Oil and Gas:

PFC Energy's Diwan, GOP Rep. Bartlett of Maryland look at supply, price, economies

Is the world running out of oil? How promising are new sources of petroleum? What risks do volatile oil prices pose for the world's economies? Rep. Roscoe Bartlett (R-Md.) and Roger Diwan, oil markets expert at PFC Energy, join OnPoint to discuss the current and future state of the world oil market and its economic implications.

Transcript

Colin Sullivan: Welcome to OnPoint. I'm Colin Sullivan. With us today is Roger Diwan, and oil markets expert at PFC Energy, and Congressman Roscoe Bartlett, Republican from Maryland. Our subject today is peak oil and whether or not the world is running out of cheap oil and what effect that might have on the global economy. Thank you both for being here.

Roscoe Bartlett: Thank you.

Colin Sullivan: Congressman, I'd like to first start with you. You made some very strong statements in the past about how world production capacity is headed towards peak, or is at its peak, or in decline. What are the consequences of that, and what makes you so convinced that oil production is in decline and reached its peak?

Roscoe Bartlett: Well, two things, one is the science that led to the prediction that the United States would peak in oil production in 1970. It did, and we have fallen in our production the curve that was predicted. Was predicted, by the way, in 1956 by a scientist and geologist named M. King Hubbert, who worked for worked for Shell Oil Co. He made a prediction that the world would peak in oil production about 2000. Now, we didn't. We had a few years of grace, because he couldn't have known about the Arab oil embargo or the oil price spikes or the worldwide recession that occurred, which reduced the demand for oil. The second thing is that oil is now over $50 a barrel. For the fourth week in a row, gas prices have increased in our country. If countries had the ability to increase oil production, $50 a barrel ought to be a big incentive to increase oil production. If we are not at peak oil, we're very close to peak oil, and so we really ought to be talking about what now and what should we have been doing that we didn't do, and what do we absolutely have to do now.

Colin Sullivan: Mr. Diwan, what's your response to that? Does $50 oil sustained mean we're at peak oil?

Roger Diwan: Well, what we have here, in many ways, is a number of cyclical and structural issues which have brought us $50 oil. It's true that we're running at very high capacity. Right now we're producing at 98 percent. It means that we have very little spare capacity. We've rarely had that phenomenon. And in term of this issue of peak oil, if you look at the current conditions, and if you trend them up for the next 10, 15 years, you see that, you know, with the present technology and the present access to resources, it's difficult to imagine that we're going to be able to produce a lot more than 100, 105 million barrel per day, which probably could be around 2015. So we're entering that era, if we don't have two dramatic changes. One is technology, both on supply and demand, and second one is access to the reserve which do exist in the Middle East.

Colin Sullivan: Well, is there any reserve capacity in the world besides in Saudi Arabia going forward the next 20 years? Or do you have rely exclusively on the Saudis and the Middle East?

Roger Diwan: No, no, I mean you have a lot of oil in the ground, in Saudi Arabia, in Iran, in Iraq, in Kuwait, in the UAE, in Russia. The question is how do we have access to those reserve, and are these countries willing to develop these reserve at the pace we want them to develop them.

Colin Sullivan: And will it be just as inexpensive as it's been for the past 50 years, or are we talking about more expensive oil production?

Roger Diwan: It could be a little bit more expensive; but, you know, if you're producing oil at $7 or $8 or $9 in the Middle East, and prices are $50, there's, you know, it's not a big issue.

Colin Sullivan: Congressman, what do you see as the consequences of this -- if we have reached peak oil, as you say? What are the consequences on our long-term economic growth and the global economy and U.S. economy?

Roscoe Bartlett: Although there's a lot of oil left in the world, and we agree that there's roughly 900 to 1,000 gigabarrels of oil left in the world, you need to put that in context. Up until the Carter years, every decade, we used as much oil as had been used in all of previous history. Now, with exponential growth, if you're at about a 7 percent growth rate, and we were using oil at about 7 percent more per year, the world was, that explains how we got on that curve. Now, the fact that we have about half of all the oil that was ever in the world still there, doesn't mean that the next 50 years, 100 years are going to be like the last 50 years, 100 years, because the world is now demanding a whole lot more oil. Last year, China increased their use probably 25 percent. In less than three years, that doubles their use of oil. They probably won't continue on that growth path, but India's increasing. China's now the No. 2 importer in the world. What are the consequences of this? Boy, economic and geopolitical. When the world recognizes that there's only so much oil that can be produced, and we need more oil -- by the way, if our economy doesn't grow at least 2 percent a year, we can't service our debt. And if we don't think the economy's growing at 2 percent a year, the stock market starts tanking. You know, we have to get used to the fact that there is not going to be oil in the quantities there have been in the past available in the future, and we should have started a long time ago, 'cause we knew -- the world knew -- by at least 1980, that M. King Hubbert was right about our country. If he's right about the United States, why shouldn't he be right about the world? And we should have been doing some things that we've now blown 25 years, that we could have been doing some very meaningful things to prepare for this time when the world reaches its peak ability to produce oil. We didn't do those things then. We really need to start doing them now.

