[Petrodollar]

I have begun to read a rather candid report by the Netherland-based Clingendael International Energy Programme (CIEP): "Oil turbulence in the next decade: An Essay on High Oil Prices in a Supply-constrained World". The authors are Jan-Hein Jesse and Coby van der Linde.

Link to publication:
http://www.clingendael.nl/publications/ ... _jesse.pdf

CIEP is an organization that is apparently endorsed by BP, the Dutch Ministry of Economic Affairs, Total E&P Nederland, and various other government ministries and energy-related organizations, and thus it appears that some EU nations are waking up to the fact that by the next decade, peak oil will be a fait accompli....

Here are some notable excerpts from pages 7 thru 11:

OIL PRICE

The current high oil prices are still primarily driven by structural factors and can be explained without resorting to throwing blame at speculative investors playing the futures market or at the low dollar. Prices are mainly driven by the supply and demand imbalannces and the fear that these will further deteriorate in the next decade.

Until recently, the oil price was largely underpinned by the marginal cost of the last barrel needed to match demand, with some political and econokmic conjuncture mark-ups or -downs. This currently puts a structural floor of $110 a barrel under the oil price (WTI).

...regarding Supply and Demand, the authors are refreshingly candid...

A new supply/demand outlook of around 100-105 million b/d for 2030, most likely to be published by the International Energy Agency (IEA) in their next edition of the WEO in November (versus 116 million b/d in the WEO 2007), will have far reaching implications.

It basically means that world oil (and liquids) supply can grow at only half the rate in the next 22 years than earlier anticipated (circa 13-18 million b/d versus 29 million b/d).

If correct, it implies that the world will have to go through a period of substantial demand destruction - in the order of a half to two thirds of today's oil demand in the US, or up to 100% of the oil projected to imported by China in 2030. {!!!}

A possible quickening of the underlying oil field decline rates at the time deepwater oil production (circa 10% of the global supply) goes off plateau in the first half of the next decade caould make this pessimistic supply outlook even worse.

But even with stable observed decline rates, the industry still has to bring twice as much new oil and liquids onto the market in the next 22 years than what they have done over the past 22 years - around 80 million b/d if supply and demand were to grow to 116 million b/d by 2030 as per WEO 2007, or 70 million b/d in case supply can't grow much further than recently suggested.

...and here is the first time that I have read a quasi-gov't think tank write about the requirement of demand rationing, esp in the US:

In practive this means that demand rationing will be required in the OECD countires and particularily in the US, in order to accomodate growth in the newly developing countries, notably China and India.

Different fuel prices for end-consumers in the different countries will be the dominant factor behind this 'oil redistribution'.

Through a combination of current OPEC policies and different price mechanims in the differnnt consumer regions, the OECD countries pay twice for the burden: once directly at the pump, and secondly indirectly by rationing demand to accommodate the surge in oil demand in the emerging economies, where consumers benefit from subsidized prices but drive up prices in international markets.

In parallel with the OECD countries accomodating the economic growth of emerging economies, the latter countries have to work away their oil product subsidies withouth triggering a jump in consumer proice inflation, in order to improve energy efficiency and to reduce world oil demand growth. {thats quite a cahllenge...}

...and the authors even state what will happen if the above items do not take place within the next decade...

The alternative is that new and oil oil consumers end up in a firece competition for scare oil supplies at much higher price levels, with the risk of triggering a deep and prolonged recession and possible geopolitical tensions.

...Lots more I need to read, but the first 12 pages of the report are remarkably candid and well presented (includng some interesting comments about Iraq).

