Black Swans and Plug-in Cars

Last year the global credit crunch and its knock-on effects precipitated the sharpest oil and gas price declines in over two decades. Despite the recent $100+/ Bbl price implosion and subsequent partial recovery, we have now entered an historic inflection point—call it “practical peak oil”—in the global balance of conventional energy supplies due to:

1) undeniable conventional resource maturity—an aging infrastructure above aging oil fields;
2) entrenched resource nationalism;
3) realigned economic and national security interests—the resource base could accommodate further growth if the oil were not in the hands of countries acting increasingly in their own self interest; and
4) environmental sensitivities.
Due to recent low prices, we have seen evidence of powerful self-correcting forces regarding the future supply outlook for oil and gas. To cite just one example, given investment trends we thought two million barrels of production from the Canadian oil sands was likely by 2011. With slowdowns due to low prices and other concerns, 2 mb/day is more likely by 2014-2015. And this is just one example of many around the world.

What spiked prices last year? In part, there is an under-appreciation of how much the world changed on the demand side. Back in 1980, large chunks of the world population were living under oppressive government regimes. Consider that there was systematic impoverishment of Indian and Chinese populations. When that changed, it laid the foundation for large demand growth. When combined with some level of price subsidies in developing nations, that meant it took a much bigger price spike to trigger demand elasticities in the developed world. Right now it’s too soon to know if the current demand reduction is a one-to-two year or three-to-five year or multi-decade event.

One important point related to oil price spikes: A key difference between the recent price spike and those of 1973-74 and 1979-80 is that back then we still had new fields to bring on stream to keep the oil supply both cheap and growing. Not so today.

“Practical peak oil” is a reality. It will rear its head again. World oil production won’t come down super-fast. But three or four years of coming depletion won’t be offset by new production investment. You can make a really good case that in the future we won’t significantly exceed last year’s level of world oil production.

EVWorld