Why 'peak oil' may soon pique your interest

World oil production peaked in 2005, says one expert, and that presents serious problems in the future.

By , columnist

Do a Google search of the Web on "global warming" and it calls up more than 80 million references. Search for "peak oil" and the number exceeds 10 million.

In two years or so, world concern over crude oils supplies should be so great that a Google search on that subject probably will top that of global warming, predicts Matthew Simmons, chairman of Houston-based Simmons & Company International, an investment banking firm for the energy industry.

Peak oil refers to the time when production of crude oil in the world (or in a country or in an oil field) reaches its peak and starts to slide. It doesn't mean the world has run out of oil – only that the supply of oil isn't rising to meet growing demand. That change could be reflected in even higher prices, if the demand for oil doesn't stall or fall.

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Last Tuesday, the price of oil futures on the New York Mercantile Exchange set a record, rising as high as $78.40. That exceeded the previous high of $77.03 set in July 2006 at the onset of Israel's war in Lebanon.

The world output of oil actually already peaked in May 2005 at 74.2 million barrels a day, says Mr. Simmons. Since then, production has fallen about 1 million barrels a day (MB/D). If that trend continues, the results for the world economy will be "so real, so devastating" that peak oil concerns will overwhelm slower-moving global warming in grabbing world attention.

That's because today's civilization hangs heavily on an adequate supply of oil. It, for instance, fuels most vehicles, heats many homes and businesses, and is used in many chemicals and plastics. Oil and natural gas now meets some 60 percent of the world's primary energy needs.

Oil shortages, warns Simmons, could lead to war.

Dr. Fadhil Chalabi, executive director of the Centre for Global Energy Studies in London, isn't so pessimistic. He notes that with higher prices, the demand for oil has started to fall, at least in the 30 industrial nations belonging to the Paris-based Organization for Economic Cooperation and Development. Since 2006, their demand has dropped by about 400,000 barrels a day. And the demand for crude in bustling and populous China and India rose only 0.7 percent last year.

His research institute forecasts world demand will rise "not more than 1 percent a year." Other researchers predict 1.4 to 1.5 percent a year, a significant difference.

Mr. Chalabi says forecasts for the world oil industry cannot be relied on, having proved wrong in the past. Today's forecasts do not fully take into account the impact higher prices have in reducing demand and encouraging alternative energy sources, he adds.

However, concern over the world's oil supply is mounting. Last month, the International Energy Agency (IEA) issued a report warning that world oil demand will rise faster than previously expected. The result could be a supply crunch – "extremely tight," one IEA economist told the BBC. The report sees world oil demand soaring 2.2 percent a year to 95.8 MB/D by 2012. That's up from the 2 percent annual growth rate it forecast in February.

The Paris-based IEA advises 26 industrial nations, and, in Simmons's view, it now has a more realistic chief economist, Dr. Fatih Birol. So the agency, Simmons says, is no longer "a cheerleader for cheap oil," always saying crude oil supplies are so large that oil prices will surely fall.

In July, the National Petroleum Council, a federal advisory group representing the oil industry, published a 476-page study titled "Facing the Hard Truths About Energy." Simmons, one of 350 participants who prepared the study, holds that its wording is not stern enough considering the statistics on the oil demand/supply situation it includes. The study states, "The world is not running out of energy resources, but there are accumulating risks to continuing expansion of oil and natural gas production from the conventional sources relied upon historically."

Simmons uses such terms as "hogwash" and "junk report" in describing the study.

For years, many in the oil industry viewed the peak oil forecasts by Simmons as odd. Now his position has a lot of company. Several websites publish sophisticated material on the issue. There's the Oil Drum (www.theoildrum.com), featuring "Prof. Goose" and "Gail the Actuary." Those pseudonyms hide a full professor at Colorado State University and an actuary in an Atlanta suburb. There's also the Energy Bulletin (www.energybulletin.net). The site's coeditor, Bart Anderson, say it receives 11,000 visits a day. Peak oil enthusiasts, he says, have now divided into a majority seeing life after an oil crunch and those he calls "doomers."

In Britain, Douglas Low, director of the Oil Depletion Analysis Centre (www.odac-info.org), foresees a "crisis coming up" with a real shortage of oil. In June, he notes, the world used 1.5 MB/D more crude than it produced. He expects much higher oil prices in the future.

"It's not a very happy message," he says. "A lot of people want to slip it under the carpet."

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