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By Robert Rapier on Sep 30, 2012 with 22 responses

Hofmeister: A Difficult Decade Ahead For Oil Prices and Supplies

Potential for Expansion of Global Oil Production

I, along with my editor Sam Avro, recently conducted a broad-ranging interview with John Hofmeister, former President of Shell Oil. The topics touched upon included future oil supplies and prices, climate change, U.S. energy policy, and topics familiar to R-Squared Energy readers such at Peak Lite and the Long Recession.

I will present this interview in a series of stories covering some of the various topics. In this first story, I will discuss Mr. Hofmeister’s detailed answer to the question, “What do you feel is the potential for expanding global oil production, and the time frames?”

Readers my recall that I have put forth a pair of hypothesis with respect to future oil production and prices. One is called Peak Lite. (See also: Five Misconceptions About Peak Oil)

In a nutshell, we all know that peak oil is a phenomenon in which global oil production begins an irreversible decline, and the shortages that ensue drive global oil prices very high and cause widespread hardship. However, as I began to see spare global oil production capacity erode away over the past decade, I began to ask myself how that situation was really distinct from peak oil? Technically the difference is that production can continue to grow in that scenario, but if demand growth is higher than production growth, for practical purposes you have a situation that mimics peak oil. I referred to this situation as peak lite.

The Long Recession hypothesis is related. Historically the oil industry undergoes boom and bust cycles. When oil prices are high, the oil industry invests more money into infrastructure, the economy slows (and often ends up in recession), and consumers begin to conserve. This results in a major correction — and often a crash in oil prices. This leads to underinvestment by the oil industry, and people once more are attracted to gas guzzlers. This ultimately tightens up supplies, and the cycle repeats.

But what if the supply situation was so tight that spare capacity could not be built out? In either a peak oil or a Peak Lite scenario, it will be impossible for the oil majors to build out sufficient spare capacity because it simply isn’t there to be had. So high oil prices slow the economy, and people begin to conserve, but supply can’t build out ahead of demand as in years past either because demand is growing too fast, or supplies are declining. This prevents a collapse in prices which previously enabled the economy to recover. Therefore, what’s waiting on the other side of the recession is more recession: The Long Recession.

Mr. Hofmeister’s views very much reiterated my positions on these topics. The first question I posed to him was:

RR: How great do you feel is the potential for expanding global oil production, and over what time period? Some people have suggested 100 million bpd of oil, some even higher. My former CEO (at ConocoPhillips) Jim Mulva was quoted as saying he didn’t think we could get to 100; he didn’t know where that oil would come from.

In response he reminded me of the studies from the late 1990′s and early 2000′s that claimed that oil production could reach over 120 million barrels per day (bpd). But he suggested that this we before a more realistic understanding of the nature of the resources evolved, and concluded “I think that 120 million bpd of global production probably remains on the outside of optimistic. So I am not sure we will ever get there.”

On the topic of Peak Lite, he stated “I think the course that we are on, with China growing rapidly, India not too far behind – I think that demand for oil is going to exceed the supply by the middle of this decade – the current decade. And I think we are going to be hard-pressed to keep supply growing as rapidly as it needs to grow to meet the demand.”

Gas Lines — U.S. At Greatest Risk

What might that mean? “And so what I actually anticipate is that even with the shale oil of North America, the Canadian oil sands, the bare beginnings of Arctic development, with Brazil coming in on time, which is late in the decade, and the other kinds of basin development that are taking place, I am not sure that in this decade supply will keep up with demand. And I anticipate shortages, gas lines — at any price — because of the growing demand, without alternative fuel technologies yet grabbing hold and picking up some of that demand.”

This is very much in line with my assessment of the upcoming decade, which thus far is playing out as I expected. Oil prices are high by historical standards, and I see little relief over the longterm due to very strong demand in developing countries. Mr. Hofmeister agrees: “Possibly by 2020 and beyond we could see alternative fuels beginning to play a bigger role than they do today, which could ease the pain on the oil front, perhaps even ease the price on the oil front. But in the meantime I think this decade is going to be a struggle, and countries like the United States are going to be the greatest countries at risk from suffering the effects of not only high prices, but insufficient supplies.”

