We are united by our concern for the potential cultural, economic and ecological impacts of petroleum depletion. Prudent energy resource management must include conservation and efficiency, ecologically responsible energy production and consumption, and the development ofalternative energy resources. Petroleum depletion will inevitably force extensive cultural change.

Of particular interest is the development of a constructive response within our state, municipal and county infrastructure, the implementation of a pragmatic federal agenda, and the formation of productive partnerships between private and public organizations.

more details “seeking Executive Director

1. Oil and the Global Economy

After touching a high of over $83 a barrel in early August, oil fell to below $71 on Wednesday before rallying to close at $75.17. Despite a stream of negative economic and oil stockpile news, the equity and oil markets rose on remarks by Fed Chairman Bernanke that although he expected the economy to grow slowly in 2010 and more rapidly in 2011, the Federal Reserve was ready to step in if the recovery was in jeopardy.

Despite the knee-jerk reaction to the Chairman’s remarks, many analysts remain skeptical, pointing to falling manufacturing, plummeting home sales, increasing unemployment and high petroleum inventories. Some are talking of a rapid price decline to below $70 a barrel while others are saying that $60 or even $50 oil is in the offing. Last week US stockpiles grew by nearly 9 million barrels to 1.1 billion, the highest level in 27 years. Many are saying that there is little the Central Bank can do to stem the deteriorating economic situation.

The great unknown remains China’s demand for oil over the next year or so. Despite a drop in Beijing’s imports in July, this may be only a temporary phenomenon caused by weather and credit tightening earlier in the year. Estimates coming from the Chinese oil industry still talk of 6 to 9 percent increase in oil consumption during the 3rd quarter. The Saudis remain optimistic, saying the price of oil will reach $82 a barrel by the end of the year due to demand from China and India.

In Iraq a coordinated series of attacks in 13 cities reminds us that there is no end to the political crisis in sight and that all US combat units have now left the country. Baghdad got its 450,000 b/d northern export pipeline to Turkey repaired after it was bombed near Mosul. Last month the pipeline was closed after an attack by Kurdish separatists in Turkey.

2. China - the costs of growth

As the Chinese surge into industrial civilization at a pace unknown before, here and there growth pains arise. Last week’s headline was about a 60-mile-long traffic jam that took five or, some reports say, nine days to unsnarl. It seems that in the government’s headlong rush to generate increasing amounts of electricity, it opened new coal fields in Mongolia and relied on heavy trucks to bring the coal down a new expressway to Beijing. As the demand for electricity rose, so did traffic on the expressway until it simply filled up. A little maintenance work compounded the problem. In reality, it could take years to lighten the traffic load. In 2000, China had 7,400 miles of expressways. It now has 40,400, rivaling the US Interstate system, and the breakneck pace of construction continues.

Beijing says that global car sales are expected to reach 70 million this year, up from a recession-hit 60 million in 2009. As a large share of this production is going to first-time buyers in the developing world, it is easy to see why the demand for motor fuel will continue to climb.

Chinese government food specialists are beginning to worry about the nation’s grain supply. Shortages of farmland and water are bringing into question whether an additional 50 million tons of grain can be produced by 2020 even with good weather. Cultivatable land in China has already fallen from 130 to 120 million hectares due to urbanization, dam building, and natural disasters. This leaves the country with only 0.09 hectares per capita, about 40 percent of the global average, with which to feed itself.

As in the US, the security of its oil supply is becoming an issue in China. With 55 percent of its oil consumption currently imported, Beijing seeks to increase domestic energy production, diversify its sources of oil imports and make major increases in the efficiency with which it uses energy. In recent weeks, Beijing ordered thousands of inefficient, high-polluting, factories to shut down as the country tries to meet its goal of cutting energy consumption per unit of GDP by 20 percent. This is a very ambitious goal, which recent data suggest the country is unlikely to achieve.

3. Macondo - the blame game

Last week, lawyers took over from engineers in the continuing saga of the Deepwater Horizon explosion as all the firms involved in the tragedy attempted to lay the blame on each other in an effort to escape at least some of the liability. Some officials directly involved in the decision chain are taking the 5th amendment in anticipation of possible criminal prosecutions. Some of the issues being raised, such as lack of a role for rig captains in overruling drilling decisions that are a threat to the safety of the rig, are fundamental to the way the oil industry conducts its offshore drilling.

In the Gulf, BP is trying to replace the old blowout preventer with a new one prior to permanently cementing the well closed. The debate over where all the oil went and how much damage has been done to the seafood industry continues. A research ship circling over the well is not finding much lingering evidence of oil and more areas are being reopened to fishing. A study was released saying that a newly discovered microbe is gobbling up the remaining oil at a prodigious rate. The government’s compensation czar is taking charge of the $20 billion BP compensation fund and is trying to determine who should get how much.

While the details of just who forewarned of the explosion and who rejected the warnings are intriguing, the real issue that remains is the impact of the explosion on future oil production in the Gulf. The administration continues to take heat over the continuation of the deep water drilling ban with the Presidential Oil Spill Commission questioning whether there is still a need for the moratorium now that new regulations have been issued and drillers are well aware of the consequences of their actions. The Interior Department however is defending its decision to re-issue the drilling moratorium after a court overruled the first ban; Secretary Salazar says more safety reforms are necessary before drilling can be resumed.

The longer term question is the impact of changes that are likely to be required of the oil industry and the cost of producing deep-water oil in the Gulf and elsewhere. Just for starters, the cost of insuring drilling rigs is likely to increase by as much as 50 percent. Increasing liability limits are likely to result in only the largest, best-financed companies being able to undertake offshore drilling.

Quote of the Week

“OPEC doesn’t seem to have raised its supply very much in response to the higher oil prices [2004-2008], except a million barrels a day or so at the end. One might suspect that their statements about high spare capacity overstate the extent that they can really ramp up supplies when oil prices are tight. But they are willing to drop production when oil prices decline, and the portion of their oil supply that is most expensive to produce becomes less profitable.”

