Peak oil, peak dollar on the front page of the WSJ

The folks over at The Oil Drum were understandably a little excited yesterday as the subject of "Peak Oil" finally made it onto the front page of the Wall Street Journal. Today's headline is more along the lines of "Peak Dollar", a much easier event to detect with certainty, though it appears that many have waited longer than they should have to take action as a result.

First, to the apparently no-longer "fringe" thinking that the world may have reached a peak in crude oil production. If you read this entire report($) closely, you can detect some interesting choices of words as the authors seem to want to remain optimistic but grudgingly accept the possibility that the Peak Oil theorists might be right.

A growing number of oil-industry chieftains are endorsing an idea long deemed fringe: The world is approaching a practical limit to the number of barrels of crude oil that can be pumped every day.

Some predict that, despite the world's fast-growing thirst for oil, producers could hit that ceiling as soon as 2012. This rough limit -- which two senior industry officials recently pegged at about 100 million barrels a day -- is well short of global demand projections over the next few decades. Current production is about 85 million barrels a day.

The world certainly won't run out of oil any time soon. And plenty of energy experts expect sky-high prices to hasten the development of alternative fuels and improve energy efficiency. But evidence is mounting that crude-oil production may plateau before those innovations arrive on a large scale. That could set the stage for a period marked by energy shortages, high prices and bare-knuckled competition for fuel.

The current debate represents a significant twist on an older, often-derided notion known as the peak-oil theory. Traditional peak-oil theorists, many of whom are industry outsiders or retired geologists, have argued that global oil production will soon peak and enter an irreversible decline because nearly half the available oil in the world has been pumped. They've been proved wrong so often that their theory has become debased.
...
The oil industry has long been beset by doom-and-gloom scenarios, which so far haven't panned out. "The entire oil industry in the late 1970s was convinced the price [of oil] would be $100 by 1990 and we would need huge oil shale mines" to exploit oil locked away tightly in rock, says Michael C. Lynch, president of Strategic Energy & Economic Research Inc. Of course, that didn't happen, as discoveries ushered in new eras of low-priced oil in the mid-1980s through the late 1990s.

Well, the folks at the oil drum were surely pleased with the press, but Gail the Actuary had some issues with a few parts of the story.

In a critique of the WSJ report that appeared late in the day yesterday, the characterization of the "global oil tank" being close to the "half-empty point" seemed to cause the most discomfort and understandably so, as anyone familiar with the fine work that appears at TOD should well understand.

Gail? Tank half empty? Debased theories?

This is non-sense. One by one, each field that has been pumped extensively has gone into irreversible decline. The production of the majority of countries of the world is now in irreversible decline. It is becoming increasingly clear that in the not-too-distant future, world production will begin to decline. The coming decline of oil production has been predicted by many. The estimated date has varied, but the general time frame has been around 2000 to 2020.

One aspect of peak oil theory that is being refined is the method of prediction. One of the earliest techniques predicted that oil production would begin to decline when half of the available oil had been extracted. Methodology has been expanded, so other forecasting techniques are now also used. (It is doubtful that this was ever the only technique used.) Some reasons for not relying on this technique:

• There are many types of oil resources, including free flowing traditional oil and the very difficult to develop oil sands and oil shale. If a 50% factor is applied, it must be applied to each type separately. Thus, adding oil sands reserves which are very slow to be developed does virtually nothing to push forward the peak oil date.
  
  
• New technology can change the pattern of production. Sometimes, new extraction techniques can "hold up" production until perhaps 60% of the ultimate resource extracted has been removed, so that the decline begins later, and is steeper.
  
  
• Many of the frequently quoted reserve amounts appear to be seriously overstated. OPEC numbers appear to be too high, as indicated by this analysis. Even US Geological Study reserves have been questioned as being too high, in analyses such as this one. Reserve estimates are not audited, and different organizations have different standards for setting their reserves.

Because of the these issues, those involved with the study of peak oil use a variety of techniques to project the peak in future production, rather than simply applying a 50% factor to estimated ultimate production.

What will make "Peak Oil" all the more interesting is what now appears to be "Peak Dollar", that is, the irreversible decline in the world's reserve currency for most of the last century - the U.S. Dollar.

Today's front page story($) at the Wall Street Journal tells of oil-rich nations that are either de-pegging, revaluing, or thinking about one of these two options as the "global dollar tank" appears to be overflowing.

For many years, oil-rich Persian Gulf states have pegged their currencies to the dollar. Now that link is stoking a bad bout of inflation in their red-hot economies and putting policy makers in a dilemma: Break the dollar peg and risk undermining the U.S. currency, or keep it and face growing local discontent.

The dollar peg has "served the economy...very well in the past," said Sultan Nasser al-Suweidi, the governor of the United Arab Emirates' central bank, last week. "However, we have reached a crossroads."

Because countries such as the UAE, Saudi Arabia and Qatar sit on large reserves of U.S. dollars, their decisions will have repercussions beyond their borders. If they move away from their strict dollar pegs -- perhaps following Kuwait, which earlier this year switched to a basket of currencies -- it could undermine demand for dollars and encourage others to diversify their holdings. Many nations have already created sovereign wealth funds to invest their holdings in a broader array of assets.

The Persian Gulf nations originally tied their currencies to the dollar to stabilize their revenue from oil, which is traded in dollars. Also, some nations had little central-banking expertise and found it easier to tie their monetary policy to that of the Federal Reserve in Washington.

Now, however, the Fed is cutting rates to prop up the slowing U.S. economy and forestall damage from the U.S. housing downturn. That's precisely the wrong prescription for economies trying to tame galloping growth, such as those in the Persian Gulf.

This is probably not going to end well.