Colin Sullivan: Mr. Diwan, what's your take on what the long-term economic consequences may be?

Roger Diwan: Well, if we don't believe that the world can produce more than 100 or 105 million barrel per day, and we're at 80, 84, 85 right now, it's certainly time to start preparing for what to do next. I mean the technology exists to consume less. You have car technologies. You have other sources of energy: gas, coal. So there's a lot to be done. The question is how proactive the consuming country are about it, and so far we haven't, because energy was very cheap. Hopefully, $50 oil will open the eyes and start thinking about that and plan for tomorrow.

Colin Sullivan: So what are the alternatives, especially in the transportation sector? I mean hydrogen seems pretty far out. Fuel cells seem pretty far out.

Roger Diwan: Yeah.

Colin Sullivan: Hybrids are starting to become more -- the public seems to be more interested in buying hybrids now. But, still, there's a consumption of gasoline with hybrids. What's the alternative? Development of a energy source we haven't conceived yet?

Roger Diwan: Well, if we can consume less, we have more oil in many ways. So the question is what technology can be put on the market very quickly. And you're right, fuel cells and hydrogen are not for the next 10, 15 years. So it's hybrid and it's more -- it's cars that are a lot more efficient. After all, we're still using 100-year-old technology. We can do better than that. We can have small cars. We can have lighter cars, and we can certainly have cars which are a lot more efficient.

Colin Sullivan: Congressman, what's your take on what the alternatives should be going forward?

Roscoe Bartlett: Well, certainly, we need to conserve, and we certainly need to be more efficient. But that alone won't solve the problem. With the industrial growth in China and India and Third World would like to do for their people what we've done for our people and have an Industrial Revolution that will improve the quality of life for their people. We're going to have to start moving to alternatives. That's just the reality. This is a very daunting challenge because of the energy density in fossil fuels. One barrel of oil is the equivalent of 25,000 man hours of labor. That's like you having 12 people that work exclusively for you for one year, and all it costs you is a little over a hundred dollars. That's the $50 for the barrel of oil and maybe $50 for refining it. And you get that kind of labor intensity. The energy intensity is just phenomenal. I have a little personal experience. I was in West Virginia with a heavily loaded Prius, a hybrid car which we drive, and the worst mileage I got was 20 miles per gallon -- 20 miles per gallon going up a steep West Virginia mountain. The car was heavily loaded. How long would it take me to push that car 20 miles up the mountain? Obviously, I can't do it. I could do it with a come-along and chains and so forth, and if I did it in 90 days, I'd be very lucky, which is really about what the 25,000 man hours of labor per barrel of oil is. None of the alternatives have anything like the energy density of the fossil fuels except nuclear, but you can't put a nuclear power plant in the back of your car. And, by the way, hydrogen is not an energy source. It's not a solution to the problem. It's a good idea, because it's a handy way to move energy around. And when you finally use it, it's non-polluting. You get just water from it. but I think that probably more than half of our people believe that it's an energy source and we can solve our energy problem with hydrogen. You've got to produce more energy -- you've got to use more energy to produce the hydrogen than you will get out of the hydrogen. Nevertheless, it's a good idea, because it burns so cleanly when you finally use it.

Colin Sullivan: Do you agree with what the congressman has to say on hydrogen, specifically?

Roger Diwan: Yes, I do. I also think that we have a lot of oil still left in the ground, and if oil use is only geared toward transportation, we can actually extend the life of our barrels here. It means also that we need to destroy demand in other use -- in industrial and non-transportation. And that's also feasible, because, as oil prices increase, we're going to find alternatives, and we're going to certainly be more efficient. The efficiency gains in burning energy are still improving, and we need to make sure that that continues. Often, the technology exists. It has not been deployed.

Colin Sullivan: Congressman, it seems like you're saying that the Republicans Party's -- or factions of the Republican Party's preoccupation with drilling in the Arctic National Wildlife Refuge is a little bit misled. I mean do you -- what's your comment on that? Do you think that drilling in ANWR is just a drop in the bucket and that's not what an energy policy should be all about?

