[Marxism] Running on empty

Louis Proyect lnp3 at panix.com
Tue Mar 15 09:04:45 MST 2005

Running on empty
The leading energy analysts who foretold Enron's demise have an alarming 
new claim: The world's major oil companies are almost tapped out.
- - - - - - - - - - - -
By Robert Bryce

March 15, 2005  |  Four years ago, the analysts at John S. Herold Inc. were 
the first to call bullshit on Enron. On Feb. 21, 2001, three Herold 
analysts issued a report that said Enron's profit margins were shriveling, 
the company had too few hard assets, and its stock price was way too high. 
Less than ten months later, Enron filed for bankruptcy.

Today, the analysts at Herold -- a research-only firm that issues 
valuations on several hundred publicly traded energy companies -- are 
making predictions even bolder than their call on Enron. They have begun 
estimating when each of the world's biggest energy companies will peak in 
its ability to produce oil and gas. Herold's work shows that the best minds 
in the energy industry are accepting the reality that the globe is reaching 
(or has already reached) the limit of its own ability to produce ever 
increasing amounts of oil.

Many analysts have estimated when the earth will reach its peak oil 
production. Others have done estimates on when individual countries will 
hit their peaks. Herold is the first Wall Street firm to predict when 
specific energy companies will hit their peaks.

Since last fall, Herold has done peak estimates on about two dozen oil 
companies. Herold believes that the French oil company, Total S.A., will 
reach its peak production in 2007. Herold expects 2008 to be critical, with 
Exxon Mobil Corp., ConocoPhillips Co., BP, Royal Dutch/Shell Group, and the 
Italian producer, Eni S.p.A., all hitting their peaks. In 2009, Herold 
expects ChevronTexaco Corp. to peak. In Herold's view, each of the world's 
seven largest publicly traded oil companies will begin seeing production 
declines within the next 48 months or so.

Executive vice president Richard Gordon, who heads Herold's global 
strategies team, says the firm's goal in doing peak-production estimates 
for individual oil companies is simple: "If the dinosaurs are going 
extinct, we are trying to figure out which ones are going to go extinct the 

Herold's projections have enormous ramifications both for stockholders in 
the major oil companies and for every energy consumer on the globe. If 
Herold is correct, and the world's biggest oil companies cannot increase 
their production in the coming years, then several things appear certain:

# Oil prices -- which are already at record levels -- will continue rising 
as demand outstrips supply. In a few years, gasoline prices of $2 per 
gallon could seem like a bargain.
# State-owned oil companies like Mexico's Pemex, Venezuela's PDVSA 
(Petroléos de Venezuela) and Saudi Arabia's Saudi Aramco may be unable to 
increase their production enough to meet burgeoning global demand.
# The producers who belong to the Organization of the Petroleum Exporting 
Countries, and Saudi Arabia in particular, may have even more leverage over 
the global oil market in the coming years.
# The United States will be ever more reliant on oil imported from 
countries filled with people who don't like George W. Bush or his policies.

While Herold's projections provide ammunition to the growing chorus of 
analysts who believe peak oil is imminent, they are not being welcomed by 
the oil companies. Last month, when I asked ChevronTexaco's chairman and 
CEO, David J. O'Reilly, to respond to Herold's projection that his company 
would reach its peak production in 2009, he replied snappishly, "I'm not 
going to comment on that."

A spokesman for Royal Dutch/Shell in London was similarly coy, saying in an 
e-mail that the company had "no comment" on Herold's projection. However, 
the company's spokesman, Simon Buerk, pointed to a September 2004 report 
published by Shell that predicts the company will be producing the 
equivalent of 4.5 million barrels of oil per day by 2014, not the 4 million 
barrels per day that Herold foresees for that time frame.

Charley Maxwell, an analyst at Weeden & Co., a Connecticut brokerage, says 
oil industry officials are loath to discuss Herold's projections because 
doing so would "circumscribe their future prospects and the future growth 
of their stock, and executives have no interest in doing that since so much 
of their compensation is tied to their stock options." Maxwell, one of the 
most respected stock pickers in the energy business, believes the non-OPEC 
oil producers will hit their peak oil production in the next five years. 
And he applauds Herold's research, saying that no other reputable firm "has 
been willing to make this type of prediction."

