25 November 2009

Blowing the Whistle on Cheap Oil

IEA credibility under fire
by Tony Allison

Is the Peak Oil clock ticking closer to midnight than generally believed? The credibility and integrity of the International Energy Agency (IEA) took a hit this month after two whistle-blowers from the IEA claimed the agency has been deliberately underplaying a looming oil shortage under pressure from the US government. The striking allegations appeared in the British newspaper The Guardian, and not surprisingly, were largely ignored by the mainstream US media.

The allegations raise serious questions about the accuracy of the organization’s latest World Energy Outlook publication on global oil supply and demand. In the Guardian article, an unnamed senior IEA official claims the US played an influential role in encouraging the agency to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves.

Future oil supply questioned

“The IEA in 2005 was predicting oil supplies could rise as high as 120 million barrels per day by 2030, although it was forced to reduce this gradually to 116 million and then 105 million last year,” said the IEA source in the Guardian article, who was unwilling to be identified for fear of reprisals inside the industry. “The 120 million bpd figure always was nonsense but even today’s number is much higher than can be justified and the IEA knows this. Many inside the organization believe that maintaining oil supplies at even 90 million to 95 million bpd would be impossible but there are fears that panic could spread on the financial markets if the figures were brought down further. And the Americans fear the end of oil supremacy because it would threaten their power over access to oil resources,” added the source.

A second senior IEA whistleblower who has left the agency (but also remained anonymous) said that an unwritten rule at the IEA was never to anger the Americans, and that there was not as much oil in the world as the agency claimed. “We have (already) entered the peak oil zone,” the source told The Guardian. “I think that the situation is really bad.” The Guardian article significantly noted that the British government, among others, uses the IEA statistics rather than any of its own to argue that there is little threat to long term oil supplies.

John Hemming, the MP who chairs the all-party parliamentary group on peak oil and gas, said the revelations confirmed his suspicions that the IEA underplayed how quickly the world was running out of oil and this had profound implications for British government energy policy.

“Reliance on IEA reports has been used to justify claims that oil and gas supplies will not peak before 2030. It is clear now that this will not be the case and the IEA figures cannot be relied on,” said Hemming.

World Energy Outlook a “political document”?

After the release of the IEA’s annual World Energy Outlook this month, Uppsala University in Sweden published its own assessment, blasting the findings of the IEA. According to a follow-up article in The Guardian, Kjell Aleklett, a professor of physics at Uppsala University and co-author of a new report titled “The Peak of the Oil Age” claims oil production is more likely to be 75 million barrels per day by 2030 than the “unrealistic” 105 million bpd used by the IEA in its newly published World Energy Outlook 2009.

Aleklett, who runs a Global Energy unit at Uppsala, described the IEA’s latest report as a “political document” developed for consuming countries with a vested interest in low prices. The IEA dismissed the suggestions of political influence on its analysis as “groundless”. It said the annual document was reviewed by 200 different and independent experts.

“I am a scientist, not an economist or a politician”, added Aleklett. “I believe in facts, and if someone can prove me wrong I will happily change my mind.”

Colin Campbell weighs in

Colin Campbell, a geologist and prominent proponent of the theory of peak oil, wrote a letter to The Guardian, responding to their article on the IEA whistleblowers. The following is an excerpt from a more extensive letter.

“A debate rages as to the precise date of overall peak but rather misses the point when what matters is the vision of long decline on the other side of it.

Given the central role of oil in the modern economy, the peak of production promises to be a turning point of historical magnitude. It seems that banks have been lending more than they had on deposit, confident that Tomorrow’s Economic Growth was collateral for Today’s Debt, without recognizing that the expansion was fuelled by cheap oil-based energy. The governments are now printing yet more money under Keynesian principles in the hope of restoring past prosperity, which may meet with a brief success. But if it does, it would stimulate the demand for oil that would again soon breach the supply limits, leading to another price shock and an even worse consequent economic depression. In fact, today 28 billion barrels a year support a world population of 6.7 billion people, but by 2050 the supply will have fallen to a level able to support less than half that number in their present way of life. (emphasis added)

There is a great deal that can be done to reduce waste and bring in renewable energies. Coal and nuclear power can also ease the transition although they are themselves also subject to depletion. The challenges are however great, and it is clear that governments must move urgently to prepare for what unfolds.”

