A Proposal for Policy Development

Preparing for the End of Cheap Oil

A proposal by Ronald B. Swenson and Francis de Winter
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Executive Summary

Recent studies prepared by Dr. Colin J. Campbell conclude that the world petroleum production peak will occur around the year 1999, and that afterwards there will be serious supply shortages. A concerted client effort is proposed to examine and verify the petroleum reserves and production scenarios identified by Dr. Campbell and others, and to identify investment possibilities that the likely energy scenarios make especially attractive. To that end the enclosed proposal has been prepared, for a short first phase effort. This would enable client officials to get a clear picture of the situation, and to determine what to do next.

Understanding petroleum depletion is complicated by the fact that many countries have grossly overstated their reserves. Such inflated reserves might well qualify them for a larger OPEC quota or for larger loans, but they cannot help stave off depletion. Only educated skepticism can make it possible to understand depletion.

Many might think that tar sands or oil shales can save the day. This is unrealistic. Tar sand or oil shale yields expensive oil, probably no cheaper than $60/barrel. It is far cheaper to use wind power, biomass, passive solar, or energy conservation. Cheap natural gas will not last for long after cheap oil is gone, and coal has serious environmental problems. We face the end of cheap energy. This will be painful for many, but it can be profitable for those who understand and who prepare. This proposal is to assist the client and its customers to prepare properly for the changing times.

Table of Contents

  1. Introduction
  2. Background
  3. Needs and Opportunities
  4. Proposed Program
    1. Phase 1
    2. Phase 2
  5. Proposed Budget and Terms
  6. Background of Proposed People


  1. Introduction

    On April 1, 1994 a story was published (in the English language newspaper "The News" of Mexico City) in which it was predicted that the worldwide "Hubbert peak" for cheap oil is likely to be in the year 1999, only 5 years away, and that after this peak the world production of cheap oil is likely to decline quite rapidly, and forever. Since a persistent oil supply shortage would have such significant impacts on solar energy and on many other questions, Mr. de Winter tracked down the author of the study, Dr. Colin J. Campbell, found that the study had been based on the data of the Petroconsultants group, and that Dr. Campbell had worked closely with Dr. Jean Laherrere of Paris and Mr. L. F. Ivanhoe of Santa Barbara. Subsequently Mr. de Winter visited with Dr. Campbell in southern France, talked at length with Mr. Ivanhoe, talked with the Petroconsultants staff of the London and the Geneva offices, visited the Geneva office of Petroconsultants to talk at length with Dr. Laherrere and other associates of Dr. Campbell, and later visited the OPEC headquarters office in Vienna to get the OPEC view of the future petroleum supply scenarios. Mr. Swenson later visited Mr. Ivanhoe.

    Dr. Campbell, Dr. Laherrere, and Mr. Ivanhoe are all very senior oil experts, with many years of experience with major oil companies in many countries around the world.

    There is indeed serious evidence that before the end of the century there will be real petroleum shortages in the world, tied to the beginning-of-the-end of the cheap, pumpable petroleum reserves which have powered the world throughout this century. Virtually everyone seems to be oblivious to the evidence, outside of the exploration departments of the oil companies who have a vested interest in silence. The lack of awareness means that society will be poorly prepared for the consequences.

    Dr. Campbell writes: "The situation is serious, and the political and economic implications are colossal." In 1973 there was great turmoil, even though the "Energy Crisis" then was only political: OPEC simply was using oil as a weapon in the Yom Kippur War. The subsequent "oil glut" developed when the Prudhoe Bay field in Alaska and the North Sea oil fields came on line; and when humanity was motivated by the "Energy Crisis" to be more frugal with oil. The percentage of the world oil supply coming from OPEC dropped sharply, going from 36% in 1973 to as low as 16% in 1985, and OPEC lost power and coherence. In 1979 there was another political oil shock, caused by panic buying when the Shah of Iran lost power. This time we are coming up against real limits: the end of cheap oil. When people realize that the days of plentiful and cheap petroleum are over, there may be more oil wars; an increase in terrorism, revolutions, and coups; expensive fertilizers, smaller crops, more hunger, and more vegetarians; and serious population pressures and immigration restrictions. There may be many other unpleasant effects. For example, imagine the changes likely in air travel or in automotive transportation with much higher fuel costs. The new Denver airport could become a white elephant. There will be many things affected, since so much is tied to energy.

    We are proposing to bring together experts to make an extended presentation to the client on the likely near-term petroleum shortages. We would also discuss the most likely petroleum replacement technologies and the associated financing opportunities which might result from these impending oil shortages. We are proposing a carefully prepared two day session for client's staff at the client's offices, with an allowance for answering followup questions that the participants might have.

  2. Background

    The client's fortunes depend upon an accurate assessment of primary economic trends. In matters of petroleum people have generally not been looking far ahead, but a clear view of the future is possible. Dr. Campbell and a few associates have achieved this by working with the database of the Petroconsultants company, and by examining the scenarios that one might expect when OPEC becomes able to impose a real energy crisis on the world. This seems to be very soon, before the end of the century.

