The Year in Review
This special issue of the Peak Oil Review looks at the major developments in the Peak Oil Story during 2007.
1. Production and Prices in 2007
The most interesting aspect of oil’s 57 percent price increase in 2007 is that it was caused by supply, demand, some speculation and a weakening dollar for there was no new oil-related geopolitical crisis nor a production-damaging natural catastrophe all year. Nothing major was blown up; the Straits of Hormuz remained open; the few hurricanes did little damage to oil production; and late in the year Iraq managed a considerable increase in its exports.
The year started with oil prices dropping below $50 a barrel in mid-January due to a warm winter in the US, Europe and Russia and doubts about whether OPEC would actually make the production cuts totaling 1.7 million b/d announced in the fall of 2006. When it became clear in late January that the Saudis had actually cut exports by 1 million b/d, prices started to move up. From there on oil prices climbed steadily reaching $60 in March, $70 in July, $80 in September and finally the record for the year of $99.29 on November 21st. Although many tried to blame this unprecedented price increase on speculation, the underlying reason was increasing demand coupled with OPEC production cuts and the fall of the US dollar in the midst of a spreading liquidity crisis and interest rate cuts.
In late April concerns about US gasoline inventories began to arise as import-discouraging low prices, the US’s high demand, and refinery problems pushed US gasoline inventories down by 30 million barrels and very close to the level where spot shortages could develop. Also in April a dispute arose between the IEA and OPEC over OPEC’s production cuts the previous winter. The IEA noted that total OECD stockpiles had been dropping by 1 million b/d while OPEC rejoined that the market was well supplied and that inventories had been too high.
In early May US gasoline stockpiles were said to have reached their lowest levels since 1956 and gasoline prices were up to an average of $3 a gallon. Throughout this period the US Department of Energy held that the situation would straighten out before the summer. This view turned out to be correct as higher gasoline prices attracted more imports and shortages that many feared did not develop, although the price of gasoline did rise to $3.20 in late May.
In August a new and ominous set of concerns arose as it became evident that the subprime mortgage situation was expanding into a worldwide liquidity crisis or worse. For the rest of the year, prospects for a recession and the interest rate cuts made to forestall it had as much to do with oil prices as did the normal dictates of supply and demand.
By September oil rose to a new high of over $80 a barrel on a combination of a tight market, expectations of increased demand over the winter, a continuing drop in the US crude stockpile, and a pop-up hurricane that temporarily shut down three Texas refineries. When OPEC met on 11 September, they voted to increase production by 500,000 b/d as a result of pressure from consumers.
In October and November oil prices continued to rise despite increasing oil production from OPEC. The Saudis increased production by some 400,000 b/d and the Iraqis got their northern export pipeline to Turkey working after years of incessant sabotage. The combination of increased Saudi production, contributions from the rest of OPEC and increased Iraqi exports seems to have pushed total world liquid fuels production to a new high slightly above the record set in 2006. Whether this is sustainable remains to be seen.
As the year closed, OPEC rejected calls to increase production at a meeting in early December; oil prices hovered around $90, moving up and down mostly on prospects for a recession; and world stockpiles continued to drop. On the first trading day of the New Year oil hit the much anticipated $100 a barrel.
2. A peak oil media milestone: November 2007
On Sept. 18 at the ASPO-6 Conference in Ireland, former Energy Secretary Schlesinger stated that “peakists” are no longer voices in the wilderness but are now mainstreamers who have won the debate over peak oil; “the only question--when will it occur--is secondary.” In our view, while the mainstream media haven’t yet gotten the Schlesinger memo, progress in grasping the world’s systemic energy problem was made during 2007, especially during the fall. The hard-to-ignore run-up towards $100 oil led many major newspapers and news networks to devote more time and front pages to the issue. After the Oct 18-19 ASPO-Houston conference, media coverage, while mixed, generally added a little fuel to a small fire that flamed up in November.
