by: Joel Makower

One of the great debates of the Age of Energy Uncertainty has to do with something called Hubbert's Peak. Promulgated by Shell Oil geologist M. King Hubbert in the mid 1950s, it refers to the highest point on the curve of oil production -- the point when the known sources of available oil max out and start to decline.

It is at this critical point, say Hubbert and many others, that oil prices will begin an inexorable rise -- to what heights nobody knows.

Hubbert predicted that the U.S. peak would occur in 1970, and that the world's peak would come around 2000. When the exact peak actually comes, of course, is a matter of conjecture -- and controversy.

And there are those for whom Hubbert’s Peak is moot. Rising oil prices, they cavil, will only incentivize oil companies to dig deeper, so to speak -- to deploy new and better technologies to find and extract oil that, until now, wasn’t profitable to bring to market. So, this line of thinking goes, the post-Hubbert era won’t make much of a dent in oil supplies.

Such thinking, suffice to say, bumps up against an inevitable law of diminishing returns -- the point when the hardest-to-get oil just isn’t worth it.

Now comes “Anonymous” -- no, not the author of Primary Colors, but another nameless soul with a far more serious tale to tell. Writing on the Energy Bulletin web site, this self-proclaimed insider at a “major international oil company” tells us that

It is not a question of “if” peak oil has occurred – it has! The better question might be “when are the crows coming home to roost?” When will we begin to actually experience the shortages and the rising prices? I think we might make a decade, if everybody plays nice across the world. But when has that ever happened when something got scarce?

By way of explanation, Anonymous offers several insights into the world of oil. Among them: 

  • the industry is drilling-rig-limited at full-capacity worldwide;
  • it is also personnel-limited, with fewer than a third of the 1.6 million workers it had 20 years ago
  • the notion that the industry is sitting on “capped wells” of oil and gas is “ludicrous” -- it doesn’t make financial sense;
  • the industry is finished with most of the “second tier” exploration domestically, mostly due to NIMBY pressures; and
  • “many people foolishly believe that higher prices will make the oil as valuable as gold is today.”  

    On that last point, says Anonymous,

    What they fail to realize is this: as liquid energy (oil) prices rise, all associated prices rise! Even if oil sells for $100/bbl, everything built with this $100/bbl oil will experience the same price increases, and likely more. This includes all plastics, steel, transportation and chemicals! We are currently bypassing the drilling of certain wells right now because the cost to get them out of the ground cannot be recovered. If our material costs (what we buy or rent to actually build an oil or gas well) rise with oil prices, many fields will never be produced, as it will always be uneconomical due to the small size of the oil trap.

    So, if it’s true -- if the peak has passed -- why aren’t oil prices rising? Well, they are. Fifty dollars a barrel -- once viewed in crisis terms -- is now the norm. Where will it stop? Nobody, including Anonymous knows, of course. But that’s the scary thing: Nobody knows. And nobody -- at least nobody in charge -- seems to care.

    Writes Anonymous in conclusion:

    Just wanted to get that off my chest. I have been maligned and spit on by too many people who drive cars and use electricity, and then bitch about prices or claim some kind of “Big Oil Conspiracy” . . . I can tell you that the collective consensus within my business will be “let the bastards freeze in the dark” when the big wail arises.

    And I’m quite certain they will.

    Original Post: http://makower.typepad.com/joel_makower/2005/02/hubberts_peak_i.html

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