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Interview with Michael Smith (Part 2 of 2)

(Note: Commentaries do not necessarily represent the ASPO-USA position.)

Peak Oil Review: Saudi Arabia is obviously yours and everyone’s kingpin producer.

Smith: Saudi Arabia has been the world's main swing producer. Since 2006 when I developed the slides, Saudi Arabia has increased its production capacity; a lot was planned at the time, but they've been quite proactive in investing in their industry. Meanwhile the global recession of the last two years has led them to shut-in output and that will lower and push the Saudi peak forward. My 2006 graph was published on the basis of no output restrictions but my overall model accounted for intermittent restriction.

POR: Back in June of 2008, didn’t the Saudis only have heavy oil that some refineries couldn’t use as their only excess supply capacity? Weren’t they otherwise tapped out?

Smith: I agree with that. That was what it seemed like but, of course, you can never really be sure about Saudi Arabia because the government is secretive about what they can do. But they did seem to be pretty near to full capacity back then, apart from heavy oil. It seems likely that when prices reached over $100 per barrel they would have produced as fast as they could. The price peak of $147 was not in their interest and certainly had an impact on the severity of the recession.

POR: Your view of supply includes a set of reductions in demand for gasoline, jet fuel, heating, and oil use in plastics and power generation, etc.

Smith: The key point about demand pulling back to meet supply is that we can figure out how we can achieve demand reduction through efficiency methods, without suffering real pain to our standard of living. But we will not reduce demand and suffer a drop in standard of living unless we are forced to. This indeed happened in late 2008 and 2009 with demand declining rapidly through painful conservation that was driven by the global economic recession.

POR: Your 2006 view of expanded supply shows some production from gas-to-liquids [GTL], on the order of 3+ million barrels a day by 2025. Is that still your view?

Smith: This was the high-case scenario. I haven't done any recent studies on this, but I get the impression that a lot of the projects to bring on alternatives to conventional oil have been delayed due to capital constraints, the lower oil price, to the perception that prices will remain low for a period and to inevitable technological hurdles. Unconventional oil sources have always been dogged by technology problems, where the energy return on investment is so low. People sometimes forget that GTL techniques and conversion of the oil sands in Canada for example are very old technologies which have proven very difficult to establish commercially.

POR: Back in 2006 you showed a world oil and liquids production plateau at around 100 million barrels a day, with a 3-year plateau starting fairly soon. How would you update that view today?

Smith: I feel the peak/plateau period is much delayed because of the recession. Currently I am looking at around 2020 - perhaps as late as 2025. But of course it is dependent on what happens to the global economy (and the environment) between now and then. When I first started forecasting in the late 1990s, I had a production plateau beginning around 2016. Over time, supplies got tighter and tighter and oil prices started to rise, and the plateau moved nearer to around 2012. Now it has moved out to 2020, showing how uncertain this modeling can be because so many technological, financial, political and social variables are at work. The fluctuation points to volatility of course which is a signal of tight energy supply. If there is a new surge in economic growth and China and India continue to grow and mop up oil supplies, then it will move back to 2016 very quickly.

In the old days, people who used to argue against the reality of peak oil pointed out that the so-called peak is always shifting into the future. And they were right as the subject was not fully understood, especially the impact of political and economic circumstances. That's generally not the case now, with the peak moving both forwards and backwards. The world has hit a volatile period in history where new energy supplies are all difficult to find and expensive to produce. The hope is for a magical new energy source to replace hydrocarbon liquid fuels.

POR: That’s a fundamental point. The peak oil denial club is always saying that peak oil is always being pushed out into the future. And in fact, a number of the people in the peak oil community, with good data and good intentions, have made calls of peak dates that have been premature.

Smith: One of the reasons I haven't done any major presentations in this form since 2006 is for that very reason - making timing calls is the wrong choice if you want to get across your point. Ironically too, if you successfully persuade people of the need to act on peak oil, and demand is cut in some fashion, then they will be regarded as having been wrong about peak oil because it does not happen. It will be called peak demand.

POR: In other words, policies might be changed, along with investments etc., to lower demand such that it stretches out supply and pushes back the peak.

Smith: Yes. It parallels our environmental issues of the day. The Oxford English Dictionary has just added a new word to its lexicon - catastrophizing, which I think means “assuming the worst.” Nobody likes a pessimist, they get vilified in the press, but we need people to do this if we are ever to change our approach before it is forced upon us.

POR: Any changes in your conclusions you stated: “that vested interested do not provide the best solutions, that companies and governments must take more energy risks, that demand will want to grow faster than the supply of liquid energy, and that most of the ready alternatives have environmental consequences”?

Smith: They still apply, though they are not particularly prescient.

POR: What’s your summary comment today on the evolving peak oil story?

Smith: I think it has obviously lost its cachet… it has become mainstream, supported by empirical observations, greater understanding of both above- and below-ground factors and more detailed modeling. Defining a date of peak is not regarded as so valuable. However the deniers are becoming more vocal just as they are in the environmental movement. The original people who denied peak oil were focused on supply but the angle today is demand. We won't reach a supply peak but a demand peak. Of course supply and demand are really the same thing with demand, through pricing mechanisms, controlled by supply.

POR: Do you see in Europe, and particular within the UK, any shifting or broader acceptance of the background concern, even though the vocabulary is changing?

Smith: No, I don't think there's broader acceptance because there is simply less interest in it. There is now focus on the economy and when you're strapped for cash, some parts of the future, especially the longer term, become superfluous. So no, I don't see any shift. If anything it's the other way. Oil is not a big issue whilst it sits at a sustainable price level.

POR: Any final word?

Smith: When I ran Energyfiles, which was a commercial concern, I was concerned about being linked too closely with the peak oil movement. For years it was not mainstream and, although developed by excellent scientists and promoted by good organizations such as ASPO and the Oil Drum, it had many weird hangers-on, just like in the environmentalist movement. It was not treated seriously by most of my potential clients. Conversely now it is generally accepted - albeit with new names such as "peak demand" and "bumpy plateau" - it has become less of an issue because of the recession. However in just a few years I suspect we will go through the argument all over again.

Michael Smith, trained as a geologist, worked in the oil industry for a number of years before he started Energyfiles back in 2000. Energyfiles was purchased in early 2010 by Datamonitor. Smith is currently helping Datamonitor integrate the Energyfiles database into their products.

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