– Gail Tverberg, The Oil Drum

Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

• Speculation that UK government ministers are far more concerned about a future supply crunch than they have admitted has been fuelled by the revelation that they are canvassing views from industry and the scientific community about “peak oil.” The Department of Energy and Climate Change is also refusing to hand over policy documents about peak oil under the Freedom of Information Act, despite releasing others in which it admits “secrecy around the topic is probably not good.” (8/23, #16)
• The global oil-tanker fleet will expand 3.7 percent this year, Clarkson, the world’s biggest shipbroker, said Thursday, reversing its previous forecast for a 1.3 percent contraction. Clarkson said it changed its forecast because of lower estimates for the rate at which owners will phase out single-hull tankers. The new estimate represents at least the fourth consecutive annual expansion. A global phase-out of single-hull tankers started this year, and a ban by the International Maritime Organization takes full effect in 2015. (8/28, #4)
• Saudi Arabia’s King Abdullah named David O’Reilly, who built Chevron Corp. into the world’s fourth- largest publicly traded oil company, to be a board member at state-run Saudi Aramco. O’Reilly, Chevron’s chairman and chief executive officer for a decade, will serve a three-year term on oil producer Aramco’s board. (8/23, #7)
• Insurgents in Iraq unleashed a wave of coordinated attacks nationwide on Wednesday in a demonstration of their ability to strike at will, offering their counterpoint to American aspirations of bringing the war in Iraq “to a responsible end.” (8/26, #7)
• Venezuela’s oil exports dropped 16 percent in this year’s second quarter, largely due to increased use of domestic fuels for electric power, according to the central bank. Their report showed the country’s gross domestic product down by 1.9 percent, led by a 2 percent drop in oil sector GDP. (8/26, #10)
• Cairn Energy said it found natural gas off Greenland’s western coast, bolstering hopes that the area could become one of the world’s last significant untapped hydrocarbon provinces. But the find is too small to be commercially viable, disappointing investors who had hoped Cairn was about to announce a major oil discovery. (8/25, #20)
• In India, gasoline will become significantly costlier next week as state-owned oil companies get ready to exercise their pricing freedom for the first time after the government decontrolled petrol prices on June 26. (8/28, #10)
• In Columbia, Ecopetrol SA incorporated a new special-purpose company to construct and operate a 960-km, 450,000-b/d oil pipeline to move crude oil from expansions in the Llanos basin to the port of Covenas for export. (8/27,#8)
• China averaged 4.77 million b/d of oil imports (over 30% more than 2009). The country’s oil demand is also experiencing double-digit growth, up nearly 19% over 2009. (8/23, #18)
• Russian oil major OAO Rosneft is close to acquiring stakes in four German refineries, marking one of the largest purchases of assets in Western Europe by a state-controlled Russian energy company. (8/27, #18)
• Royal Dutch Shell said Thursday it began a commercial demonstration of a new technology to reduce the waste pools created by Canada’s oil sands mining industry, and that it will make it freely available to competitors. However, it appears unlikely that the technology will meet a new directive set by the Alberta government to reduce the tailings ponds. (8/27, #16)
• BP has been forced to abandon hopes of drilling in the Arctic, currently the center of a new oil rush, owing to its tarnished reputation after the Gulf of Mexico spill. (8/27, #17)
• US drilling activity continued increasing for the 12th consecutive week with 1,656 rotary rigs working (973 for natural gas, 672 for oil), 5 more than the previous week and up sharply from 999 during the comparable period in 2009. (8/28, #18)
• The number of offshore oil and gas drilling rigs working in the Gulf of Mexico has increased slightly in recent weeks, and the number available has remained steady despite the U.S. drilling moratorium. A total of 36 mobile offshore drilling rigs were working this week, up from 27 as of July 23, but down from 69 before BP‟s Macondo oil spill began April 20. The week before the spill, 122 rigs, floating and jack-up, were in the Gulf, though 36 were cold-stacked, meaning preparation is needed to get them back on the job. As of Friday, 121 were in the Gulf and 40 were cold-stacked. A total of two mobile rigs have left the Gulf. (8/28, #19)
• The worst of oil industry job-loss forecasts in the Gulf area have failed to materialize. Unemployment claims related to the oil industry along the Gulf Coast have been in the hundreds, not the thousands, and while oil production from the gulf is down because of the drilling halt, supplies from the region are expected to rebound in future years. (8/25, #12)
• Enbridge, Canada’s No. 2 pipeline company, said on Tuesday it will further expand its Bakken pipeline program, which will raise capacity by 145,000 barrels per day, to handle growing production from the oil field. (8/25, #19)
• A new law requiring oil companies to disclose all payments made to governments has sparked a sharp debate, with Big Oil saying it will put it at a big competitive disadvantage. The law, attached at the last minute to the financial reform bill last month, applies to extractive industries - basically all U.S.-listed oil, gas and mining companies. (8/27, #12)
• The BP well being drilled by the Deepwater Horizon was about 45% over budget in March–a month before a blowout, according to an internal BP email. (8/27, #13)
• Shell has much at stake in the Arctic as the presidential commission investigates the BP spill. Shell has spent about $3 billion so far on leases, equipment, training and oil-spill response planning in connection with plans to drill exploratory wells in the Beaufort and Chukchi seas. It had hoped to drill wells this summer. But five weeks after the Deepwater Horizon rig exploded President Obama put the drilling plans on hold. (8/26, #17)
• China will surpass Japan as Asia’s largest natural gas importer through a combination of LNG and pipeline gas in 5-10 years, according to FACTS Global Energy Group. (8/26, #11)
• Natural gas futures fell to their lowest level in 11 months Thursday on a larger-than-expected increase in U.S. gas storage as summer weather comes to an end. Natural gas for September delivery settled down at $3.817 a million British thermal units on the New York Mercantile Exchange, the lowest settlement price since Sept. 28. (8/27, #5)
• Natural gas prices have fallen so far that gas-powered plants are able to capture a bigger share of the market from coal, driving down prices of Central Appalachian coal futures. The front-month contract settled at $60.05 a ton Wednesday on the New York Mercantile Exchange, down 15% since reaching a 20-month high of $70.87 a ton Aug. 5. (8/26, #21)
• With U.S. natural gas operations shifting onshore, and offshore increasingly “hardened” by hurricanes, the historical tendency for storms to give gas prices an automatic boost may be over, said Adam Sieminski, chief energy economist, Deutsche Bank. (8/26, #4)
• The amount of capital that was sunk into leasing drilling acreage in the Haynesville, at $15,000 to $30,000/acre, is what has dominated the drilling environment. These producers will continue to drill to hold-by-production (1 well required to be drilled per 640 acres during the first three years) this acreage, even if they are well below break-even costs. (8/27, #21)
• An estimated 1.5 trillion bbl of oil in place lies in Western Colorado’s Piceance basin oil shale, the US Geological Survey said in the first comprehensive assessment published since 1989. The amount represents a 50% jump from the previous 1 trillion estimate. (8/25, #18)
• The ethanol industry this fall will face important policy challenges for which it may not be fully prepared, including expiration of supportive tax credits and tariffs and a government decision whether to expand the amount of biofuel allowed in gasoline. (8/26, #22)
• Chile produces almost 42% of the worldwide lithium supply for new electric-car batteries. However, of the nearly 100 projects that have been announced, only two exploration projects are being developed in Chile. This is because lithium is considered in Chile a strategic element, therefore the government regulates its use. This is why lithium is not available for new exploitation. (8/27, #22)

Smith: Saudi Arabia has been the world’s main swing producer. Since 2006 when I developed the slides, Saudi Arabia has increased its production capacity; a lot was planned at the time, but they’ve been quite proactive in investing in their industry. Meanwhile the global recession of the last two years has led them to shut-in output and that will lower and push the Saudi peak forward. My 2006 graph was published on the basis of no output restrictions but my overall model accounted for intermittent restriction.

POR: Back in June of 2008, didn’t the Saudis only have heavy oil that some refineries couldn’t use as their only excess supply capacity? Weren’t they otherwise tapped out?

Smith: I agree with that. That was what it seemed like but, of course, you can never really be sure about Saudi Arabia because the government is secretive about what they can do. But they did seem to be pretty near to full capacity back then, apart from heavy oil. It seems likely that when prices reached over $100 per barrel they would have produced as fast as they could. The price peak of $147 was not in their interest and certainly had an impact on the severity of the recession.

POR: Your view of supply includes a set of reductions in demand for gasoline, jet fuel, heating, and oil use in plastics and power generation, etc.

Smith: The key point about demand pulling back to meet supply is that we can figure out how we can achieve demand reduction through efficiency methods, without suffering real pain to our standard of living. But we will not reduce demand and suffer a drop in standard of living unless we are forced to. This indeed happened in late 2008 and 2009 with demand declining rapidly through painful conservation that was driven by the global economic recession.

POR: Your 2006 view of expanded supply shows some production from gas-to-liquids [GTL], on the order of 3+ million barrels a day by 2025. Is that still your view?

Smith: This was the high-case scenario. I haven’t done any recent studies on this, but I get the impression that a lot of the projects to bring on alternatives to conventional oil have been delayed due to capital constraints, the lower oil price, to the perception that prices will remain low for a period and to inevitable technological hurdles. Unconventional oil sources have always been dogged by technology problems, where the energy return on investment is so low. People sometimes forget that GTL techniques and conversion of the oil sands in Canada for example are very old technologies which have proven very difficult to establish commercially.

POR: Back in 2006 you showed a world oil and liquids production plateau at around 100 million barrels a day, with a 3-year plateau starting fairly soon. How would you update that view today?