Here's the conclusion of the CIEP report (page 105), which is essentially the same conclusion that I reached in my book a couple of years ago:

Irrespective what will happen with the oil price in the short term, the outlook for the next decade is bleak, and effective global leadership and a determination to cooperate are urgently needed. Many countries are taking the right initiatives to combat oil dependcy and climate change. However, these are long-term actions of which the impact will only become visible over time. In the interim period, the coming decade, things could get much worse before turning better, especially if interests (especially between the major resource holders and consumer countries) further diverge. In the adsence of a more harmonious world, the world economy could suffer terribly, which is ultimately bad for consumers and producers alike. In this light, their is no alternative than to change positions and to become more cooperatibve in adequately tackling the energy and climate challenges, so that the world can become a better place by 2020 and beyond.

Overall, I recommend that others read this detailed report.

Anecdotally speaking, I suspect we could see global oil prices over $150 in the months immediately following IEA's publication of its 2008 WEO report (in November 08') with perhaps a separate appendix on the world's largest 400 oil fields, which may show that these fields are declining around 4% per year.

Unfortunately, the effects of these IEA reports on the market will likely catch the average American by surprise...and we'll continue to blame speculators and a declining dollar - as opposed to the fundamentals. I really wish the US-based EIA would publish a similar report to the CIEP in an effort to wake-up Americans about the global energy landscape, and allow us to have a real debate this fall about Peak Oil policy differences between John McCain and Barak Obama, but I doubt that Guy Caruso, who heads the EIA has the courage to push thru this administration an honest report on the Peak Oil issue and coming turbulence in the global marketplace...

[KevO]

thanks for the link. a great find

[Petrodollar]

I read more of the report, and I should note that I disagree with a couple of assumptions that the authors make about potential oil supply capacity for 3 or 4 nations. On page 23 they wrote:

Quickly rising oil prices would not be necessary if OPEC and a couple of other major oil resource holding countries, notably Russia and Mexico, would accept their global responability and take actions to accordingly. The fact is that around 8 to 10 million bbl/day of medium priced oil is avaliable in these countries[sup]4[/sup] in addition to what is currently under development, but it cannot be developed and produced for political reasons, due to ongoing conflicts and demand uncertainties. {See footnote below - as I think these assumptions are overly confident} Should this oil become available, global oil prices would still (need to ) rise, but would do so in a much more smoother and controlled way. The transition period from an Oil Supply-constrained World to an "Energy-sustainable World" deperately needs to be beter managed globally. The world definitely needs more time to adapt, to realize the innovations and to roll out the new alternative fuels - not to replace oil, but to supplant it, in order to meet the surge in global demand, particularily in the developing and industrializing countries. If this does not happen, the Oil Supply-constrained World will be much more turbulent than necessary. Realistically, things will get worse before getting any better.

[sup]4 [/sup]Iraq: 4 mln b/d+; Iran: 1 mln b/d; Nigeria: 1 mln b/d; Venezuela: 1 mln b/d: Saudi Arabia, Kuwait and UEA: 1 mln b/d+; Russia: 1 mln b/d; Mexico: 0.5 mln b/d+; Rest of OPEC: 0.5 mln b/d

...I disagree with the above assumptions - for example, even if "peace were to breakout" in Iraq tomorrow morning - I don't see Iraq producing 6.5 million b/d - ever. That's way above its peak of 3.5 mln b/d from 1979-1980. Same goes for Iran, which peaked in 1974, Russia which peaked in 1987, Mexico which peaked in 2004, etc. My strong suspicion is that incremental flows available for actual export from those 9+ oil countries probably total 2 or 3 million b/d, not the 8 to 10 that the authors mention, and this is especially true of Iraq and Iran.

...well, despite my criticism of these assumptions, and in the author's defense, their subsequent paragraph seemed to reflect a more realisitc appraisal of the next decade.

Without being able to persuade OPEC, Russia and a couple of major resource-holding countries to change their (national interest driven) policies, Western consuming countries have no alternative than to work even harder on conservataion and innovation with the objective to acheuve a sustained reduction in the rate of demand growth relative to the rate of economic growth, and on developing their most expensive unconventional oil reserves (such as Canadian oil sand and ultra deep water developments) and substitution. The alternative is stagnation; a reduction in the rate of economic growth as supply constraints become binding on overall economic growth as predicted as a possible scenaio in 2005 [sup]5[/sup] (the "Fourth Oil Shock and a Supply Constrained World").