The “present way of life” that Campbell refers to is likely to change for millions of people, for better or worse. By 2050 China and India’s per capita oil consumption should grow considerably.

Annual Per Capita Oil Consumption – 2009

United States – 25 barrels
Japan – 16 barrels
Korea –15 barrels
China – 2 barrels
India – 0.9 barrels

Growing oil demand from Asia

This is the crux of the demand problem. In future decades, China and India (approximately 40% of the world’s population) will likely use much more oil per capita (per person) as they continue to industrialize and develop their economies. China is already the world’s largest automobile market in annual sales numbers and is just scratching the surface of potential auto demand.

This means the world is likely to face a growing demand for a depleting resource in the decades ahead. This is a sure-fire recipe for both higher prices and rationing unless the world switches over to alternative fuels very rapidly. The big issue for the US is that 95% of our transportation fleet runs on oil. As Matt Simmons has noted many times, this situation is a “disaster in the making”.

A weaker dollar means higher prices

To make matters even more challenging for US consumers, oil is still traded and priced globally in US dollars. Since the US unfortunately now imports 65-70% of its energy, the price of imported energy will get more costly if the US dollar continues to weaken. And given the long-term weak fundamentals of the dollar, that scenario is certainly a strong possibility. This means that even if supplies are sufficient to meet demand, the price of oil may continue to rise based on the dollar falling in value.

The total lack of a coherent domestic energy policy makes higher prices nearly inevitable. Since many prospective areas within our boarders are currently off-limits to energy exploration, our level of energy independence is not likely to improve anytime soon. This alarming situation should be grounds for a national wake-up call, but unfortunately our political leadership rarely sees or plans beyond the next election cycle.

The low-hanging fruit disappearing

For more than a century, the availability of cheap energy offered the prospect of prosperity without limit. Future generations will hopefully create new paths to prosperity, but they will never enjoy the natural endowment of inexpensive energy we have experienced since the oil age began 150 years ago. Peak oil does not mean the end of oil, only the end of cheap oil. Most of the world’s low-hanging fruit has been picked and consumed. The bulk of future oil lies miles beneath the sea or in the dense tar sands. This is fruit that will not be easily picked. And when finally brought to market, (after great effort, cost and energy expended) this oil will carry a price reflecting those factors.

Learning the hard way

It is unfortunate that organizations such as the IEA have not been more transparent and less political. Perhaps the world would be father along in developing alternative energy sources. But political expediency seems to always trump common sense. When the cheap oil stops flowing, the political landscape will turn on a dime and energy policies will abruptly change, but unfortunately not a minute before. Using history as a guide, civilizations tend to learn critical lessons in only one manner: the hard way.

As to the investment implications, it seems clear that well-run energy companies should do very well if energy prices are indeed on a rising long-term trend. The problem for many investors is holding good companies in a currency that is losing value. It would seem prudent looking forward to hold a portion of one’s portfolio in quality energy stocks denominated in foreign currencies, if one has access to that service.

Today’s Markets

Investors halted a three-day losing streak on the stock market Monday, sending prices broadly higher on a weaker dollar and better-than-expected home sales numbers.

Major stock indexes soared more than 1 percent, including the Dow Jones industrials, which rose 133 points to a 13-month high. The Dow rose 132.79, or 1.3 percent, to 10,450.95, after losing 120 points over the previous three days. The Standard & Poor's 500 index rose 14.86, or 1.4 percent, to 1,106.24, while the Nasdaq composite index rose 29.97, or 1.4 percent, to 2,176.01.
Crude oil for January delivery, the new front-month contract, gained 11 cents, or 0.1%, to end at $77.56 a barrel on the New York Mercantile Exchange. It earlier rose to $79.97.

Gold futures rallied Monday for a seventh session, hitting a new high above $1,170 an ounce as the dollar fell and war games in Iran boosted global tensions, increasing gold's appeal as a safe-haven investment. Gold futures have already seen a seven-day winning streak ended on Nov. 11. The metal has only recorded one losing session this month.

Wishing you a good evening,

Tony Allison
Registered Representative

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