Editor’s note: Oil supplies for the future are likely to be tight. In this analysis, Dr. Duarte updates his Peak Oil series with new data adding further insight into why global oil prices are likely to remain above what was once perceived as “normal” market prices. Dr. Duarte’s premise remains that Peak Oil is as much a man-made problem as it is a resource supply problem, as geopolitics and investment risk are as significant a set of contributors to the problem as the possible dwindling of available oil for extraction. In this installment Dr. Duarte looks at how low levels of investment and a worsening situation in Iraq are significant contributors to the global oil supply. The analyses below appeared on November 7^th and 8^th at www.joe-duarte.com. For more articles in the Peak Oil series by Dr. Duarte, visit:

• Peak Oil: Exploring the Oil Top

• Peak Oil: Is Venezuela Running Out of Oil?

• Peak Oil: Congress Declares War on Big Oil

• Peak Oil: Venezuela Slowly Turning Off the Tap Toward the US

• Peak Oil: The Black Gold Rush

• Peak Oil: Long, Hot Summer Looming for Drivers

• Peak Oil: The Covert War & The Uneasy Triangle

• Peak Oil: The Gulf Jitters

• Peak Oil: Bush, the Middle East Conflict, & Alternative Sources

• Peak Oil: China & Iran - The Energy Tightrope

• Peak Oil: Big Oil Companies Want Reserve Accounting Change

• Ethanol Hits the Big Time

• Peak Oil: On the Verge of Hitting Prime Time

Low Investment And Portents For Future Supplies (11-8-06)
Self-Fulfilling Prophecy

The International Energy Agency is describing spending on oil production by the global oil industry as "inadequate," and amounting to "almost nothing." Yet, a careful analysis suggests that a top in oil production has been influenced by multiple factors, not the least of which are the global economy and the geopolitical climate.

Global oil companies, despite record profits, have underspent on expanding production capacity over the last five years reported the Wall Street Journal.

Citing a study by the International Energy Agency, The Journal noted: "investment in the oil-and-gas industry was $340 billion in 2005, up 70% from 2000. But cost inflation for goods and services used by the industry accounted for almost all of that increase, according to the IEA, the energy club of 26 of the world's major industrial nations. Adjusted for inflation, the oil industry's investment increased by 5% between 2000 and 2005."

In other words the oil industry is spending money on equipment not on finding or bringing new projects online. That means that if this analysis is correct, the oil industry is spinning its wheels, and going nowhere.

Long Term Trend Toward Higher Prices

To be sure, this is not a simple set of issues, given the complexity of the oil industry and time factors involved.

For one thing, as the Journal points out: "Because oil and gas projects take many years to complete, the results of any scrimping on investment during the first half of the decade will become evident only toward the end of the second half."

That means that all the money currently being spent, may or may not actually deliver any additional oil to refineries or storage tanks.

Therefore, the marketplace remains vulnerable to higher oil prices over the long term.

As the journal points out: "If world demand for oil rises faster than projected, or if production-capacity gains are less than expected, the result would be upward pressure on prices. But even if demand-and-supply trends conform to projections, which is unlikely, the oil industry's investments won't significantly add to the world's spare oil-production capacity, a buffer that is needed to offset supply disruptions that periodically occur because of political, natural or industrial upheaval."

Reaping Results From Prior Booms And Busts

In essence, the global oil industry is reaping the results of past price trends, and the consumer is paying the price.

According to the Journal: "Oil prices nearly doubled between 2000 and 2005, leading to a gusher of revenue and profits for oil-producing countries and companies. Among the reasons for the sharp price increase was the industry's inability to increase production capacity to match the surge in demand. That was the result of self-imposed investment restraints during the industry's lean years in previous decades, when oil prices crashed twice because of excess supply."

Yet, due to fear of loss, as well as regulatory and political issues, the pace of exploration has not kept up.

The current situation in Nigeri, the risk of attacks in Saudi Arabia, the war in Iraq, the politics of Venezuela, and the helter skelter politics of Russia, are not likely to go away anytime.

Problems with weather, such as the Hurricane Katrina and Hurricane Rita disasters in the Gulf of Mexico in 2005 also point to the intangibles of the oil exploration business.

Fatih Birol, the IEA's chief economist, told the Journal that 'he expects the oil industry's production capacity will slightly outstrip demand through the end of this decade -- or by 1.3 million barrels a day -- "if all the projects see the light of day." Even then, when added to current spare oil-production capacity of roughly two million barrels a day, the total reserve of 3.3 million barrels a day still would be well short of the five million barrels a day needed to put the world into the comfort zone, he said.'

Hidden Costs

Perhaps one of the more important issues for the oil industry has been the rise in material costs.

According to Marketwatch.com: "Labor and manufacturing costs have escalated so sharply this past year that projects' price tags are nearly doubling from when they were announced. Where the industry once thought it could complete a project at $10,000 per barrel of oil, actual costs are closer to $18,000 to $20,000, said Doug Terreson, managing director at Morgan Stanley, at a conference in Houston last week."

