Why the oil industry doesn't want you to remember the last 14 years
Oil prices belie the industry's story of continued abundance in oil supplies.
What were the prices of oil and gasoline in 1998? Do you remember? Without looking them up (or looking below this line), make your best guess.Skip to next paragraph
Kurt Cobb is the author of the peak-oil-themed thriller, 'Prelude,' and a columnist for the Paris-based science news site Scitizen. He is a founding member of the Association for the Study of Peak Oil and Gas—USA, and he serves on the board of the Arthur Morgan Institute for Community Solutions. For more of his Resource Insights posts, click here.
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I've been taking an informal poll to find out what people remember about oil and gasoline prices in that year. So far, only one person has correctly characterized prices back then. Most guesses have clustered around $2.50 to $3 a gallon for gasoline (in the United States). Only one person could come up with a crude oil price which she guessed was around $55 a barrel. The answers show a vague recollection that oil and gasoline were cheaper than they are today. But just how much cheaper has been lost down the memory hole.
Okay, I know the suspense is killing you. Here's how gasoline and oil fared in 1998. The nationwide average price of a gallon of gasoline in the United States in December of that year was 95 cents. The closing price for a barrel of crude oil sold on the New York Mercantile Exchange on December 31 was $12.05.
Just three weeks earlier the price of oil had hit its nadir for the year at $10.72. Oil had started the year above $17 and steadily slid as the Asian financial crisis slowed the world economy and reduced oil demand. Gasoline prices dropped only a little during the year starting from the January average of $1.09 a gallon.
Why does the oil industry want you to forget this? Because after a 10-fold increase in the price of crude oil and a fourfold increase in the price of gasoline, the industry is once again trying to sell the same story of continued abundance that they were selling back in the late 1990s. But the manyfold increase in oil prices ought to make everyone doubt an industry which has repeatedly told us that huge supplies are just around the corner, and prices are headed for a crash.
Perhaps the best example of the oil industry's "Wrong Way Corrigans" is industry mouthpiece Daniel Yergin, head of Cambridge Energy Research Associates (CERA), a prominent energy consulting firm. For a long time Yergin has been a frequent guest on prominent television news programs and a source for many print journalists. He is a darling of the media on energy issues, a media which is too polite to confront him with his abysmal record of predictions in the oil market. He was wrong in his public pronouncements every step of the way from the 1998 low in oil prices right up to the all-time highs of 2008, frequently predicting a large buildup of new supply and crashing prices. (One wonders why clients of CERA continue to buy the company's research when it has been so wrong for so long. But that's a story for another time.) Only at the end of 2008 did oil prices finally crash and then only because the world economy was headed into the worst economic decline since the Great Depression. But as soon as the economy revived even tepidly, prices rose back to $80 a barrel and then above $100 which is about where they are today.
The reason for high prices is actually quite obvious. Crude oil production worldwide has been stuck between 71 and 76 million barrels per day since 2005 (calculated on a monthly basis). Oil volumes have been tracing out a troubling bumpy plateau that many fear will mark the all-time peak in world production. These numbers are reported by the U.S. Energy Information Administration, the statistical arm of the U.S. Department of Energy, and are widely considered to be the most reliable available. They reflect total production of "crude oil including lease condensate" (which is the definition of crude oil) from all sources worldwide.
Oil production has stalled despite the huge incentive that record high prices are providing for oil exploration and development. And, despite enormous spending by oil companies on exploration and drilling worldwide, we have only just kept production on a plateau for the last seven years. These high prices and enormous capital spending were the reasons given by Daniel Yergin for the expected buildup of production volumes. So what went wrong?
The simple answer is that we've exhausted the easy-to-get oil and are now left with mostly the hard-to-get oil. It only makes sense that the early oil pioneers harvested the easy oil first. Why go after the hard stuff at that point? We've since learned how to extract oil that is much harder to develop. This includes deposits far offshore and deep below the seabed as well as those locked in the Canadian Tar Sands, deposits that must undergo expensive and energy-intensive processing to convert what is really bitumen, a goopy, thick hydrocarbon, into what we call oil.
And, this leads me to a crucial concept which I find myself repeating over and over again in response to all the foolish Daniel Yergins of the world: The critical factor in the oil markets and a global economy dependent on large, continuous supplies of oil is the rate of production. The rate is the key, not the size of the world's reserves. It is the size of the tap, not the size of the tank that matters.
Let me offer another analogy to help explain. If you inherit a million dollars with the stipulation that you can only withdraw $500 a month, you may be a millionaire, but you will never live like one. That is increasingly the situation we face with oil. There may be huge resources of tight oil(often mistakenly referred to as shale oil) and of oil-like substances such as tar sands. But the expense, the necessary energy and increasingly, the amount of water required to extract and process them is so great that we have been unable to lift the worldwide rate of production significantly above its current plateau for a sustained period during the last seven years. Even with all our vaunted new technology, we have only just barely been able to replace the capacity lost each year to the inexorable decline in the rate of production from existing oil fields.
Recently, the head of a company well placed to judge trends in the worldwide rate of oil production said he believes that the all-time peak is in.Core Laboratories CEO Dave Demshur told attendees at the Denver Oil & Gas Conference last month that "[t]he maximum yearly oil production of the planet is taking place now." Core provides well analysis and reservoir management to oil and gas companies in practically every major oil region of the world. Demshur's statement is an unusual admission from an industry insider with access to information that spans the entire industry.
The truth is we won't know for sure that we've passed the peak in world oil production until long after it occurs. It may be a decade after the event before oil production turns down definitively and the peak becomes obvious for all to see.
Just to clarify, here's what peak oil does NOT mean:
- Peak oil does not mean we are running out of oil. This is a canard used by the oil industry to confuse the public. Nobody who understands world peak oil production ever says that it means we are running out. In fact, we won't run out of oil for a very, very long time. At the peak the rate of production will cease to rise, probably trace a plateau for a time, and finally begin a possibly slow and bumpy decline. That means we'll have less and less oil available each year. As oil becomes more and more expensive, we will use less, and we will ultimately reserve it for critical purposes for which we cannot find good oil substitutes.
- Peak oil does not mean that we won't find any more oil. We are finding oil every day. We're just not finding enough and putting it into production fast enough to grow production in the face of declining flows from existing fields.
- Peak oil does not mean the immediate collapse of modern civilization. However, if we stand still and do little to address oil depletion, peak oil will likely result in immense difficulties.
The industry and its paid spokespersons try to dazzle the public with talking points that include the notion that we have more oil reserves than we've ever had. That is questionable, and I'll explore that claim in a later piece. But again, I emphasize that reserves are not the salient point. It is and always will be the rate of production that matters more. If oil production stopped for a sufficiently long period--enough to drain all aboveground supplies--modern civilization as we know it would collapse. The amount of reserves would not matter since the rate of production would have dropped to zero.
What matters is how much we can produce for continuous input into the world economy. As you might intuit, we've built a financial system and physical infrastructure premised on continuous and rising levels of oil consumption. That's why peak oil matters so much, and why flat oil production has been a large contributing factor to the unstable world economy in recent years.