During October 30-31, two oil company CEOs at the Oil & Money Conference (London) stepped out and made statements that set up a media breakthrough. The chairman of Libya’s national oil company said, “There is a real problem that supply may not increase beyond a certain level, say around 100 million barrels [a day].” Total’s CEO Christophe de Margerie was quoted by the Financial Times as saying, “One hundred million barrels a day is now in my view an optimistic case. That is not just my view; it is the industry view, or the view of those who like to speak clearly, honestly, and not…just try to please people.” The previous week, James Mulva, CEO of ConocoPhillips, repeated a statement about a permanent ceiling on oil production that he first made last spring: “I don’t think we are going to see the supply going over 100 million barrels a day.” Former Saudi Aramco vice-president Sadad al Husseini stated that production “could be sustained for years but can’t be significantly increased.” These sound bites dumped barrels of ice-water on hopelessly optimistic views that have been paraded endlessly by government agencies and then parroted by the press.
Shortly thereafter, November 19 started a banner week for peak oil in the US media. On three successive days, the Wall Street Journal, the Houston Chronicle, and Time magazine addressed the issue. With oil prices on fire, editors started to realize that it is not enough to simply blame high gas prices on speculators, the falling dollar, and national oil companies. They seem to get it: production is not keeping up with soaring demand, and if prices do not fall soon, serious economic damage will likely follow.
To emphasize that they are not talking about “peak oil”, the Journal and Time said some unflattering things about people who believe geologic limits on oil production are imminent. But they did at least describe the notion of plateau production; world oil output wouldn’t decline right away, but would flatten for a period of years. While some coverage of the peak oil story is still generally very critical and often dismissive—“the peak oil theory is fading” (NYTimes, 3/07)—the tide seems to be turning.
3. Reports on peak oil in 2007
2007 was the year when significantly more reports covered peak oil than in any previous year. Several helped stir up press coverage of peak oil, especially the National Petroleum Council (NPC) study. Here’s a short list of several key reports:
- On March 1, the U.S. Government Accountability Office released an 82-page report that acknowledged peak oil as a serious issue, then made some excellent points while dodging what many see as the relative immediacy of the “when” question.
- In Oregon, Portland’s Peak Oil Task Force was our first local government to publish a comprehensive study of the vulnerabilities and wide-ranging changes that cities will face with the onset of peak oil. The study, also released in March, provides an initial set of recommendations for addressing that challenge “thoughtfully and prudently.”
- A few days later, Germany’s Energy Watch Group published “The Capacity of Coal Is Significantly Overrated”—the first of a handful of reports during 2007 to assert that coal reserves data are unreliable and in many cases overstated, and to communicate that coal can’t bail us out from our current oil supply problems.
- In early July, the International Energy Agency’s Medium Term Oil Market Report, a normally mundane projection, broke new ground by acknowledging in the near-term: "Despite four years of high oil prices, this report sees increasing market tightness beyond 2010, with OPEC spare capacity declining to minimal levels by 2012.”
- Later in July, the U.S. NPC published “Facing the Hard Truths about Energy.” The NPC artfully camouflaged the enormous near-term challenges in producing sufficient oil and gas to fuel the global economy. Hard truths are hinted at but never clearly identified. Troubling trends are referenced, but their ramifications are dodged.
- In early September, Kjell Aleklett delivered his 57-page report to the OECD, entitled “Oil Dependence: Is Transport Running Out of Affordable Fuel?” It featured peak oil issues.
- Later in September, a Queensland (AUS) task force published “Queensland’s Vulnerability to Rising Oil Prices.” In it they presented the likely time frame for peak oil (“within a decade”) and offered recommendations to minimize peak oil’s impacts.
- In mid-November, the state of Connecticut issued a report on peak oil that stated, “Global oil production appears to have stagnated and may soon be headed toward terminal decline…There is no short-term fix.” The lead recommendation: form a peak oil task force, modeled in part on Portland’s earlier effort.
4. The Asian demand
Unlike in the OECD countries where demand has been essentially flat and in much of the world where imports have been dropping, consumption in China, India, and the oil producing states continued to grow strongly during 2007. Beijing increased consumption from 6.6 million b/d in 2005 to 7.1 in 2006, and on to 7.5 in 2007. For 2008 consumption is forecast to increase to 8 million b/d unless major economic difficulties intervene.
