The ‘Peak Oil’ Theory: Will Oil Reserves Run Dry?:

John Hofmeister, president of Royal Dutch Shell’s US operations, shared his thoughts on the supply issue on CNBC’s Squawk Box on Thursday. He took aim at the peak oil theory as popularized by Matthew Simmons, the author of “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.” [See the Hofmeister interview in the original article.]

“The peak oil theory has really swamped the world — God bless Matt Simmons,” Hofmeister told CNBC.

Simmons is mistaken, said Hofmeister, because he is overly focused on a single country: Saudi Arabia, the world’s largest exporter and OPEC swing producer.

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CNBC: What’s your response to critics like Hofmeister?

Simmons: There is a kind of schizophrenia within the likes of Shell where the chairman basically says, “We think by 2012 global demand will exceed conventional supply” and yet Hofmeister basically says the idea that we are ever going to have peak oil is ridiculous.

CNBC: But he’s suggesting you are leaving out unconventional sources of energy in your calculations.

Simmons: They make the distinction [between conventional and unconventional], but they don’t seem to make the connection about the vast difference of flow. They are so hung up on the total estimated volume. Once they start in a project they say, “Well, the reserves last forever so we can book a million barrels of reserves.”

The energy that is consumed to get oil out of the oil sands of Canada — in massive amounts of potable water and natural gas — is so vast you are really turning gold into lead. What you get out is a very low quality amount of oil that has to be upgraded and diluted with high quality oil to get synthetic crude. What I can’t figure out is why the executives of these oil companies don’t understand that.

CNBC: And what about the reserves on the Outer Continental Shelf?

Simmons: That’s sort of irrelevant because we have such an unbelievable shortage of deep-water rigs. We are totally out of deep-water drilling rigs. There are about 100 that are struggling to get built. Four will ready by the end of next year.

And none of that deep-water stuff they are talking about has been properly tested to know if it is even commercial. It’s in such remote areas that we just don’t have the tool kit to realistically bring it on stream before maybe ten years from now — maybe 6-7 years from now.

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CNBC: So, what is your prognosis for prices?

Simmons: I think prices have to go way higher. The sooner people get used to the fact that we are still living in a fool’s paradise, the better … you just can not argue that $100 a barrel is expensive when you realize it is 15 cents a cup — do you know anything other than crude oil that sells for 15 cents a cup? I know wine doesn’t, bottled water doesn’t.

OK, a couple of obvious things here:

First, whoever wrote the title on this CNBC article should be slapped with the salmon of enlightenment. We will never, ever see all the reserves “run dry”. Oil will become far too expensive long before that happens. Yes, I realize that it’s imagery and not meant to be a literal depiction, but it still bugs me to no end simply because it’s pointless imprecision.

Second, like you, I’m sick to death of Simmons and his “15 cents a cup” thing. He’s right, but I wish he would give it a rest.

I wonder how many people know that the Canadian oil sands production requires blending that product with “real” oil, or how tight the offshore oil rig situation is. It’s funny how that kind of thing gets mentioned so seldom.

As for the business (pun intended) of the oil companies ignoring the energy return on energy invested, Matt should know the answer to that question. The oil companies measure everything in terms of money, not energy. This is the same reason why we make some insanely large number of “disposable” batteries for cameras, radios, etc., even though the tiny amount of energy they deliver is a fraction of what it takes to make them. All the battery companies make and sell them because we buy them at a price that lets the companies make a profit.

This is a good article to send to friends and relatives who are just becoming aware (hopefully with your diplomatic help) of what’s going on with the world oil situation. It’s a prime example of “brother-in-law material”.