AmerCon : Oil : WSJ Dire Prophecy

Wall Street Journal
2004.09.21

Dire Prophecy: As Prices Soar,
Doomsayers Provoke Debate on Oil's Future
By Jeffrey Ball

In a 1970s Echo, Dr. Campbell Warns Supply Is Drying Up, But Industry Isn't Worried
__________

BALLYDEHOB, Ireland -- As he sat last month in his book-lined study, Colin Campbell got a
phone call that made him shriek with joy.

"Holy Mother!" he yelped after he put down the receiver. "The good ol' moment's arrived!"

The call had brought word that the price of crude oil was shooting up -- a climb that, in the
days that followed, would take it to near $50 a barrel. To Dr. Campbell, a 73-year-old
retired oil-industry geologist who lives in this coastal Irish village, this was sweet
vindication. It meant that the "moment" he had been predicting for about 15 years -- the
beginning of the end of the age of oil -- might finally be at hand.

Dr. Campbell is at the center of a small but suddenly influential band of contrarians known
as the peak-oil movement. They see cause for alarm in the fact that since the early 1980s
the world has been pumping more oil out of the ground than it's been finding. By as early
as next year, they say, humanity will have reached a point of reckoning: It will have
extracted half the oil it will ever get. Once that "peak" is reached, Dr. Campbell says, global
oil production will start falling, never to rise again.

The peak would mark the end of cheap oil. Although people would probably keep using oil
for another century or so, prices would steadily rise. To maintain economic growth, the
world would have to become radically more energy-efficient, shifting quickly to alternatives
such as solar and nuclear power. If the switch wasn't fast enough -- an outcome Dr.
Campbell thinks more likely -- the global economy would screech to a halt.

"The perception of this decline changes the entire world we know," says Dr. Campbell,
whose wife affectionately calls him Mr. Doomsday. "Up till now we've been living in a world
with the assumption of growth driven by oil. Now we have to face the other side of the
mountain."

People have been incorrectly predicting oil's demise since the industry's early days, and
the peak-oil movement has yet to make a serious dent in the energy policies of the U.S.
and other developed nations. But the debate is flaring up with new intensity
because of some powerful forces changing the geopolitics of oil, among them
the rise of an oil-guzzling China and persistent instability in the Middle East and
Russia.

The oil industry calls Dr. Campbell a crackpot. Since he began writing about a looming
peak, the industry notes, he has progressively postponed his predicted date, from 1995 to
2005. This roughness of the numbers, the industry says, points to a more fundamental
problem with the peak-oil theory: It underestimates the power of technology to find more oil
-- indeed, to broaden the concept of oil itself.

That this debate can occur points to a striking fact: Nobody really knows how much oil
exists. More to the point, nobody knows how much can be gotten out of the ground. Much
of the oil lies in places with volatile politics, including the Middle East, Russia and Africa.
Further complicating the calculation: Beyond the pool of conventional oil that the industry
can easily extract today lie vast stores of hydrocarbons that, until recently, haven't been
thought of as oil. Among them: tar-soaked sands in Canada and oil-laden shale rock in
places including the western U.S.

So far, over the approximately 150 years since the first oil well was drilled, the world has
burned through about 900 billion barrels. Dr. Campbell thinks the world will be able to
pump out about that much more. The industry, however, contends Dr. Campbell is being
far too pessimistic. Exxon Mobil Corp., for instance, estimates there are something like 14
trillion barrels of fossil fuel still in the ground, including the tar-soaked sands and other
nonconventional forms. It figures the industry can extract a good chunk of that.

If Dr. Campbell and his colleagues are right, then nations should rush to promote fuel
efficiency to minimize economic upheaval. If they're wrong, but the world follows their
advice anyway, then huge sums of money could be wasted jumping to alternative energy
sources that, while environmentally friendly, would be more expensive than oil.

"We're running out, but not in any important way. We're running out so slowly it doesn't
matter," says Michael Lynch, an oil-industry consultant who has emerged as a leading critic
of the peak-oil theorists. At some point, the world will shift from oil to other energy sources,
Mr. Lynch agrees. But he says there's plenty of oil to ensure that transition will happen
smoothly -- long before the world hits the last drop. The world, he notes, "changed from
horses to cars, and we didn't run out of oats."

For years, Dr. Campbell has been visited in Ballydehob, a village of about 300 people
southwest of Cork, by a stream of visitors he describes as "fringes" -- among them a
Louisiana woman who drives a van powered by vegetable oil and a British couple moving
to Australia to live off the land.

