Oil Really Is Running Out at a Rate of a Billion Barrels Every 12 Days: My Second Report on Hubbert's Peak
Reality Check (September 7, 2000)
On September 27-29, the heads of state of the OPEC countries will meet for the first time in a quarter of a century. For the first time, they will meet in the Western hemisphere. Specifically, they will meet in Venezuela.
This is bad news for the West. The President of Venezuela, Col. Hugo Chavez, is a disciple of Castro, a self-declared social revolutionary, and a man so far to the left that the United States government revoked his visa in 1994 after he was released from prison for having participated in a failed coup attempt in 1992. The visa was restored in 1998, after he was elected, but he has not used it.
He now runs the country under a new constitution which was approved by referendum. He has replaced the nation's judges with his own appointees. He runs a tight ship.
Late last year through this year, he put restrictions on any relief supplies from the U.S. being distributed in response to the massive flooding, disease, and literal starvation in Venezuela's rural areas. My church was involved in relief efforts that he vetoed. We could not get supplies into the country.
This man is a hard-core, vindictive leftist. He is further to the left than any other elected official in the Western hemisphere, other than Castro. But, unlike Castro, he has clout: his nation exports 1.5 million barrels of oil to the U.S. every day. It is our major supplier.
In the last 30 days, he made a personal tour of the Middle East, meeting with the heads of state in Saudi Arabia, Kuwait, Iran, and Iraq. He had to drive across the border of Iraq from Iran, since the U.S. will not allow planes to fly into the country. Saddam Hussein personally drove him around Baghdad in his limo. After returning to Iran, he flew to Indonesia.
What he got was assurance from the leaders that they will personally show up at the OPEC meeting this month. If they do, it will be a major show of force.
This information was published by Adrian Van Eck's MONEY-FORECAST LETTER for September. He is forecasting a move to $40 a barrel in 2001.
In a report issued last December, Steve Ellner made a similar observation regarding OPEC. Nobody picked up on it. After giving a favorable sketch of Chavez, in which Chavez sounded amazingly like Castro, though Castro was never mentioned, the author reported:
Of overriding importance is the key role Chavez has begun to play in OPEC. In recent years, Venezuela was notorious for scabbing on OPEC by increasing oil exports. The Chavez government's announcement early this year that it would not attempt to recover the portion of the U.S. market previously lost to Saudi Arabia signaled a new policy of complying with Venezuela's production quotas. In March [wrong: September] of next year, Chavez hopes to host OPEC's second summit of heads of states (the first was held in 1975) in which non-OPEC oil exporters will also participate. There Chavez is expected to push for the proposal for OPEC to reassume the role abandoned two decades ago of setting prices in the form of establishing a maximum-minimum range between which prices will be allowed to oscillate.In less than one year in office, Chavez has diverged from the U.S. on a wide range of issues. What he said in China on the last day of a visit in October was more than just empty rhetoric: "We have begun to put into practice an autonomous foreign policy independent of any center of power, and in this we resemble China." Chavez went on to tell the Chinese that his end vision was nothing less than a "multi-polar world."
When Chavez exhorted fellow rebels to lay down their arms after intense fighting on February 4, 1992, he declared, "Unfortunately, the objectives we formulated have not been achieved for now. The "for now" phrase has since become legendary in Venezuela. It serves as a reminder that Chavez is, above all, a strategist with a keen sense of timing. . . .
OPEC supplies about a third of the world's oil. But at the margin, they are the swing producers. They can force the price up if they are willing to cut production. Cartels tend to break down because of cheating, but the price of oil has tripled since 1998. The trend is up.
Not many analysts seem worried. Statfor.com's site has recently run a pair of articles that dismiss the threat of higher oil prices, unless oil hits $40. Then it could produce a shock similar to 1975, they estimate. The West has become more efficient in terms of oil. From 1,400 barrels to produce $1 million (adjusted for inflation) in goods and services in 1976, the U.S. has fallen to 800 barrels.
Stratfor assesses regions and countries in terms of their vulnerability to an oil shock. Best off: Argentina; next: U.S., Canada, Australia, United Kingdom; next: Western Europe; next: Asia, especially Japan.
If this estimate is correct, then the U.S. dollar would be initially stronger, because OPEC demands payments in dollars. My recent assessment has been that the U.S. dollar is close to its peak. But, if OPEC really does cut back on oil production, then for a period, the U.S. dollar could appreciate in relation to other currencies.
I had not thought it possible for OPEC to pull this off until I read Van Eck's report. But Chavez is determined to extract wealth from the U.S. and redistribute it to the poor. He is an ideologue, and one with a personal desire to get even with the U.S.