Smith: I feel the peak/plateau period is much delayed because of the recession. Currently I am looking at around 2020 - perhaps as late as 2025. But of course it is dependent on what happens to the global economy (and the environment) between now and then. When I first started forecasting in the late 1990s, I had a production plateau beginning around 2016. Over time, supplies got tighter and tighter and oil prices started to rise, and the plateau moved nearer to around 2012. Now it has moved out to 2020, showing how uncertain this modeling can be because so many technological, financial, political and social variables are at work. The fluctuation points to volatility of course which is a signal of tight energy supply. If there is a new surge in economic growth and China and India continue to grow and mop up oil supplies, then it will move back to 2016 very quickly.

In the old days, people who used to argue against the reality of peak oil pointed out that the so-called peak is always shifting into the future. And they were right as the subject was not fully understood, especially the impact of political and economic circumstances. That’s generally not the case now, with the peak moving both forwards and backwards. The world has hit a volatile period in

history where new energy supplies are all difficult to find and expensive to produce. The hope is for a magical new energy source to replace hydrocarbon liquid fuels.

POR: That’s a fundamental point. The peak oil denial club is always saying that peak oil is always being pushed out into the future. And in fact, a number of the people in the peak oil community, with good data and good intentions, have made calls of peak dates that have been premature.

Smith: One of the reasons I haven’t done any major presentations in this form since 2006 is for that very reason - making timing calls is the wrong choice if you want to get across your point. Ironically too, if you successfully persuade people of the need to act on peak oil, and demand is cut in some fashion, then they will be regarded as having been wrong about peak oil because it does not happen. It will be called peak demand.

POR: In other words, policies might be changed, along with investments etc., to lower demand such that it stretches out supply and pushes back the peak.

Smith: Yes. It parallels our environmental issues of the day. The Oxford English Dictionary has just added a new word to its lexicon - catastrophizing, which I think means “assuming the worst.” Nobody likes a pessimist, they get vilified in the press, but we need people to do this if we are ever to change our approach before it is forced upon us.

POR: Any changes in your conclusions you stated: “that vested interested do not provide the best solutions, that companies and governments must take more energy risks, that demand will want to grow faster than the supply of liquid energy, and that most of the ready alternatives have environmental consequences”?

Smith: They still apply, though they are not particularly prescient.

POR: What’s your summary comment today on the evolving peak oil story?

Smith: I think it has obviously lost its cachet… it has become mainstream, supported by empirical observations, greater understanding of both above- and below-ground factors and more detailed modeling. Defining a date of peak is not regarded as so valuable. However the deniers are becoming more vocal just as they are in the environmental movement. The original people who denied peak oil were focused on supply but the angle today is demand. We won’t reach a supply peak but a demand peak. Of course supply and demand are really the same thing with demand, through pricing mechanisms, controlled by supply.

POR: Do you see in Europe, and particular within the UK, any shifting or broader acceptance of the background concern, even though the vocabulary is changing?

Smith: No, I don’t think there’s broader acceptance because there is simply less interest in it. There is now focus on the economy and when you’re strapped for cash, some parts of the future, especially the longer term, become superfluous. So no, I don’t see any shift. If anything it’s the other way. Oil is not a big issue whilst it sits at a sustainable price level.

POR: Any final word?

Smith: When I ran Energyfiles, which was a commercial concern, I was concerned about being linked too closely with the peak oil movement. For years it was not mainstream and, although developed by excellent scientists and promoted by good organizations such as ASPO and the Oil Drum, it had many weird hangers-on, just like in the environmentalist movement. It was not treated seriously by most of my potential clients. Conversely now it is generally accepted - albeit with new names such as ‘peak demand’ and ‘bumpy plateau’ - it has become less of an issue because of the recession. However in just a few years I suspect we will go through the argument all over again.

Michael Smith, trained as a geologist, worked in the oil industry for a number of years before he started Energyfiles back in 2000. Energyfiles was purchased in early 2010 by Datamonitor. Smith is currently helping Datamonitor integrate the Energyfiles database into their products.

(Note: Commentaries do not necessarily represent the ASPO-USA position.)

Michael Smith: I was once a geologist, and worked with oil and gas consultancies and companies after graduating from Oxford University in the UK with a PhD. I had worked in most parts of the world when, at the turn of the millennium, I started my own company Energyfiles, focusing on oil and gas production, consumption and activity. I had been noticing difficulties with traditional oil supplies for independent oil companies since 1990. My employer, Sun Oil, despite ample investment capital, could not access good reserves opportunities except in costly deep water environments or risky political environments. At the beginning of 2010 I sold Energyfiles to Datamonitor, a leading business information provider, and I am now helping Datamonitor integrate the Energyfiles database into their product, ‘the Global Oil & Gas Analyzer’.

POR: Our questions go back to the November 2006 slide presentation “Oil Depletion-Dealing with the issues, Modeling the Supply Gap,” you gave to The Energy Institute. On slide #4, you mention fields decline annually at 5% to 15%, depending on characteristics. Is that still your view?

Smith: That‘s just an average for typical fields. Of course some will decline much faster, others slower. It depends on the reservoir and its engineering characteristics - the rock formation that contains the hydrocarbons. The 5% to 15% was a general guide to model average production profiles for a typical field in a region. In this case it applied only to offshore fields. Some giant onshore fields will plateau for years and decline very slowly, as new wells are drilled and new technologies are installed. Some small offshore satellite fields may be abandoned after just a couple of years. Average decline rates across the world are in fact lower than model rates, skewed by the influence of the largest fields. Whenever possible the model I used was based on actual field profiles and how these are currently declining in an area.

POR: On your slide of countries past peak and pre-peak, you mention 64 countries post-peak and 36 countries pre-peak. Have you updated that number?

Smith: The numbers have changed a little with a few less productive countries passing peak (such as Pakistan and Japan) and one or two producing more than expected (such as New Zealand and Ghana). Some countries have split and I have added new potential production areas such as Uganda and Madagascar. Currently 67 are past peak and 45 are pre-peak.

Iran peaked back in 1974 but of course this depended not on below ground influences but on investment in infrastructure and political restrictions in output. Russia peaked in 1982 and at one time it was believed by some commentators that Russia could eventually overtake the 11.5 mm bbls per day it was managing at the time. However this was dependent on large rapid investment in infrastructure. The way demand is looking right now this is unlikely to happen fast enough.

Thus the peak depends on both supply and demand. Perhaps since 2006 that‘s the biggest change to my presentations - the need to show the importance of demand in future outcomes. I have talkedabout the supply gap, but in truth there‘s no such thing as a supply gap - it is hypothetical. As soon as a shortage of supply appears, demand must reduce to fill the gap. And of course that is what has happened in the last two years. Discussion of a supply gap gives a false impression. Demand reduction will always move to fill it. People who are predicting a future supply-led peak in oil production argue with people who deny this supply peak. But inevitably peak oil will be controlled by both demand and supply - as prices go up, demand comes down. The argument is what will be the initial driver and I am not sure if that argument is merely an academic one.

POR: You showed China as being on plateau by now. Is that still your view?

Smith: What was predicted in China was that offshore oil production would just manage to replace declining onshore oil production. However China’s large onshore fields have performed well as the country puts considerable effort into drilling and applying more modern technologies, in particular steadily increasing the amount of horizontal drilling. But I suspect the country remains near plateau and overall decline will begin before the end of the decade.

POR: They announced further discoveries in Bohai Bay several years ago, but it doesn’t seem that China’s production reality is going to match the hype.