5 Jan-Hein and Frans Kunst, The Fourth Oil Shock and a Supply Constrained World, CIEP paper, June 2005.

...Lots of interesting comments on pages 24-26 regarding China, the US and the EU.

[CarlosFerreira]

It is an excellent report. As Gasmon says, troubles ahead! If OECD countries and developing economies can't agree on import tariffs and GW, they certainly won't agree on this and on nuclear proliferation. Thus is very serious.

Again, thank you.

[venky]

Interesting document. Have downloaded & will read ASAP

Very frightening statement you noted,

"In practive this means that demand rationing will be required in the OECD countires and particularily in the US, in order to accomodate growth in the newly developing countries, notably China and India."

Do you think the Yanks (and us Europeans) will let this happen ? - I think not. BIG troubles ahead, on many fronts.

Gasmon

I think prices and market forces will do most of the rationing; right now India and China are strong as far as currency reserves go and are able to cope with the high prices (although subsidies do cause distortions in demand). I wonder for how long though they can cope, given an economy in turmoil in the years ahead.

Only the US is militarily capable of controlling the flow of oil (and denying it) to its competitors, though it needs to be seen if it is politically capable of that.

[KevO]

Having just read the Executive Summary, it's hit home what a very serious situation we are all in made all the more scary that it's predictions are such with the assumption that Saudi has loads of spare capacity!
Simmons say they haven't.
So even the best case scenario is very grim indeed.
50mph speed limits for all nations within a year I bet!

[CarlosFerreira]

The predicted growth in "resource nationalism" is hitting hard. Russia and Mexico are holding back: high prices or no oil. Venezuela is selling at bargain prices to selected costumers (South America and Europe), further skewing demand. The US could possibly attack Mexico and Venezuela, Brazil is not totally out of their depth, but I don't think further involvement in the Gulf (attacking Iran) can help them (remember: no nukes, or your oil glows in the dark), and Russia is way too far and strong for the kind of swift, "shock and awe" wars they can do right now.

As someone says, if the US gets too tough, China my drop the debt bomb. And the Saudis, if pushed against the wall, can do it too. The EU has too many problems of its own, and Japan alone can't help.

[Starvid]

Anecdotally speaking, I suspect we could see global oil prices over $150 in the months immediately following IEA's publication of its 2008 WEO report (in November 08') with perhaps a separate appendix on the world's largest 400 oil fields, which may show that these fields are declining around 4% per year.

Bulls eye! That report will be the the drop that causes the cup to overflow.

[Zardoz]

Further confirmation that we Peak Oilers are correct, and everybody else is wrong.

It's really simple and easy to sum up, isn't it? We're screwed. There's just no way out of this.

[Petrodollar]

The predicted growth in "resource nationalism" is hitting hard

Yes, but this CIEP report also points out something rather important that few other quasi-govt thinks tanks will dare discuss - equality of resource consumption based on population levels - and the evolving psychology of the Chinese poplution. Page 25-26 offer some important insights that many OECD countries, and the US in particular, really don't understand.

