Dr. Colin Campbell on Global Oil Production: “Playing With Fire”

Jim welcomes back to Financial Sense Newshour geologist and Peak Oil pioneer Dr. Colin Campbell to discuss the global energy situation. He believes that oil insiders around the world know Peak Oil has arrived, but don’t want to alarm consumers and shareholders with the truth. Unfortunately for those weary of high gas prices, Dr. Campbell sees this as just the beginning of much higher prices.

Dr. Campbell has over 40 years of experience in the oil industry. He earned a Ph.D. in geology from the University of Oxford in 1957, and has worked as a petroleum geologist in the field, as a manager, and as a consultant.

Transcript

JIM: Joining me on the program is retired geologist C.J. Campbell. 

And Colin, I want to talk about a piece that you are going to be publishing here called Playing With Fire about the importance of oil and the role that it’s played in shaping empires from the British Empire to the commercial empire of the United States. But it seems, Colin, that we have run against a brick wall. And it’s amazing. Something that I have noticed since the recovery of the Great Recession of 2007 and 2009 is we get oil prices, they start to go up as they did in 2010, and then all of a sudden the economy begins to slow down. Then we get more economic stimulus, the economy picks up, oil prices go up as they did in 2011. Last spring oil prices hit another peak; Brent crude got to $1.26; West Texas got to $1.15. The economy begins to slow down, we get more stimulus, it picks up, the economy is now growing, but here we are in our third year, Colin, and West Texas Intermediate crude is at $1.08, Brent is at $1.24. 

So what do you think is behind this? 

I think this is how we see peak oil unfold; in other words, we get weak economic growth, demand for energy falls, the price comes back down. Then we get stimulus, growth picks up and the price goes up. Is this how peak oil unfolds over time? [2:19]

COLIN: Yes. I think you’re right. And I think as we try to look into the future a little bit — one has to try looking in the past also, and I’m no historian, but I’ve reached the conclusion that this industrial age that opened only about 200 years ago — started with coal which provided the energy which changed the world radically; provided the steam engine, the trains and everything that started to stimulate trade and industry and transport grew and that was followed by oil, as you say. And over the last 100 years or so we've seen the rapid expansion of oil that has just fueled everything that you can imagine.

But we are now more or less half way through the oil age and the production begins to go down and, as you say, once you reach the barrier of supply, the price goes through the ceiling, it prompts a recession, demand collapses, the price falls again and then the governments, who don’t really seem to understand what we're talking about, they print more money out of thin air, make more credit available in the hope of stimulating consumerism and restoring past prosperity, but — and they meet a little brief success, but as they do, the demand for oil goes up again; it soon goes through the barrier and the price starts to surge. So the future price of oil is an interesting subject. And I would say myself that we're talking about something in the range of $100-150 a barrel because if it goes above that, it just kills demand and you have growing recessions. 

So I think you’re absolutely right. We have these, sort of, cycles of a little surge of prosperity followed by another recession. And we are entering the second half of the age of oil when this stuff just gradually declines. [4:15]

JIM: You know, you would think, Colin, given where we are going with energy, I mean I’ve been floored by the cost of air travel. I have to serve on a board in Canada and just in the last year the price of air fares has almost doubled to fly up to Vancouver and you’re only talking about a three-hour flight. But yet, we're seeing with companies like Boeing come out with their Dreamliner; we’re seeing muscle cars come back into fashion. It’s as if the world is operating without the slightest thought that one day oil may be not only more expensive, but it’s going to be harder to get and produce. [4:55]

COLIN: Yeah. I think you’re absolutely right. And the problem is, in a way, there’s democracy, you know, and everybody is a great enthusiast for democracy, but it’s very difficult for a politician to get votes if he comes forward with a less than enthusiastic picture. And so in this interim stage that we’re in now, it’s extremely difficult for the government to come out and say, Look, we're facing a long term contraction in the economy and we have to face up to that and do our best and we can find ways to live in a different way. 

They have to come forward and massage the financial system. But it’s getting more and more divorced from reality; reality really being the supply of cheap, easy energy is delivered by oil. You know, you look into every single room — in the room I’m sitting in here, we've got glass windows. Well, the windows needed energy to make them and deliver them. Every little item, a book or whatever you care to look at, a chair, a table; all of this is imbedded energy. And so the consumption of energy has been enormous but it now has to dwindle. [6:04]

JIM: The other thing that strikes me about this is the world has always relied on Saudi Arabia and let’s say the United States Strategic Petroleum Reserve as sort of those big two cushions if an event like a geopolitical event takes place; like maybe something happens in the Straits of Hormuz, that this would be the sort of two big cushions. But now we learn, Colin, that the Saudi oil minister basically said, Well, you know that 2 ½ million barrel cushion? It really roughly is about 1 ½ million barrels. 

