Peter Orszag Destroys The Peak Oil Myth

I just had to laugh when I saw Peter Orszag's Bloomberg column Fracking Boom Could Finally Cap Myth of Peak Oil. You probably already know, but I'll remind you who Peter Orszag is.

Peter R. Orszag is a Bloomberg View columnist appearing on alternate Wednesdays. Now vice chairman of global banking at Citigroup, he was President Obama's director of the Office of Management and Budget.

Orszag was previously the director of the Congressional Budget Office, from 2007 to 2008. He served in two different jobs in the Clinton administration, as a senior economist at the Council of Economic Advisors from 1995 to 1996 and, in 1997, as top adviser to the director of the National Economic Council. He has a Ph.D. from the London School of Economics and a B.A. in economics from Princeton University. An adjunct senior fellow at the Council on Foreign Relations, he lives in Manhattan.

There is a phrase I like—a little knowledge is a dangerous thing. It means "a small amount of knowledge can mislead people into thinking that they are more expert than they really are."

On slow days when he is not using the revolving door between Washington and Wall Street, Peter takes the time to enlighten us on things he knows little about. On Tuesday he wielded his "expertise" to destroy the peak oil myth.

The U.S. oil market could be on the verge of its own fracking revolution, similar to what the natural-gas market is already experiencing. As a result, domestic production is now projected to rise significantly over the coming decades, reducing the relative share of imports in U.S. oil consumption...

The same controversial technologies used to recover natural gas from deep-rock formations are now increasingly being used to extract oil. Oil is already being produced from shale at several locations throughout the U.S, most notably the Bakken shale in North Dakota.

Orszag then cites the EIA's AEO 2012 preview I recently deconstructed in Where Is U.S. Oil Production Going?

As Jim Mulva, the chief executive officer of ConocoPhillips, recently said, “The [fracking] revolution has spread to domestic oil production. And it may track the path it followed with natural gas. We just don’t know yet. But it looks promising.”

The federal Energy Information Administration certainly thinks . An early release of its annual energy outlook projects a substantial increase in onshore production of oil from shale formations — what experts call “tight oil.”

In 2010, oil companies produced 5.5 million barrels per day of domestic crude. The Energy Information Administration estimates that figure will rise to 6.7 million barrels per day by 2020, mostly because of “continued development of tight oil, in combination with the ongoing development of offshore resources in the Gulf of Mexico.” The U.S. has not produced as much as 6.7 million barrels per day since 1994.

The mirror image of this projected increase in U.S. production of oil and natural gas is a decline in reliance on imports. In 2005 and 2006, about 60 percent of the liquid fuel used in the U.S. was imported. By 2010, that share fell to 50 percent, and it continues to decline. The Energy Information Agency expects it to drop to 37 percent by 2035.

Other analysts believe that even this projection is too conservative because tight-oil production could rise faster than expected. Every time projections are revised, the numbers seem to move higher.

America's oil imports declined to a 50% share in 2010 because consumption was about 1.5 to 2 million barrels per day below its peak level in 2006-2007. Increased oil production had little to do with it. As for the 2035 estimate, I compared that to a visit to Walt Disney's Magic Kingdom in my recent article, which I will not rehash here. But I will reprint my conclusion.

But even granting the dubious assumption that the U.S. will be producing 6.1 million b/d of crude oil by 2035, we are still entitled to ask where the hell those other 6-plus million barrels per day are going to come from. Those will be natural gas liquids barrels or biofuels barrels. Here we have entered the realm of Pure Imagination, Disney World's Magic Kingdom. We are now in Cinderella Castle.

And so we can see how everything fits together—the President's SOTU speech, the EIA's rosy forecast issued about 24 hours prior to the speech and now a Woofie nominee, the political need to counter the "Drill, Baby, Drill" mantra of the Republicans. Taken together, these elements posit a Bright Energy Future for the United States. Given who we are in America, which is without question the Greatest Country on Earth, could it really be any other way?

I think not.

And now we must add Peter Orszag's Bloomberg column to this propaganda blitz promoting and celebrating America's Bright Energy Future. But this former OMB director who is now a vice-chairman at Citigroup is not content to proclaim the Good News. As Gore Vidal once said, it is not enough to succeed. Others must fail.

So, will this push oil prices down overall, as shale gas has done to natural-gas prices? For years, analysts have worried that known oil reserves have peaked, so that prices will keep rising. Tight oil could change that dynamic. As the energy analyst Seth Kleinman, a colleague of mine at Citigroup Inc., argues, the price effects of the shift to tight oil “may be more immediate and subtle than the supply-and-demand balances hint at.”

The year ahead, [Kleinman] says, “could really see the death of the peak-oil hypothesis, something that has been underpinning a lot of the structural bullishness on oil.” (The terminology is thus borderline ironic, since tight oil could make oil markets much less tight.)

Clever boy! ("Tight oil could make oil markets much less tight.") The notion that oil from shale rock reservoirs in the United States could kill off the peak oil hypothesis is laughable. Right now, peak oil is a fact, even if there is an unknown (but limited) amount of spare production capacity in Saudi Arabia. The global oil supply has been more or less flat for about six years now. As new oil comes on-stream every year, net of declines in older depleting fields and despite higher levels of investment in exploration & production driven by rising prices and demand, crude flows have not signficantly increased. If we get another 900,000 barrels per day by 2020 as the EIA predicts—there is an outside chance this could happen—the global oil supply & demand balance would not be altered significantly.

Oil from shale rock reservoirs in the United States is not a game changer any more than deepwater oil from the Gulf of Mexico was a game changer (as we were told in 2006) any more than oil from Alaska's North Slope was a game changer in the 1980s. Wash, rinse and repeat.

If world crude oil production remains flat (with some volatility) in 2015, which I think is the mostly outcome, the peak oil hypothesis will have been confirmed beyond all doubt by the historical data. A phrase some of us have used says peak oil is only visible in the rear view mirror.

But really, it is almost too much to bear to have Peter Orszag of all people, writing in Bloomberg of all places, telling me about the impending death of the peak oil myth. Laughter is our only relief. Never forget that people are usually just as mindless as they come off, even in politics, where dissembling is a way of life. Could this country and its ruling elites become any more foolish and ridiculous?  Seriously, is that possible?

I don't think so.

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[Bill Hicks]

"Given who we are in America, which is without question the Greatest Country on Earth, could it really be any other way?

"I think not."

Those two sentences are all you really need to read to know that Orszag is completely full of shit. Gee, hubris much? It is that kind of thinking that has repeatedly brought down empires throughout world history.