Mr. Hofmeister has been helping to shape content for the launch of Total Energy USA as a member of the Executive Committee. Total Energy USA is the groundbreaking conference and exposition that addresses the greatest uncertainty in the energy industry today — the cross-fertilization of energy sectors and technologies. More information about Total Energy USA, November 27-29 in Houston, Texas at www.TotalEnergyUSA.com

Link to Original Article: Hofmeister: A Difficult Decade Ahead For Oil Prices and Supplies

By Robert Rapier

  1. By Walter Libby on October 1, 2012 at 6:32 pm

    The concern over peak oil will take a back seat as the global economy continues its relentless contraction and drives us ever closer to abyss.  However, whether your concern is peak oil or a collapsing economy, both prompt the question: Do we need a contingency plan? Rean more @ http://theendpoint.blogspot.com/

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  2. By TimC on October 2, 2012 at 3:14 pm

    “And I anticipate shortages, gas lines — at any price — because of the growing demand, without alternative fuel technologies  …”

    That doesn’t make economic sense.  Gas lines result from price controls, not shortages.  The worst gas lines I’ve seen were following hurricanes in Florida, where strict anti-profiteering laws prohibit retailers from charging true market prices.  If retailers were allowed to charge $20/gallon, the gas lines would evaporate, as many of the people waiting in line would realize that they don’t really need gas all that bad.  Supply, demand, and price quickly find their local equilibria, if they are allowed to. 

    The future that Mr. Hofmeister is describing, in which oil supplies are unable to keep pace with growing global demand, will surely drive prices way up.  That will continue to force consumers to make hard decisions about how bad they really need gas for their cars, or products made using oil.  Increasingly, their decision will be to do without, which fits the long recession scenario.  But it’s unclear to me how alternative fuels represent a solution, if the alternatives are more expensive than conventional oil products.  Alternative fuels offer a solution only if they are significantly cheaper than oil.  I don’t know of any alternative fuels that meet that requirement. 

    A few years ago there were three companies adamantly insisting that they could make cellulosic ethanol for $1/gallon:  Range Fuels, Terrabon, and Coskata.  Two are now bankrupt, and the third has abandoned the cellulosic biofuels arena.  The US military is now paying upwards of $20/gallon for renewable JP-5 and JP-8.  At some point we will be forced to acknowledge that renewable fuels are not low-cost alternatives, that they are not going to save us from the long recession. 

     

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    • By Optimist on October 4, 2012 at 10:47 pm

      You’re right about the gas lines. Apparently Mr. Hofmeister’s many talents do not include economics.

      But follow the same logic, and it becomes clear how alternatives figure in a solution: the higher gas prices, the bigger the reward for finding an alternative that works. Eventually somebody’s going to strike gold. Especially when the serious money starts investing.

      The current prices the US military pays is of little consequence. It is the trend of those prices. And with a drop-in solution, the military’s strategy is likely to pay off, unlike the ethanol boondoggle…

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      • By TimC on October 15, 2012 at 3:20 pm

        “It is the trend of those prices.” 

        What is the trend?  About six years ago the USAF paid Syntroleum $20/gallon for synthetic JP-8 (S-8) made from natural gas.  Last year a USAF Undersecretary admitted that they were paying $36/gallon for biofuels used in fleet certification tests.  And now Reuters reports that the USAF paid Gevo $59/gallon for IPK jet fuel made from bio-isobutanol (see the story on the CER news page).  If we keep saving money like this, we gonna go broke. 

        If there is some data indicating a downtrend in military alternative fuels production costs, please share it with us. 

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      • By Martha on December 8, 2012 at 5:38 am

        HSE just posted their 2nd qeratur earnings and WOW are they nice.Be interesting to see what their stock price does tomorrow, though I imagine it is already figured in to the price (their Q2 numbers are no surprise, really).

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  3. By Doggydogworld on October 2, 2012 at 6:51 pm

    Many alternatives are cheaper than gasoline. Electricity from coal, nuclear, wind, natgas, hydro, etc. clocks in around 1.5 cents/mile for an EV, ER-EV or PHEV. That compares to almost 15 cents/mile for a typical sedan. We use gasoline because it’s convenient and because the 280 million cars on the road are incapable of using anything else. Kind of stupid, but that’s the path we’ve chosen.

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  4. By mac on October 2, 2012 at 10:33 pm

    Thank you Doggydogworld.  Yup,  a stupid path indeed……………

    It is cheaper to run EVs by the mile, versus gas guzzling,  limited oil resource depleting ICE vehicles…


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  5. By Dashui on October 3, 2012 at 10:55 am

    Even if one could afford 20 dollar gas, it would be too dangerous to drive around. It would be like wearing a Rolex in the ghetto.

     

     

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    • By TimC on October 3, 2012 at 2:39 pm

      Yes, but imagine the robust growth in the black market for stolen gas. At least one sector of the economy will flourish, which should create lots of jobs: siphon operator, jerry can runner, car jacker, etc. Lots of opportunities for America’s youthful entrepreneurs. Isn’t that what it’s all about?

