A reader named Greg from Sunnyvale, Calif., writes, regarding my column about how ExxonMobil is devoting a significantly smaller share of its resources to developing new sources of oil than it did back in the late 1970s and early 1980s:
I was thinking that, as a journalist, you might want to investigate an alternative explanation for the corporate behavior we are seeing. It is well documented that world wide oil discoveries, in terms of volume of oil found, peaked way back in the 1950′s.
After more than a century of exploration, the world as a whole is actually remarkably well characterized, and ALL of the most likely places to find oil have already been looked at. The oil exploration conducted today is considered an outstanding success if a well finds a billion barrel field. Does that sound like a lot? It is a drop in the proverbial bucket.
… Since the good spots for new oil have already been found, you have to look in the hard spots, and you are not likely to find anything. It costs more, and you don’t have much to show for it. You said it yourself, “executives can’t find enough new projects that they think will generate 30%-plus returns.”
Since oil company stock price is dictated by the level of expectation that the company will continue to be able to grow, there is a powerful incentive for corporate spokesmen to paint rosy pictures of the future. What do you suppose would happen to their stock price if the CEO of a major oil firm made a statement like ‘Our reserves are shrinking, and we can’t replace them fast enough. Our largest fields are old and the rate of production is declining from them despite massive investments in advanced recovery technology. We will not be able to pump as much oil next year as we did before.’ Despite the fact that tight or shrinking supplies would mean more record profits from outrageously upward spiking prices at the pump, I am sure that CEO would not hold his job long, and stock prices would tumble.
Is this actually what is happening unsaid behind the scenes? That depends on the actual state of world oil production, and you are not likely to get truthful statements on this condition from people with vested interests in business as usual.
So what does this behavior really depend upon? Specifically, it depends on the timing of something called “Peak Oil”. If you are not already familiar with this term and concept, I highly recommend that you at least do a quick web search on the term. I believe the timing of this looming event will have an unimaginably large impact on the world economy, and by association, impacts on the economic reporting you do. It is quite possible that this event will make global warming look like a B movie. No one in the national press is talking about it yet because they don’t know about it yet. Could you shed some light on it?
It’s simply not true that “no one in the national press is talking about” peak oil–the claim that world oil production is already at or near its peak, and will soon begin to decline–but Greg is right to wonder why, at a time when everybody is griping about high gas prices, peak oil is so seldom offered as an explanation (the term last showed up in the pages of Time in 2005, in a debate between geologist and peak oil believer Kenneth Deffeyes and skeptic Peter Huber).
In the case of my column, I was describing a condition approaching peak oil for the countries to which Western oil companies have easy access. I don’t think anybody knows enough to confidently predict when the rest of the world’s oil production will peak, and I was writing a pretty short column, so I didn’t get into the broader question. But it is out there, and I probably should have found a way to shoehorn it in.
I don’t really buy the argument, though, that Big Oil executives see the oil-production peak approaching but are afraid to discuss it in public. Oppenheimer analyst Fadel Gheit, whom I cited in my column, says ExxonMobil executives are convinced that $60-a-barrel oil isn’t here to stay, and that this belief that oil prices could drop any minute informs many of their investing choices. Whether they’re being delusional about this or not is another matter.