The Pentagon is concerned that the world could see a severe lack of oil beginning as soon as 2012 but at least by 2015. The Pentagon took several years to analyze the assertions from several sources including the late Matthew Simmons book "Twilight in the Desert." Their results were surprising.
Simmons wrote the book in 2005 after years of research into the Saudi Arabia oil fields. Since as much as 40% of the world's remaining oil is claimed by Saudi Arabia he thought that claim deserved some serious scrutiny. Matthew Simmons gave a presentation of the facts in his book to the Pentagon in 2008.
According to Simmons his research showed the Saudi's have highly overstated their claimed reserves and he feared they were on the brink of a decline in production rather than a sharp increase as they claim. The Pentagon analysts arrived at the same conclusion and predicted that a "severe energy crisis" is potentially inevitable.
The Joint Chiefs produce a biannual report that describes the current and future environment the armed forces will have to deal with in the near future. The Joint Operating Environment or JOE Report for 2010 warned of trouble ahead.
Since 1944, America as a super power, relied on oil supplied from Saudi Arabia and even drew up attack plans to capture and occupy the Saudi fields and terminals during the 1973 oil embargo. Saudi agreed to break the embargo and to supply the sixth fleet with oil from that point forward. The point here is that the U.S. armed forces depends on Saudi Arabia for fuel for their ships traveling all over the middle east and northern Africa. Having Saudi go into permanent decline would be a serious problem since other countries that depend on them would suddenly be competing for the remaining oil.
In the JOE 2010 report it warns, "By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 mbpd." If in fact this shortfall came to pass it would (will) be a very different world. (It will come to pass in this decade and lead to a massive global recession possibly greater than the financial recession of 2008 and be much longer lasting.)
The report also warns, "A severe energy crunch is inevitable without a massive expansion of production and refining capacity. While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India.
At best, it would lead to periods of harsh economic adjustment. To what extent conservation measures, investments in alternative energy production, and efforts to expand petroleum production from tar sands and shale would mitigate such a period of adjustment is difficult to predict. One should not forget that the Great Depression spawned a number of totalitarian regimes that sought economic prosperity for their nations by ruthless conquest.
The report warned that the current rebound in oil exploration after the 2008 recession could lead to a prolonged plateau where production equaled demand for several years before shortages appear. The peakists have for years called this the "undulating plateau" where progressively higher prices depress demand and allow production to keep pace for several years before continuing downward. Demand will continue to grow but low cost demand will shrivel and die. Enterprises that are profitable at $3 gasoline will be bankrupt at $6 gasoline.
The JOE report does not blame all the decline on Saudi. The report warns that production declines already evident in the North Sea, Russia, China and Venezuela will add to the production shortfall. This is identical to a drop predicted by the EIA.
Glen Sweenam, said to be the EIA's expert on future demand, authored a document for the EIA that claimed "There is a chance that we will experience a decline" in world production of liquid fuels between 2011 and 2015, "if investments are lacking." I have reported on this repeatedly over the years. The EIA/IEA claim something like $30 trillion would have to be invested in exploration and production in order to meet demand by 2030. It is not going to happen.
Another expert in the field, Sadad Al-Husseini, former vice president of Saudi Aramco, claims that oil production has peaked except for some temporary spikes as new fields come online.
I have been crying out in the wilderness for four years now and our time is running short. Thanks to the 2008 recession and the sharp drop in demand the shortages may not develop until the 18 million Americans currently unemployed return to work. This puts 2012 to 2014 as the start of the next Great Recession.
This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.
Subscribe to Energy Picks Newsletter