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Page added on February 19, 2014
A 10-year oil supply retrospective shows unwarranted optimism
Our guest blog today comes from Steve Andrews, who is a retired energy consultant and contributor to the Peak Oil Review, reachable at sbandrews@att.net. We reached out to CERA to determine its interest in providing a response, but did not hear back.
“False optimism leads to very poor investment decisions.”: Jeremy Grantham, co-founder and Chief Investment Strategist, GMO
Ten years ago this month the Oil & Gas Journal published a story from CERAWeek—an annual elite conference for the oil industry put on by Cambridge Energy Research Associates—that bears revisiting.
Why go back? Three reasons. First, CERA arguably has maintained the highest profile of any oil industry analytical shop since at least the turn of the century, thanks in large part to founder Daniel Yergin’s reputation. Every time there is a surprise in world oil supply, he’s the media’s go-to guru. When the National Petroleum Council convenes a world oil study, you can bet the ranch that CERA will play a lead role. When the US Senate or House convenes a committee hearing on oil, CERA often sits on the panel; they also deliver some of their key research papers free of charge to all US lawmakers. Their policy-oriented footprint is large and their strategic media outreach effective.
Second, at the time CERA’s 2004 forecast of seven years of history-breaking sustained growth in world oil production capacity struck many players as being an unreasonably if not outrageously optimistic headline. How does it look 10 years later? Way off base.
Third, if CERA’s oil forecast was that off base a decade ago, should we believe the current abundant-oil storyline that CERA jumpstarted in the fall of 2011 and that has been embraced by the press and policy makers alike? So let’s look back.
On CERA’s lead panel in February 2004, Robert W. Esser, senior consultant and director on global oil resources, predicted global oil production capacity would expand by 20 million barrels/day from 2004 through 2010. (CERA doesn’t forecast production. It forecasts production capacity, which is essentially unverifiable.) That’s nearly 3 million b/d of capacity growth every year for seven straight years from 2004 onward. It didn’t happen.
Per data from BP’s Statistical Review of World Energy, actual production of global petroleum liquids grew by 5.7 million b/d during that period. Then consider the 4 million b/d of spare OPEC capacity that the US EIA shows for 2010. But there were also at least 2 million b/d of spare OPEC capacity in January 2004, at the start of the forecast period. So net, CERA missed their forecast by well over two thirds.
Note that by CERA’s definition production capacity “…eliminates economic or political factors and temporary interruptions such as weather or labor strikes.” Note too that unused productive capacity is never intentionally present among non-OPEC nations, and unused and undamaged production capacity among OPEC nations was primarily limited to Saudi Arabia, Kuwait and United Arab Emirates during 2010.
Why did CERA stumble so badly?
First and foremost, CERA underestimated decline rates from existing oil fields. About the time of its 2004 conference, an oil industry analyst who knew Daniel Yergin asked him, during an elevator discussion, what decline rate for producing fields CERA used when calculating growth in world oil supply in their major studies. Mr. Yergin replied that it would be in the 1% to 2% range.
Chalk that up as a fatal flaw. Over seven years, a decline rate of 1.5% would mean having to replace only 8+ mbd of production capacity. It’s ironic that by late 2007, in what CERA called a groundbreaking study, they calculated the actual decline rate from 811 of the world’s major oil fields at 4.5% per year. Over those same 7 years, using their 4.5% decline rate would require 23 million b/d of capacity just to keep production flat. IEA estimates for decline rates rank even higher than CERA’s.
On the production side, CERA spoke optimistically about projected gains from the Gulf of Mexico, West Africa, Brazil, the Caspian area, Canada, Venezuela, Iraq, Nigeria, Algeria, Ecuador, Sudan and Russia. Indeed, production increased in 11 of those 13 nations for a net gain of 6.7 million b/d. But on the bad news front, the rest of the world lost 1 million b/d of oil production during CERA’s forecast period, hence the 5.7 million b/d net gain. Declines badly undercut forecast gains.
