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Ghost of the peak oil theory

Jun 30, 2010

The recent BP oil spill in the US Gulf coast is a game changer. It has caught everyone's attention because of the graphic nature of damage. The US government has swung into action. The media worldwide provides continuing coverage. In fact, even the Indian media carries the story. It is particularly incensed by the double standards of the US government when it comes to another industrial disaster - the Bhopal gas tragedy. There the company was American, not British. And the victims Indians, not Americans.

But in this article let us focus at what the BP oil spill disaster means for crude oil prices.

Unreliable technology, reliable data?
BP admits that it did not have the tools to contain a deepwater oil leak. This comes from a global oil and gas giant! It is among the few companies that shaped the oil industry itself (and by extension, world history) in the 20th century. Its failure with such an obvious risk casts doubt about its understanding of other risks. The number one among them is the 'peak oil' theory, which suggests that global production of oil will taper off.

You see, BP publishes a widely cited report - the Annual Statistical Review of World Energy. And BP has been a leading voice in rubbishing the onset of peak oil. In other words, the BP annual review is a risk assessment on peak oil. BP routinely says that there are about 40 years of proved oil reserves. It believes advances in technology will lead to more discoveries. Higher oil prices can finance the increasing cost of exploration and infrastructure. In short, global oil supply can go on rising for decades.

The question is, coming from a company that does not have the tools to contain deepwater leaks, how reliable is the estimate of deepwater reserves? Much of the new oil & gas finds are located in deep waters. Given that fact, is it possible that the current estimates could be wrong? Or that the economic and regulatory viability of such oil and gas, even if oil prices go up, is under a serious cloud? And what technology are we talking about - like the one that caused the recent leak?

The impact
We believe there is only one direction oil prices will go - up. The average Chinese and Indian does not consume anywhere near as much oil and gas as citizens of the developed world. Not even close! Their per capita consumption of hydrocarbons is certain to go up. And given how unprepared one of the world's leading oil and gas companies is looking right now, we worry about the supply side as well. Some experts believe that a premature peak oil situation will be as bad as the recent global financial meltdown. We don't know. We just hope that the oil industry doesn't fail us the way the other large global industry - banking - recently did.

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