Wednesday, July 19, 2006

Oil Analyst Charles Maxwell on Peak Oil.

On June 3rd 2006 Weeden & Co's Senior Energy Analyst Charles Maxwell appeared on Bob Brinker's Moneytalk radio show as a guest. Charles Maxwell has been involved in the oil industry since 1957 and has solid credentials. One of the callers [Mitch in Des Moines] asked Mr. Maxwell a rather involved question about the state of Saudi Arabia's production and it's place as the dominant oil producer in the world and in OPEC, the peaking of world oil production, and how this might relate to an earlier era when the Texas Railroad Commission was running the show and US oil production peaked.

Mr. Maxwell's answer:

There's always been too much oil around the world that could be produced, and to get a reasonable return in the industry somebody had to bring supply and demand into balance.

In the early days that was John D. Rockefeller, and then of course that was stopped with the anti-trust action of Theodore Roosevelt and so on, and then we went to the Texas Railroad Commission which was a government group that did the same thing in the name of supporting the oil industry, and then we went to the Seven Sisters who tried to regulate the oil industry in the same way - not very successfully - and finally we've ended up here with OPEC trying to do the same thing.

But that 147 year history is now likely to be broken, because the problem that each of these famous organizations have tried to do, is to bring supply and demand into balance effectively by creating some kind of a monopoly that would limit the amount of supply. It was necessary because we had too much supply. Now the world is completely changed. Completely changed.

And I don't think that the majority of governments, or the majority of analysts, or the majority of the public really understand the face of the energy crisis that we're coming in to, is that there is not enough supply.

This is the first time in the history of the world that that problem has arisen; there isn't enough supply. And the reason that OPEC is now opening up their quota system and producing pretty much as much as they can, is that they too are caught up in this problem. There is just a finite amount of oil, we are using up the oil in the great fields that we've had in the past that was cheaply brought in, and we are finding a good deal less each year than we are actually using, and we will gradually reach that peak, probably in about 7 to 10 years, and the Saudis have a critical role to play.

Now you're bringing the issue up, how much oil do the Saudis have? And I think it is more, perhaps, than some analysts have recently suggested, but probably a lot less than the Saudis have been given to believe in the past that they had.

Oil industry people are notoriously unreliable in terms of their own reserves, they tend to make a political statement about reserves instead of a geological statement about reserves. The Saudis want us to believe that they have almost limitless reserves.

I've looked at the situation carefully, and I think the Saudis can produce a bit more oil, maybe 15 or 20% more oil than they're producing today, but when they reach something in the order of 12 to 15 million barrels a day - they're at 9.5 million now
[note- those numbers don't appear to add up, perhaps he meant 13 million, but that's still more than 20% higher]- I think they're going to run into the inability to proceed any higher. They're going to reach a peak and they're going to hold it for a while, but they're not going to be able to help us with incremental barrels. I think that will happen in about 10 to 12 years.

So I think you're bringing up a very important point; Mr. Bush says that we're addicted to oil, and we will be hurt terribly when the Saudis are unable to produce more, because they have been the main hope that the world's oil supplies would go on a long, long time. When it becomes obvious that the Saudis can't carry higher and higher production, the world will recognize that peak oil is here.

Answering a follow up question from Bob Brinker on Hubbert's Peak and the fact that the major oil discoveries date back 35 years:

We had these great oil finds in the past, and now we're finding smaller and smaller fields, many of them, but not enough to make up for the loss of these great fields and they continue to be depleted, that is, used up, and the production from them is falling, so we can begin to forecast that without a lot of new production, and with the old production falling, we're in a pickle.