PEAK OIL: THE END OF THE ROLLER COASTER RIDE IMPLICATIONS FOR RESOURCE POLICY AND LAW

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PEAK OIL THE END OF THE ROLLER COASTER
RIDE?IMPLICATIONS FOR RESOURCE POLICY AND LAW

• Skip MaryanThompson Knight LLP(713)
  951-5894skip.maryan_at_tklaw.com

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Oil Crude Oil Prices since 1861
US Dollars per Barrel
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PRICE IS INCREASING FOR FIVE REASONS

• OIL DEMAND IS HIGH (especially in USA, India,
  China) and rising faster than expected.
• SUPPLY IS STRAINED We consume two barrels of oil
  for every one we findand no short term action by
  OPEC can affect the price.
• NO SPARE CAPACITY EXISTS in upstream facilities,
  transportation or refining.
• OIL EXPORTING NATIONS ARE LESS STABLE NOW THAN
  FIVE YEARS AGO (Venezuela, Russia, Saudi Arabia)
• The TERROR PREMIUM
• SOURCEPAUL ROBERTS-Washington Post

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SOME NOTEABLE QUOTATIONS

• prices are likely to remain (high)until new
  supplies come on stream in three or four years.
• Lord John Browne, CEO BP
• There is no doubt that in the longer term
  industry will solve the supply issue.
• Andrew Gould, CEO Schlumberger Ltd.
• In the short term we expect Oil to remain around
  60 a barrel. But if supply factors, demand and
  the geo-political environment can be dealt with,
  expectations for oil prices could come back to
  40
• M.J. Mojarrad, Governor of Irans Central Bank

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Noteable Quotes (cont.)

• There is enough supply in the market. Sheik
  Ahmed Fahd Al Ahmed Al Sabah, OPEC Pres.
• Todays high prices are a result of an
  exceedingly tight and precarious supply-demand
  balance. Yet significant new capacity is coming
  on stream.
• Daniel Yergin, Chairman Cambridge Energy
  Associates and author of THE PRIZE.
• OPEC Producers might find it more challenging
  to firm up oil prices over the next few years,
  given the expected increase in non-OPEC supply.
• US Dept of Energy 2004 Energy Outlook
• WHAT ONE PRINCIPLE DO THESE QUOTES ASSUME?

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THE LAW OF SUPPLY AND DEMAND

• Economic Theory to explain and predict how
  markets work developed by Alfred Marshall.
• In its most simplified form, this law assumes
  markets are perfectly competitive.
• DEMAND is the QUANTITY of a commodity that
  consumers are willing to buy at a given price.
• SUPPLY is the QUANTITY that producers are
  willing to produce and sell at a given price.

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SIMPLE SUPPLY AND DEMAND
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THE PRICE ROLLER COASTER RIDE(THE SYLLOGISM)

• THE PRICE OF OIL HAS RESPONDED HISTORICALLY TO
  THE LAW OF SUPPLY AND DEMAND (TRUE)
• BUT, IF UPWARD SUPPLY IS NO LONGER FLEXIBLE
  (MAYBE)
• THE LAW OF SUPPLY AND DEMAND CAN NO LONGER CAUSE
  PRICE TO RESPOND DOWNWARD
• THIS CONCLUSION IS GREATLY DEBATED TODAY

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• Contested Premise Supply is no longer elastic
  because
• Reserves are not there. (Running out of Oil)
• Reserves are there but lag in development of
  infrastructure will delay supply.
• Refining Capacity...or Transportor other
  infrastructure is not there.
• Worldwide Oil Production has peaked and is in
  decline. (PEAK OIL)

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PEAK OIL

• A scientific conclusion based upon oil production
  profiles.
• Sometimes called Hubberts Peak named after the
  Shell Geologist who, in 1956, accurately
  predicted that US oil production would peak in
  1970.
• New and Permanent Condition by which worldwide
  oil demand will outpace production by an ever
  increasing margin.

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TYPICAL OIL GAS WELL PRODUCTION CURVE

• Production
• Time

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TYPICAL OIL GAS FIELD PRODUCTION CURVE

• Production
• Time
• PEAK PRODUCTION CAN BE ACCURATELY DETERMINED
  FOR A SINGLE WELL, A GROUP OF WELLS IN A FIELD, A
  GROUP OF FIELDS, A COUNTRY OR THE ENTIRE WORLD
  USING THE SAME MODELS AND METHODOLOGY.

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FOUR THEORIES TO DETERMINE WHEN WORLDWIDE PEAK
OIL WILL OCCUR

• Calculate the half way point of extraction using
  Ultimately Recoverable Reserves.
• Calculate Production Rate Needed vs. Production
  Rate Capacity in Development
• RULE of Thumb 40 years from discovery peak to
  Peak Oil.
• Add the Production peaks of all Producing
  Nations.
• source Richard Heinberg, www.museletter.com
• The Partys Over, Oil, War and the Fate of
  Industrialized Societies

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FOUR THEORIES TO DETERMINE WHEN WORLDWIDE PEAK
OIL WILL OCCUR

• Calculate the half way point of extraction
  using Ultimately Recoverable Reserves.
• Calculate Production Rate Needed vs. Production
  Rate Capacity in Development
• RULE of Thumb 40 years from discovery peak to
  Peak Oil.
• Add the Production peaks of all Producing
  Nations.
• source Richard Heinberg, www.museletter.com
• The Partys Over, Oil, War and the Fate of
  Industrialized Societies

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SELECTED RESERVE ESTIMATES-OPEC
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FOUR THEORIES TO DETERMINE WHEN WORLDWIDE
PRODUCTION HAS PEAKED

• Calculate the half way point of extraction using
  Ultimately Recoverable Reserves.
• 2007

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FOUR THEORIES TO DETERMINE WHEN WORLDWIDE
PRODUCTION HAS PEAKED

• Calculate the half way point of extraction using
  Ultimately Recoverable Reserves.
• Calculate Production Rate Needed vs.
  Production Capacity in Development
• RULE of Thumb 40 years from discovery peak to
  Peak Production.
• Add the Production peaks of all Producing
  Nations.