On the demand side, CERA actually worried that “should this spurt in output exceed projections of a very large increase in world oil demand this decade, then persistent downward pressure on oil prices might result.” For the record, when CERA made that comment, oil prices were upward of $30. But while nearly everyone was wrong about oil prices a decade ago, CERA was also wrong about the key demand driver: China. CERA forecast that China’s demand growth for oil would slow to 5% in 2004, compared to what eventually occurred: record-breaking growth of nearly 17%. And while CERA talked about volatility in Chinese demand going forward, China’s record-setting growth rate for oil demand continued throughout CERA’s 2004-10 forecast period.
If this was a personal forecast which I had blown this badly (and I’ve blown a couple), no one would notice. But this enormously flawed vision was widely circulated. CERA gets press coverage, but the press isn’t checking CERA’s track record, and this 2004 prediction is just the tip of the iceberg.
In 2005, CERA dialed back their optimism only slightly. They projected world oil supply capacity still growing 16.4 mbd from 2004 through 2010—a reduction of 3.6 mbd from their original forecast. They projected world demand in 2010 at 94 million b/d, leaving 7.5 million b/d of idle capacity. Note this comment about related impacts on prices: “We generally expect supply to further outpace demand growth in the next few years, which could result in oil price weakness around 2007-08 or thereafter.”
In 2006, CERA projected potential world oil capacity growth of 21.3 million b/d—from 88.7 million b/d in 2006 to 110 million b/d in 2015. We’re less than two years away from year-end 2015, yet total petroleum liquids production will likely run in the 90 million b/d range. Clearly, CERA’s was an exceedingly pollyanish view, rather like a best case in a perfect world.
Now square CERA’s long-standing optimism bias on future world oil supplies with the recent spate of sobering news from Wall Street on the financial travails of the large investor-owned super-majors. Mark Lewis has done a nice job highlighting the near tripling of oil and gas capacity expansion costs since 2000—from $250 vs. $700 billion; three quarters of that was spent on oil, yet oil supply rose only a modest 15% (BP data). Increasingly blunt reports from analyst shops like Sanford Bernstein add to the growing contrarian chatter. Solid coverage in the UK of Richard Miller’s recent paper “The Future of World Oil Production” opened a few eyes about limits. But those voices still have a steep hill to climb.
That’s in part because, starting in September 2011, CERA went on the offensive as chief cheerleader of an overly optimistic, US-led oil abundance storyline. It features the US’s record-breaking shale oil bonanza—an amazingly successful yet term-limited reality. Viewed at the global level, for the last few years the brouhaha about our shale oil bonanza has been the tail wagging the world oil supply dialogue.
CERA’s oil supply predictions should have earned deep skepticism from the press and policy makers. That hasn’t happened yet. It’s overdue.
But please keep the larger backdrop in mind: Without a serious revisiting of the questionable optimism that dominates any dialogue related to longer-term world oil supplies, without a harshly realistic scrub of the facts, we face unnecessarily large energy policy risks.
18 Comments on "A 10-year oil supply retrospective shows unwarranted optimism"
Davy, Hermann, MO on Wed, 19th Feb 2014 12:07 pm
“False optimism leads to very poor investment decisions.”: Jeremy Grantham, co-founder and Chief Investment Strategist, GMO This is happening in many markets and is driven by greed and ignorance. Yet, it is how the markets work, but in our case now, we do not have the time or surplus energy for mistakes.
