Seems to me there’s only two basic positions: either oil is being created as we speak at a pace rapid enough to supply our needs, or we’ll reach the peak of oil production at some point, the so-called Hubbert Peak.

Since we have sketchy data to infer from, we don’t know where we are on that curve with certainty. The Saudis, for instance, hold onto the best estimates for their remaining reserves like Bush holds onto information about torture memos and spying on Americans.

There are disagreements among the participants about when the oily dance will come to a finale. Oil companies naturally don’t want people to cut back on their use of oil. For example, Exxon Mobil recently reported a quarterly profit of $10.3 billion, in light of which the executives at Royal Dutch Shell might have been shamed by their measly $8.7 billion over the same period. Anything that tends to get people talking about conserving or switching to realistic methods of transportation is generally anathema to Big Oil.

We probably won’t recognize the actual peak until we’re a bit past it.

Some things, however, are clear. For instance, it’s uncontroversial that the cost of extracting oil goes up as more oil is pumped from that field, because the original pressure of compressed oil decreases and eventually must be supplemented by human ingenuity. It’s also well known that the world’s biggest oil fields are decades old and well into their useful lifecycle.

We’ve found most of the easy oil, says Michael Klare, and we’re headed into the era of tough oil. He cites one new project and two studies in support of his argument.

In the forty years since the discovery of oil in Alaska’s Prudhoe Bay, the largest field to be developed anywhere in the world is the Kashagan project in the Kazakh section of the Caspian Sea, currently estimated at 9-13 billion barrels. The project is big enough for Exxon Mobil, Shell, ConocoPhillips, Total (French), and Eni (Italian) to share interest. It was originally planned to be online in 2005 at a cost of $10 billion. The new estimate is 2010, for $19 billion. The government of Kazakhstan is threatening to take control of the project, but in fact it appears that the project faces a number of difficult issues.

The oil reservoir itself is buried beneath high-pressure strata of gas, making its extraction exceedingly tricky, and it contains abnormally high levels of deadly hydrogen sulfide; moreover, the entire field is located in a shallow area of the Caspian Sea that freezes over for five months of the year and is the breeding ground for rare seals and beluga sturgeon.

No doubt they’ll get that oil out, but it’ll be expensive.

Two new reports, one from the International Energy Agency, part of the Organization for Economic Cooperation and Development, and the other submitted by the National Petroleum Council to the US Department of Energy, add fuel to the fire. In fact they throw gasoline onto it with predictions of significant near-term dislocations worldwide.

The IEA report, according to Klare, points out that demand for oil is increasing rapidly, especially in surging Asian economies like China and India. High prices at US pumps have not kept Americans from setting new records for distances driven. The demand does not show any signs of decreasing anywhere. To keep up with current demand, new demand, and declining production from older fields requires the production of five million new barrels a day. Since the older fields, like those in the US, can’t increase production, those five million barrels must come from

…Iran, Iraq, Kuwait, Saudi Arabia, Algeria, Angola, Libya, Nigeria, Venezuela, and one or two other countries. These are not places that exactly inspire investor confidence of a sort that could attract the many billions of dollars needed to ramp up production enough to satisfy global requirements.

Read between the lines and one quickly perceives a worst-case scenario in which the necessary investment is not forthcoming; OPEC production does not grow by five million barrels per day year after year; ethanol and other substitute-fuel production, along with alternate fuels of various sorts, do not grow fast enough to fill the gap; and, in the not-too-distant future, a substantial shortage of oil leads to a global economic meltdown.

If we’re lucky. Which major power would lay down its arms rather than go to war over the dregs of the oil its military machine requires?

The National Petroleum Council is a oil-industry association. Its recent report recommended, of course, more drilling in federal lands, but also increased fuel-efficiency standards.

Contributing to the buzz around its release was the identity of the report’s principal sponsor, former Exxon CEO Lee Raymond. Having previously expressed skepticism about global warming, he now embraced the report’s call for the taking of significant steps to curb carbon-dioxide emissions.

Like the IEA report, the NPC study does claim that — with the perfect mix of policies and an adequate level of investment — the energy industry would be capable of satisfying oil and gas demand for some years to come. “Fortunately, the world is not running out of energy resources,” the report bravely asserts. Read deep into the report, though, and these optimistic words begin to dissolve as its emphasis switches to the growing difficulties (and costs) of extracting oil and gas from less-than-favorable locations and the geopolitical risks associated with a growing global reliance on potentially hostile, unstable suppliers.

And the costs are significant. The NPC estimates that by 2030 the world will need to spend about $3,000 for each individual now alive, or $20 trillion, to ensure that enough oil exists to meet expected demand. Get out your wallet…

Another area of agreement between the two reports:

Both reports claim that with just the right menu of corrective policies and an unrealistic streak of pure luck — as in no set of major Katrina-like hurricanes barreling into oil fields or refineries, no new wars in Middle Eastern oil producing areas, no political collapse in Nigeria — we can somehow stagger through to 2012 and maybe just beyond without a global economic meltdown.

That’s right, five years. After that, it gets ugly.

More competition among buyers, more difficult places to drill and extract, less stable host countries, aging fields with declining production.

What would six-dollar-a-gallon gas mean to the American Dream?

Posted by Chuck Dupree at August 17, 2007 05:15 PM

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