Smith: That’s right, some large discoveries were announced but large reserves don‘t necessarily mean large production. I worked on the Bohai Bay back in the 1980s and admit I did not fully appreciate the volume of reserves in the area. The reservoirs are difficult and the oil is often heavy so that significant investment is required in shallow water platforms and wells. China is doing that but this takes time. Bohai Bay will eventually produce a lot of oil, but, of course, plateau and peak are all about rates not volumes.

POR: There’s a sense that most people following the oil supply issue don’t fully appreciate the very simple phrase you just delivered. There still seems to be a major focus on the size of the reserves and/or resources; there are arguments about the size of those, and there always will be. It seems that the shift by some within the industry to focus on the rate oil can be produced is a pivotal point that most of the industry appreciates.

Smith: I agree with you. I‘ve got to say that it frustrates me that journalists and even some professionals who should know better are driven by gross reserves numbers when a large part of those reserves won‘t be produced for decades - if they’re produced at all - and have no impact on the financial well-being of a country or company. They really are irrelevant to what will be happening over the next 20 years. Experts in the oil and oil service industries understand this, but I‘m not sure governments who set policy related to energy security and sustainability do. Of course it‘s so much easier to quote a volume than a time-dependent series of production numbers, with caveats. I have still not seen any drift towards policy makers or economists properly appreciating that peak oil depends on rates.

POR: Have you sensed that since 2007, there has been a tipping point of a small but growing number of CEOs-Total’s Christophe de Margerie, Hess Oil’s John Hess, and James Mulva with ConocoPhillips-who see world oil production not exceeding first 100 million barrels a day, then 95 mbd, then possibly less?

Smith: Total has always been ahead of the game on this subject. When I wrote my very first world oil supply report back in 2001, Total was the first to buy a copy. Generally however oil companies seem better able to argue this point since the IEA [International Energy Agency] has cut back its demand forecast. Not long ago the IEA was talking about 120 million barrels a day of demand but now they’ve dropped that number to around 100, so it‘s easier for the oil companies to talk along these lines - production rates that can be met. The concern comes when they talk about supply maxima that are insufficient to meet forecast demand.

[To maintain our continuing effort to have this publication remain suitable for time-short individuals, Part 2 of the interview will run next week. Peak Oil Review Team]

(Note: Commentaries do not necessarily represent the ASPO-USA position.)

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1. Oil and the Global Economy

Oil prices have now fallen steadily since reaching a high above $83 a barrel in early August. Friday‘s close of $73.82 a barrel was only slightly above the lowest prices we have seen in the last three months. A stronger dollar, weaker equities and a surfeit of bad economic news is behind the decline. The announcement that commercial inventories of oil and products are now at their highest level in nearly 27 years did not help prices. The major support for oil prices at the minute are fears that one of the many hurricanes that are expected to spring up in the Atlantic during the next two months will tear up oil production. There is also the lingering fear that Asian oil demand, though apparently slowing at the minute, may still work its way through OPEC‘s spare capacity in the next 18 months.

Analysts at Goldman Sachs are concerned that global oil demand is already outrunning supply as evidenced by the rapid decline in the amount of crude in floating storage. If this analysis is valid, we should be seeing a decline in commercial stocks and upward pressure on prices in the next few months. Goldman foresees higher prices in the next six months. Numerous commentators have pointed out that recently oil traders have been ignoring traditional supply and demand signals and have been trading oil in sympathy with the equity markets.

An in-depth analysis of how OPEC crude supplies have been responding to price changes suggests that the cartel may have only some 2 million b/d of marketable spare crude production capacity left. If this is indeed the case and global demand continues to grow at the rates forecast by the EIA and IEA, then there will be very little spare production capacity left by the end of 2011. The moratoriums, delays and new regulations resulting from the Deepwater Horizon explosion are likely to slow the pace at which new offshore oil comes into production for the next few years.

An analysis of total OPEC revenues shows them climbing back past $800 billion next year. The revenues hit an all-time high of over $900 billion in 2008 when prices spiked to $140 a barrel. The precipitous decline that followed sent OPEC revenues below $600 billion for 2009 as production and demand declined. With global production now on the order of 87 million b/d and prices around $70-80 a barrel, OPEC revenues are again doing well.

A new analysis of China‘s -apparent‖ oil demand in July shows that it fell by 5.6 percent to 8.47 million b/d from the June high. Chinese oil imports have always been volatile. Recent slowing of industrial production, coupled with heavy rains, floods, mudslides and a major oil spill at an import terminal have all help to slow or disrupt oil imports. The overriding factor, however, is that even a -slowing‖ Chinese economy is still growing at 8 to 10 percent a year so that until major setbacks occur, Beijing‘s demand for oil is likely to continue at the rate of about 5 percent that we have seen in recent years.

2. Iran in the news

Tehran made news on many fronts last week. A development that stood out was a Reuters‘ analysis of Iranian gasoline imports which concluded that the UN and special US/EU sanctions have choked off nearly 90 percent of the gasoline that Iran was importing last year. As Iran was supposed to be

importing around 40 percent of its gasoline requirements in recent years, an embargo anywhere near as effective as that suggested by Reuters is remarkable. Conventional wisdom has been saying that any effort to embargo Tehran‘s gasoline would fail as Beijing would make up the difference. Venezuela and Turkey have announced that they would help the Iranians in their time of need, but neither is in a position to supply the necessary quantities of gasoline.

As oil is becoming tougher to produce, even in Iran, Tehran has been looking toward large increases in its natural gas exports to offset an inevitable decline in oil production. Hampering Iranian natural gas exports is an area where the sanctions have some teeth. As long as sanctions are in place, it is unlikely that natural gas export pipelines will be built to Europe. Liquefying natural gas is a difficult technology and Tehran is unlikely to build LNG liquefaction plants plants without help from the West, unless, of course, Beijing decides to develop and provide the technology.

The New York Times reports that the US has assured the Israelis that continuing difficulties inside Tehran‘s nuclear program means that the Iranians will not be able to build a nuclear weapon for at least another year. This assurance is said to have pushed off the possibility of an Israeli military strike against Iranian nuclear facilities for another year.

In the meantime, Tehran started up its first nuclear power station last week with Russian help. As Moscow is providing the enriched uranium and taking away the spent fuel, the new reactor will have no impact on Tehran‘s capability to produce nuclear weapons. President Ahmadinejad announced a new law that requires Tehran to build a new nuclear enrichment facility to provide for medical research reactors. The law also requires that Iranians cooperate with the IAEA only to the extent required by the Non-Proliferation Treaty.

Quote of the Week

“People want to believe that everything is OK and I think this report and the way it is being discussed is giving many people a false sense of confidence regarding the state of the Gulf.”

– U.S. Rep. Ed Markey (D.-Mass.) during a hearing last Thursday

Energy Stat of the Week

In July 2010 world production of all liquid fuels increased by 860,000 b/d from June according to the latest figures of the International Energy Agency (IEA), resulting in total world liquid fuels production of 87.22 million b/d. Total oil production capacity in July 2010 increased by 820,000 b/d from 90.16 million b/d in June 2010 to 90.98 million b/d in July. (The Oilwatch Monthly, August)

Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

• Venezuela’s state oil company PDVSA is at a crossroads: act now to salvage the skills and equipment that once made it a rival to Brazil‘s Petrobras, or risk tipping irrevocably into the type of decline suffered by Mexico’s Pemex. So far, it appears more likely to take the same path as Pemex. (8/20, #10)
• The US Department of Energy still projects Iraq will expand its oil production from 2.4 million barrels per day in 2008 to 2.6 in 2015, 3.1 in 2020, 3.9 in 2025, 5.1 in 2030, and 6.1 in 2035. This expansion is critical in offsetting declines in the production of other major exporting states. (8/20, #23)
• Sudan, the third-largest producer of crude in sub-Saharan Africa, wants to raise output to 650,000 b/d next year from its current level of as much as 480,000 b/d. European and Arab investors show more interest in exploring for crude and China continues to expand its operations, according to Sudan‘s oil minister. (8/19, #7)
• Anadarko Petroleum Corp said it made the first documented deep-water oil find off the coast of East Africa in Mozambique’s Rovuma Basin. The deposit probably won’t be commercial to develop; it appears to have low permeability and low porosity. However, the well will provide information for further exploration in the region. (8/18, #8)
• Nigeria’s crude oil exports, which had stabilized at 2.5 million b/d in the last three weeks, declined as Shell declared force majeure on the export of Bonny Light following a recent attack on its pipelines in Rivers State. (8/19, #8)
• Equatorial Guinea expects oil production to increase by more than 100,000 b/d within two years as new offshore developments come online. The country is already one of sub-Saharan Africa’s largest oil suppliers with about 300,000 b/d of output, although production has been falling in recent years as existing fields mature. (8/16, #10)
• Afghanistan discovered an oilfield containing an estimated 1.8 billion barrels of crude in the north of the country, a Mines Ministry official said. (8/16, #7)
• Cuba plans to drill seven exploratory oil wells in its Gulf of Mexico waters over the next two years. If this drilling finds significant oil, production could start as early as 2014. The USGS has estimated 4.6 billion barrels are in Cuba‘s offshore areas. Cuba currently produces about 60,000 barrels of oil per day, all from onshore wells. Part of Cuba’s Gulf of Mexico zone is within 50 miles of Florida, where U.S. politicians fear that Cuban drilling could lead to an accident like the huge BP oil spill off the Louisiana coast. (8/19, #9)
• In Greenland five exploratory wells were drilled in 1976-77. Exploration was discontinued in late 1978 after all wells were declared dry by the operators. Re-investigations of the well data in 1997 uncovered evidence that many areas had been abandoned prematurely. Greenland oil and gas activity could pick up again as oil and gas operators worldwide set their sights on the Arctic’s untapped resources. The USGS estimated that Eastern Greenland holds an estimate 31 billion BOE; Northern Greenland holds 3.3 billion BOE; and Western Greenland/Eastern Canada contains 17 billion BOE. (8/18, #14)
• At a value of 333 billion dollars, Petro China now has a larger market value than ExxonMobil. Of course, Saudi Aramco would have a greater value if that company were listed on a stock exchange. (8/16, #27)
• Data from EIA shows that between 2005 and 2008, petroleum consumption within OPEC increased by more than 1 million b/d, from 6.5 million to more than 7.5 million. (8/19, #16)
• Saudi Arabia’s King Abdullah issued a decree Saturday to appoint former Chevron Corp. CEO and Chairman David O’Reilly to the board of directors of Saudi Aramco. (8/22, #4)
• Shell says it has intensified efforts to clean up a major oil spill in the Bonny area of the Niger Delta. Bonny is made up of about 90 tiny islands and one large one. Community leaders say current efforts have been unsuccessful and oil has gushed from the damaged well for 18 days. (8/22, #5)
• ExxonMobil’s withdrawal from a controversial $4 billion agreement to buy a stake in a vast oilfield off Ghana’s coast may indicate the oil giant is seeing cheaper deepwater opportunities elsewhere after the Deepwater Horizon oil spill. Small companies may get squeezed out of their deepwater leases because of tougher drilling rules or higher costs. (8/22, #6)
• Petroleos Mexicanos expects to hire foreign oil companies for the first time to explore and produce in the Gulf of Mexico as it seeks to arrest a five-year decline in output. Pemex expects Exxon Mobil, Royal Dutch Shell and Chevron Corp., to help develop reserves after changes to Mexico’s oil laws in 2008 allowed it to hire foreign companies. (8/22, #7)
• The IEA’s chief economist Fatih Birol has been repeating the phrase -the era of cheap oil is over‖ at numerous interviews recently. (8/17, #26)
• Fuel consumption in Baghdad has reached a record of 6.5-7 million liters per day, an oil ministry official said Tuesday, as Iraqis increasingly turn to private generators because of frequent power cuts. (8/18, #6)
• New Orleans Mayor Landrieu said Thursday he will “politely” raise the issue of ending a ban on deepwater oil drilling with President Barack Obama when the president visits the Gulf Coast region Aug. 29. (8/20, #20)
• BP’s massive oil leak is complicating the belief that the Gulf of Mexico is the nation’s best source of oil and natural gas. Experts predict that production will slow while regulation and deep-water drilling costs will increase. (8/16, #25)
• Weeks before the Deepwater Horizon drilling rig exploded, the crew was warned not to let down its guard in a sternly worded memo from the rig’s owner. “Do not be complacent… Remain focused on well control,” drilling company Transocean wrote in a 10-page “operations advisory” on April 5. The memo was prompted by a frightening but small blow-out on another Transocean drilling rig two days before Christmas 2009. (8/18, #12)
• Saudi Aramco is shifting its exploration and production focus to developing gas output as it looks to meet rising domestic demand from power plants and the petrochemical industry. (8/16, #6)
• Shell plans to spend as much as $50 billion in Australia over the next decade, more than in any other region, as Europe’s largest oil company continues a shift to gas production. Shell is among energy companies planning more than a dozen liquefied natural gas projects in Australia targeting Asia. (8/20, #13)
• Devon Energy’s CEO said he expects a wave of merger and acquisitions to happen in the next two years among independent natural gas producers as companies face persistent lower commodity prices, rising costs and lack of investment. Much of the current drilling for natural gas in the US isn’t profitable at current prices, he added. (8/19, #12)
• Not only will Middle East nations need more of their own fossil fuels to fund domestic construction, but the improvement of leased, foreign farmland to match their above-trend population growth will also require fossil fuels. (8/18, #15)
• With higher energy prices and a limited supply of fossil fuels, the modern food system that evolved while oil has been cheap clearly cannot survive as it is currently structured. (8/18, #18)
• Supporters of high-speed intercity rail believe it will cut US dependence on foreign oil, reduce climate-changing pollution and fatten wallets by triggering economic development. Opponents say high-speed intercity rail is too expensive and won’t save energy. (8/19, #17)
• Coal stockpiles at US power plants fell 1.4 percent this week and were 19.2 percent smaller than a year ago, Genscape said Tuesday, as the summer drawdown steepened due to hot weather. Inventories of coal typically grow in spring and autumn when demand for heating and cooling drops. Stockpiles shrink in summer and winter when demand for interior climate control rises. (8/18, #13)
• India may soon face a shortage of coal as more power plants are built and domestic production lags. Coal imports could go up sharply over the next few years in spite of large domestic reserves. Companies building power projects are also acquiring coal mines around the world. (8/17, #19)
• What if we’re overestimating the amount of coal left? If coal is soon going to get harder to reach and more expensive, an enormous investment in carbon capture and storage may not make sense. And if there’s much less coal than widely assumed, climate change may not be humanity’s biggest problem. (8/19, #20)
• The Chinese economy eclipsed the Japanese economy in size in the second quarter after Japan posted poor economic growth figures for the period, increasing the chances that China will officially overtake Japan as the world’s second-largest economy for the year. (8/16, #14)
• China’s power consumption rose 14 percent in July from a year earlier. The nation also has used 20 percent more electricity year-to-date in 2010 from the year-earlier period. (8/16, #18)
• China approved 24 power projects last month to help meet rising energy demand in the country’s less developed northern and western provinces. (8/17, #17)
• China, determined to become a world leader in green technology, says it plans to invest billions of dollars over the next few years to develop electric and hybrid vehicles. (8/20, #24)
• The new Advanced Research Projects Agency - Energy is intended to finance high-risk, high-reward projects. The goal of this agency, whose budget is $400 million for two years, is to realize profound results-to succeed in -the hunt for miracles,‖ primarily for replacements for oil. (8/19, #21)

Matt Simmons was arguably the most influential individual on this side of the Atlantic to warn about the coming peak-and-decline of world oil production. Beginning in 2001, when he published his ground-breaking white paper on the world‘s giant oil fields, Matt alerted presidents, politicians and whoever else would listen that our energy joyride was headed for deep trouble. He drove himself tirelessly, riding the speaker circuit at breakneck speed, visiting some 25 countries to deliver over 400 fact-filled energy talks to industry, investment, academic, and general interest audiences.