During 2007, the Chinese managed to get themselves into a serious fuel shortage by keeping a lid on the prices refiners were allowed to charge users as world crude prices soared. Refiners started to lose money which resulted in significant drops in diesel production and shortages. To remedy this situation, Beijing directed the state-owned refineries to increase production and cut exports, increased retail prices and began importing large amounts of diesel fuel thereby increasing pressure on world prices.
In India total oil consumption rose by about 5.1 percent in 2007 to 2.8 million b/d. Automobile sales and air travel in India continue to increase rapidly with no let-up in sight unless there are major economic problems.
5. Production, exports, and stockpiles
The interaction between production, exports and stockpiles in consuming countries became of increasing concern during the year. With production flat and domestic consumption rising in producing countries, the amount of oil being exported to consuming nations dropped. For those countries with substantial stockpiles and steady consumption, shrinking exports led to a slow but steady drawdown of reserves.
The year began with the OECD countries holding stockpiles of nearly 2.7 billion barrels which was well above average and is one of the reasons OPEC had decided to cut production in the fall of 2006. Starting in July, once the full effects of the OPEC cutback rolled through, OECD stocks began to slide from well above the five-year average down to the average. In the fall when stocks normally build in anticipation of the winter heating season, the stocks continued to slip. By October, OECD stocks were nearly 100 million barrels lower than in October 2006.
The situation with US stockpiles mirrored the OECD experience with crude stocks reaching a well above normal peak of over 350 million barrels in July and then declining steadily to 290 million barrels by year’s end.
While as yet there is no cause for alarm, the prospects for this situation reversing are not good. Domestic consumption in oil producing countries such as Russia, Venezuela, Mexico, and those in the Middle East likely will continue to grow. Stockpiles in the OECD nations are likely to continue dropping unless consumption is constrained by higher prices, economic setbacks, or government intervention to enforce conservation.
6. Oil from the Middle East
Production from around the Persian Gulf continued as the key to the world oil situation in 2007. With production or exports stagnant or dropping in Russia, Venezuela, Mexico, and Nigeria, only the Middle East, Kazakhstan, Brazil and Angola offer much prospect for even modest production increases in the near future.
During the past year Saudi production which had been running at about 9.6 million b/d in early 2006 fell to 8.6 million b/d after the production cutbacks in late 2006. After the cuts were partially restored last fall, Saudi production rose to about 9 million b/d where it seems to be holding.
The debate continues as to whether Saudi Arabia has peaked or is close to peaking Although the Saudis continued with their expensive program to increase productive capacity, many observers remain skeptical, noting that production has not yet returned to their 2006 level. The Saudis continue to claim they have 2 million barrels of spare capacity and that total production capacity will increase to 12.5 million barrels a day by 2009.
The surprise of 2007 was a surge in Iraqi production and exports due to an improved security situation and the reopening of the export pipeline to Turkey. While Iraq probably has the best potential to increase production of any Middle Eastern country, the political situation there is so precarious it is difficult to believe a significant and sustainable increase in production will take place in the foreseeable future.
Although tensions around the Persian Gulf were lowered somewhat by events in 2007, there are numerous festering situations waiting to explode ranging from Al Qaida attacks on oil installations to increased hostilities between Turkey and Kurdish separatists.
7. Resource nationalism: shifting the playing field
Based on 2006 and 2007, the above-ground development that might well play the largest near-term role in moving the timing of peak oil closer and flattening production is resource nationalism. The three most significant players of this card in 2007 were Russia, Venezuela and Kazakhstan, with lesser roles played by Ecuador and Bolivia.
In January, Russia shut off for three days the pipeline across Belarus to Germany, Poland and other parts of Eastern Europe, charging that Belarus was illegally siphoning off oil meant for the other countries. By late summer, they raced to lay claim to a large share of Arctic Ocean floor, then signed a joint venture with France’s Total to develop the giant Schtokman gas field in the Barents Sea, limiting Total to a 25% stake.