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  6. By mac on October 3, 2012 at 5:41 pm

    Who cares about Hoffmeister’s opinion on oil prices ?  It’s irrelevant if we adopt alternative fuels.

    The  “Long Recession” theory works only if we assume that we are going to continue to rely only on gasoline or diesel derived from crude oil and doggedly persist with the inefficient internal combustion engine to fuel the transportation sector.

     

    This “Chicken Little, The Sky is Falling” scenario absolutely assumes we will in perpetuity continue with the ICE and gasoline.  Not so…………………..

     

     

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  7. By mac on October 3, 2012 at 6:57 pm

    The Peak Lite and Endless Recession theories only work if one assumes that the transportation sector can only run on oil. 

    Both CNG and electricity have been cheaper by the mile than oil………..for at least a decade.

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  8. By mac on October 3, 2012 at 7:39 pm

    Dead on Arrival………………..??????

    Hybrids…………….??????

    Really, ???

    Toyota sold over 18.000 plus Prius hybrids in September 2012 in the U.S.to finish at number 13 for total monthly sales among all makes and models.  This total does not include Prius V,   Prius C  or Prius Plug-in sales (PIP)

     

    In Japan, the traditional lift-back Prius is the best selling car in Japan.

    I already know what you are going to say………………….. Hybrids are dead on arrival……………

    Well,…………. Uh,…………..  Err……….. NOT EXACTLY

     

     

     

     

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  9. By mac on October 3, 2012 at 8:12 pm

    Once you assume that we will be forever indebted and chained to oil,  then bizarre theories and short-falls concerning  oil  will gain currency.

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  10. By pelinoc on October 4, 2012 at 1:34 pm

    I think your “Long Recession” scenario is an interesting one,but not necessarily for the reasons you state. On the surface, you are making a traditional argument that if the price of energy rises, then it diverts economic resources from other potentially more productive uses and the total output of the economy falls. That is unequivocally true if the cause of the price increase in energy is an “external” supply shock (such as Hurricane Katrina, that cut oil and gas supplies from the Gulf of Mexico, causing prices to jump). However, in your Long Recession scenario, it is not an external supply shock that causes the high prices, but a growth in demand caused by the expansion of the middle class in developing countries. In other words, the size of the global economy is growing because more people are entering it who were previously not effectively part of it, and energy supplies are not keeping pace with that growth. The interesting bit here is that all of these new consumers need lots of things other than energy, some of which in fact have very low energy intensity (think services, for example).

    I’m sure my post is too long already, so I will just say this: while the Long Recession scenario is obviously worse than a scenario where world energy supplies – at stable prices – kept up with demand growth, I am not sure that “Long Recession” is the right characterization for what might happen. Yes, there will be a rebalancing of the affordability of energy intensive goods compared to those with lower intensity, and yes, developed economies will suffer relative to the optimum energy scenario, but on a global basis, lots more people will still have a higher standard of living than ever before, and they will have demands that will create many opportunities for people who want to fill them. I’m not sure that “Recession” is the right way to describe this scenario, especially from a global, rather than local perspective.

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  11. By Ben on October 4, 2012 at 3:23 pm

    PELINOC seems to lean into some reasoanable assumptions about the elasticity of demand that accompanies supply/demand dynamics in the marketplace.  His misgvings about RR’s  characterizations of the ‘Long Recession’ are well taken even if they risk missing thew point of his macro-assumptions.    

    The foundational question as to whether we are in a new era of constrained growth that is largely attributable to recent developments in the global economy bearing on the accessibility of “affordable” energy supplies.  To sustain growth in the face of ever-increasing demand for energy and the daily requirements of 7 billion consumers is daunting, indeed.  It probably isn’t much of a leap of logic to envison challenges in sustaining the remarkable growth witnessed at the close of the past century and the early dawn of the 21st.    Yet, sustainable economic growth is the predicate upon which all contemporary politics turns to deliver the holy grail of politics here at home and abroad– the pledge that our next generation will have it better than their parent’s.   That underlying assumption, and the threat that such a promise may increasingly prove illusory, is beginning to frame a debate that may test the foundational beliefs of a citizenry that has too long taken for granted that tomorrow will necessarily be better than today.   

    How American leadership responds to these new circumstances will soon test our collective mettle even as it sheds light on where we are quite likely to find ourselves as we put more of the new century in our rear-view mirror.   If last night’s debate was any indication, we may just want dig a little deeper in the hope of finding the right stuff to prserve our economic competitiveness and leadership in the world.   I do remain hopeful–even if cautiously so.  

