Community Office of Resource Efficiency in Aspen (CO) and co-founded ASPO-USA. Matthew R. Simmons is Chairman of Dallas-based Simmons & Company International—an investment bank specializing in the energy industry—and a member of ASPO-USA’s Advisory Board.

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