June 15, 1998

Oil prices aren't going anywhere for a while, but just wait five or so years! Franco Bernabi backs his assertion with solid statistics.

Cheap oil: enjoy it while it lasts

By Howard Banks

NOT THIS YEAR, nor the next, but maybe as soon as five years hence, oil prices will start to rise, says Franco Bernabi, chief executive of the Italian oil company ENI SpA. Well before 2010, he believes, the world will be vulnerable to 1970s-style oil shocks.

Speaking to FORBES in London in early May, he says, "There is a great deal of complacency among politicians and economists that the oil problem is over. But despite today's low prices, in the long term we will be back to a high-price scenario in the oil sector."

It sounds unlikely, at a time when crude prices have sagged below $15 a barrel. In real inflation-adjusted terms, that's not much above the price level just before OPEC sandbagged the world with $30 oil in the mid-1970s. In short, on balance, the price of oil has gone nowhere in a quarter of a century. However, Bernabiwho is a former economics professor and in the 1970s was a senior economist at the Paris-based Organization for Economic Cooperation & Developmentputs forward a well-argued case that oil will be a lot dearer in the 21st century than it is in the 20th.

What about technology? Haven't things like horizontal drilling greatly increased the yield from existing fields in recent years? Sure, says Bernabi, but there's not a lot more scope to increase recoverable reserves this way.

Today's conventional view is that prices will remain low for the foreseeable future because reserves of oil have been increasing, especially with the discoveries of oil outside the OPEC countries (the North Sea, Alaska's North Slope). On paper, the world's declared reserves, when related to production, are one-fifth higher than pre-1973.

Oil Reserves versus production

Spikes in reserves can be based on political maneuvering, not discovery. Oil and gas production is expected to peak before 2010, and then decline.

Source: BP Statistical Review of World Energy 1997.

Source: Petroconsultants

"Actually, the exact opposite has happened," Bernabi says. Most of the increase in world reserves has been within OPEC, and occurred in 1987 and to a lesser extent in 1989. These were years with low oil prices. "OPEC countries boosted their reserve figures as a way [under their calculation method] to increase their shares of OPEC production through the quota system." A negotiating ploy to boost earnings to pay for their rising debt? "It was simply a trick," he says. Either the newfound oil existed only on paper, or it had been there all along but the owners hadn't declared it. In either case, not new oil.

Another region claiming growing reserves is the former Soviet Union. "These countries, too, overstate their reserves, in this case because they use the concept of geological reserves [everything that might be in the ground] rather than the West's concept of economically producible reserves," he explains.

Bernabi's key concern is the reserve-to-production ratio the ratio of proven economically producible reserves to actual output of the non-OPEC oil companies. He looks at the world's 200 largest oil companies that are not owned by an oil-producing country, eliminating from his list such national companies as Saudi Arabia's Aramco and the Iraq National Oil Co. (a group which accounts for over 60% of the world's oil reserves). For his list of 200, Bernabi says, new reserves are failing to keep up with growing output. "From 1980 to 1997, their reserve-to-production ratio declined from 18 years to 12 years."

Bernabi thinks the figure will continue to decline. "Even to maintain this ratio at today's 2.5% annual increase in world production, this group would need to replace 140% of their reserves over the next five years," he says. This simply isn't in the cards.

"The amount of new discoveries in the world has dropped from a peak of 41 billion bbl. a year in 1962 to 5 billion to 6 billion bbl. a year now," he says. The peak of new discoveries was in the 1960s, with just half a dozen major fields found since then.

"The only really major new basin recently has been Africa's Gulf of Guinea, off Angola, Congo, Gabon and Nigeria. Even the new North Slope field in Alaska contains less oil than was once hoped.

"For the U.S. as a whole, the industry is spending 15% more than five years ago on upstream capital expenditure, but without seeing an increase in reserves," he says.

"The North Sea has accounted for over half of increased production in the last 15 years. But output there will start to decline in the next 2 to 3 years."

Bernabi points to what has been happening in the Norwegian sector. "They have announced that their planned increase in natural gas production to 100 billion cubic meters a year from 2000 to 2010 will now be trimmed to 80 billion cubic meters. The reason is that they can only keep oil production up by injecting gas into their wells," says Bernabi. The new field west of the Shetland Islands is also proving to be much harder to produce from than predicted.

"My forecast is that between 2000 and 2005 the world will be reaching peak production from our known fields, and after that, output will decline." But demand will keep growing, slowly but inexorably.

Does this mean that oil prices will stay down well after the turn of the millennium and then start to go up? Not necessarily. Once the markets recognize that production has peaked while demand continues to grow, prices could move up in advance of any actual shortages.

