2007-11-10

The Economist keeps ignoring Peak Oil

This is classic:
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.

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.
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.

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).

5 comments:

Dave Lankshear said...

And if things get real bad...

gulp...

people...

might...

even...

catch — I can't say it!! No, don't speak it! It's too horrible! It CAN'T be true! Fred Nile will save us, I know he will!

Sam Norton said...

On the question of how high the price will have to go, I suspect even $200 might not be enough. We've just been doing bonfires, and I used some petrol to make sure it all worked as thoroughly as it should (also hurt myself but that's another story that I might blog about before too long). But it cost me about £5 for the petrol I used. I wondered how high the petrol would have to cost before I had second thoughts. £10 wouldn't have changed the behaviour but £20 might - but probably I'd just get together with some friends and have a bigger fire. Now for the UK to start pricing petrol at £4 a litre, the barrel price would need to be quite a bit more than $200. I suspect that whilst this example is trivial - indeed, wholly unnecessary from one point of view - it's an indication that the demand for oil is extremely inelastic, and hence the price has a long way up to go. I keep thinking about Simmons' point that oil is cheaper than bottled water. It will need to get a lot more expensive before people really start to change their habits. Plus which the third world will get priced out much sooner, and that will slow things down.

BLBeamer said...

OT:

Found this today and applied it to your blog, Neil. Congratulations, your blog is at undergrad level!

Reading Level

Dave Lankshear said...

Hi Rev Sam,
there are many ways in which $200 a barrel will draw attention, in a big way. Quantas airline has said that anything over $100 a barrel is going to hurt air travel, and if air travel becomes more expensive then tourism might take an economic hit.

Plastics manufacturers are already feeling the pinch. Fertilizers are already rising in price. Costs are going up, core inflation is going up, interest rates (here in Australia where we still seem to believe in monetary policy) are going up. Peak oil is hurting people already — but just by other names.

The real issue will be when it's not just expensive, but unavailable. Once the price hits $150 I'm expecting the peak oil message to be taken a lot more seriously. When the message finally gets out that 2005/6 was the maximum oil we'll ever pump, then rationing will probably be instituted because governments and the public will finally know that we are on the down-slope and will never pump as much oil again.

Then the cry will break out for "more ethanol" and we'll have to educate all these people about ERoEI, arable land degradation, food or fuel choices.... etc.

We love our SUV's here in Australia... sadly we're following the American path instead of a more European model. Giving up the SUV ain't going to be pretty. From various travels online I get the impression that the average European is far more receptive to the peak oil message than the average Aussie. It ain't gonna be pretty.

Sam Norton said...

Dave - fully agree with most of that, especially "The real issue will be when it's not just expensive, but unavailable". My point is that the richer countries - thinking especially of the US - have quite a lot of room for paying more for petrol than they do at the moment (ignoring the effect of sudden shocks etc). It would be good to see a bit of analysis of the varying levels of demand elasticity in different countries, ie some are already priced out, but the US may be the last bidder standing. Which simply means that price won't be the element which determines worldwide allocation in the end...