Then, suddenly, he was gone. Matt died Sunday evening, August 8th, at his home in Maine. He will be missed enormously by his wife Ellen, five daughters, his close associates, and all of us who knew and respected him.

Matt was a contrarian thinker with high-level access and influence. The access was due to his decades of stunning success in the energy investment banking business, where he made his fortune; the influence came from his research, timing, acumen and luck-and from swimming ahead of the crowd. Matt‘s energy investment firm, Simmons & Co., Int’l., helped clients navigate through the oil industry‘s historic down cycles. By the mid-1990s, with a high-profile column in World Oil magazine and a growing number of top-level media appearances, Matt began to leverage the reach of his ideas.

How high up the ladder did his viewpoints climb? To the very top. Matt co-chaired the energy task force of presidential candidate George W. Bush in the fall of 2000. (He also shared his energy insights with staffers for a Democratic candidate earlier in the year.) Matt helped Bill White win election as Mayor of Houston, and provided advice and support to Republican presidential candidate Mitt Romney in his 2008 campaign. During a short session in the Oval Office with President Bush in early 2001, Matt shared his concerns about our emerging energy crisis. In subsequent years, he would testify before several House and Senate committees, an experience he would compare to “shouting down a well.” More recently, he gave a one-hour presentation in the Pentagon auditorium that stretched another hour with intense questioning.

In 2003, Matt began questioning the conventional wisdom that Saudi Arabia could someday produce 15 or even 20 million barrels a day. This forced the Saudis to publicly defend their reserves and production capacity. In early 2004, at a symposium sponsored by the Center for Strategic and International Studies, Saudi Aramco officials worked hard to directly rebut Matt’s claims that their oil fields were depleting faster than acknowledged.

Of course, Matt wasn‘t the only one speaking about peak oil. In 1998 Campbell and Laherrere had published a landmark piece in Scientific American, “The End of Cheap Oil.” A number of excellent books soon appeared, from Deffeyes, Heinberg and others. But Matt, along with other industry analysts like Charley Maxwell, Henry Groppe and Tom Petrie, helped bring peak oil to the boardroom and to Wall Street. He doggedly pushed the topic on cable news shows, buttressing peak oil‘s intellectual and numeric underpinnings, reinforcing its respectability. In doing so, he helped animate a new generation of researchers whose findings would be published in books, magazines, and websites like theoildrum.com

When Matt’s opus, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, appeared in May 2005, it was an instant sensation. Within Saudi Aramco, engineers fixated on a few of the book‘s factual errors, thereby missing the big picture. On the world stage, however, the book brought a harsh dose of reality to the happy talk proffered by Cambridge Energy Research Associates and others. Daniel Yergin might remain a cheerleader for abundance, but no longer could it be assumed that Saudi Arabia‘s “endless oil” could solve the world‘s larger energy problems.

In response to Twilight’s assertions, Saudi Aramco mounted a PR campaign, stating it could boost production to 12 million barrels a day and maintain that level for decades. Ironically, this knocked some stuffing out of the U.S. Energy Information Administration, whose annual forecasts often seemed like a vision in search of reality, particularly those which foresaw Saudi production reaching 20 million barrels per day by 2020.

Matt was flooded with speaking requests. His presentation style was always memorable: the phrase “drinking from a fire hose” borders on understatement. Passionate, animated, face flushed, words flowing, Matt commanded the podium, bombarding his listeners with facts, figures and original graphics that often connected established dots to make new points. His material was usually fresh, always insightful, often provocative. He brought a teacher‘s mindset as much as a businessman‘s to his talks and appearances. Periodically, he made outlandish statements. Though we admired his chutzpah, Matt‘s $5000 bet with a New York Times columnist in 2005 that oil prices would average $200 a barrel by 2010 struck us as ill-advised.

Throughout this period, several key threads flowed through Matt’s papers and presentations. One was his relentless plea for data transparency; the lack of reliable production numbers frustrated him no end. The most important “missing evidence” was depletion data from mature oil fields. Although drillers took depletion for granted-waged war against it incessantly in their own fields “they hated to talk about it in public. Matt lent his voice early and often on the need to obtain better data on decline rates, thus helping to spark the decline rate study that the International Energy Agency published in 2008. He also called attention to -rust,” the aging of energy infrastructure and trained workforce, and to the high-wire act that is deepwater drilling.

Apart from his book, Matt‘s most insightful analyses derived from two early papers: “Revisiting Limits to Growth: Could the Club of Rome Have Been Right?” (October 2000) and “The World’s Giant Oilfields” (late 2001). In “Revisiting Limits,” Matt swam upstream against cornucopian groupthink, which held that resource limits would never constrain economic growth. When he reread the book, what he found surprised him.

In September 2000, Matt emailed: “I have just finished the most important white paper I‘ve tackled…I always thought this Club of Rome thing was some bad joke. But I am now of the opinion that historians will mark the book as perhaps the most important piece of ‘writing that got ignored’ in the last half of the 20th Century.” Seven years later, Matt hadn‘t changed his mind about the value of the “Limits” study: “The world sleep-walked for three decades while believing all natural resources would last forever.”

The research that fully awakened Matt to the impact of oil field depletion, however, was his trail blazing “Giant Oilfields” paper. In early 2001, he had noted a worrisome fact: almost 30 years had elapsed since the discovery of the last super-giant oil field that could produce 1 million barrels a day. Then he dug into the numbers. The resulting paradigm-shifting paper proposed that, rather than projecting the world‘s oil future by examining the size of its debatable reserves, “perhaps it is time for the energy world to focus on the critical role played by today‘s aging giant oilfields.”

Although he was forced to guesstimate production for some fields, the paper highlighted how critically important giant fields are to world production; the largest 3% of fields produced 47% of the world‘s daily supply. Pair Matt‘s “Giant Oil Fields” with Chris Skrebowski‘s research on future mega-project development and you have all you need to convince alert scientists and astute businessmen that it would be wise to start planning for a pending peak in oil production.

“Petroleum is industrial oxygen,” Matt liked to say. The more he looked, the more convinced he was that much of our energy system was being red-lined, run on the ragged edge of disaster. Matt was alarmed, and sometimes-as with recent ill-advised comments about BP‘s Gulf of Mexico oil spill-he could be alarmist. But no matter. The contribution he made was titanic, in every sense of the word.

Aspects of the private Matt that few knew: he painted with water colors, often used on his Christmas cards. He was a devoted family man - his presentations were sometimes delivered via live webcast so that he could attend a daughter‘s graduation from high school or college. He loved to play the marimba. He liked to cook for his family to relax after a hard day. He and Ellen revived the historic Strand Theatre in his adopted Maine hometown of Rockland-one of the many “pay it forward” endeavors that will be the legacy of this remarkable man.

Let‘s give the last word to him: -As oil becomes a scarce resource, its use will have to be rationed in one way or another. There are ways to allocate oil use and direct it to its most valuable applications. But achieving such a rational plan will require a carefully orchestrated global effort. Left unattended, this process could quickly evolve into genuine chaos. The global economy can function after oil supplies peak, but not in the same manner in which we live today.‖ (Twilight in the Desert, p. 347)

By Steve Andrews, Sally Odland, John Theobald and Randy Udall | Andrews and Udall are retired co-founders of ASPO-USA. Odland is a former ASPO-USA board member. Theobald is a former ASPO-USA conference organizer.

