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Commentary: Major oil companies on peak oil

Background: Production from oil fields is known to peak and then decline. Oil production in a large and growing number of oil producing countries has peaked and declined. Because the world oil resource is finite, it is undeniable that world oil production will peak and decline also. However, it is extremely difficult to predict when decline might begin and how rapid the decline might be. If the decline rate were very small, then it could be argued that the ensuing stresses might be readily managed.

With the exception of the French oil company Total, the International Oil Companies (IOCs) have denied concerns about the impending decline in world oil production, often called “Peak Oil.”

Some possible explanations for the IOC position are as follows:

1) OPTIMISM BIAS. Oil companies have a bias to be optimistic and might justify their positions on the basis of the fact that giant and smaller oil fields continue to be found.

2) CONFIRMATION BIAS. Since other companies are taking the same position, it must be correct.

3) EVENT TIMING. Companies may believe that the decline will not happen soon, so talking about it now is counterproductive.

4) CONTRACT TERMS. A credible Peak Oil announcement could upset existing IOC contracts with oil producing countries, leading to more restrictive contract terms or contract terminations, resulting in a decline in company production and profitability.

5) STOCK PRICE. A credible Peak Oil announcement could lead to an emotion-driven selloff in oil company stock, even though just the opposite is likely in the aftermath.

6) CHAOS TRIGGER. The managements of the IOCs are likely cognizant of the chaos that the declaration of the advent of world oil production decline would create and they do not want to be the first credible, large institution(s) to announce it.

7) FEAR. Talking about the implications of the potentially radical change in economies due to resulting high oil prices and oil shortages could shut oil company executives down and cause them to ignore the threat.

8) FEAR OF OIL MARKET COLLAPSE. A credible Peak Oil announcement would almost certainly frighten the general public into suddenly cutting back on oil use, negatively impacting oil demands and damaging near-term IOC profits.

9) STAFFING PROBLEMS. An announcement of “Peak Oil” could cause staff to flee from a company to another industry and could cause recruitment difficulties.

10) NEED FOR A MITIGATION PLAN. An IOC publicly admitting Peak Oil would be compelled to simultaneously announce an aggressive company plan for dealing with the tragedy. Such an effort would require significant planning, possibly including acquisitions, e.g., acquiring coal for CTL, gas for GTL, etc. Such an effort would take time.

Upton Sinclair is purported to have said, “It is difficult to get a man to understand something when his salary depends on his not understanding it.”

Robert L. Hirsch is a former senior energy program adviser for Science Applications International Corporation and is a Senior Energy Advisor at MISI and a consultant in energy, technology, and management. Hirsch has served on numerous advisory committees related to energy development, and he is the principal author of the report Peaking of World Oil Production: Impacts, Mitigation, and Risk Management, which was written for the United States Department of Energy.

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