As the oil price climbed towards $100 a barrel during the past few weeks, big Western oil firms were reporting their results for the third quarter. Record oil prices, it turns out, do not translate into record profits. Oil is now close to exceeding the record set in 1979 of between $100 and $110, depending on how you adjust for inflation and what benchmark you use. Yet almost without exception, big oil firms' profits are falling from the peaks reached last year.Don't you just love it? As I complained back in July, The Economist magazine seems to be all at sea trying to explain why oil prices are so high. If you read my July posting, you'll see that, back then, the reasons for high oil prices was because nasty horrible OPEC wasn't pumping enough and that, when they realise that high prices might actually kill off demand, they'll start pumping out more oil to lower the price. All very logical.
Exxon Mobil, for example, reported a 10% drop in profits in the third quarter, and BP's fell even more sharply. Profits also fell at Chevron, ConocoPhillips and Eni. They rose at Total and Royal Dutch Shell—but only thanks to exchange-rate fluctuations and one-off asset sales. Analysts at Citigroup calculate that, measured in dollars, the biggest oil firms' earnings fell by 15% on average.
To be fair, the oil price has surged most dramatically since the end of September, although it was also buoyant in the third quarter. The majors' poor showing also reflects lower profits from refining, as the difference in price between petrol and crude oil has fallen from the exceptionally high levels of recent months.
But the fact remains that oil giants are struggling to pump more oil and gas. In part, this is due to a quirk of the rules that oblige Western oil firms to share the crude they produce with state-owned oil firms in many countries. The contracts in question often stipulate that as the price goes up, the volume of oil the foreigners receive decreases. Worse, several countries are changing contracts or tax rules in ways that will further erode the Western oil firms' profits—and in some cases are throwing them out altogether.
Rising costs are also a problem. Exxon, which is known for its stringent financial discipline, saw costs rise almost twice as fast as revenue in the third quarter. The shortage of labour and equipment that is feeding this inflation is also causing delays to new projects. And there are not enough new projects in the pipeline. The International Energy Agency, an energy watchdog for rich countries, reckons that the expansion plans of the big Western and state-owned oil firms will leave the world 12.5m barrels per day short of requirements in 2015.
Despite this looming deficit and the glaring price signal, all the big companies except Total produced less oil and gas in the third quarter than they did in the same period last year. According to Citigroup, the average decline in overall output was 3.3%. If the relatively steady supply of natural gas is stripped out, the numbers look even worse: oil production fell by 9% on average. No matter how high the price goes, the oil majors cannot make a profit from oil they do not produce.
This time around, however, they concede that "oil giants are struggling to pump more oil and gas". So, do they believe in Peak Oil? Hardly. The first reason is simply contractual - bureaucratic red tape set up by governments is the problem. The second reason is that new projects have not been started up fast enough because of labor and equipment shortages.
It is really interesting to watch The Economist peer at the same figures as we do - figures which show an inexorable decline in oil production - and then come to a completely different conclusion. The reason is, for lack of a better word, pride. The Economist derided Peak Oil theory as bad science and just another kooky apocalyptic fad (see here and here for examples). Now that we peakniks are increasingly being heard and believed, not just by scientists but by the public generally, The Economist will refuse to budge from its rock-solid belief system.
Sadly, it is increasingly obvious that the market - the people with money all over the world who buy and sell oil and who determine its price - will be the last part of the world to accept Peak Oil. A person who is ignorant of, or dismissive of, Peak Oil and who has the power to move millions of dollars per day trading in oil, will more than deafen the growing chorus of people who believe in Peak Oil but don't have much power to affect the market. Even if 80% of the world believe in Peak Oil, the 20% who don't will be responsible for 100% of the damage caused by not factoring in this scientific reality into market prices now.
If Peak Oil were to be believed by those who control the market, we would be well on our way to providing solutions to it - mainly because the market will go berserk and price oil more accurately (which, to my mind, would be well over $200 per barrel).