The richest OPEC countries have wasted billions on wars (Iraq-Iran; Iraq-Kuwait) and welfare projects (Saudi Arabia). They need the money. Even for oil exporting nations, expenditures rise to meet income -- and then rise some more. The lure of an OPEC price hike will be very great.
Chavez's influence appears to be strong. If the heads of state do show up in Venezuela, then they will be demonstrating a degree of solidarity not seen during the entire period of the booming U.S. stock market, 1982-2000.
It is legitimate to take a wait-and-see attitude. Caution is wise for the next four weeks. But we may be on the verge of a foreign policy/economic reversal that will send a message to Western powers: energy is still a serious business.
I like cheap energy, but I don't think today's cheap energy can be sustained. I sent REALITY CHECK #46 (Feb. 27) on this topic. Here are selected extracts.
The increase in the price of oil in the second half of 1999 was spectacular. Yet an increase to about $30 was predicted in a July report by Dr. Colin Campbell, who spoke to an All-Party Committee of Britain's House of Commons. He said it would take place in 2001 or earlier. Much earlier, as it turned out.
This report appears, appropriately, on www.hubbertpeak.com.
Hubbert is not a familiar name to most people. . . . In 1974, he predicted that world petroleum output would peak around 1995. His forecast here was not quite so accurate, although it has been reasonably close. . . .In his presentation to the Commons committee, Campbell outlined a theory of oil reserves. He thinks that they are basically fixed -- a matter of geology. Oilfields were produced under rare circumstances. Modern technology has advance considerably, letting us identify these fields. "The world has now been very thoroughly explored with the benefits of this new understanding and the high resolution seismic surveys. About 90% of the world's oil endowment lies in just 30 major petroleum systems. . . . All the promising areas have been thoroughly explored." . . .
Yet the public is unconcerned. "The general situation seems so obvious. Surely everyone can see it staring them in the face. How can any thinking person not be aware of it? How can governments be obvious of the realities of discovery and their implications?" . . .But aren't there stable or increasing oil reserves today? No. There is statistical deception going on. Companies usually under- report reserves when a new field is discovered. So do OPEC countries, whose quotas are tied to oil reserves. These reserve figures should be backdated. If they were, this would have major implications on the discovery charts. They would be flattening.
Prudhoe Bay's depletion curve has been flat since 1991. It will barely make the original 1977 estimate of 12.5 Gb, which was downgraded officially to 9 Gb.What we have experienced is a growth of reporting, not a growth in oil reserves.
Today, half of the world's known oil reserves are in five Middle East countries. They hold the hammer. He thinks they will be using it soon.
There is a discovery/production relationship for newly discovered fields. Production peaks at the halfway point. In the U.S.A.'s lower 48 states, discovery peaked in the 1930's and production peaked in 1971. In the North Sea, discovery peaked in 1980 and peak production seems to have been reached.
The Middle East will have to make up any deficit: the hammer. Campbell calls this "swing share." Swing share rise to 38% in 1973, just before the OPEC oil embargo. It fell to 18% in 1985 as a result of North Sea oil. Oil prices fell. As of mid-1999, the Middle East's swing share was back to 30%.
"This time it is set to continue to rise because there are no new provinces ready to deliver fresh production, save perhaps the Caspian and that seems to be turning sour."He thinks the swing share will hit 35% in 2001. "The Middle East countries will then have the confidence to impose much higher prices, realising that they have no competition. They may even get such confidence sooner." Norway's production is set to halve by 2006. Norway is the world's second largest exporter. . . .
"I think prices might briefly soar to very high levels. . . ." Also, "I think demand does become elastic above about $30/b, reacting to normal market forces, so higher prices may curb demand."
The price reached $29/b before 2000 rolled over.
"But I expect that somehow a plateau of production, however volatile, will unfold around $30 a barrel. But the end of this plateau will soon come into sight." He thinks it will hit in 2008, when swing share is 50% and Middle East countries will be approaching their depletion midpoint. . . .
The geology of oil points to increasing prices before 2010. But the geopolitics of oil could force that increase even sooner -- maybe before the end of the year.
What I recommend is awareness -- and being out of the stock market. The financial press has not picked up on any of this yet. It's "good times for all" as far as the U.S. financial press is concerned. This kind of story is off the radar screen.
The world is run in terms of digits, but it runs on oil. There is a real economy out there, underneath the dance of the digits. It operates in terms of supply and demand, but also in terms of politics, including the politics of revenge.
We are an oil-importing nation. We are now funding our prosperity by means of massive borrowing from foreigners. For visual confirmation, see this chart from FORBES:
The effect of an oil price of $40 will be far-reaching, but one of them will be to move foreign-owned dollars out of U.S. investment U.S. instruments and into oil-exporting nations' treasuries. Whether oil-exporting nations will rush to buy U.S. debt is a real question. Given the geopolitics of oil, I would bet against it.