Peak Oil Scare Fades with Coming Energy Glut

20 Years Ago, They Said There Were Only 20 Years of Oil Left

When Daniel Lacalle, in his early 20s, took a job with Spanish oil company Repsol YPF SA in 1991, friends chided him for entering a field with no future. "They all said, 'Why do you want to do that? Don't you know only 20 years of oil is left in the whole world?'" he recalls.

Two decades and four energy crises later, the U.S. Geological Survey estimates that more than 2 trillion barrels of untouched crude is still locked in the ground, enough to last more than 70 years at current rates of consumption. Technological advances enable companies to image, drill and shatter subterranean rocks with precision never dreamed of in decades past. Trillions of barrels of petroleum previously thought unreachable or nonexistent have been identified, mapped and in many cases bought and sold during the past half decade, from the boggy wastes of northern Alberta, to the arid mountain valleys of Patagonia, to Africa's Rift Valley.

"Betting against human ingenuity has been a mistake," says Lacalle, who today helps oversee $1.3 billion as a portfolio manager at Ecofin Ltd. in London. "The resource base is absolutely enormous, so much so that we will not run out of oil in my lifetime, your lifetime, our children's lifetimes or our grandchildren's lifetimes." _Bloomberg

Peak oil fears have been around for over 150 years, since the early days of modern oil discovery and production. Peak oil apocalyptics received a shot in the arm by King Hubbert in 1956, when he "discovered" a mathematical means of predicting how long it would take for oil fields to decline. Doom disciples glommed onto Hubbert like buzz flies on excrement, and peak energy doom has been just around the corner ever since.

It is true that oil prices have shot upward over the past decade or so, but that had far less to do with supply problems -- and far more to do with a huge jump in demand from emerging overpopulated nations like India and China -- than doomers are willing to admit. The high prices, of course, are stimulating a wide range of activities meant to meet the inflated demand.

As the shale oil & gas revolution has swept across North America, so is it due to sweep across China, parts of Europe, South America, the Levant, and scattered areas of Asia. With China possessing almost twice as much shale gas as the US, the clock is ticking for the middle kingdom to substitute domestic fuels for imported fuels -- slowly but surely.

China's future demand for fuels is anything but guaranteed. Beginning tomorrow, China will increase domestic prices for diesel and gasoline. And as China's leaders belatedly face the prospects of having to reform state banks and other state owned enterprises in the face of a collapsing construction bubble and dropping real estate values, slowing growth in the celestial kingdom will be reflected in reduced demand for imports of a wide assortment of commodities -- including fuels.

In Europe, the debt and demography debacles are slowly coming to a head. More reduced demand. In the US, the ongoing Obama war against the private sector of the economy in general, and energy producers in particular, will result in continued damping of opportunity in the world's largest economy -- and only military superpower. More reduced demand.

Global energy traders and speculators want to maintain high energy prices. Russia, Iran, and Venezuela are desperate to maintain high energy prices, with their very regimes' existence at threat. In fact, in order to drive oil prices up, Russia is willing to push Iran into global conflict. Why not? Russia's oil will sell for a premium in such a situation, while the rest of the world is forced to pay more. In addition, China gets to buy oil from Iran at bargain basement prices as long as the spigot remains open, which helps explain China's role in the slow motion disaster.

But here is the rub: High oil prices are high oil prices, for whatever reason. Such high prices spur the technological drive for alternative sources of oil, and for substitute forms of fuels and energy. High prices also spur the development of alternative feedstocks for oil-dependent industries such as plastics, lubricants, and industrial chemicals.

While it takes time to build the infrastructure for producing substitutes and alternatives, the process is already underway, and far beyond the early planning stages. The only thing that could shut down these alternatives is if OPEC opened the spigots wide, and flooded markets with cheap oil. But that is no longer possible, for political reasons, and reasons of regime survival across a wide array of oil dictatorships and quasi-dictatorships.

Very interesting times in energy markets.