Marketwatch added: "A key factor pushing costs skyward have been surging steel prices, which have risen meteorically due to development in Asia."

Conclusion

Once again the specter of peak oil is on the rise as this latest report suggests that global oil production has at the very least flattened out.

To be sure, the reasons are multifold, yet interdependent, with higher material prices and geopolitics playing significant roles.

To us, the question remains open, though, as to whether the top in oil production is a result of politics and logistics, or whether indeed the resource is running out.

At this stage of the game, the answer to the question remains an academic pursuit.

But at some point, when prices again start to bite, the question of peak oil will move from an academic one to a very personal one for all consumers.

Iraq: Army Support Crisis Ahead (11-9-06)
Bechtel Sounds Exit Bell

The U.S. Army occupying Iraq is in danger of losing significant support services as outsourced contractors are finding the risk in Baghdad too high to stay.

U.S. infrastructure rebuilding behemoth Bechtel is pulling out of Iraq, a move that is sending a significant and loud message to the world about the state of affairs in Iraq.

According to Stratfor.com: Citing Cliff Mumm, who heads up Bechtel's infrastructure projects, "the security situation in Iraq has deteriorated to the point where continuing is not possible. Bechtel's decision follows the decision by Kroll Security International to sell or abandon -- it was not clear which from media reports -- its operations in Iraq following the loss of some of its personnel."

The Middle East Times reported: "Bechtel veterans, accustomed to mammoth projects around the world, say that they cannot recall as hostile an environment."

The company, whose job was to rebuild water plants and hospitals, received $2.3 billion worth of contracts from the U.S. government.

According to AP: "The U.S. government hired Bechtel in April 2003, hoping the company behind manmade marvels like the Hoover Dam would be able to bring Iraq into the 21st century as it repaired much of the damage caused by the invasion that overthrew Saddam Hussein. The daunting task required rebuilding roads and bridges, expanding the power grid, cleaning up the water supply and adding telephone lines."

AP added: "Bechtel said it completed all but two of the 99 projects on its Iraq to-do list, but at a horrible cost: 52 dead workers and another 49 wounded. At peak times, Bechtel employed more than 40,000 workers — mostly Iraqi subcontractors — on the various projects. Most of the Bechtel workers were killed while off duty, said company spokesman Jonathan Marshall. It is among the greatest losses of life that Bechtel has suffered during any job in the company's 108-year history, possibly exceeded only by the company's Depression-era work on the Hoover Dam, Marshall said."

The statistics and the details of some of the problems encountered by the company are quite dramatic, as reported by AP: "Bechtel said it finished all its jobs except a water treatment plant in Baghdad and a two-story children's hospital in Basra that had been championed by first lady Laura Bush. The government suspended work on the hospital last summer amid rising security expenses that drove the project well above its original $50 million (€39.19 million) cost. Bechtel estimated it would have taken at least $98 million to finish the hospital. Before the hospital was abandoned, Bechtel's onsite security manager was murdered, another manager resigned because of death threats and a senior engineer quit after his daughter was kidnapped. Another 23 workers employed by a subcontractor and a concrete supplier were murdered."

Consequences

Aside from the obvious message about safety in Iraq, there are other significant consequences, especially for the U.S armed forces.

More than any other group, the U.S. Army is being stressed beyond its capacity and design, with the Bechtel departure becoming critical.

As Stratfor puts it: "The combat capability of the U.S. Army is therefore breaking in two ways. First, its manpower base is being exhausted through multiple deployments. Second, it is now going to find that the contracting support it relies on won't be there if the security risk becomes too extreme. Unlike combat support drawn from the ranks of the military, the contractors can't be ordered and expected to carry out their duties in high threat circumstances. But the Army is not built to operate without them."

In other words, the Bechtel withdrawal is the tip of the iceberg as "It is unlikely that a decision reached by Bechtel and Kroll is so unique that others won't follow. They will. And that now poses a new problem for the U.S. effort: It does not have the military capability of filling in for the contractors. There are just not the numbers or skills. That means that if the security situation worsens, we will see a spiral in which contractors withdraw, the security situation further deteriorates and more contractors withdraw."

Conclusion

The U.S. population is not the only group that wants out of Iraq. The contractors hired by the U.S. government are now making it clear that they have had enough of the risk in Baghdad and elsewhere in Iraq.

That means that the situation is now critical for the U.S. armed forces on the ground, as key support services are about to be withdrawn.

Armies depend on their supply lines, and the U.S. Army in Iraq is facing a crisis, as its supply lines are being cut, ironically, not so much by the enemy, but by the hired hands of the Pentagon, the outsourced contractors, who even receiving large amounts of money, are cleary saying a very loud "No Ma's."

As Stratfor puts it: "When you depend on contractors looking to make money, a lot of them will bail when the risks get too great. Defense planners in the 1990s did not count on this scenario, when the enablers of the Army decide to leave the theater of operations. But it seems that that is what is happening."

© 2006 Joe Duarte, M.D.
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