Folks,

Last week’s release of a new GAO study on peak oil was a watershed event. Here’s my report on it for Wealth Daily

–C

U.S. Government Admits Peak Oil Threat

By Chris Nelder

April 5, 2007

At long last, the U.S. Government admitted last week that peak oil is a reality.

Thanks to the relentless efforts of Rep. Roscoe G. Bartlett (R-MD) and Rep. Tom Udall (D-NM) and their Congressional Peak Oil Caucus, the U.S. Government Accountability Office (GAO) has performed a comprehensive study of the peak oil issue.

Their report, titled “Uncertainty about Future Oil Supply Makes It Important to Develop a Strategy for Addressing a Peak and Decline in Oil Production,” pulls no punches, either.

It warns that the U.S. is unprepared to deal with the decline of conventional oil, and is likely facing price shocks. “The consequences of a peak and permanent decline in oil production could be even more prolonged and severe than those of past oil supply shocks,” it says, and adds that the decline “would be neither temporary nor reversible.”

Anybody want a marker on $100 per barrel? $200?

As the title of the report implies, the U.S. is late in developing its response to the problem, partly because of uncertainty about the available data on oil reserves and production. “There is no coordinated federal strategy for reducing uncertainty about the peak’s timing or mitigating its consequences,” it says.

No, there is no coordinated federal strategy, because up until just recently, there were plenty of voices in the federal government denying that peak oil was even an issue.

But those days are behind us now, and this report is really a watershed moment in the debate. It comes from one of the most sober and respected agencies in the world, one right at the heart of the U.S. government.

What this means is that now we may be able to move beyond the political, often uninformed debate that has prevailed on the peak oil issue, and start focusing on facts and probable outcomes.

The authors of the report surveyed 21 previous peak oil studies, from the sublime (Bartlett, Deffeyes, Bakhtiari, Campbell) to the ridiculous (IEA, CERA, Exxon, Lynch) and observed that most studies project the peak to occur some time between 2000 and 2040, noting the many factors and unreliable data that make such projections difficult.

For the record, I have read many of these authors’ studies, and the ones I most respect all project a peak somewhere between 2005 and 2020, with 2015 a good median of consensus.

The report also noted that liquid fuel alternatives now in development–everything from biofuels to alternative transportation technologies–are not a panacea, because they could be limited by several factors, including the increasing cost of corn, the immense expense of adding ethanol-compatible infrastructure (pipelines, tanker trucks, storage tanks, and filling stations), and the sky-high cost of alternative engines such as hydrogen-burning fuel cells.

Consequently, a conservative but probably realistic projection is that alternative technologies could offset about 4% of U.S. petroleum consumption by 2015, up from 1% today.

Under that scenario, the study notes that “an imminent peak and sharp decline in oil production could cause a worldwide recession.”

It takes a lot of guts for a governmental office to use the R-word like that, especially in an administration that’s hostile to that message.

On the more optimistic end of their projections, they note that if the peak comes significantly later, we may have the time to overcome some of the technical challenges, and could potentially displace up to 35% of U.S. petroleum consumption by 2025 or 2030. (One observer made the wry comment that the word “could” appears in the report 84 times, and “uncertain” appears 87 times.)

So this report wasn’t your usual EIA- or IEA-style “don’t worry, be happy” pabulum, and the GAO isn’t offering any pie-in-the-sky alternatives. It’s realistic, and provides a rational basis for our national dialog about energy.

I give it two thumbs up–way up.

I also give the conclusion of the report top marks for honesty:

The consequences would be most dire if a peak occurred soon, without warning, and were followed by a sharp decline in oil production because alternative energy sources, particularly for transportation, are not yet available in large quantities. Such a peak would require sharp reductions in oil consumption, and the competition for increasingly scarce energy would drive up prices, possibly to unprecedented levels, causing severe economic damage. While these consequences would be felt globally, the United States, as the largest consumer of oil and one of the nations most heavily dependent on oil for transportation, may be especially vulnerable among the industrialized nations of the world.

The authors recommend that the Secretary of Energy develop a strategy for addressing peak oil, and make it a priority. They specifically call for better monitoring of oil supply and demand, and improved information on oil reserves, projected production, and the realistic capacity of alternatives.

Wow. I have long waited for this day, but little did I expect that it would be so satisfying!

The mainstream media, for its part, managed once again to summon the courage to run out and shoot the wounded. The very day after the GAO report was released, CNBC interviewed the world’s top oil banker, Matthew Simmons, about peak oil. And for once, they let him get the straight story out.

“I believe–and I have for some time–that we are on the verge of actually replacing ‘global warming’ by this term ‘peak oil,’” he said. “It’s not a kook issue, it’s a reality, it’s a physical reality. We have demand roaring ahead and supply is faltering.”

Commenting further on the extremely tight balance between supply and demand, he continued, “There is a likelihood that by this summer, demand will start to fast outstrip supply, and we can tolerate that for a few weeks, but then actually that spells ‘shortage’ as opposed to high prices.”

Noting that Saudi Arabia has only a glut of heavy sour crude, which the world doesn’t need any more of than it now consumes, and that Mexico’s oil fields are in irreversible decline, “a disaster happening before our eyes,” with a depletion rate that might be as high as 25%, he warned, “That is so dangerous to the United States economy, you cannot believe it.”

Speaking alongside Simmons on the program, energy analyst John Kilduff admitted that we are “tremendously vulnerable” and lamented that oil prices have come down from last year’s highs, because that has caused us to “take our eye off the ball.” “We are absolutely held hostage” to unfriendly countries that still have significant amounts of oil, he said.

Simmons concluded: “The fossil fuel era is basically waning, as far as meeting the unbelievable, insatiable demand, and we don’t have any solutions. The best new oil basin we will ever find is called ‘conservation.”

And there you have it. The top oil industry banker in the world–a guy who makes his living financing oil projects–says that our salvation is in conservation.

Any further questions?

Until next time,

–Chris