Peak Oil Cover Story
With the public's focus on energy matters understandably elevated for the last couple of years, two previously esoteric subjects have received a remarkable amount of attention in the press. I suspect that increased coverage of liquefied natural gas (LNG) owes as much to a carefully managed public relations campaign as to the slew of proposals to build terminals to import liquefied gas to meet our growing domestic demand. I'm less sure about the other big emerging issue, "peak oil". There's no obvious lobby for the "peak oil" issue, unless it is those who support various alternative energy technologies or greater conservation. This weekend, the adherents of "peak oil" achieved a coup of sorts: a cover article in the New York Times Magazine. It also provided another high-profile venue for the widely-disseminated views of Matthew Simmons on Saudi Arabia's productive capacity.

I've talked about peak oil in a number of previous postings, looking at both its technical and sociological aspects. Many of the articles that prompted these postings focused squarely on a geological peak in oil production, the point at which global production cannot be increased further, but rather begins to decline. The fact that this point cannot be predicted with any certainty--having previously been specified for dates that have come and gone--makes it all the more fascinating. While the Times article does a good job of covering this same ground, it includes some very interesting new insights and some nuances that bring it closer to my own views.

First, the author correctly assesses that the point at which growing production cannot keep up with expanding demand is more important and world-altering than the technical peak, which may occur years or even decades later. That point, rather than the peak itself, is the market discontinuity that could make every alternative energy technology ever dreamt of economical.

The article's discussion of the Saudi situation is also balanced and informative. While some of the commentary from past and present Saudi officials might seem self-serving, their focus on the importance of looking at demand, rather than future Saudi supply, seems apt. The clear message is that although the world can probably rely on the Kingdom to maintain its current production for years, we should not assume more than modest increases for the future. Even if the Ghawar field, which produces half of all Saudi oil, does not go into precipitous decline, tapping the vast remaining Saudi reserves will be qualitatively different from their past efforts.

You can think about this by analogy to the US. We've produced oil since the 1860s, and our cumulative production exceeds that of Saudi Arabia, though our "original oil in place" was somewhat less than theirs. But imagine how our oil industry would look if all of our most productive fields, including not just the East Texas field, but also the North Slope, West Texas, offshore Louisiana, etc., had been produced between 1860 and 1920, rather than the pattern of major new producing areas coming onstream every couple of decades. This is what the Saudis face. They will have to go from an industry that has drilled only a few thousand wells in its entire history, to one that will have to drill thousands or tens of thousands within a few decades, just to maintain current production. Whether they can access the industrial, financial and professional capacity to achieve this is exactly the right question to be asking.

The good news, from my perspective, is that the recent optimistic production forecast by Cambridge Energy Research Associates does not rely on massive increases in Saudi production to attain global production of 100 million barrels per day by 2010. But maintaining that production level and growing it further to meet new demand from China and India could prove a bridge too far, so we had better use the time this buys to ramp up alternatives, even if the price of oil were to retreat from its current level for a few years.