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Other remembrances from colleagues and friends

Matt’s impact on the petroleum industry stemmed from his incisive analyses of underlying fundamentals and his willingness to be an effective iconoclast when dictated by his conclusions. As a result, we didn’t always agree, but he sure challenged us to think, and often rethink, our views and expectations of the future. In sum, Matt epitomized “energized thinking outside the box.” Tom Petrie, a vice-chairman of Bank of America/Merrill Lynch

I think there were several important aspects to Matt‘s personality that made him stand out and endeared him to his friends. He was dynamic, diligent and outgoing. He focused on both the big picture as well as the details and was not afraid to speak his mind when he thought the issues were significant. Those who criticized his conclusions missed the global issues he was addressing: maturing oil resources, an over-extended industry, runaway energy demand, and the absence of a “Plan B”. Those issues remain and we are still looking for “Plan B”. Sadad al Husseini, consultant, retired executive vice president of E&P for Saudi Aramco

With the sad and premature death of Matt Simmons, we have lost an important analyst who played a prominent and successful part in raising awareness of the critical issue of so-called Peak Oil. His experience as an investment banker helped him penetrate the barriers of lax reporting to establish the true position. He drew the media’s attention to this critical turning point for Mankind, and he will be sorely missed. Colin Campbell, retired petroleum geologist, founder of ASPO

Matt was a gentleman, a patriot, a talented analyst, a nice man, and a good friend. His contributions to informing the public about the impending dangers of the decline in world oil production are legion. The country and the world owe him a debt of gratitude. Bob Hirsch, senior energy advisor at MISI

Matt’s passion for better understanding all energy issues was stimulating and inspiring to all who had the privilege of knowing and working with him from the time he came to Houston. We will miss him intensely. Henry Groppe, cofounder oil industry consultants Groppe, Long & Littell

As an environmentalist, I found Matt Simmons to be a delightful surprise: a wealthy Republican who talked openly and intelligently about limits to growth! He refused to be held back by friends, colleagues, and perhaps even by clients in the oil and banking businesses who no doubt wished he’d just shut up and go back to making money. He went where curiosity and evidence led him, and that meant probing the inscrutable monolith of the oil industry–Saudi Arabia. I don’t know of anyone else who would have had the courage and respect within the industry to accomplish what he did. Richard Heinberg, senior fellow, Post Carbon Institute

I first met Matt in 1989 when he presented an analysis of the state of the drilling industry and what it would take to get it back to profitability. His presentation featured the insightful analysis, backed up with superb graphs, that we have all become used to. Because I have a hobby of checking out predictions, I followed the drilling business with unusual interest over the next few years. And Matt’s analysis was correct on what it took to slowly evolve back to profitability. I learned a lot from Matt’s analyses of the productive capability of oil and natural gas fields through the years. You might not always have agreed with what he said, but if you ignored what he said, you did so at your own peril. Vince Matthews, State Geologist of Colorado

I first met Matt around 1982 at his Investment firm. Roice Nelson, a founder of Landmark Graphics, was there to introduce me to Matt, but it never got that far. Matt came charging into his “trophy room” with all its glass mementos to the millions of shares of hundreds of companies his company had invested in, shaking both our hands while launching into a blistering dialogue on the “rusting” of the offshore oil industry worldwide. Matt had just calculated, on the literal back of an envelope that he produced on the spot, that within 20 years industrial accidents from rusting old rigs would “explode”. I reflexively thought of Matt when I first heard of the Deepwater Horizon” explosion this spring. Though it was “brand new”, I knew Matt would come out railing. We will sorely miss Matt’s always frank, often politically incorrect, prodding of what he considered “the established group think” of the oil industry. Roger N. Anderson, Con Edison Senior Scholar, Columbia University.

Matt touched my life in a profound way. Within weeks of reading Twilight in the Desert, I was flying to Denver to hear him speak at the ASPO-USA conference. With book and camera at the ready, I pounced on him as he left the podium and he graciously honored me with both a picture and an autograph. Our paths have crossed numerous times since then but I will be most grateful for our last visit this past spring when I had the good fortune to sit with him for several hours and talk about our energy future and to personally thank him for making my life richer and deeper. Matt, we will miss you. Debbie Cook, former City Council Member and Mayor of Huntington Beach (CA)

Matt saw Peak Oil as heralding the end of an era. It was something that struck him with alarm and something which he knew we needed (as a society and as individuals) to prepare for so that it would not sweep away our way of life. He did not have the satisfaction of knowing that his calls to a new preparedness were being answered because he was taken too soon, but he did sound a “certain trumpet” in respect to what he saw ahead. Therefore, his passing could be an occasion when experts and the public alike might take a moment to reconsider Peak Oil as a global force for imminent change. Charles T. Maxwell; senior energy analyst, Weeden & Co.

1. Oil and the Global Economy

Oil prices have fallen steadily since touching a high of $83 a barrel two weeks ago and closed on Friday at $75.39 a barrel. Demand for gasoline in the US the week before last fell to 9.2 million b/d from 9.6 million in the week ended July 23rd. As has been the case for several weeks, a steady stream of bad economic news convinced the oil markets that the outlook for increased oil consumption is not good. Despite all the gloom, the official forecasters — the IEA, the EIA, and OPEC — are still forecasting substantial growth in world demand for oil between now and the end of 2011 with global consumption rising by another million or more b/d.

The IEA estimates that world oil supply rose by 850,000 b/d in July to 87.2 million b/d and forecasts that with business as usual world demand will average nearly 88 million b/d next year. The Agency does warn that there are -significant downside risks‖ and that a weaker economic situation could reduce their projected 1.3 million b/d growth in global demand to nearly un-changed.

The US‘s EIA is now expecting that crude output from the Gulf of Mexico will fall by an average of 120,000 b/d next year due to the consequences from the Deepwater Horizon explosion, such as the six month drilling moratorium and delays resulting from tougher regulation. The IEA takes an even more pessimistic view, saying that the BP spill places the ability of the oil industry to access new reserves on a -knife edge‖. The Agency estimates that nearly 50 percent of the new oil supplies needed by 2015 would have to come from offshore fields, much of it from deep water. With operating and regulatory standards likely to be tightened and sensitive areas such as the Arctic seeing permitting delays, the pace of offshore oilfield development could slacken.

OPEC‘s Secretariat also issued a revised forecast for oil demand in 2010 and 2011 increasing its outlook for 2010 and 2011 by 140,000 b/d. The cartel too sees demand for oil increasing by more than a million b/d next year to an average of 86.5 million b/d, considerably lower than the IEA‘s estimate of nearly 88 million b/d for average demand in 2011. OPEC‘s lower-than-usual growth estimate is attributed to sluggish economic growth and large stockpile surpluses.

Any increase in oil consumption next year is likely to come from the usual suspects - China, India, and domestic demand in the oil exporting nations themselves. Whether the global oil industry can absorb another million b/d increase in demand during the next 18 months without growth-shattering oil price increases remains to be seen. OPEC seems to be pumping close to flat out. The Saudis may or may not have a few million b/d of light-enough-to-sell spare productive capacity. Some say that an increase in production from non-OPEC sources may add another 800,000 b/d in the next 18 months. This increase is expected to come from the China, Russia, and even the US where some see a 300,000 b/d increase in production next year - provided of course that regulatory issues don‘t bog things down.

2. China cooling

A spate of new numbers and pronouncements came from of Beijing last week all adding to the question of just where China‘s massive, surging, and, in some sectors, overheating economy is headed. Much of the news focused around record high energy consumption in the first half coupled with a declining pace of economic growth in July. China‘s oil consumption in the first half of the year increased by 15 percent over 2009. Electricity consumption in July increased by 12 percent over last year. As in the case in much of the world, increased use of air conditioning to combat higher temperatures was behind the growing summer demand for electricity as temperatures set new records.

