About the $100,000 CERA Bet

Why the bet?
Back in this publication’s January 21* Commentary, Randy Udall and I explained our rationale for the bet. In a nutshell, we highlighted two facts. First, CERA calculated a world decline rate of 4.5%/year; that’s almost 4 million new barrels a day that have to be brought on line just to keep world production flat. Second, CERA then dodged the huge implications of that decline rate, arguing that “our model shows that liquids capacity could climb to 112 million barrels a day by 2017…” The disconnect here left us dumbstruck, hence the challenge.

“Betting on depletion is like betting on rust. Your authors here, Udall and Andrews, are willing to wager CERA $10,000 that petroleum liquids capacity won’t climb to 112 million barrels a day by 2017. That wager, in our view, is a sure thing.”

But the idea here isn’t to flex muscles and pound chests like a couple of twenty-somethings on steroids. The idea is to say: look, this is such a deeply flawed conclusion that any policy-makers following CERA’s logic here will likely make enormously regrettable decisions.

How did the bet balloon from $10,000 to $100,000?
A host of colleagues dialed in wanting a piece of this action. We gladly accommodated. The wagering partnership now numbers a dozen, with more wanting on board, including possibly a mayor or two of major US cities.

With the total amount approaching $50,000, one investment-oriented member of the pool scrutinized the bet as a pure investment risk, then offered to double the bet to an even $100,000. There it rests, awaiting CERA’s acceptance.

Who would take CERA’s side of this bet?
Probably not ConocoPhillips, whose CEO James Mulva said several times last year that he doesn’t see production ever growing over 100 million b/d. Probably not Shoki Ghanem, Chairman of Libya national oil company, who said last October, “There is a real problem that supply may not increase beyond a certain level, say around 100 million barrels [a day].”

CERA shouldn’t try to recruit Total’s CEO Christophe de Margerie, who told the Financial Times last October, “One hundred million barrels a day is now in my view an optimistic case. That is not just my view; it is the industry view, or the view of those who like to speak clearly, honestly, and not…just try to please people.”

CERA can clearly cross off their list of candidates Dr. Sadad Al-Husseini (Saudi Aramco, retired) and Dr. Moujahed Al-Husseini (GeoArabia), the two gentlemen from the industry cited in this week’s “Quote of the Week” just above this Commentary. Even Shell is probably out of CERA’s potential betting pool, given CEO Jeroen van der Veer’s email to company staff in which he stated that “Shell estimates that after 2015 supplies of easy-to-access oil and gas will no longer keep up with demand.”

How about research teams? CERA shouldn’t waste their breath contacting IFP, France’s petroleum institute, where that same 100 million b/d number is also viewed a non-starter. Don’t even count on the evolving International Energy Agency, where previous reliance on the USGS’ key analysis from their 2000 World Oil Study is being seriously questioned.

If the US Energy Information Agency could actually bet, they might team up with CERA. But they would be assuming that the 11 million b/d increase in world oil production achieved during the past decade would roughly double during the next decade for a net increase of 20 million barrels. That assumption shouldn’t pass anyone’s sniff test, yet it already has.

Is this an ASPO-USA bet?
The wager pool includes ASPO-USA members as well as non-members. The wager is supported by—but not placed by—ASPO-USA. The organization has agreed to act as an intermediary in this action to further our mission to seek truth and transparency in research and education concerning our nation’s peak oil energy challenge. But no, ASPO-USA itself has no dollars on the table.

What’s the key metric in the bet?
CERA speaks in terms of “production capacity” reaching 112 million b/d by 2017. That’s a tough factor to verify. Right now, CERA rates the world’s production capacity at 91 million b/d. Since production currently runs near 87 million b/d, we propose a simple ratio of today’s production vs. production capacity times CERA’s forecast in 2017. That means 87/91 times 112, or 107 million barrels a day of actual production by December 31, 2017.

How about some near-term signposts?
Back in 1980, resource optimist Julian Simon bet population expert Paul Ehrlich $10,000 that a decade hence, five key natural resources (metals) of Ehrlich’s choice would cost less that decade later. It was a long time to wait, but the optimist Simon won on all five bets. (Message to CERA? The “pessimists” will, of course, be wrong again. Correct? So go for it!)

A decade is a long time to wait, given the range of energy policies—often based on flawed information—that are likely to be passed in the interim. We would prefer to have intermediate steps where the bet’s trend-line could be noted and publicized. Otherwise, this is a case where, assuming the challengers win, the bragging rights would be a Pyrrhic Victory.

Any word from CERA?
Not yet. We sent CERA’s Peter Jackson a copy of the wager last week. One of our wager partners is attending CERA’s annual conference in Houston this week and will likely raise the subject. If we don’t hear by week’s end, we’ll be following up. To get CERA to move on the bet, we expect we’ll probably have to set a deadline.

Any sign of interest from the press?
The press release went out Wednesday afternoon. Early on we noted promising early coverage, including stories on the Wall Street Journal’s blog and in Platt’s Oilgram. We expect some press will be inquiring this week whether CERA accepts or declines the bet before they file their coverage.

Steve Andrews is an energy consultant and co-founder of ASPO-USA.