The “lobby of plenty” is not illegal but we know their motivation is money not the truth. The truth is being distorted or exaggerated. Distortions or exaggeration are fine during a fishing trip but not with our global support system. We are talking malinvestments due to this hype resulting in less. We are talking society moving in the wrong direction. With the overshoot of our carrying capacity we will create a situation of shortage sooner than later. Our very survival will hinge upon a gentle ride down the energy gradient. Our complex interconnected global system supporting our local support system will come under strain and may break down. Since no region is self-sufficient in this hyper complex world we are talking a possible drop in complexity or standard of living. When this happens much of our previous investment could be lost. These investments were expensive for society. We paid the price in resources and waste created. It would be ashame to lose these investments. IMHO these folks distorting the truth for profit are evil in the sense of a “system of evil”. These seemingly benign distortions may lead to immense suffering considering our survival system is shaky at best.
rockman on Wed, 19th Feb 2014 12:45 pm
“False optimism leads to very poor investment decisions.” And true optimism leads to very good investment decisions. Such words of wisdom. LOL. Kinda of reminds me of that old joke: falling off a 10 story building isn’t a bad thing. It’s the abrupt stop that’s bad. Most politicians, like most stock brokers, don’t make a living by predicting failure…especially when it comes to their own actions. And consultant companies don’t tend to get paid for delivering answers that the client doesn’t like.
So between CERA, politicians and stock brokers it always amazes me how much blind faith some folks put in them. But we understand how it works: human nature tends to dictate that we give merit mostly to those who draw conclusions that support our expectations/hopes.
Davy, Hermann, MO on Wed, 19th Feb 2014 1:00 pm
@rock – agreed- good point
paulo1 on Wed, 19th Feb 2014 2:14 pm
Plus, as I contemplated sending this article to some of my math teacher buddies who are all still convinced growth and decent returns on investments are written in stone, why bother? Excuse the pun, but why waste the energy? They simply do not want to hear it and would prefer to hear false good news over realistic projections. There is absolutely no room for a limits to growth dialogue, they just don’t want to hear it. I have many friends in ther cornucopian camp, but I always thought number crunchers would get it first. Instead, it is one other argument after another while mine has stayed the same.
For now, I continue to retain close friendships but have been relegated to the ‘odd man out’ status; something almost akin to a crackpot. “Paul just went weird about ten years ago,right after he bought that place in the country. When he sold out in town in 2007 and spent all his money buying land and putting in gardens, I don’t know…he just got weird buying tools and stuff”. Meanwhile, I watch this train wreck unfolding with both frustration and sadness.
regards….Paulo
Davy, Hermann, MO on Wed, 19th Feb 2014 2:44 pm
@paulo – I am in the same boat- I have done similar changes- I guess we will have to accept human nature for what it is and not what it should be. The problem is at this point in time there is little margin of error
Kenz300 on Wed, 19th Feb 2014 3:13 pm
Those who predict should have their previous predictions measured for accuracy and disclosure.
Giving wrong overly optimistic predictions may be no more than propaganda. Phony spin of the facts.
Republicon’s and the top 1% are very good at telling lies, half truths and distortions of facts.
Northwest Resident on Wed, 19th Feb 2014 4:01 pm
The inherent flaws in human beings result in their creating equally flawed social/business structures. The problem is that a single flawed human being generally can’t screw up too many things. But these giant social/business structures — food delivery system, stock market, trade systems — have immense impact on large populations. Humanity has built systems that are animated by human greed, corruption and short-sightedness. Those systems will be our doom in the end. I only hope that someday, future humanity will have learned from the very painful lessons of their previous historical mistakes. We could be looking at a major evolutionary event coming up on the horizon — let’s hope that enough of “the good ones” make it to the other side to make a difference, rather than the other way around.
ghung on Wed, 19th Feb 2014 4:21 pm
Yeah, Paulo, to paraphrase Daniel Elsberg; “First they listen they understand you, then they proceed to ignore you.”
It was when I couldn’t ignore this fact about our society that I decided to dis-associate myself from as many of our complex systems as possible. Our society (species?) finds the limitations inherent in considering long-term consequences as annoying inconveniences. We discount the future.
People are fully invested in things as they are. I know smart folks who fully agree with my view of things, on the surface, and have made absolutely no changes in their behavior. They’ll be in for a very rude awakening if the SHTF and they show up at my place seeking shelter from a storm they agreed was coming and didn’t prepare for.
