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« Randgold Resources Limited: As Good as it Gets | Main | Precious Metals Stocks: The Next Quarter »

Washington Capitulates: Peak Oil Is Real

World Liquid Fuels Production 2005-2030.JPG

Just arrived a few minutes ago is this article regarding Peak Oil by Doug Hornig, Editor, Casey’s Energy Opportunities which we hope you find of imterest.

Each year, generally in May, the Energy Information Administration publishes a less-than-eagerly-anticipated tome called the International Energy Outlook, 250+ pages of mind-numbing text, charts, graphs, and tables.

No one reads it. The mainstream media ignore it.

It’s the product of the best prognosticators in the Department of Energy. Okay, that may be what puts most people off. But if you’re patient enough to dig into it, it will cough up some fascinating nuggets of information.

The present edition is no exception. The report refrains from spelling out the conclusion that seems most obvious from its data. However, confirming a trend begun just last year, the 2009 edition clearly reveals that the government has been forced to admit that Peak Oil is coming. Moreover, it’s expected to arrive much faster than was believed as recently as two years ago.

This represents a remarkable turnaround in the agency’s opinion. Up until 2008, they were predicting unbroken growth in world oil supplies for the next two decades. But in ’08 and ’09, the rosy picture turned decidedly unrosier.

Before we look at the numbers, a couple of notes on terminology. The EIA makes its projections based on what its analysts call the “reference case,” i.e., average economic growth. It also provides estimates for better- and worse-case scenarios, but the reference case represents the best guesses they have.

Oil (as we generally think of it), upon which most of the world economy depends, is termed “conventional liquids,” i.e., the stuff that comes gushing up from under Saudi sands. “Unconventional liquids” – extra-heavy oil, bitumen, coal-to-liquids, gas-to-liquids, and biofuels – are also covered in the report, as we’ll see, but conventional is far and away the most important one at this moment in history.

With that in mind, by 2007 the IEO was in its final year of irrational exuberance, confidently predicting that world production of conventional liquids would be 107.5 million barrels/day (up from 81.9 in 2005). That dovetailed nicely with a forecast for world demand of 118 million b/d, with 10.5 million barrels of unconventional liquids taking up the slack.

By ’08, they had put the info into table form, and look what happened on the chart above:

Same table, ’09:

World Liquid Fuels Production in Reference Case 2005-2030.JPG

Projected production, as you can see, is suddenly shriveling up. From 107.5 million b/d of oil projected for 2030 in 2007, to 102.9 million b/d in 2008, to this year’s meager expectation for 93.1 million. That’s a drop of 13.4% in only two years, and posits production growth of only 11.6 million b/d (14.2%) from 2006 levels.

If that isn’t an admission that the era of Peak Oil is upon us, what is?

The report assumes that some of this stunning shortfall will be made up by development of unconventional liquids to the tune of 13.5 million b/d, including a jump of 5.9 million b/d in biofuels. At the same time, while conventional liquid production from non-OPEC nations is projected to grow only 7%, OPEC is expected to substantially increase its contribution, ramping up output by almost 25%. (All figures are for the period of 2006-2030.)

Does this seem optimistic? Well, it presupposes some heavy lifting on the part of OPEC, a dicey proposition in the best of times.

And it means creation of the infrastructure necessary to exploit extra-heavy oils, tar sands, shale, ultradeep deposits and other unconventionals, all of which require sophisticated technological know-how and face significant environmental challenges.

Biofuel production could more easily be elevated. But to reach the lofty level of nearly 6 million b/d would necessitate a huge diversion of cropland from food to energy, certain to be attended by a rise in food prices, not to mention potentially serious food shortages. The need for food being rather more primal than the need for gasoline, politicians are going to be reluctant to risk loosing angry mobs into the streets.

Even if all of these developments proceed flawlessly, though, we’ll still have to face a widening gap between production and consumption. Or will we?

As it turns out, we’re in luck! Or so the EIA would have us believe. Because, accompanying that falling supply is – you guessed it – declining demand. In 2007, the IEO anticipated world demand for all liquids of 118 million b/d in 2030. This year, that estimate shrank to 107 million b/d, right in line with production.

The important point to take away from the IEO’s analysis is that the world is facing a decline in liquid fuel production and the government, after years of straight-faced denial, is now admitting it.

Does this mean we’re going to run out of oil? No. But supply constrictions mean that the good old days of limitless, cheap oil are gone. And, though viable alternatives eventually will be developed, there’s no way of putting a timetable on that. In the interim, we’re going to have to pay up if we want to keep the family jalopy on the road.