In February, Venezuelan President Hugo Chavez set May Day as the deadline for the international oil companies to surrender at least 60 percent of the multibillion-dollar Orinoco Belt crude projects to government control. Six international oil majors had an estimated $30 billion invested in the projects. The choice was stark: accept a smaller profit from operations they built but would no longer control, or leave. Exxon, Conoco and Petro-Canada pulled out, filing for arbitration. This transfer to government control has increased the uncertainty about the future of Venezuelan production, which is down substantially this year.
During the summer, Kazakhstan's environment ministry ordered a halt to all work at the giant Kashagan oil field in the Caspian Sea. While the excuse was environmental problems, the government simply wanted compensation plus an increased stake in the Eni-led consortium that is developing Kashagan as a way to resolve the dispute over rising costs and delays in production. Originally scheduled to begin in 2005, production is delayed at least until 2010, then starting at 400,000 barrels per day and costing up to $19 billion. Kazakh officials claim that total project costs have jumped from $57 billion to $136 billion. While at year’s end the five-month dispute appeared close to resolution, those who were hoping that near-term production from Kashagan would offset depletion elsewhere in the world will be disappointed.
Actions by several of these nations are understandable. With world oil supplies tight, demand steadily rising and prices rocketing, exporters are in a much stronger negotiating position than they were when deals now more favorable to major oil companies were originally drawn up. We should expect more of the same. Yet over the longer run, reduced participation by international oil companies, who have the capital, management and technical expertise to undertake multi-billion dollar projects, is likely to slow development of many new oil projects.
8. Fuel vs. food
Controversy over converting food grains into fuel ethanol increased during 2007 as more distilleries came into production and world food prices continued to rise. According to the latest figures, US ethanol production was about 330,000 barrels/day in 2006 and over 410,000 b/d in 2007. Production increased so fast during the year that by October there was a glut that drove prices down about 30 percent. Exports to Europe grew so large that they were damaging the European biofuels industry, leading to demands that the EU take action to stop the imports.
The US Congress is largely responsible for the rapid growth in the use of corn-based ethanol for fuel. By giving a 51 cent per gallon tax credit for blending ethanol into gasoline, coupled with a 54 cent per gallon tariff on imports, and the refusal to provide liability protection for the effects of MTBE, an oxygenating additive that can contaminate drinking water, the Congress ensured a rapid switch to widespread blending of corn-based ethanol into gasoline
The energy act of 2005 mandated that the use of ethanol be increased to 179 million barrels per year by 2012 and the Energy Act of 2007 increased that to 857 million barrels (36 billion gallons) of bio-fuels by 2022.
Many observers are expressing alarm at the share of the corn crop going into ethanol production and the rapid increase in the price of corn. In 2006 14 percent of the US corn crop was used to produce ethanol. This share is expected to reach 30 percent shortly. In 2006 corn was selling for around $3 a bushel and it is now about $4.60. The rapid transition to using corn-based ethanol as motor fuel is having all manner of secondary effects in US agriculture. Soybean planting in the US for 2007 was down by 11 million acres (15 percent) and cotton planting down was down by 4 million acres. The high cost of feed grains is likely to slow meat and poultry production with higher food costs for consumers in the US and around the world.
9. Peak oil and technology
New technologies related to the world oil situation were much in the news during 2007. Some technological developments such as improvements in the industry’s ability to find and extract oil from deep below the ocean floor were hailed as breakthroughs that would delay any production peak by many years. We view those sentiments as wishful thinking.
Of more interest, however, were new technologies that could offer viable substitutes for fossil fuels or at least displace liquid fuels. Numerous technical breakthroughs relating to improved cellulosic ethanol and photovoltaic generation of electricity were announced during the year – some by prestigious laboratories. It will be a good many years before it is known if these “breakthroughs” can be turned into commercial-scale alternatives.
Good progress on battery technology that offers the prospect of electric cars and trucks was made during the year. Many are optimistic that electric or partially electric cars and light trucks will be available within the next few years. The problem of course is that the world’s light vehicle fleet is now on the order of 900 million and is increasing by about 50 million a year. Replacing or converting a fleet of this size, amidst all the other problems that are likely in ensue when world oil production peaks, may be an insurmountable task.
