The U.S. Energy Information Administration (EIA) is funded by taxpayers to monitor energy usage and warn about energy issues. Somebody needs to wake up the EIA.
Once in a while I come across and article that is written so well that to revise or paraphrase it would detract from its impact. Today I am reprinting an article posted on ASPO by Bill James on the EIA's failure to sound the alarm on the coming oil shortage. Link to original article
Mission Failure By: Bill James
The Energy Information Administration (EIA) is funded by American taxpayers to warn about energy issues. Every Wednesday the EIA publishes This Week in Petroleum (TWIP). The failure to warn is highlighted in the Jan 12, 2011, TWIP:
"EIA expects a continued tightening of world oil markets over the next two years. World oil consumption grows by an average of 1.5 million barrels per day (bbl/d) each year while the growth in supply from non-Organization of the Petroleum Exporting Countries (non-OPEC) countries averages less than 0.1 million bbl/d. Consequently, EIA expects the market will rely on both inventories and significant increases in production of crude oil and non-crude liquids by OPEC to meet world demand growth."
The TWIP notes that demand for oil will grow by 3 million bbl/d over the next two years but there is no supply risk because EIA "expects" OPEC to fill in the need. That is like being lost in a desert and saying that you will be hungry and thirsty at 6 PM so you "expect" the pizza delivery company will find you. Oh, and you will need to borrow money from China to pay for the meal.
OPEC Crude Production 2004-2010
EIA's own data shows how absurd their "expectation" is. OPEC's oil production between 2004 and 2010 averaged about 30.5 million bbl/d; supply growth in response to price increases from $40-$140 per barrel was only about 0.6 million bbl/d. Add to this International Energy Agency (IEA) reports that existing oil fields are depleting at 6.8 percent per year (or about 2 million bbl/d). Even if OPEC can overcome depletion rates and increase production to their previous high average of 30.5 million bbl/d, demand will exceed supply by 1.8 million bbl/d. The 2007 increase in production required President Bush to go and beg the Saudis to step up their output. What assurances does EIA have from OPEC? If the latter cannot provide declarations then EIA should be warning of supply shortfalls.
EIA and IEA have an incredible record of failing to warn the American people about risks of higher oil prices and supply shortfalls. Following are graphs from the Dallas Fed and ASPO on EIA and IEA repeated underestimation of price increases and overestimation of supply.
EIA Production Forecasts
Life requires energy: less affordable energy, less life. Failure to warn of higher oil prices resulted in policies that encouraged home ownership with "drive to qualify." As gas prices increased from $1.45 in 2002 to $2.92 in 2006, American families lost $2,000 per year of disposable income. More and more families were forced to choose between paying for their commute or their mortgage. Foreclosures collapsed the banking system, housing market, and jobs.
There are alternatives, but they will take time to build. China's economy is growing at $90 a barrel oil because they have 100-plus million electric motor scooters so coal can be used as a transportation fuel.
Chinese cities are bikeable. Europe has trains. The Personal Rapid Transit (PRT) network in Morgantown, WV, has delivered 110 million oil-free, injury-free passenger miles since being built as a solution to the 1973 Oil Embargo. The solution is self-reliance.
US policies over the last 50 years have caused the loss of thousands of miles of railroads and a monolithic dependence on a single source of energy 65 percent outside our control that we must borrow from China to buy.
Policies have created oil's Potato Famine potential. Instead of warning of supply shortfalls and much higher prices, EIA says there is no need to innovate our infrastructure because we "expect" OPEC will save us.
(end of article)
My comments: In the forecast graph above the EIA has consistently projected higher production but production continues to remain flat at 85 mbpd through 2009. In 2010 we did see a spike to 87 mbpd but it was not due to increased oil production but increased natural gas liquids from all the shale gas drilling. Oil production has remained relatively flat since 2005 even after the spike in prices to $147 in 2008.
Currently the IEA and OPEC are projecting demand in the 89 mbpd range for 2011. That would be a major jump on this chart if it actually occurs. That 89 mbpd is all liquids including oil, NGLs, ethanol, biodiesel, oil sands, etc. Oil production has not increased 5 mbpd over 2009 levels but that capacity is claimed to exist by OPEC. We will find out if it really exists over the next 24 months. If it does not exist we will be paying $8 a gallon when we can find it by the end of 2012. If it does exist it will buy us two more years of higher but still manageable gasoline prices and $8 gasoline will not appear until 2014.
Do you trust OPEC to tell us the truth? I suggest everyone plans for the worst in 2012 and you will be ahead of the crowd in 2014.
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
See a list of our closed plays from 2010 here: Closed Positions
The OilSlick Newsletter is based on the expectations for global oil production to peak and begin to decline in the 2012-2014 timeframe. This is called "Peak Oil." This is the point where global production of conventional oil supplies can no longer be supplemented by enough oil sands production, deepwater oil production, biofuels and natural gas liquids to offset the decline in existing fields. The roughly 6% annual decline of existing production due to depletion is larger than the rate of new discoveries and new production being added each year. The Peak Oil countdown clock is ticking and time is growing short. Peak Oil is coming, are you prepared?