There’s been a bit of a buzz in the peak oil crowd (not to mention my in-box) about CERA, famously dismissive of peak oil, supposedly becoming peak oil adherents. This all started, as best I can tell, with a presentation by CERA Global Oil Group Managing Director Jim Burkhard spoke at a CSIS session on “Transforming the Transportation Sector: Energy Security, Climate Change and Transportation”. (This is how it was reported by ASPO (see link below); I don’t know what the setting was for this session or presentation.)
Check ASPO’s web page about the talk, where you can download a 6.5MB MP3 of the event. ASPO’s description of the talk, from that same page:
During his presentation, Mr. Burkhard explained that in acknowledging that peak oil is here, CERA’s interpretation is that US gasoline demand peaked in 2008 and is expected to decline in future years. He also stated that CERA maintains its position that the reasons for US liquid fuel demand having peaked are economic and geopolitical in their nature, rather than in any way driven by geologic factors. He repeatedly came back to the notion that “peak oil is here”.
It commonly claimed, often used in a somewhat derogatory way, peak oil is only about geology. We rather state that peak oil is the result of a complex series of forces which include economics and the physics of oil wells. Bardi has earlier discussed the four stages of an idea and how it diffuses into public knowledge. At the ASPO 6 Conference former US secretary of Energy Dr James Schlesinger declared the following: “The peakists have won … to the peakists I say, you can declare victory. You are no longer the beleaguered small minority of voices crying in the wilderness. You are now mainstream. You must learn to take yes for an answer and be gracious in victory”. We at ASPO can only be glad to see that CERA now is acknowledging our concerns are begins to shift their position.
As for what Burkhard said, here’s my summary, with quotes transcribed directly from the recording:
Early in the presentation, Burkhard says, “The peak oil I’m talking about is peak oil in transport fuel demand for light duty vehicles. Light duty peak oil fuel demand in the United States and Europe. We’ve reached it.”
He then mentions that CERA issued a report talking about peak fuel demand in the US in 2007, and how the Great Recession (his term, not mine) has only “intensified” the forces they saw at work. Those forces:
- Biofuel mandates
- Lower economic growth in VMT (vehicle miles traveled), which he says have been flat since 2005 and declined in 2008 and so far in 2009.
- Fuel economy legislation
- The Great Recession
Later on in the presentation he talks about the possibility of this decline in transportation fuel causing large-scale capacity surpluses in both crude oil production and refining. He mentions that currently there’s about 6.5 million barrels/day of excess crude oil production capacity, much greater than normal in recent years, and that it could “hang around for a while.”
The upshot is the possibility of what he called “the long aftershock”, his (CERA’s?) term for excess capacity suppressing investment which ultimately leads to a tightening of supply and prices “spike up quite a bit in three to five years”.
So, that’s what was said, and what was said about what was said. Here’s my take on it:
CERA is clearly not leaping to embrace the online-dominant view of peak oil, namely that geologic limitations are about to crush us like a bug striking the Universe’s windshield. They’re talking about a peak in demand for oil used to fuel transportation in the US and Europe, and how that could have larger ramifications worldwide in the coming years. So all the borderline doomers e-mailing me about CERA’s capitulation or whatever can stop it. It never happened.
Is this the right way to view the issue of peak oil, in general, namely that a drop in the quantity supplied (as opposed to production capacity) caused by a drop in demand still “counts” as being “the” peak? I’ve long argued that it does, and I still believe that. But I also think we need to add another layer to our taxonomy of oil terms, and distinguish between the overall peak in world oil production via whatever mechanism and two sub-cases: A demand peak and a supply peak.
A demand(-triggered) peak, unless caused by a total collapse of the world economy or something even more horrible, like a nuclear war, is the much preferred route, at least preferred by anyone who’s primarily concerned with human welfare. If we’re shifting our petroleum demand to direct oil substitutes (biofuels) or electricity, and using conservation and greater efficiency to reduce our overall liquid fuel consumption, and doing so in advance of supply declines, then we’re in a very good position. In that scenario consumers are in control of the market and there’s considerable downward price pressure on oil.[1]
A supply(-triggered) peak creates a dramatically different dynamic and is very bad news, as it results in much higher market prices, greater stresses on virtually all levels in importing countries, and more than sufficient incentive for those countries with a high ratio of guns to oil to act stupidly.
Many of the online peak oil adherents think a supply peak is much more likely, while CERA seems to saying quite clearly that a demand peak is our immediate concern, with a supply crunch coming in three to five years largely because of a lack of investment now, not because of geological limitations. This sounds to me like there’s been very little effective change in CERA’s outlook.
Or is that a too simplistic view? CERA would certainly claim that not much has changed–they were talking about these factors being in play two years ago, and now they’re saying that the current recession has “intensified” them. (One can argue about whether the recession had anything to do with factors other than the reduction in VMT, but the overall impact is the same: Downward pressure on oil demand for transportation fuels in the US and Europe.) But I think it might not be too cynical to claim that CERA is still “splitting the difference”, a tactic I’ve repeatedly said we’d see employed by those unwilling to embrace a supply peak. As time passes and events unfold, it seems quite reasonable that reality is getting ever closer to the basic scenario the supply peak adherents predict: Demand might decline slightly due to voluntary (conservation, efficiency) and non-supply related involuntary (economic cycle) reasons, but by far the major force at work will be constrained supply driving prices up and demand down.
So, right now the comfortable (and, in the short run, conscious easing) thing to do is predict a crunch in a few years, and if and when it happens, talk about how it was triggered by that investment drought back in 2009. But the problem is that unless we make some pretty dramatic changes to reduce our use of oil, none of which I see on the horizon, reality will diverge wildly from the rosy scenario of CERA and others, and we will hit a supply peak. At first it will be a crunch, as moderately higher prices are persistent enough (while still volatile) to cause us finally to wring some of the waste out of our oil use. This will cut demand and create some restraining downward pressure on oil prices, but only for a while.[2] Once those relatively easy steps are taken, and the supply of oil continues to decline and the price rises, we’ll be faced with making ever tougher and more expensive choices, likely over a period of decades.
I remain confident that even though we’ll be much slower to act in our own best interest than I would prefer, we will find the individual and collective will and ingenuity to avoid realizing the catastrophic visions that launched a trillion keystrokes online. But that doesn’t mean it will be easy, cheap, or enjoyable, by any measure.
[1] Because oil is not traded on what anyone would rationally call a free market, I would expect to see quite an effort by the major oil exporting nations (not just those in OPEC) to prop up the price. This would quickly evolve into a very interesting situation, to say the least. They would be giving importing nations even more incentive to use even less oil, plus it would quickly put considerable political pressure on the oil exporters to lower prices.
[2] This dynamic is half of the reason I think we’re headed for an undulating plateau, and might already be on it. The other half is how the supply side of the equation responds to higher prices: The production of more and higher volume of alternative fuels, as well as the revenue needed to fund extraction from ever more expensive oil fields and entice cartel members to break their production quotas, where excess capacity still exists.
