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What Stern got wrong

David Strahan, Prospect
The Stern review on the economics of climate change completely fails to acknowledge the imminent decline in global oil production
The Stern review on the economics of climate change was published to almost universal acclaim, and six months on, only a handful of economists have found anything to criticise. In one sense, Stern’s conclusions were entirely predictable. Now that climate change so clearly has a pistol at the head of our species, there could only be one response, irrespective of cost. But there was also a surprise: paying off the highwayman of climate change would not be extortionate.

…His review is indeed based upon a mistaken assumption-but one which means our situation is even more dangerous than his analysis allows.

Stern asks rhetorically whether there are sufficient fossil fuels to fulfil economic growth forecasts, or whether fossil fuel shortage would provide a laissez-faire solution to climate change by forcing up the price and depressing demand. He concluded that, “There appears to be no good reason… to expect large increases in real fossil fuel prices to be necessary to bring forth supply.” In the case of oil, this conclusion was based largely on a resource assessment by the International Energy Agency… And with that, Stern regurgitated the facile assumption that because the available resource is large, there will be no problem with supply in the foreseeable future.

…So where does “peak oil” leave the Stern review? The intuitive answer is that running out of oil should at least be good for climate change, but the reverse could be true. A growing shortfall of global oil production is likely to send the crude price skywards, obliterating Stern’s grand bargain. The kind of long-term impacts attributed by Stern to climate change could arrive much sooner and in a single thunderclap. With the economy reeling, it will be far harder to fund the expensive new energy infrastructure we need to combat climate change.

…What makes Stern’s omission the more surprising is that two of Tony Blair’s closest advisers believe global oil production will peak by around 2015. David Manning-Blair’s chief foreign policy adviser in the run-up to Iraq-seems to think it will come at “some point between 2010 and 2020,” while chief scientific adviser David King told me in 2005, “ten years or less.” …

David Strahan is the author of The Last Oil Shock: A Survival Guide to the Imminent Extinction of Petroleum Man (John Murray). http://
(May 2007)
More articles by Strahan. A current campaign is to “re-cycle” copies of Stahan’s book on peak oil by sending them to members of parliament.

The article is a web-exclusive, meaning that it isn’t in the print version Prospect. Many related articles are available on the Prospect site; some are free, some are behind a paywall.

About Prospect magazine:

Prospect was launched in October 1995 by its present editor David Goodhart, a senior correspondent for the Financial Times, and chairman Derek Coombs. The aim was to launch a monthly that was “more readable than the Economist, more relevant than the Spectator, more romantic than the New Statesman,” as Sir Jeremy Isaacs subsequently described Prospect.

Prospect has acquired a reputation as the most intelligent magazine of current affairs and cultural debate in Britain. Both challenging and entertaining, the magazine seeks to make complex ideas accessible and enjoyable by commissioning the best writers, editing them vigorously and packaging their work in a well designed and illustrated monthly.

This Week in Petroleum

Robert Rapier, The Oil Drum
If you follow the petroleum markets, or you just want to know what is going on in the world of energy, the weekly reports from the Energy Information Administration (EIA) are invaluable. Every Wednesday the EIA releases reports detailing information on petroleum and product inventory levels, imports, prices, refinery utilization, etc. For those who follow this information, the recent run-up in gasoline prices is not a surprise, as you would have seen it coming. The price increase is not driven – as certain politicians and consumer groups have indicated – by a renewed willingness on the part of oil companies to gouge consumers. On that topic, I quote Paul Sankey, of Deutsche Bank, in his Senate testimony on May 15th:

Anybody who blames record high US gasoline prices on “gouging” at the pump simply reveals their total ignorance of global oil supply and demand fundamentals. The real reason for high pump prices is the lack of global gasoline supply relative to demand. Just in the US, overall US refining capacity, at 17 million barrels per day (mb/d), is far below demand at 22 mb/d. In turn, pump prices are effectively set by import prices. With strong demand outside the US on the back of global economic growth and a weak dollar, the era of abundant US oil supply augmented by willing international sellers is dead.

But this essay is not about allegations of price gouging. I know people have strong opinions on both sides of the matter, and I will leave that debate for another day. This essay is intended to introduce you to an accessible, easy to understand tool that will help you more clearly understand the fundamentals that affect price and supply at the pump. In fact, it was largely the information in these reports that led me to start sounding warnings at the first of March that we had potential gasoline supply problems looming this summer.

The roots of the current situation go back to last winter. After record high prices, demand softened, autumn rolled around, and prices plunged. Consumers, having become accustomed to gasoline near $3/gal, were now looking at prices closer to $2/gal. This spurred record demand. When refineries started coming down for spring turnarounds, the gasoline drawdown was very steep due to such high demand (which you could see in the weekly reports), and prices were too slow to respond. So, now prices are trying to make up for lost ground.