    The Petroconsultants database is the most comprehensive one available for the areas outside of Canada and the USA. It is used as the "bible" by all international oil companies, and the larger companies actually input their own data, to be managed by Petroconsultants on a confidential basis.

    It has for long been known that there is a finite amount of petroleum, and that the production would grow to a maximum, after which there would be an unavoidable decline in production. M. King Hubbert was the first to be precise and specific about this. In 1956 he predicted that the maximum production peak (Hubbert peak) for the USA (of cheap oil that one can pump out of the ground) would come in 1970. He also predicted repeatedly that the world peak for cheap oil would come close to the end of this century. A Hubbert paper of 1975 is enclosed with this proposal.

    Many were upset about Hubbert, but his 1970 Hubbert peak prediction for the USA was quite accurate, and it now seems that his end-of-the-century Hubbert peak predictions for the world were also correct. It would indeed be surprising if today we were not able to check the Hubbert predictions: we can certainly see the oil scenarios at the end of this century more clearly in 1994 than Hubbert was able to do decades ago. Many countries and companies have however grossly exaggerated the estimates on their own petroleum reserves, so as to get an increased OPEC production quota, to increase their stock prices, or to "obtain" more collateral for their loans. Many people are simply not looking at the real numbers, being unaware of these invented "political reserves." Few have a real understanding of the evidence.

    Some have been working hard to understand world oil problems. Hubbert died in 1989, but he worked in this area until the end. Dr. Colin J. Campbell started examining world petroleum reserves in a careful and critical way in the late 1960's, as did L. F. Ivanhoe, a disciple of Hubbert who worked with Occidental Petroleum. Jean Laherrere (working for Total Oil in Paris) has done much work on the understanding of the size distribution of oil fields, and this can be used as guidance in determining how many oil fields of different sizes still remain to be discovered. In 1991 Dr. Campbell wrote a book on the future limitations of oil entitled: "The Golden Century of Oil: 1950-2050: the depletion of a resource" (Kluwer Academic Pub., Norwell, MA). This book was based on his own numbers, and on a study he started for Norway in 1989 on the limitations of oil. It led to an invitation to prepare a more definitive report (now completed) based on the Petroconsultants database.

    In the last few decades there have been marvelous improvements in technical understanding. Plate tectonics can tell us where most areas of the world have been in the past. The chemistry of oil creation (a process taking hundreds of millions of years) is now well enough understood so that vast areas of the world can be eliminated as possible areas in which oil might be found: it is known that in the last six hundred million years the conditions in these areas have never been quite right for the creation of oil fields. It is known to be futile to search for oil at depths greater than about 20,000 feet: geothermal conditions make it too hot there for oil. Digital data techniques have essentially provided us with seismic "X-rays" of major parts of the world in which oil might be (or is) found. A total of about 41,000 oil fields have already been found. About 641,000 exploratory wells have been drilled. Most of the promising areas of the world are already thoroughly explored. There are many other areas in which exploration is futile, but given enough tax benefits or subsidies people will drill wildcat wells there anyway. They will be drilling for the tax benefits or subsidies and not for oil, but one should not expect them to be candid.

    Thanks to the work of Laherrere and others, we have a good idea on the amount of "yet to be discovered" oil. Large oil fields are found first, and there is almost universal agreement that virtually all of the giant fields have been found already. The fields still to be discovered are primarily small and very small fields, which people used to find left and right in the past while they were hoping to find the real giant fields. With few or no giant fields left, the incentives for exploration are diminished, and it may well be decades or even centuries before some of the small and very small fields are finally discovered.

    Behind the closed doors of the international oil exploration community there are few illusions about the oil supply. There are many reasons why few (of those outside of these closed doors) are worrying about the oil supply:

    Many want to believe in a rosy future, and they do not want to think about the end of the oil age any more than they want to think about death. Many do not want to believe in any bad news, since they have heard people cry "wolf" too often.

    Many politicians and businessmen are simply not concerned with the future several elections or quarterly reports from now.

    The news media seem to be incapable of covering the energy field properly. Even as "The News" in Mexico City on April 1, 1994 covered the Petroconsultant's study on the impending petroleum shortages, the New York Times on April 3, 1994 predicted that the only salvation for OPEC lay in the rapidly growing automobile fleet in China. After the oil peak, the car fleet in China will probably not grow rapidly much longer!

    Many economists feel that tax credits or other subsidies can increase oil discoveries, and many lawyers feel that laws can help. Hubbert used to say that economists can find twice as much oil on paper as geologists can find in the ground!

    Many engineers feel that any technical problem can be solved, and many geologists are not free to talk.

    Many lack understanding. They do not distinguish between "resources" (all of the fossil fuels known to be in the ground) and "reserves" (limited to only that part of the resources that can be produced at a cost that people are willing to pay). They are oblivious to the limitations of the cheaply pumpable petroleum "reserves," and they point to the enormous deposits of tar sand and of oil shale without any awareness or acknowledgment that these are "resources" and not "reserves." The synfuels program started by President Carter (and later abandoned) examined the possibilities of turning such "resources" as tar sands and oil shales into real "reserves." Such a synfuels effort involves mining (not pumping), it involves large amounts of capital and of water, it involves a significant amount of processing and refining even before one has crude oil, and it involves disposing of very large amounts of toxic and harmful waste material in an environmentally acceptable manner. Unless people are prepared to pay perhaps US$60 or more per barrel of crude oil, the deposits of tar sand and oil shale are likely to be a pipedream: "resources" but not "reserves." What humanity faces is the end of cheap oil, and around the year 2000 many pipedreams are likely to end.