Mainstream Attention

But suddenly Dr. Campbell is receiving mainstream attention. In the past few months, he
has spoken before a joint committee meeting of the British House of Commons and
addressed about 200 J.P. Morgan Chase & Co. investors by conference call from
Ballydehob. This month two officials from AB Volvo, the truck and engine maker, visited
from Sweden. His theory, if right, would force vehicle makers to revamp their lineups.

Also this month, PFC Energy, a respected Washington energy- consulting firm, released a
report essentially endorsing Dr. Campbell's gloomy prediction. PFC puts the peak a bit
further out than Dr. Campbell does -- sometime between 2010 and 2015. But Michael
Rodgers, the PFC senior director who coordinated the report, agrees with Dr. Campbell
that the precise year of the peak is less important than the conclusion that it is coming.

Mr. Rodgers says PFC officials debated whether to stake their reputation on the
side of those whose pessimistic predictions have been wrong before. But they
concluded that the decline in global oil discoveries has become so pronounced
that the industry can't count on technological breakthroughs to bail it out in time.

"Part of the problem that Campbell suffers from is that he's been saying this for 20 years.
People have gotten to the point where it's like the boy crying wolf," Mr. Rodgers says. "We
believe his current predictions are closer to being accurate than they ever have been
before. But unfortunately, because he's said this so often, people are skeptical."

No one disputes that for the past two decades, the world has been pumping out more oil
than it has found in new fields. And consumption is rising quickly, meaning the gap could
widen. By 2030, predicts the Paris-based International Energy Agency, global oil
consumption will jump to 120 million barrels a day from 82 million barrels a day
now.

But critics such as Mr. Lynch argue there's every reason to assume that discoveries will
revive. They contend that the decline in discoveries since the 1960s isn't an inexorable
trend but an artifact of economic forces. Today's supply crunch, by pushing up oil prices,
should give the industry an incentive to figure out how to extract more of the oil still in the
ground.

Dr. Campbell's analysis is clouded by his "conservative, Malthusian bias," charges Mr.
Lynch, 49, who works out of a bedroom office in his house in Amherst, Mass. Mr. Lynch's
clients include the U.S. Department of Energy as well as Saudi Arabia's national oil
company, Aramco. Mr. Lynch has written several papers that pick at the peak- oil theory in
painstaking detail. His latest one, complete with a three-page bibliography, alleges "a
pattern of errors and mistaken assumptions presented as conclusive research results."

Dr. Campbell so dislikes Mr. Lynch that he has declined invitations to appear with him in
debates. "It's like asking a doctor to talk about medicine with a faith healer," Dr. Campbell
says. He calls Mr. Lynch "the high priest of the flat-earth economists."

Alarms that the world is running out of oil have long been sounded. In 1875, just 16 years
after Edwin Drake drilled what's generally regarded as the world's first commercially
successful oil well in Pennsylvania, the state's chief geologist warned that it soon would run
out of oil. He was wrong.

Hubbert's Graph

Today's peak-oil theorists are the intellectual descendants of the late M. King Hubbert, an
American oil geologist. In 1956 he published a foreboding graph featuring a bell-shaped
curve. At the time, the U.S. still was the world's top oil producer, while production was still
ramping up in the Middle East. Dr. Hubbert figured that the rise and fall of oil production in
a nation would follow the pattern of a single well. A peak in oil discovery would come first;
then, years later, production would peak as engineers got out the oil. Once discoveries
started falling, production would too -- but only after a gap of about 40 years, Dr. Hubbert
estimated. Since discoveries in the continental U.S. had peaked around 1930, his graph
showed production peaking around 1970 and then dropping off.

Dr. Hubbert was derided when he released the graph, which came to be known as
Hubbert's Peak. By the early 1970s, however, the facts had proved him right. The U.S. no
longer produced the bulk of the world's oil. Production was rising fast in Middle Eastern
nations, the Soviet Union and South America.

Then, in 1973, the Arab members of the Organization of Petroleum Exporting Countries
tightened their spigots, and the world panicked. The result: high prices, long lines and
frequent shortages at gas stations across the U.S. and Europe.

Suddenly, the future of oil was an urgent international concern. Just as America's oil supply
had gone into decline, skeptics warned, now the entire globe was beginning to run out of
oil. In 1979, James Schlesinger, the Carter administration's departing energy secretary,
declared that world oil production had nearly peaked.

