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 Dick Vodra is a financial planner with Spire Investment Partners in McLean, VA. He is one of the industry’s leading experts on the topic of Peak Oil and its implications for financial planning and investment management. He wrote his first article on the topic in 2005, and more recently presented his views at the FPA National Retreat in 2007.
We spoke with Mr. Vodra on June 6, 2008.
Peak Oil is a concept originally developed in 1955 by the geologist M. King Hubbert. Hubbert studied US oil well production and found that maximum production occurred approximately 40 years after discovery. By obtaining data on all US production, he predicted, in 1955, that US oil production would peak in 1970, and his forecast was correct within a few years. The concept became known as Hubbert’s Peak, and is now studied on a world-wide basis. Peak Oil represents the point at which the world’s production rate for oil cannot be increased. Vodra’s article, cited above, provides an excellent overview of the topic.
At the end of this article are graphs showing the current projections from ASPO, the Association for the Study of Peak Oil.
Has there been any significant new information on Peak Oil in the last three years?
The basic story is still valid, and probably more so. Three quarters of the people who focus on Peak Oil are from the petroleum engineering crowd, and the other quarter are those with left wing or anti-capitalist views. Peak Oil and its sister problem, climate change, are real problems. Many find it exceedingly inconvenient (to steal Al Gore’s phrase) to deal with these problems, because the way we want the world to work is not the way it works. We are accustomed to free markets and having access to a vast and inexpensive supply of raw materials. We assume that these materials, like oil, water, gold, and other commodities, will always be available in greater supply with better extraction technology. Conventional economics is based on the assumption that our world will work this way forever. It won’t, but most people would rather die than change their minds. The world has a limited supply of most natural resources, and we are starting to run up against those limits now, making it hard to increase or even continue current production levels.
On climate side, all the news is coming in worse than we projected: water temperatures, jet stream changes, ice cap shrinkage, greenhouse gas levels, and so much more. James Hansen, from NASA, says we may already be at the tipping point where feedback effects will overwhelm any attempts we make to address the climate problem.
On the energy side, we have tripled the price of oil, and it hasn’t mattered in terms of conservation and overall demand, especially“On the energy side, we have tripled the price of oil, and it hasn’t mattered in terms of conservation and overall demand, especially at the global level.” at the global level. We will continue to find oil, but it will not be enough to satisfy world demand and offset the depletion in existing oil and gas fields.
The data continues to support the hypothesis that the date for Peak Oil production is between 2006 and 2012. However, there are still some, including the US government, who say Peak Oil is 15, 20, or more years away. [Ed. Note: Noted Goldman Sachs oil analyst Arjun Murti said in a recent interview “…we don’t subscribe to the peak oil view.”]
Climate control is the “rock star” when it comes to planetary crises. Peak Oil is taking a back seat, even though its impact will be felt first.
In the last three years, one major change has been an awareness that the increase in demand for oil from the Middle East is now greater than from China. Therefore, the amount of oil available for international trade is getting smaller.
You said in your article that we could be close to Peak Oil in 2005. Are we there yet? (In your article you predicted that we would be there by the end of 2006, and would know this only in retrospect.)
There are actually several definitions for Peak Oil. Gross production is the figure most often addressed. However, as the effort it takes to extract oil increases (as from wells in the deep ocean), the net production is less than the gross. Further, as oil producing nations increase their consumption, the amount in international trade falls quickly. For example, the UK exported one million barrels of oil per day as recently as 1999. Five years later, the UK was a net importer. Everyone’s numbers are basically flat for gross production, but exports seem to be declining. By whichever definition you use, we are probably at or close to peak now.
There is some discussion over how to factor biofuels into the Peak Oil equation, because it requires oil to produce them. But even allowing for biofuels, I am confident we have reached Peak Oil on a worldwide basis, or will in a matter of months.
Do you see much hope for political solutions to our energy problems?
Unfortunately, it has been very difficult to create meaningful action politically. The Republicans today killed a climate bill [which would have created a US market for trading carbon emissions caps] because they believed it was too expensive. It baffles me that nobody in power takes either Peak Oil or climate change seriously, whether in the US or abroad. Another example of where politicians have failed us is with improving the energy efficiency of buildings Building standards have a much greater impact on energy consumption than CAFÉ standards [for automobile fuel emissions]. But, because modifying building standards threatens many jobs in the short term, no significant legislative action has been passed.
The countries in the Middle East will take care of themselves first. The US is used to having 75% of the world’s oil, but China and India have other ideas. Our share is declining. The military, farmers, and the airlines all take their share. The gasoline that remains for unrestricted consumer use will take a huge hit, in US and in other countries. This will be amplified beyond gross production levels. The sooner we start to plan, the more we will be able to deal with the pain and dislocation ahead of us.
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