Roscoe Bartlett: Oh, it is indeed a drop in the bucket. ANWR is going to be probably half or maybe less than half, but about half of Prudhoe Bay, and Prudhoe Bay -- we have a chart that we'll show -- Prudhoe Bay had a pretty insignificant impact on oil production in our country. We were on the down slope of Hubbert's curve when we discovered oil in Alaska; and we had a little bump, but we still went down, and we're still going down. I'm opposed to drilling in ANWR for a couple of reasons. We use 25 percent of the world's oil, and we have only 2 percent of the known reserves. Now if you have only 2 percent of the known reserves, I'm having a lot of trouble understanding why it's in our advantage to use up that 2 percent as quickly as possible. If we could pump ANWR tomorrow, what would we do the day after tomorrow? And I think pumping ANWR will give a false sense of security that is totally irrelevant. ANWR will not solve our problems. We can't drill our way out of this problem. It just isn't going to happen. We're going to have to -- as Mr. Diwan says -- we're going to have to use conservation and efficiency, and then we've got to use the time we buy with that to move to alternatives. I mentioned that up until the Carter years, every decade we used as much oil as in all of previous history. If that curve had continued, when we've used half of the world's oil, we'd have 10 years of oil left. Now we're better off than that. At current use rates, we have 40 years, because it won't be current-use rates. We'd like to use more, but it's going to be decreasingly available. It's going to fall off. By the way, nobody yet has mentioned an enormously important use of gas and oil, and that's the big petrochemical industry. We live in a plastic world. We fertilize our crops with natural gas. All of the nitrogen fertilizer comes from natural gas. And, by the way, when we talk about the depletion of oil, natural gas will follow just about along with it, won't it?

Roger Diwan: Oh, we have a lot more gas reserves than oil, and we have mined them much less. So in a way, if you look at the ratio of production and reserve, gas is actually the next source of energy. We do have a lot more gas --

Roscoe Bartlett: But we're now using gas at an increasing --

Roger Diwan: At an increasing rate, but, in a way, we're 20 -- or I would -- more like 30 years behind oil. So we have gas, and gas in many ways is our transition fuel here. Question is what happened after oil and gas. But gas is used, as you said, for petrochemicals and for industrial and for electricity, not for transportation.

Roscoe Bartlett: And there's another problem with gas, and that is that it's very difficult to move across the ocean.

Roger Diwan: Correct.

Roscoe Bartlett: It's now used pretty much where it's produced through a very complex system of pipelines moving it around. To move it across the ocean, you've got to what? Liquefy it and store it at very cold temperatures.

Roger Diwan: Yeah.

Roscoe Bartlett: In a pressurized ship.

Roger Diwan: But that's the next 10, 15 years, we'll see a dramatic increase in the LNG, in the liquefied natural gas.

Roscoe Bartlett: So we will be dealing -- we will be in -- using oil -- gas more than we are now. But even that will run out. If all we're doing is finding clever ways to use the little bit that's there more quickly, we've missed the point. Gas and oil are not forever, and we need to be moving to technologies that free us. From a national security basis, by having only 2 percent and using 25 percent is an enormous national security risk. That alone should drive us to do something else, should it not?

Colin Sullivan: Mr. Diwan, changing the subject a little bit, your consulting firm recently released a study that said, "Depletion of oil resources will cause a shift in geographic dominance of production sources." What kind of shift are we talking about? Are we talking about people -- countries in the Middle East being able to dominate more easily now the world energy markets than they are now?

Roger Diwan: Oh, what you have is the declines in oil field are very steep, in the United States, in the North Sea. So, in general, in the OECD countries and in some of the countries like Mexico, which are close to the United States, and probably even Venezuela, and the reserves that we know of are based in the Middle East and a little bit in Russia. So as we demand more energy, and energy production plateau or decline in the OECD countries, the gap has to be filled by the producers in the Middle East. So you see that shift happening already over the last two years, over, actually, the last five years. Most of the increase of production came all from the Middle East or from Russia.

Colin Sullivan: Now, the Saudis say that they can meet demand growth over the next 20, 30, 40 years. But there's never really been an audit done on Saudi capacity. How do you do that? Should we believe what the Saudis say about their capacity, about their reserves?

Roger Diwan: They don't say that. They say they can increase their production to 12 and 14 million barrels per day, which I think is feasible with a lot of investment. But is that enough to meet the increase in demand, and that's what the Saudis do not answer. I do not believe that they -- that if we start to see the big decline setting in later this decade or the next decade in the United States in a number of major fields coming on-stream right now in West Africa, that Saudi Arabia will be able to produce 20 and 25 million barrels per day. I don't think Saudi Arabia wants to produce 25 million barrels per day. There is a limit about how much production can come from a lease, even if the reserves do exist. To get those reserves into production, you need to spend tens, if not hundreds of billions of dollars. And I'm not sure these countries want to do -- to spend that amount of money that fast to meet the energy needs of the West.

Colin Sullivan: Now, if we are on a decline, if we are past the peak, isn't it just more expensive to get this oil out of the ground? Isn't that part of the problem? And we're going to continue to see sustained oil prices beyond $50 a barrel.