Another energy industry veteran, John Olson, co-manager of Houston Energy 
Partners, an energy hedge fund, agrees. Olson believes that Herold's 
predictions about peak production are "very significant. It is perhaps the 
first cannon ball over the bow of a big tanker."

But Herold has its critics. Brian J. Jennings, the chief financial officer 
of Oklahoma City's Devon Energy Corp., which Herold believes will hit its 
peak in 2009, says that Herold's analysis is "a truncated look at the 
company. It assumes that nothing we are going to do over the next five 
years will increase our production." Jennings says Devon expects to 
increase its oil production by 25 percent over the next five years -- and 
that figure does not include fields that the company is developing in the 
Gulf of Mexico.

Of course, scientists, pundits and oil men have been predicting that the 
world will run out of oil ever since the gusher blew at Spindletop in Texas 
in 1901. Despite those predictions, the last century has been one of 
unbroken increases in supply. Each year, the oil industry has produced more 
oil than it did the year before. Today, the industry is producing about 83 
million barrels of oil per day. New oil fields in the deep-water Gulf of 
Mexico, in the Caspian Sea and in Saudi Arabia will soon begin pumping oil 
onto the global market. Plus, huge deposits of oil are available in the 
Canadian tar sands and American oil shale.

But turning tar sands and shale into motor fuel is a very expensive 
proposition. And those new, unconventional oil sources may be insufficient 
to replace the decline in production from existing fields, which deplete by 
about 6 percent per year. Further, they may be too small to quench the 
demand from the developing world -- China in particular. Last month, at a 
conference in Houston, Zhu Yu, the president of China's Sinopec Economics 
and Development Research Institute, said that between January and September 
of 2004, motor fuel use in his country soared by 20 percent. Yu also 
predicted that China's oil consumption will double over the next 15 years 
to more than 10 million barrels of oil per day. Meanwhile, the Energy 
Information Administration expects India's oil consumption to increase by 
nearly 30 percent over the next five years.

The oil industry has plenty of other reasons to be nervous. The royal 
rulers of Saudi Arabia, the world's biggest producer, appear vulnerable to 
terrorist attacks and civil unrest. The Saudi government's biggest enemy, 
Osama bin Laden, has focused his ire on both the Saudi royals and the oil 
infrastructure in the Persian Gulf. And his loyalists are eager to attack 
both of those targets.

In Iraq, insurgents are continually attacking that country's oil 
infrastructure -- thereby crippling the war-torn nation's economy and its 
future prospects. In Venezuela, which has the biggest oil deposits in the 
Western hemisphere, president Hugo Chavez has threatened to cut off the 
flow of oil to the United States if the Bush administration continues its 
efforts to undermine his government. In Russia, president Vladimir Putin's 
brazen, state-sponsored theft of Yukos, one of that country's biggest oil 
companies -- and his jailing of the company's CEO, Mikhail Khordokovsky -- 
is likely to slow investment in Russian oil fields for years.

Furthermore, spare oil-production capacity has largely disappeared. Oil 
producers are running their wells at maximum capacity. Indonesia, a member 
of OPEC, cannot meet its OPEC quota of 1.4 million barrels per day. In 
February, Indonesia was able to produce only 942,000 barrels per day, its 
lowest level of production in 34 years. And last week, Algeria's energy 
minister, Chakib Khelil, said that OPEC "does not have the production 
capacity to increase its quotas."

All of these factors are sending oil prices to record highs. Monday's NYMEX 
closing price for light sweet crude was $54.95 per barrel. Last week, the 
Department of Energy issued a report saying that it expects prices to stay 
near or above $50 per barrel for the rest of this year. That's a big change 
for an agency that has always been conservative in its price projects. At 
about this same time last year, the agency was predicting that oil would 
cost about $29 per barrel throughout 2005.

Whatever price projections are used, it's increasingly clear that the era 
of cheap oil is over and that oil companies are having a harder time 
finding new oil to replace the oil they're pumping. In short, it appears 
that the late M. King Hubbert, a geophysicist who worked for Shell in 
Houston, is being proved right. In the 1950s, Hubbert used mathematical 
models to predict that American oil production would peak in the early 
1970s. That's exactly what happened. Now, Hubbert's theories are being 
tested on a global scale.