Many people are working on sustainable alternatives to fossil fuels. Three of the key questions over the coming decades: will any of these alternatives will be viable for widespread use, what are their environmental footprints, and will there be sufficient resources to effect the transition?
10. Peak oil and climate change
The relationship between the peaking of world oil production and concerns about global climate change strengthened in 2007. In April the UN’s Intergovernmental Panel on Climate Change agreed to the final text of a report that is the bleakest UN assessment yet of the threat of climate change. The report predicts water shortages that could affect billions of people, widespread extinctions of species, and a rise in ocean levels that could go on for centuries. It says human greenhouse gas emissions, mostly from burning fossil fuels, are very likely to be the main cause of warming. It also says climate change could cause a sharp fall in crop yields in Africa, a thaw of Himalayan glaciers and more heat waves for Europe and North America.
So far the US and Chinese governments are the major obstacles to substantial reductions in fossil fuel use. Both believe that climate change is a remote problem and that measures to counter it would interfere with efforts to promote short-term economic growth which is seen as a higher priority. Europe is taking emissions far more seriously and is putting in place regulations that will require large cuts in fossil fuel consumption within a few years.
In the US, state governments are already moving on their own by passing laws to severely limit greenhouse gas emissions. California has created its own standard for emissions which has already been adopted by 17 other states. Although Washington has already moved to block the new standards (especially the more stringent vehicle efficiency standards) by refusing to issue the required waivers, the issue is in the courts and is expected to be resolved in favor of California.
Once the new emission regulations are in place, they will have the effect of reducing fuel consumption in new cars sold in much of the US by amounts considerably greater than envisioned in the recently passed us 2007 energy bill. It is ironic that federal standards arrived at in December, after years of wrangling between environmentalists and the automobile industry should be quickly overridden by actions at the state level.
Energy Briefs for the week of December 31
- Last Wednesday oil broke the $100 a barrel barrier on expectations of another drop in US fuel stocks and a falling US dollar. By Friday oil had retreated from the high on more bad economic news suggesting that a recession may be coming. In the meantime, high energy prices are receiving only cursory attention in the campaign speeches of the candidates for US President.
- A combination of low reservoirs, low natural gas supplies and high oil prices have led to growing electric power shortages across the Indian sub-continent. The situation appears to be worst in Pakistan which is in turmoil in the wake of the Bhutto assassination, but there are also reports of scattered blackouts in India and Bangladesh.
- Political violence in Kenya is choking off supplies of fuel to neighboring countries such as Uganda and Burundi and is likely to hit a swathe of others from eastern Congo to south Sudan. They all get fuel from Kenyan ports, where supply lines have been interrupted by the chaos that has followed the disputed re-election of President Kibaki.
- According to Venezuela's central bank, the country’s oil industry shrank by 5.3 percent in 2007.
- Violence broke out in Nigeria last week when a local war lord launched attacks on two police stations and the main hotel in the oil city of Port Harcourt killing at least 16 people. In the meantime, the leading militant group MEND vowed to cripple Nigeria’s oil exports.
- A report in the December issue of the OPEC Review, published by the OPEC Secretariat, says the cartel will be much harder pressed than previously thought to meet the world's surging oil needs and could realistically fail to supply its share of global oil markets by 2037. Later in the week, the secretariat downplayed the conclusions of the report.
- Saudi Aramco delayed the start of production from the 500,000 barrel-a-day Khursaniyah field and said it will meet market demand with existing spare capacity. The company said that "should the need arise prior to the completion of the project, Saudi Aramco stands ready to meet market demands with ample spare capacity, including 1 million barrels of Arab Light crude."
- California sued the EPA on Wednesday, challenging its recent decision to block California rules curbing greenhouse-gas emissions from new cars and trucks. Under the federal Clean Air Act, California has the right to set its own standards on air pollutants, but must receive a waiver from the EPA to do so.