    Since the OPEC reaction to the Campbell petroleum supply predictions was of interest, Mr. de Winter visited the offices of OPEC in Vienna, to talk to Dr. Mohammed Al-Sahlawi, the Head of OPECNA & Information Department. Dr. Al-Sahlawi is well aware that the OPEC share of the world oil market is growing rapidly and that this share will continue growing, but was clearly not willing to predict major oil price increases. He seemed to have faith in further oil discoveries, he did not seem to foresee a near-term Hubbert peak, he may well be politically unable to question the doubtful "political reserves" of OPEC members and of other countries.

    The fact that nearly everybody now seems to be oblivious to the forthcoming petroleum shortages and cost increases should make it possible for the client to identify profitable long-term programs and ventures that others are unable to recognize, and to avoid investments likely to turn sour as oil prices rise. It is the objective of the proposed program to help make this possible.

  3. Needs and Opportunities

    Around the turn of the century, if not before, it will become clear that replacement energy supplies will be needed to make up for lasting oil shortages. The replacement technologies (to some extent coal and natural gas, but more likely solar energy, wind energy, other sustainable energy technologies, and above all energy-efficiency) are fully capable of making up for the foreseeable petroleum shortages, but there are several hurdles for humanity which represent opportunities for the client:

    A financial institution prepared with imaginative financing programs, practices, and instruments for energy equipment and ventures is likely to be extra profitable. There is also much in P.R. benefits likely to accrue to a group which is perceived to be very progressive and perceptive in terms of environmental and sustainability concerns, and this can be a free byproduct. There are already major opportunities, some of which which will be identified in the proposed Phase 1 presentations.

  4. Proposed Program

    We propose a two-phase program. We would be able to organize the proposed Phase 1 two-day session at the client's offices within two months, and suggest a program start one month earlier.

    1. Phase 1

      We propose a concerted effort aimed at enabling the client to examine and verify the petroleum reserve and production scenarios determined by the experts, and to identify some of the most likely investment possibilities that the resultant high energy prices may make especially attractive.

      To this end, we propose a two-day set of presentations and meetings for the client's executives.

    2. Phase 2

      The purpose of Phase 1 is to define the impending petroleum shortages for the client, and to suggest some possible strategies the client might establish to prepare for the petroleum shortage and price increases, and to take advantage of them. Phase 2 would be a long term program with two main objectives:

      a. To continue to track the developing petroleum shortage in the world. The situation for different countries will be quite different, and understanding this will be important to help the client capitalize on a changing world. Some examples follow.

      • Argentina is self-sufficient in oil, but is depleting its reserves very rapidly. Argentina will need to change fast. Brazil is just beginning to tap into its oil, and has already done much to develop alcohol as a car fuel. Brazil is likely to be in less of a bind than Argentina.
      • In Venezuela gasoline is almost free. When people realize oil is scarce and valuable, major changes are likely.
      • Some OPEC countries need many new wells just to keep up.
      • The Netherlands (with natural gas reserves) and Belgium (without any) are in quite different circumstances.

      b. To help the client to define specific financing programs and possibilities which would take advantage of the increased oil prices, to avoid and to eliminate problem loans, and to help the client gain maximum P.R. benefits from its "green" ventures. Examples follow:

      • The client could tie in with UNCED programs in many ways. This could be very visible, and could help line up business.
      • The client could unload bad investments. A critical study of the client investment portfolio is likely to be useful.
      • The client could establish sustainable energy financing instruments. A "Bond for a Sustainable Future" might for example be set up to allow utility groups to buy renewable energy generation facilities, or to invest in energy efficiency. The client could take a lead in this area.

      We think a very profitable and long range Phase 2 program is possible, and we have many ideas to contribute. Phase 2 should be designed in conjunction with client personnel, for it would not only have to be a joint effort, but client staff must get actively involved in an independent fashion if Phase 2 is to be of significant value. The client's personnel should get an independent view of the likely petroleum scenarios, and the client should get an independent view of the possible alternative energy options (and of those options that humanity is likely to choose).

      Our role would be to facilitate this process and to make it as efficient as possible, but not to present "a complete and definitive picture," and not to prepare pretty but innocuous reports. Phase 2 would not only focus on the needs of the existing customers worldwide. It would also identify new customers and new ventures, before competing organizations are even aware of these possibilities.

  5. Proposed Budget and Terms

    The proposed budget is available upon request.

  6. Background of Proposed People

    The proposed effort involves Mr. Francis de Winter and Mr. Ronald B. Swenson. A brief description of their backgrounds follows below. Detailed resumes can be accessed from below as well.

Detailed Resumes of the Participants in Our Policy Development Proposal

updated 2004 September 6