Herold's owner and CEO, Art Smith, is a believer in Hubbert's work. Smith 
and his fellow analysts at Herold have been building their peak production 
databases since 1996. About 10 months ago, Herold began publishing what it 
calls "strategic evaluations" of specific companies, which include graphics 
showing when that company will reach its peak production. Herold does not 
do geologic analysis. Instead, its analysts mine the company's filings with 
the Securities and Exchange Commission. It also looks at the oil properties 
that the company has acquired or sold, along with new projects being 
drilled, and older oil fields in the company's portfolio. "We look at this 
data, put it into a financial model, and start asking questions," says 
Herold analyst Gordon.

Herold isn't the only Wall Street firm considering the issue of peak oil. 
In early December, Deutsche Bank issued a report that predicted global oil 
production will peak in 2014. The Deutsche Bank report also stresses 
political instability and China's surging demand. Those factors, Deutsche 
Bank believes, "could trigger a shortage shock leading to a price crisis."

And while many analysts in Houston are convinced a peak in global 
production is in the offing, there are others who believe that today's high 
prices will trigger a surge in new oil production. David Pursell, a partner 
at Pickering Energy Partners, a Houston brokerage, says with oil at $50 per 
barrel, "a whole lot of oil fields that used to be woefully uneconomic 
suddenly become profitable and that means that any peak projections get 
delayed." Although Pursell is not ready to agree with Herold's projections 
about individual energy companies, he -- along with virtually everyone else 
in the oil industry -- agrees that the era of cheap energy is over and that 
America must begin adapting to the new geopolitical realities that come 
with that fact. Alas, it appears the Bush administration hasn't made that 
same transition.

Last week, President Bush gave a speech on energy policy in Columbus, Ohio, 
in which he encouraged Congress to pass an energy bill. Once again, he 
touted his plan to drill for oil in the Arctic National Wildlife Refuge, a 
move he said would "eventually reduce our dependence on foreign oil by up 
to a million barrels of oil a day." The key word here is "eventually." Even 
if approvals for drilling ANWR were granted immediately, the first oil from 
the refuge would not reach the continental United States for years. 
Furthermore, as the New York Times reported last month, it appears that the 
major oil companies may have cooled in their desire to drill in the refuge. 
During his speech, Bush also talked about efficiency measures that could 
save homeowners electricity. But during his 4,600-word, 35-minute-long 
speech, Bush uttered the words "hybrid vehicle" exactly one time.

It's astonishing that Bush, the former Texas oil man, still doesn't 
understand the fundamental problem of America's imported oil addiction. Nor 
does he appear to grasp the threat that is posed by the possibility of peak 

The majority of the oil that the United States imports from places like 
Saudi Arabia and Venezuela is used as motor fuel in automobiles. Yet the 
president conflated the idea that burning more coal and building more 
nuclear power plants will somehow allow America to reduce its oil imports. 
In his speech, Bush refused to discuss the obvious: We cannot cut our oil 
imports (read: gasoline addiction) without dramatic changes to our auto 
fleet. At some point, the United States will have to force the automakers 
to build more efficient automobiles. And a key part of that efficiency 
changeover will mean replacing increasing numbers of America's 200 million 
cars and trucks with hybrid vehicles.

Even some of Washington's most hawkish neoconservatives are embracing the 
idea of high-mileage hybrid vehicles. Former CIA director James Woolsey, a 
key backer of the war in Iraq, is driving a Toyota Prius. Woolsey, along 
with neocons like Frank Gaffney have begun preaching the Greens' gospel of 
energy efficiency. The neocons haven't joined the Sierra Club. Instead, 
they're arguing that energy conservation is simply smart strategy when 
dealing with the Muslim extremists who reside in the oil-rich countries of 
the Persian Gulf. But so far, the neocons haven't been able to get Bush's ear.

Remarkably, when it comes to thinking about peak oil and what it means for 
the future of America, Wall Street analysts and neocons are taking the 
lead, while the former oil man from Midland keeps his head up his tailpipe.



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