So far, the developed economies have been able to accommodate the growth in oil demand in the rest of the world and have been willng to pay for it. Energy cost as a part of income has been relatively low until recently. The question is, however, if they wil continue to accpet the current condition if new supplies start falling short of growing demand, something that will become increasingly unavoiadable in the next deacade if OPEC countries continue to behave as they do today. In our view it is quite possible that each major economy will ultimately start to take unilateral and more protectionist actions, even if they collectively give a strong preference to a more cooperative and open society. {As for "unilateral" actions, the US has obviously taken the lead w/ the invasion of Iraq, and re "protectionist" actions, the Unocal-China mess of 2005 is likely the beginning of this pattern} In this sense, more and more countries will face a prisoner's dilemma, having to opt for the obvious, driven by their lack of security of supply. In this view, the glimpse we have seen of a modern fenqing, or "angry youth" in China - characterized by patriotic, xenophobic and nationalistic behavior by the well-educated young Chinese people - is worrisome. With a strong sense that the West, led by the US, is tyring to keep China down and stop if from taking its rightful ("fair") place in the world, the Chinese feek they have the fullest right to their "fair" share of the oil (and commodities) pie. In discussions several fenqing made it crystal clear that they will not accept the Western world frustrating their peaceful economic development and growth. But how that "fair share" is defined and accepted by the different parties, both West and East, is not yet clear and will only be tested in the next decade when the oil turbulence further deepens. Most likely, China's internal forces and issues, difficult for Western countries to understand and anticipate, will define the precise "fair share."

...so, in other words, the author's are suggesting that China's educated youth believe that they are basically entitled to the same level of consumption as the US/Western countries, and that in the next decade we can expect the Chinese to begin articulating these concerns over oil and other commodities. WIth 1.2 billion people, or about 20% of the world's population, will the Chinese begin informing the US and perhaps the EU that their "fair share" of global oil supplies should be 20% of production? Indeed, they are accumulating the wealth/foreign exchange surplus to begin pushing for this type of resource distribution, and I find the author's acknowledgement of this growing dynamic quite prescient.

Given that the US has 5% of the population, and uses about 24% of the world's total oil production, any such assertion by the Chinese to this effect would likely be shocking to the average American. Note: In 2003, the consumption of oil per capita in the US was 25 barrels per person. In China is was only 1.7 barrels per person. (I don't have the most recent stats, but I think for China it has risen to about 2.3 or 2.5 barrels per capita). The author's interviews with the "fenqing" and their growing desire for a more "fair share" of the world's oil and mineral resources is an important topic that is hardly acknowledged by the mainstream US media conglomerates...

The authors also comment on the US vs. EU oil consumpion variance....

Without pointing a finger only at China, the US - being addicted to oil - is, from a European point of view, equally to blame for its unsustainable extensive oil use. The US currently uses 20.35 million b/d of oi; 42% of total oil product demand in all OECD countries, or 23 percent of global demand. Compared with OECD Europe, which uses 15.26 million b/d, oil use per capita in the US is around 80% higher than Europe, with too little action seen to bring this aggressively down to be in line with European consumption. For instance, driving one mile in the US currently required 37% more fuel on average than in Europe, due both to the larger size of vehicles and to less efficient energy technology. Moreover, demand was basically flat in 2007, in spite of a deterioration of the economy. In this sense, one could equally argue that the US currently uses more than its "fair share" of the world's oil. Naturally, a much stronger change in the US than already proposed will be much applauded. For instance, an estimated 4 to 5 million b/d of oil imports into the USA could be saved by 2020 when the next car that every US citizen buys results in a fuel efficiency that is on par with the EU's fuel consumption level today. SUch investment will not only be beneficial for the US, but also for the EU and the rest of the world because it will help to stablize oil prices at world markets for years to come.

...well, I seriously doubt that last assertion, but this point sort-of reinforces their veiw that the US will lilkely have to engage in demand rationing during the next decade. Anyhow, its an interesting document with some candid conclusions.

[Twilight]

Further confirmation that we Peak Oilers are correct, and everybody else is wrong.

It's really simple and easy to sum up, isn't it? We're screwed. There's just no way out of this.

There might be. There are a lot of pages to read.

Thanks for the link Petrodollar, this looks like a good one.

[Twilight]

Lots of fat to cut in the West though. Lots. Monte is correct when he says discretionary energy use keeps a lot of people in employment, but the car taking people to the movies can have a 1-litre engine instead of a 3-litre engine without fundamentally affecting the economy, except to improve the balance of trade.