Roscoe Bartlett: Yeah, Goldman Sachs says they're going to 105, and Americans may change their driving habits when gas is $4 a gallon. But the reality is that we will reach a peak. We may have reached a peak now. A lot of authorities believe that we've reached a peak now, but we will reach a peak, and then there will be a decline after that. It's not a matter of spending more money. Certainly, oil is going to cost more. But not only will it cost more, there's going to be less of it. And those who believe that the marketplace will take care of this problem, you know, and I have a lot of colleagues in the Congress who aren't worried about this at all. Not to worry, they say, the marketplace will take care of this. But I'll tell you, you can't get blood out of a turnip, and the marketplace can't do what can't be done, and the ability to produce oil just isn't there. And the present surge capacity in the world is what? A million, million-and-a-half barrels a day?

Roger Diwan: Probably. Around a million-and-a-half.

Roscoe Bartlett: That's about what it is. You know, China will slurp that up almost overnight with their increased demand for oil. If we're not at peak oil, we very shortly will be at peak oil. We ought to be behaving like the reality says we ought to behave, and that is that oil is going to become increasingly more expensive and decreasingly available. And what will the world do? What will the major countries in the world do when they recognize that there's not going to be as much oil there as needed to support our economy? What do you think the world will do?

Colin Sullivan: Well, what kind of response do you get when you take this message to the Republican Caucus in the House, especially?

Roscoe Bartlett: Well, right now we're kind of in an education mode. We did one special order for an hour. We got a great response on that. Next week, we hope to do another special order. And most of the people in the country, including my colleagues, we have representative government, and the representatives generally reflect the general knowledge in the population, and most people in our country don't know that we're facing a crisis. One of the writers on this, by the way, starts his article by saying, "Dear Reader, Civilization as we know it will end soon." Now your first impulse is to put down the article. This guy's a nut. But if you don't put it down and read through the article, you're hard-pressed to argue with his conclusions. That if we don't do some rational things now -- what we need is a war, the equivalent of a war on this. We need the equivalent of a Manhattan Project squared if we are going to produce energy from alternatives in adequate quantities to satisfy the enormous needs of our society.

Colin Sullivan: Mr. Diwan, what do you think about this projection of $105 oil? Is that outlandish, unrealistic?

Roger Diwan: Yeah, I mean I read the report. What the report says, oil prices will be around $50. If we have a big supply disruption in the world, prices will spike. And they put the $105 number. I don't know why they put $105. Why not $85 or $150? So there's no reason for that. It's clear that we don't have a lot of excess capacity. And, in a world without excess capacity, there is a risk premium, and we can have a spike in oil prices. We need to have a disruption to go there. But what we need to think, also, that we had an economic cycle which was very strong, so demand was very strong in 2003-2004. Still strong in 2005, but also the global economy's slowing down, so the demand actually will slow down at the same time when a lot of investment made earlier in this decade, both in the former Soviet Union and in West Africa, will be coming onboard. So I imagine that in the next five years, if we had a slower economy, actually oil prices will subside. It doesn't solve the problem. What it might do is dull the problem. You can say, "Well, oil is now at $30. We don't need to think about it anymore."

Colin Sullivan: So we might see prices level off over the next couple years, but then long-term we're gonna see spikes up to --

Roger Diwan: Yes, because --

Colin Sullivan: $50, $60, $70 a barrel.

Roger Diwan: Correct, I mean the question is where we're going to find our next [supply] of oil if we don't have a dramatic breakthrough in technology to be able to pump more of the oil in the ground. Because, right now, we have recovery rates between 30 and 50 percent. In any oilfield, this is how much oil you recover. So you can increase your reserve by lifting more oil from the ground. So we need that to change. Well, that, you know, could be 10, 15, 20 years down the road.

Colin Sullivan: So the days of $20 a barrel oil, $1 a gallon gasoline, over, thing of the past?

Roger Diwan: Probably, unless we have a very major recession.

Colin Sullivan: Congressman?

Roscoe Bartlett: Oh, I would agree. Unless there's a worldwide depression, you'll never see dollar gas again. By the way, this was a resource which was depletable. Oil never should have been a dollar a barrel. Saudi Arabia, early on, what, they got $5, it was a dollar and a half a barrel or something. They got 5 cents of that. You know, recognizing that this is a resource which is not infinite. Oil has never been priced at its real replacement cost. We're still not pricing it at its true replacement cost. If we have to replace the energy we get from fossil fuels with alternatives, it's going to cost a whole lot more than the equivalent of $50 a barrel.

Colin Sullivan: OK, we're just about out of time. Congressman, Roger Diwan, thanks for being here. Join us tomorrow for another edition on OnPoint. Until then, I'm Colin Sullivan for E&ETV.

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