Testimony of Ronald R. Cooke, The Cultural Economist, before the Subcommittee on Energy and Air Quality, United States House of Representatives, December, 2005.

OK. So I didn't actually show up in Washington. But – for the reasons described below - I should have been there. It's not vanity or ego. I just see a huge gap in the testimony. Most of the testimony given on December 7, 2005 focused on oil in the ground, exploration, reserves, and production. Good stuff. But it missed a few key points.

So let's fix that problem.

Dear Members of Congress.

I agree in concept with most of the testimony given at The Subcommittee on Energy and Air Quality on December 7, 2005. Udall, Aleklett, Bartlett, Esser, Hirsch, et al. They didn't mince their words. All us oil consuming nations have a collective problem. Over the long haul, oil is going to be more expensive and less available. Although Congress obviously disregarded Joseph P. Riva's excellent report on oil depletion that was written for the Congressional Research Service in 1995, there will be no escaping THIS testimony. The cards are on the table. Congress has been informed.

Do something. Constructive.

The Key Issue.

One of the most confusing aspects of the Peak Oil debate is embedded in the definition of what constitutes reserves. Every agency and nation appears to have its own method of accounting. We hear about identified, proven, probable, and possible reserves. Reserves volumes are estimated using 95 percentile, mode, mean, or 5 percentile recovery data. Adding to the confusion, emerging technology and volatile crude oil prices change the definition of what is – or is not - economically recoverable oil.

But focusing on oil in the ground, while essential to understanding our economic future, misses the essential point. For consuming nations, the key issue is not how much oil is left, or when will production peak? The key issue is: How much oil can we produce? And that is an entirely different and far more complex question.

Although oil in the ground has intrinsic value, it has no practical value. The intrinsic value of oil in the ground is currently being used as loan collateral, and as a means of acquiring political influence. But oil reserves have no practical value until they have been found, produced, transported, refined, and distributed in the form of a product that can be consumed. In today's world, that demands a very long – and highly vulnerable – supply chain. Thus, when you consider policy legislation on the subject of oil, I suggest you consider the following reality: Proven or identified reserves are less important than accessible reserves.

"Accessible reserves are those reserves of oil that can actually be found, produced, transported, refined, and distributed without disruption at a price the consumer can afford to pay."

Why is this definition important? Because although there is a lot of oil left on this planet, only a small fraction is accessible.

Possible Optimism.

Robert Esser, CERA Senior Consultant and Director, Global Oil and Gas Resources, almost made the "there's no problem" business case. I actually agree with CERA's assessment. IF there are no disruptions to the oil supply chain for the next 20 years, then we humans will have enough oil to continue our economic expansion and population growth. But CERA inserted two key points into its testimony. You should not make the mistake of overlooking them.

1. "It is important to understand that we do not predict production as such, but rather capacity to produce, …. ".

2. " CERA believes the risks to capacity expansion are mostly above ground: …. " 

True enough. I have agonized many long hours over a very complex spreadsheet, trying to bridge the huge gap between the concept of "capacity to produce" versus a realistic estimate of "probable production". My article "Oil Depletion? It's All In The Assumptions" www.tceconomist.blogspot.com, details the potential barriers to oil exploration and production that must be incorporated into any analysis of probable oil supplies. So although CERA's testimony does give us a baseline for possible oil production, it does not – as they state – make an estimate of probable production. In order to do that, we have to examine the attributes of the entire supply chain, from exploration through production, transportation, refining, distribution, and consumption. We must examine the above ground factors that may disrupt the oil supply chain in making public policy. These factors include corporate behavior, government action, cultural stability, economics, legal agreements, geography, weather, transportation, military diplomacy and the always potent combination of religion and politics. Above ground factors are now more important than geology in developing resource production forecasts.

In order for suppliers to provide enough oil we have to assume:

• The proven reserves claimed by OPEC actually exist.
• Cultural stability prevails in the Middle East, Africa and South America.
• Saudi Arabia will continue to be a “swing” producer.
• Russia does not choose to use oil as a political weapon.
• Resource nationalism will not disrupt world oil markets.
• Emerging technology will substantially increase production.
• Environmental concerns will not limit access to potential resources.
• There is sufficient infrastructure, labor and capital.
• New production comes on-line on schedule.
• Reserve depletion rates will not increase.

Are these assumptions realistic?

Probably not. Certainly not in the aggregate.

Even a Best Case Scenario Points to Economic Hardship.

Using an economic model, I have developed several oil production and consumption scenarios. My "Best Case" scenario is very similar to the one CERA presented to you. It assumes we humans will be able to find, produce, transport, refine, and distribute oil products for the next 20 years without any impediments or disruptions at a price the consumer can (hopefully) afford to pay. There is a positive – no problem – response to the assumptions listed above. Everything works. There are no screw-ups.

Even with this optimism, however, the model still suggests that inflation and unemployment will increase in the out years of the forecast period. GDP will decline. Chronic recession is possible.

Why?

For the last 30 years, we have been living in a resource supply never-never land. Saudi Arabia has provided the world with a huge buffer of oil reserves. If the demand for oil exceeded the available supply, they opened the spigot. If the world had more oil than it needed, they reduced production. That buffer is almost gone. Even if depletion were not a factor in the oil market equation, the vulnerability and unpredictability of the supply chain will make it impossible to balance supply with demand. Going forward, we can expect price and supply volatility unlike anything we have experienced in the past.

Another point. The oil markets of the last 30 years have been characterized by excess production capability. For most of this period, changes in consumer demand defined the parameters of the available market. But we are in a trap. World oil is transitioning from a market driven by consumer demand to one limited by producer capacity. Over the next 20 years – and beyond - the characteristics of the worldwide oil market will be determined by a very vulnerable supply chain. As a result, oil exporting countries are now able to control the price and the availability of an increasingly scarce commodity.

Conclusion.

The bad news: the odds we will experience the oil production and consumption characteristics of a Best Case scenario are probably less than 40%. The really bad news: we seem to be tracking the "Production Crisis" scenario produced by my model. Unless Congress takes action and initiates a REAL energy research and development program, higher rates of inflation and unemployment are almost certain to disrupt western culture long before "peak oil". GDP will go negative. Chronic recession is probable. The industrialized nations on our planet will not have enough energy to support their economies.

So far, the odds on this scenario appear to be 80 percent.

Note 1: Joseph Riva's report is available on the Internet. Do a Google search. I found his excellent report for the Congressional Research Service, "World Oil Production After Year 2000: Business As Usual or Crises?" long after I completed the research and analysis for my book on peak oil. Why Congress ignored this report is one of the mysteries of American politics.

Note 2: Key parts of the referenced testimony before the House Subcommittee on Energy and Air Quality can be found at www.tceconomist.blogspot.com

"Oil, Jihad and Destiny"	"Detensive Nation"