While much was made of the -slowdown‖ in China‘s growth in the financial press, year over year increases of 14 percent or more in many industrial sectors does little to curb the demand for oil, coal, and electricity. Beijing reported that net crude purchases did fall in July to 18.8 million tons (4.5 million b/d) from 22.1 million in June, but China‘s imports have always been variable. A massive oil spill at a major import terminal did not help matters. Many areas in western China are suffering from severe floods and landslides that must be reducing demand.

China‘s trade surplus widened during July. While export growth slowed slightly to a 38 percent increase over last year, imports slowed to a 23 percent increase in July vs. a 34 percent year over year increase in June. The rather spectacular increases in exports in recent months are attributed to inventory restocking by foreign purchasers and are not expected to continue for the rest of 2010.

As we move farther into the second half of 2010, Chinese growth-although down from the first half-is still impressive by any standard and is likely to keep up pressure for more energy. Last week the EIA raised its forecast for growth in China‘s oil demand by 80,000 b/d to 650,000 b/d in 2010. The EIA also raised its estimate for the increase in China‘s oil demand growth in 2011 by 10,000 b/d to 560,000 b/d. With growth rates such as we have seen in China in recent years, the widely touted -slowing of China‘s growth rate‖ does not mean much when placed in perspective.

Although China has an impressive list of long-term economic and social troubles, none of these seem likely to derail China‘s rapid economic growth in the immediate future or China‘s steadily increasing demand for substantial annual increases in its oil imports. If this proves to be the case, then projections of 1 million+ b/d for increasing global demand for oil are likely to be valid.

Increasing demand for oil, increasing depletion of existing oil fields, and dimming prospects for the necessary increase in production from new oil fields all suggest that much higher oil prices and oil shortages are likely within the next few years.

Quote of the Week

T. Boone Pickens’ plans to save the United States from its energy dependence on so-called hostile petro-powers is, simply put, full of hot air. The abundance of shale gas in the U.S. will no more free the country’s motorists from dependence on foreign oil than have either the American production of over ten billion gallons of corn-based ethanol or the rollout of GM’s electric-powered Volt.

– Jeff Rubin, consulting economist and author

Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

• The head of Saudi Aramco has brushed aside ‘peak oil’ concerns, saying the world has a plentiful supply of oil and gas, with a vast quantity of known reserves yet to be tapped and additional resources still to be discovered. (8/11, #11)
• The typical drop in world oil demand between the first and second quarters of the year-after the heating season is over-is disappearing, and could even be reversed as the global market increasingly takes its cue from consumption trends in non-OECD countries. (8/12, #4)
• BP has pushed back the start of its exploration for oil in deep water offshore Libya for an unspecified period of time to ensure all its plans are in order, but the company and the Libyan authorities insist the drilling will be safe. (8/12, #10)
• Ecuador’s populist President Rafael Correa wants to take a big slice of profits away from foreign oil companies operating in the Andean nation, which is facing protracted economic problems. (8/9, #9)
• Turkish firefighters on Thursday extinguished a fire on the pipeline carrying oil from Iraq to Turkey that was bombed by Kurdish rebels earlier in the week. (8/13, #9)
• Venezuela’s crude output in July was 2.23 million b/d, unchanged from June’s figure, the IEA said Wednesday. Venezuela claims output is about 2.9 million barrels of crude a day, much higher than both IEA and OPEC figures. (8/12, #12) [Editor's note: our money is on the IEA.]
• Nigeria has pledged to pay billions of dollars in long-overdue bills this month for fuel imports. Nigeria imports almost all of its oil products–despite being one of Africa’s largest crude exporters–because its four refineries are barely operational, due to poor maintenance, theft and fire. (8/11, #12)
• Russia’s nuclear agency announced that it will load fuel into Iran’s first nuclear power plant this week. The US has called for Russia to delay the start-up until Iran proves that it’s not developing nuclear weapons. (8/13, #10)
• Tougher sanctions against Iran appear to have halved the country’s petrol imports in July, according to the International Energy Agency. (8/12, #6)
• Turkey‘s planned sale of petrol to Iran, as well as other projects it is planning with its neighbor, may indicate a shift in its energy policy to give priority to its energy-rich neighbors in the Middle East over conditions set by its traditional Western allies. Russian oil giant LUKOIL has also resumed gasoline sales into Iran in partnership with China’s state-run firm Zhuhai Zhenrong.. (8/12, #7)
• Iran is curbing its ambitions to become a major liquefied natural-gas exporter, a reversal that energy executives and analysts tie to the country’s difficulty accessing Western technology amid fresh international sanctions. (8/12, #8)
• Iran has made arrangements to start selling its oil in any currency rather than just the US dollar, central bank chief Mahmoud Bahmani said on Friday. (8/14, #5)
• US oilfield services firm Halliburton Co said it has performed the first hydraulic fracturing operation in Poland, a country where oil and gas companies have been snapping up acreage for exploration. (8/13, #18)
• Oil rigs operating in the U.S. jumped the most in nine months this week after prices climbed to a three-month high of $82.97 a barrel last week, according to Baker Hughes. Rigs exploring for and producing oil climbed by 25 to 636, the highest level since January 1991. Gas rigs gained nine to 992, the highest level since Feb. 20, 2009. The gas rig count, however, is down 38 percent from a peak of 1,606 in September 2008. (8/14, #12)
• Environmental groups and landowners, upset by last month’s oil spill in Michigan, are urging the Obama administration to deny a proposal for an oil pipeline that would go from the Montana-Canada border to refineries along the Texas Gulf Coast. (8/12, #19)
• Pennsylvania regulators are illegally allowing natural gas companies to withdraw water from rivers and streams for use in the Marcellus Shale drilling boom, an environmental group claims. (8/10, #16)
• US energy companies are steaming about a disclosure rule added at the last minute to the new financial regulation law requiring companies to disclose their payments to foreign governments. The provision in the Dodd-Frank law compels companies to reveal royalties, bonuses and other payments to governments for the “commercial development of oil, natural gas or minerals.” The companies say complying with the rule could hamper business. (8/11, #8)
• EOG Resources said its comfort level is rising slowly in the Niobrara shale oil play in the Denver basin as it awaits more well production history before formulating reserves estimates. (8/12, #18)
• Iraq’s top army officer has criticized as premature the planned US troop withdrawal by the end of next year. Lt Gen Babaker Zebari warned that the Iraqi military might not be ready to take control for another decade. (8/12, #5)
• About China’s coal consumption, Jean Lahererre‘s main point is that EIA data provides a different picture to that provided by BP and that the BP data are likely wrong. China is importing much more coal than in the past. (8/9, #16)
• Nearly 45 percent of the electricity in Portugal’s grid will come from renewable sources this year, up from 17 percent just five years ago. (8/10, #17)
• 2010 is on pace to become the warmest year, worldwide, since record-keeping began more than a century ago. The scorching weather has caused massive droughts in Thailand and Israel, and killed hundreds in India. Russia is still suffering from its worst heat wave in 130 years. (8/10, #20)
• Production of rice — the world’s most important crop for ensuring food security and addressing poverty — will be thwarted as temperatures increase in rice-growing areas with continued climate change, according to a new study by an international team of scientists. (8/12, #16)
• An island of ice more than four times the size of Manhattan is drifting across the Arctic Ocean after breaking off from a glacier in Greenland. Potentially in the path of this unstoppable giant are oil platforms and shipping lanes - and any collision could do untold damage. (8/11, #9)
• Greenland’s ice mass will disappear if temperatures rise by as little as 2C, with severe consequences for the rest of the world, a panel of scientists told Congress last week. (8/13, #5)