How much? The IEO report’s reference case calls for $130/barrel oil in 2030, but that’s based on relatively modest demand increases from India, China, and other developing nations, and we find it very optimistic. It easily could be twice that.

Rising oil prices mean some belt-tightening, but they also offer investment opportunities, in both conventional and unconventional resource companies. In addition, power-generation alternatives such as solar, nuclear, and geothermal will be coming to the fore.

But discovering the right companies with sound fundamentals and the potential for handsome returns isn’t easy. Read our report how a math-prodigy-turned-multimillionaire finds those companies… and how you, too, can profit from his secret system. Click here to learn more.

Have a good one.

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Reader Comments (7)

Sorry to nit pick but your paragraph describing the figures in the tables doesn't actually match the figures shown in the tables or at least I can't see the relationship. Would like to use your article and figures etc in an upcoming public forum so hoping you can explain the relationships more clearly.


August 28, 2009 | Unregistered CommenterWayne

I should think that most people investing in Uranium are at least aware of the idea that is "Peak Oil" -the inevitability that someday we will pump a maximum amount of the stuff that will never be exceeded.

Those of you who want to know what the likely consequences will be might like to have a look at my "Peak Oil Joining The Dots" document written back in 2007 -either Google it or click here:

Regards, Nick.

August 28, 2009 | Unregistered CommenterNick

This is the key line "But supply constrictions mean that the good old days of limitless, cheap oil are gone. This is th ekey tak away. It will cost more and much of the added $ will not be avaliable as profit or EPS, rather most will cover the added cost to produce. Look for any easy prifit to be removed, remember the windfall profit tax of the 70s.

Now comes the hard part, how to make $ from limited oil? Buy the land owner, the producer, alternatives plays, ????
Or skip oil and look to a hedge like silver or gold?

August 28, 2009 | Unregistered CommenterBC

“The bonanza from oil, however, is at an end…” Why? Everything isn’t so bad..

What are we doing in exploration now? - One commercial discovery in four wildcats, isn’t it?

I would like to inform you that there is an innovative technology for oil/gas detection to significant increase of world energy potential and mitigate the economic crisis.
With new exploration technology (patented invention US 7,330,790) we could make up to three times more oil and gas discoveries than when using conventional technology. And the fact that new technology won't need more investments is also very important. It can significantly mitigate world energy problems.
The technology is designed and successfully tested in the Barents and the Black Seas as well as in the Gulf of Mexico (see:
But the Big Oil Companies ignore the technology and drill 75% dry wildcats for nothing
to support higher gasoline prices.
A. Berg, Ph.D.

August 28, 2009 | Unregistered CommenterBerg

"...But the Big Oil Companies ignore the technology and drill 75% dry wildcats for nothing
to support higher gasoline prices..."

For someone who claims to have a Ph.D you are a funny man.


September 1, 2009 | Unregistered Commenternoutram

I worked in oil exploration (Seismic analytic software for Phillips in the 70s and 80s).

Peak Oil - yes one day we will max out. But is it this year or 30 years away? I am amazed that we continue to make major finds in supposedly very very well explored areas such as North Dakota and the Gulf of Mex. Also the finds and expected finds in the South Atlantic. Add to that things like tar sands and it is not clear to me that we will run short in the next 10 or 20 years. I do expect cost and hence price to go up.

September 2, 2009 | Unregistered CommenterBC

BC, today BP announces a "Giant find" -3 Billion barrels !!

-But this equates to just 6 weeks of global consumption and it will take the best part of 10 years to fully come online!!

Peak Oil is real -it has probably happened and soon, like within 3-5 years (my guess is 2012) there will start to be major cracks appearing in the supply / demand equation with devestating consequences for the global economy and poorer nations (life threatening in the poorest).

The Tar Sands will never exceed 4 or 5 mbpd without destroying the environment. The cost is something north of $60-$70 bbl and escalating. Technology has just made super-pipes that suck harder at the slush puppy -it has not made 'cheaper oil'. Peak Affordability was in 1999, if technology is so good why is oil 6-7x the price it was back then??

The Peak has probably arrived -we are in for escalating prices here on out, the days of cheap energy are over, this will destroy many business cases based on cheap energy (e.g airlines, 32,000 mile BLT sandwich / food, etc. etc). Essential Commodities will rise as energy input costs to extract escalate, fiat currencies may be doomed if governments pump money into dying economies expecting them to recover with 'stimulus', volatility will increase and the boom-bust business cycle will increasingly contract... Join the Dots !!


September 2, 2009 | Unregistered Commenternoutram

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