Mr. Schlesinger also turned out to be wrong. The oil industry came up with new technology,
including three-dimensional seismic imaging, to reduce the number of dry holes. Oil
production continued to climb.

Dr. Campbell was pushing as hard as anyone to find new oil. He had entered the industry
just as it was starting to boom in the late 1950s. For the next three decades, he rode the
industry's rise, prospecting for oil from the mountains of Colombia to Norway's North Sea
coast.

The insight that would transform him from oil hunter to oil skeptic came in 1989, a year
before he retired. Backed by Fina, his final employer, he conducted a study for the
Norwegian government on how much oil the world had left. The study calculated
Hubbert-style curves for countries around the world and tallied them up. Dr. Campbell's
conclusion, laid out in a 1991 book: World-wide oil production would peak around 1995.

Since then he has updated the calculations several times. In the mid- 1990s, he says, he
and a colleague switched from using publicly available data to a private consultant's
database, which shows production by individual oil fields. That information, he says,
prompted an alarming discovery: The world's oil producers were finding a lot less oil than
their official numbers suggested.

Oil producers report their hydrocarbon stocks in a category called "proved reserves,"
which means oil that's been found and can reasonably be expected to be extracted using
current technology. It's seen by the market as a fundamental indicator of how well the oil
industry is doing replenishing its stocks.

What oil producers should do, Dr. Campbell says, is add the entire capacity of an oil field
to their reported reserves in the year they first tap the field. What they actually do is
dribble that field's capacity into their reported reserves bit by bit over a number of years.

The problem with that incremental accounting approach, Dr. Campbell says, is that it gives
the world the false impression that it has plenty of oil. It disguises the less-rosy truth, he
argues, which is that massive oil-field discoveries are largely a thing of the past.

Mr. Rodgers, the PFC senior director, says he is convinced that Dr. Campbell's
criticism is valid. He says oil production is either reaching a plateau or declining
in 33 of 48 major oil-producing countries, including six of the 11 OPEC countries.
Mr. Rodgers also points to a separate set of numbers. Over the past decade, he says, the
percentage of major oil companies' exploration-and-production budget that has gone to
exploration has dropped to about 12% from about 30%. That, he reasons, is because they
have concluded that there aren't many more large caches of oil for them to profitably find.

"Despite the fact that we're in the highest oil-price era, the level of exploration is
not increasing," Mr. Rodgers says. "The reason it's not increasing is that, in so
many regions of the world, the fields have gotten so small that even though you
might be able to drill a well and get a positive rate of return, the incremental
value doesn't mean a lot."

Oil-industry executives reject this analysis. For one thing, publicly traded oil companies are
required by the U.S. Securities and Exchange Commission to report their reserve additions
in the incremental way that Dr. Campbell distrusts. That requirement, they note, reflects
the reasoning that a pool of oil shouldn't be claimed as an asset unless its owner is able to
pump it out. Being able to pump it out, in turn, means having developed the necessary
technology, and having paid to put that technology into place.

More broadly, say peak-oil critics such as Mr. Lynch, whatever the truth about the past rate
of discoveries of new fields, it's no sign of an impending geological limit. It largely reflects
geopolitical constraints that have prevented the industry from fully exploring many oil-rich
parts of the world, including Iraq and Russia. "It's a political change," Mr. Lynch says. "It's
not geology that's causing that drop."

The industry continues to wring more oil from existing fields. Moreover, there are signs that
some of the political constraints to new discoveries are falling in the face of rising oil prices.
For more than two decades, OPEC generally has kept production well below its capacity to
shore up prices, but recently it has opened its spigots wider. If prices remain high, oil-rich
countries such as Russia and Venezuela will have more incentive to put aside their political
problems and open up more fields.

Meanwhile, the industry is bullish that future improvements in its technology will enable it to
extract enough fossil fuel to stay ahead of demand. "We've got plenty of oil to last us for
decades," says Alan Kelly, Exxon Mobil's general manager for corporate planning. "Now
certainly, there has to be an end. But we're of the view that that's quite a long way out
there."

Dr. Campbell thinks the industry is fooling itself. He is so convinced that an oil-induced
financial crash is coming that he has moved much of his savings into low-risk Norwegian
bonds because he believes Norway has more oil left than other big producers. "It's no
use having bland statements about the power of technology," says Dr. Campbell.
"I just want to know where and when."

///