If Bernabi is right, oil and oil shares should be good investments for those who can take a genuinely long-range point of view. But there are other, more dire implications. "It will shift the power in the oil market back to the Gulf region," he points out. More than ever, the Middle East will become a potential powder keg for war.

-- - (x@xxx.com), May 08, 2000

Answers

http://www.forbes.com/forbes/98/0615/6112084a.htm

-- - (x@xxx.com), May 08, 2000.

The Death of the Oil Economy by Ted Trainer

From Earth Island Journal, Spring 1997

Australia - A new report on world oil resources, World Oil Supply 1930-2050 (Campbell and Laherre, Petroconsultants Pty. Ltd., 1995), concludes that the planet's oil supplies will be exhausted much sooner than previously thought.

The report, written for oil industry insiders and priced at $32,000 per copy, concludes that world oil production and supply probably will peak as soon as the year 2000 and will decline to half the peak level by 2025. Large and permanent increases in oil prices are predicted after the year 2000.

Industry experts assumed in the past that oil resources would last 50 years, based on calculations that simply divided estimated reserves by the present annual use. But this method of prediction failed to account for an increase in Third World oil use.

(snip)

http://www.dieoff.com./page1 16.htm

-- - (x@xxx.com), May 08, 2000.

Thanks, x,

Nice to see someone around here whose eyes are trained in the right direction. I've been too subtley hinting at this for months---no nibbles. Well, Flint did say, "We'll think of something; we always do." Can't prove him wrong right now. I'll ask him again in 10 years.

Hey you guys, did those articles open you eyes (did you even bother to read them)? This one by Brian Fleahy will drop your jaw: The Crunch Has Arrived. And this one by Colin J. Campbell will have leave you gasping: The Imminent Peak of World Oil Production. In fact, a few hours spent at Hubbert Peak will boggle your mind.

Btw, Brian Fleahy, Dr. Campbell, Dr. LaHerrere and Prof. Trainer are occasional contributors to the [energyresources] discussion list at eGroups.com. These guys make a certain pig farmer look like Chicken Little. But they've got the background and credibility to make it stick.

Hallyx

"Facts do not cease to exist because they are ignored." ---Aldous Huxley

-- (Hallyx@aol.com), May 08, 2000.

Interesting comment from the Fleahy article:

Iraq and Iran have the most urgent need to upgrade infrastructure and US-inspired sanctions effectively prohibit this, sanctions that now seriously threaten the political and economic stability of the world. These are unlikely to be lifted before the US Presidential elections and what happens after that may depend on who is President and the composition of Congress.

"W" was in the oil business. He certainly understands the implications and realities of this issue. Question is: would he lift sanctions? Could a conservative Republican make this sort of overture to Iran and Traq, while a Democrat like Mr. Gore would be hemmed in by party and public pressures? Something like Nixon visiting China back in the 70's, where only a dyed-in-the-wool anti-Communist could make such a move...

Thanks for the thought-provoking links, Hallyx.

-- DeeEmBee (macbeth1@pacbell.net), May 08, 2000.

Thanks for posting this "stuff" it has been on my mind all day and seems to be the kick in the pants I've been needing.

-- Swampthing (in@the.swamp), May 08, 2000.

Ever since I ran across the dieoff.com site, I have been trying to put it all in perspective. Is this oil scenario correct? Do the people pushing this have a hidden agenda? Seems that the "greens" who first warned of a nuclear winter caused by soot in the air in the aftermath of an all out nuclear war, later changed their position 180 degrees to support (or fit) the current global warming scares.

But, could there be some truth to this? I have been lurking on several of their lists, and you would be amazed to see what is being discussed. There are some hard facts, based on geological sciences and oil industry reports. Oil, or at least conventional oil, is due to peak in production sometime between 2000 and 2010, with 2005/7 being the consensus dates. After that key point, oil production will decline at about 3% a year at first, then accelerate downward as harder to extract sources are utilized. It's important to understand that price has nothing to do with more oil being "produced" in that there is a finite quantity of oil and extracting more oil at a faster rate simply means it will be used up faster. Pricing does have everything to do with determining who gets to consume it. Rising prices are the first indicater that something isn't alright. At first, I expect increased efficency will help compensate for the shortfall in oil, but there are real limits to just how much that will help. Meanwhile, world demand for oil is increasing, so the gap will be hard to cover.

Here's where it gets scary: if the oil supply does start to shrink, our entire economy is based on its use from transportation (cars, trucks, planes, ships, planes) to industries and agriculture. Oil could drop faster then substitutes could be found to replace them, or the proposed alternatives vastly more expensive or complex.

I would love someone to show what's wrong with this scenario, for if it's correct humanity is going to face the greatest crisis in its recorded history. Few are even aware, and what in the world can be done?

-- Sure M. Hopeful (Hopeful@future.com), May 09, 2000.