I’m looking for ideas for signs I can have made up to put on my road. Any ideas?
ghung on Wed, 19th Feb 2014 4:25 pm
What’s the old sign say? (from a Louis L’Amour book, I think);
Gate sighted in for a .50 calibre Sharps. You have 10 seconds to move on.”
rockman on Wed, 19th Feb 2014 5:33 pm
And most here have heard my philosophy regarding Paulo’s position but for any newbies;: I don’t try to teach pigs to roller skate for two reason: it frustrates me and pisses the pigs off. I can live without either.
Northwest Resident on Wed, 19th Feb 2014 5:34 pm
ghung — How about: “Warning — Wild Pit Bull packs, fire ants and randomly fired .50-cal rounds headed your way.”
BTW, 10 seconds if overly generous, IMO.
Davy, Hermann, MO on Wed, 19th Feb 2014 6:02 pm
“Or”
Certified Crazy and Unpredictable proceed at your own risk.
LOCAL HEALTH DEPARTMENT
Joe Clarkson on Wed, 19th Feb 2014 6:57 pm
In a more neighborly vein, how about
“Come on in; we’ve got plenty of shovels”
Davy, Hermann, MO on Wed, 19th Feb 2014 7:28 pm
You guys ever see “The Book of Eli”:
The Book of Eli (2010) film is a post-apocalyptic story of a lone man who fights his way across America in order to protect a sacred book that holds the secrets to saving humankind.
At some point there was a scene where a nice old lady and old man would invite people into their home in a humble and helpful way. When the people entered they fell into a trap and later were eaten.
The Hollywood version of collapse always gets back to cannibalism, domination of the fittest, and big guns. We need a real story. Pictures tell 1000 words but of course something real won’t sell. Anyway N/R a sign can read:
Fresh meat welcome, leave your shoes at the door.
J-Gav on Wed, 19th Feb 2014 7:44 pm
Davy said: “I guess we’ll have to accept human for what it is and not what it should be.”
I’d be 100% in agreement with that if anybody actually knew what human nature consists of. Science has been giving us a better idea for a while but it’s still far from being pegged down solid.
A lot of ‘not-yet-quite-sorted-out’ mixes in there : we’ve got Homo Erectus, Neanderthal and Sapiens but it goes further back than all that. Seems a major separation occurred millions of years ago when the Bonobos branched off from the chimps. Won’t go into details here as I’m working on the English version of a new paper on the subject and can’t give away any secrets, so I’ll limit my comment to say that we apparently got more from the chimps (violence and male domination to be brief) but also something from the Bonobos (reconciliation, stronger empathy and powerful female alliances, among other things). The point being that ‘human nature’ isn’t very easy to pin down for the moment.
J-Gav on Wed, 19th Feb 2014 10:45 pm
Davy – yeah, The Book of Eli reminded of an old Twilight Zone episode where aliens enticed humans to board en masse for a visit to their world … They negligently left a book behind – turns out it was a cookbook, with us as the main course.
Northwest Resident on Thu, 20th Feb 2014 12:39 am
I really liked The Book of Eli. But I hope that “post collapse” isn’t anything like portrayed in that movie — cruel, stark and dirty. One interpretation of the “deeper meaning” in that movie: Isn’t it interesting how the book was desperately sought by one individual whose goal it was to use that book to obtain power and control over “the people”. But the protagonist was successful despite all odds in delivering the book to another group who would use the book to give mankind hope and to teach peace. That kind of sums up the two sides of most religions that I see in the world today — can be used for good, or can be used to control and manipulate the masses for the benefit of the manipulator.
From my point of view, if/when post-collapse comes, I really don’t want to see any religious zealots rising up in different regions to enforce their religion on others. But it seems like a distinct possibility.
rockman on Thu, 20th Feb 2014 1:37 pm
NR – “I really don’t want to see any religious zealots rising up in different regions to enforce their religion on others”. You mean like it isn’t that way now? Southern Iraq or east Texas…does it matter? LOL.