The links you want to bookmark, if you want to be more informed about what’s happening in the world of energy, are: Text File of Highlights

This is the first report to come out. It is released at 10:30 a.m. EST each Wednesday. This is a text file that provides all of the important details, although without the graphics. But it is a link that I typically click into within 5 minutes of the release of the report each week.

The second link that I read every Wednesday is: This Week in Petroleum:

This is a comprehensive and graphical look at the trends and developments. The report is released at 1 p.m. EST, and is primarily written by EIA analyst Doug MacIntyre, who has been making himself available for answering questions following my blog postings on the weekly report.
(18 May 2007)

Pumping Cash, Not Oil

Business Week
Exxon’s risk-averse stock-buyback strategy is the new profit model
With gas prices hitting record highs, Exxon Mobil (XOM ) Corp. ought to be drilling like mad and refining more of that black gold, right? As it turns out, the world’s largest oil producer thinks it is smarter to use more of its resources to buy back stock. The indirect result: increased pain at the pump for consumers.

It’s Big Oil’s new formula for making money. Last year, Exxon pumped out $49 billion in operating cash flow on sales of $365 billion. It’s the world’s most profitable company, but Exxon is plowing a smaller percentage of its spare cash back into the business. Although capital expenditures have risen from $11 billion at the start of the decade to nearly $20 billion, that spending amounts to roughly 40% of cash flow, down from 50% in 2000. Meanwhile, overall production has barely budged since its megamerger in 1999.

Instead, Exxon is bingeing on buybacks to help boost profits, which also benefit from higher commodity prices. Repurchases have been part of Exxon’s strategy for decades, but they’ve exploded in recent years.

… Exxon isn’t the only big company facing essentially flat output. Oil and gas volumes slid 1% last year at Royal Dutch Shell (RDS ) PLC. After adjusting for recent acquisitions, they were flat at BP (BP ), Chevron (CX ), and ConocoPhillips (COP ). “Companies say, ‘There are fewer places we can find big oil,’ and there’s some truth to that,” says Amy Myers Jaffe, who heads the Baker Institute Energy Forum at Rice University in Houston. “Wall Street has to ask itself whether it made sense to create these big oil companies when some smaller, nimbler players are doing better [at finding opportunities].”
(28 May 2007 issue)
Exxon and other oil companies seem to be betting with their investment policies that new oil deposits will be more difficult and costly to exploit, and that better investment returns are to be found elsewhere. -BA

Peak Oil Now? New Data Leads to Speculation

Aaron Wissner, blog
New data from the U.S. government shows something disturbing. We may be looking at the peak of oil production, right now. [Graphic]

The data comes from the United States Department of Energy’s Energy Information Agency’s (EIA) report on Global Oil Production, published earlier this week. The black diamonds are the global oil production numbers from excel sheet t14.

To allow for inaccuracy of measurement of the production figures, I have added error bars showing a 1% range. I have also added a binomial fit regression curve to show the overall trend.

It is fairly apparent that oil production has reached a plateau. Growth in the oil supply seems to have stopped.

By extending the best fit curve out two years, we would find that by December of 2008, world oil production would be only 82 million barrels of oil per day (mbpd). This suggests the world may have reached peak oil, the history making all-time maximum of global oil production.

For those looking at similar data two years ago, it would have suggesting an annual supply growth rate of about a 4%. At that rate, global oil production would have reached 93 mpbd by now.

With a two more years of data, even a 2% growth rate projection was optimistic. The world is no where close to 93 mbpd. It looks unlikely that production will reach that level anytime soon. In fact, the trend would have to reverse sharply in order to grow the supply to even 90 mbpd.[Graphic]

Global oil production is about 8 mbpd less than projections from only a few years ago. This huge shortfall represents major changes in the energy supply. It is a new paradigm, one of heralding the end of growth.

The increase in oil prices seen in the past few years is due to the inability of oil supply to increase fast enough to hold oil prices steady. Since the oil supply has failed to grow, it is the price of oil that has increased. This in turn has lead to the increase in the price of gasoline.

This disappearance of growth of the global oil supply is exactly what would be seen if peak oil were at hand. If peak oil is not now, and oil production someday reaches 86 or 87 mbpd, it is still very likely that the world is now well within the peak oil era.

This data may be an early indicator of major changes ahead.
(11 May 2007)
See original for comments and graphics.

Contributor Aaron Wissner of the Local Future Network writes:
I found this data quite compelling. It agrees very closely with a similar chart I created over a year ago using EIA data.

UPDATE (May 21, 2007): Replaced text with newest version from Aaron. He has also added an addendum at the original. The gang at The Oil Drum have comments about the article here (scroll down to see all the comments).