    Ben

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    • By Optimist on October 5, 2012 at 2:59 pm

      Crud Ben!

      If it is up to American “leadership” (prostitutians) we are truely screwed.

      Luckily for America, and much of the rest of the world, a free market tends to limit the input needed from Uncle Sam (maintain the order by doing three things: [1]update the rulebook, [2]enforce the rules, [3]hold hearings to keep things as fair as possible). Even that limited role is looking to be too much for the old alcoholic (what is it about ethanol that fascinates him so much?), so I see your point to some degree.

      But at least there is no fundamental reason growth won’t continue. Sustained high oil prices will be solved one way or another. The free market is great at those unsolvable challenges. My bet: Big Oil will develop a competitive, renewable (non-ethanol) fuel, and it will pretty much be business as usual, complete with the Big Oil conspiracy theories.

      The worldwide lack of leadership, OTOH, is a real concern.

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  12. By mac on October 4, 2012 at 5:51 pm

    Toyota will sell over 1 million hybrids world-wide this year.  Not bad, considering the fact that Toyota only sold 5,800 Prius hybrids in the U.S. in 2000.  With Toyota world-wide sales at about 10 million, hybrids now represent about 10% of total Toyota sales

    OEMs are flocking away from V-8 vehicles and increasingly producing 6 cylinder vehicles, 4 cylinder cars, and even 3 cylinder cars.  Not only to meet Cafe/CO2 emission  standards. but to also deal with the coming gas shortage.

    While hybrids do not solve the oil dilemma they do reduce our consumption.

    If you insist that we run our transportation sector on oil alone, then we are indeed… “Headed for Hell.”

     

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    • By Justin on October 5, 2012 at 4:14 pm

      If you insist that we run our transportation sector on oil alone, then we are indeed… “Headed for Hell.”

      This has always been my thought as well MAC. The end of growth and the long recession can all be solved if oil is no longer the sole transportation fuel. Eventually price signals will have people rushing for CNGs, high mile ICEs and electric vehicles. Oil’s price will drop, but people at that point will be over the hurdle of switching to an alternative and won’t go back. It may take a while and it will be difficult, but I don’t see the world ending or a 30 depression on the global economy.  

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  13. By mac on October 6, 2012 at 7:00 pm

    “Eventually price signals will have people rushing for CNGs, high mile ICEs and electric vehicles. Oil’s price will drop, but people at that point will be over the hurdle of switching to an alternative and won’t go back. It may take a while and it will be difficult, but I don’t see the world ending or a 30 depression on the global economy.”

     

    I don’t either.  We don’t  necessarily have to go through a 1930′s world wide depression.  There are a number of viable alternative fuels for the internal combustion engine including CNG,  bio-diesel, ethanol (derived from sugar cane bagasse, {of course}.)  

    There is also  methanol, and synthetic fuels via the Fischer-Tropshe process.

    And then, there are electric vehicles……………. 

    And car-pooling and car-sharing.  And simple conservation.

    Then, there are bicycles and two-wheeled transportation  (and yuk, yuk, yuk),  actually walking for short distances.

    And increasing mass transportation and electric trains  ???…………..

    And increasing U.S. freight transportation by rail  ??? ……………….

    And electric bicycles ???  ………….          

    Etcetera……………………

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  14. By mac on October 6, 2012 at 7:35 pm

    Hoffmeister assumes we will forever be chained to oil.  That’s the only way his scenario works.

    As long as the oil companies can control the energy market and convince the masses that there is no alternative to oil, then Hoffmeister’s speculations may indeed become a self-fulfilling prophesy.

     

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  15. By JV on October 13, 2012 at 11:17 am

    Yeah, but these hybrids run mostly on gasoline and diesel and very little of their operation is just using the electric motor. Then there’s all the planes, ships and heavy trucks that just run on fossil fuel based fuels, and the roads are still based on asphalt surfacing. Overall, the transportation sector and personal mobility will continue to deteriorate through to 2050. Believe it. New electric vehicles are easily 30% more expensive than a new gasoline/diesel vehicle and the batteries need to be swapped out after 10 years, costing another 3000 dollars or so. Electric/hybrid vehicles have  a way to go before they are an attractive buy, and production will remain low as the metals used to make cars become more scarce and expensive due to rising conventional fuel prices.

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  16. By Joseph on October 14, 2012 at 6:15 pm

    Not surprised by oil industry hacks (even retired ones) still forecasting  the petro status quo into the decades ahead. There are already several conventional ICE sedans that achieve +40 hwy mpg… today. And, as MAC points out, it is about mobility and there are lots and lots of options without even going “exotic” (as in hybrids, etc.)

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