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PRODUCTION RATE ACTUAL VS FORECAST

• In 2005 World Oil Production Amounted to 71.8
  Million Barrels of Oil per Day
• Excess Production Capacity was a razor thin
• Forecast World Production Rate Capacity Needed by
  2016 (given expected consumption forecasts) is an
  additional 16 million Barrels of Oil per Day
• A 22 increase in Production Capacity within the
  next 10 years is not anticipated

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FOUR THEORIES TO DETERMINE WHEN WORLDWIDE
PRODUCTION HAS PEAKED

• Calculate Production Rate Needed vs. Production
  Rate Capacity in Development
• 2006

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FOUR THEORIES TO DETERMINE WHEN WORLDWIDE
PRODUCTION HAS PEAKED

• Calculate the half way point of extraction using
  Ultimately Recoverable Reserves.
• Calculate Production Rate Needed vs. Production
  Capacity in Development
• RULE of Thumb 40 years from discovery peak to
  Peak Production.
• Add the Production peaks of all Producing
  Nations.

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FOUR THEORIES TO DETERMINE WHEN WORLDWIDE
PRODUCTION HAS PEAKED

• RULE of Thumb 40 years from discovery peak to
  Peak Production.
• 2003

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FOUR THEORIES TO DETERMINE WHEN WORLDWIDE
PRODUCTION HAS PEAKED

• Calculate the half way point of extraction using
  Ultimately Recoverable Reserves.
• Calculate Production Rate Needed vs. Production
  Capacity in Development
• RULE of Thumb 40 years from discovery peak to
  Peak Production.
• Add the Production peaks of all Producing
  Nations.

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ASSOCIATION FOR THE STUDY OF PEAK OIL -
CALCULATION
Sourceassociation for the Study of Peak Oil
Website
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FOUR THEORIES TO DETERMINE WHEN WORLDWIDE
PRODUCTION HAS PEAKED

• Add the Production Peaks of all Producing
  Nations.
• 2007

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CONCLUSIONS(If Peak Oil is True)

• The world is on the edge of an increasingly
  severe shortage of Crude Oil.
• Supply increases can no longer respond to Market
  demand therefore, without remedial measures, the
  price will continue to only increase.
• The shortage will effect the highly
  industrialized, oil consuming nations most
  severely.
• Any response which only focuses on lowering
  prices will make the situation worse.
• A Plan is Needed.

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SOME LESSONS FROM HISTORY

• WORLD WAR I I (Education, Conservation,
  Rationing)
• THE CUBAN EXPERIENCE (Reallocation of Human
  Resources)
• THE US OIL EMBARGOES (1970S) (Conservation,
  public policy)
• 55MPH, Synthetic Fuels Corp (1980)
• HIGH PRICES ALONE WILL SLOW CONSUMPTION
• Gasoline consumption in March 2006 declined 4 vs
  2005
• Increases Innovation and Stimulates Technology

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IMPLICATIONS

• RESOURCE POLICY (USA)
• LEADERSHIP (A PLAN)
• EDUCATION - A Simple, Clear, Convincing Message
• In the USA, MASSIVE DEMAND DESTRUCTION
  (already being suggested by DOE)
• Incentives - to Stimulate RD in Conservation,
  Renewable Energy Sources, Technology
• Foreign Policy Initiative - based upon
  International Cooperation

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IMPLICATIONS (cont.)

• Law
• Short Term Changes
• Tax incentives to conserve / disincentives to
  consume New technology incentives
• Resources pressure to open new areas, fast
  tracking
• Pressures to Nationalize
• Long Term Changes
• National Crisis Management Forum
• New Forms of International Cooperation
• Pressure for Price Controls
• Government Loan Guarantees for Projects

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IMPLICATIONS (Cont.)

• MEASURES WHICH WILL NOT WORK
• Any attempt to artificially hold down consumer
  prices will encourage consumption and accelerate
  the problem.
• Energy Negative Solutions
• Drilling Out of the problem. (The problem is
  not Quantity of Oil, it is the growing gap
  between capacity to supply and ever growing
  demand.)
• Calls for Energy Independence

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Bibliography

• Twilight in the Desert by Matthew Simmons
• Hubberts Peak the impending World Oil
  Shortage by Kenneth S. Deffeyes
• The Coming Oil Crisis by Colin Campbell
• Peaking of world Oil Production Impacts,
  Mitigation and risk Management by Robert Hirsch,
  Roger Bezdek and Robert Wendling
• The Partys Over and Powerdown-Options and
  Actions for a Post Carbon World by Richard
  Heinberg
• The Long Emergency Surviving the End of the Oil
  Ageand Other Converging Catastrophes by James
  H. Kunstler

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Bibliography

• The Geopolitics of Natural Gas, Baker Institute
  Study, March 2005
• The Breaking Point, by Peter Maas, New York
  Times August 21, 2005
• Crossing The Rubicon The Decline of the
  American Empire at the End of the Age of Oil by
  Michael C. Ruppert
• Over a Barrel by Raymond J. Learsy
• Resource Wars The New landscape of Global
  Conflict by Michael Klare