And then the other thing we learned last year, the SPR was supposed to be able to output 4 ½ million barrels a day, but originally it was set up to work with the pipeline — that pipeline was never put in place. And so last year, when Libyan oil came off production we were only able to get a half million barrels a day because you have to put them on ships and the ports got clogged. Now, here’s the problem. Everybody is worried about Iran, but I’m looking at just, for example, over the last couple of days we've seen a couple of things happen. Libyan oil production is still at only one million barrels, so it’s down 600,000 barrels a day from where it could be. Then we have roughly 250,000 barrels a day we lost with unrest in Yemen. The political disputes in south Sudan have taken 260,000 barrels off a day; civil unrest in Syria has dropped output by 200,000 barrels a day and political problems in Nigeria have taken 20,000. So you’re almost talking well over almost 1.5 million barrels; equal to what we could bring out of Saudi Arabia if it was running full out. It’s amazing that these so-called cushions that we've relied on are becoming unreliable, or at least elusive. [8:14]

COLIN: I think you’re right. I think one thing we can expect in the future as countries increasingly come to appreciate what we're talking about, they’re going to say, Well, let’s keep as much oil as we can of our own oil for our own use. It makes no — and King Abdullah of Saudi Arabia has already said this. He says, I want to leave more wealth in the ground for my grandchildren. So the Saudis have no motive to open the tap and flood the market. And every gallon used means one less remains. And I think people are beginning to appreciate this, which means there will be less and less exports available, so it makes the situation worse again. [8:55]

JIM: It’s interesting because I was reading the BP Statistical Review and then also they just came out with a new report called their Energy Outlook to the year 2030. It was just released last month in London. And Colin, they talk about two drivers of energy demand: population and income. And they were talking over the last 20 years, the global population has increased 1.6 billion people; the growth rate is expected to slow down a bit, but over the next 20 years they’re talking about 1.4 billion additional people, with economic growth accelerating to 3.7 percent with most of that in the low to medium income economies. And they’re talking about these non-OECD countries will comprise most of — about 96 percent of the growth, but they’re talking about energy consumption in these countries is going to be 69 percent above where it is in 2010. 

And I have to ask myself, or at least the people at BP, where is all this oil going to come from? [10:08]

COLIN: I wouldn't pay much attention to the BP report. I think it’s a classic economist’s view of things: that the market must deliver; technology solves all. They try to evade the issue and I was surprised to find BP’s reporting lower than my numbers at least. And I don’t guarantee my numbers either, but I was surprised to find them a little bit lower in the past and that gives you a little bit more in the future. 

So I agree. I think that there won’t be an increase in world population because there’s flat not enough energy to support the existing population, never mind an expansion. 

And we already see these riots from Moscow to London and even more street demonstrations and revolutions throughout North Africa, in the Middle East and so on. And this really is a reaction to the worse economic conditions that people are facing and they get resentful and blame their governments and so on. And this in turn, as you already said, this adversely affects production in these places. So Libya is down from what it was and Yemen too, you say. And as this revolution spreads and this unrest and so on, I think it undermines the production rate, but ironically, there is a certain blessing to that too because it leaves a little bit more for the future when it is even more needed. [11:28]

JIM: Now, BP goes on and they say that over time, over the next two decades, the fuel mix changes and they talk about alternatives and renewables replacing everything; from biofuels to wind to solar, but a lot of biofuels and maybe non-conventional oil like shale and some of these biofuels.  But for the life of me, I do not see the day when we're going to put a 747 or a 787 in the air with solar panels. I don’t know, maybe we’ll have to put nuclear reactors on planes.

But they basically say that we’ll have enough alternative fuels that will come into play that we can gradually make this transition to a new energy economy without many hiccups. Do you see that? I don’t. [12:18]

COLIN: No. I don’t agree with that at all. And the new economy and the new lifestyle that we face has to be one that uses much less energy. After all, we have to admit we're extremely wasteful in our use of energy today. Here even in this little village in the west of Ireland, cars are driving up and down the road all day long, you know, and there’s usually only one person in them. So the challenge of the future is to find ways to use much less and simply just change the lifestyle. And it’s not that bad, you know. Even here for example, we put a solar panel on the roof, just as an experiment, and when the sun comes out, we all cheer and say, Oh my God, we can have a bath, how marvelous that is and have a shower today. 

And it isn’t exactly negative this thing, you know, and it’s sort of fun in a sense to say, Gosh, the sun is out and we can do this and that. So it’s just a shift in attitudes rather than anything else that needs to take place. 

And I would say that in America, you know, America is very blessed in many ways; there are huge amounts of land; there are many things that can be done in a more regional and local style of life, which I think people would enjoy. And you know, commuting into town isn’t the best fun in the world, so maybe people eventually find they prefer to do something different. [13:34]

JIM: Colin, given the fact that energy is going to get more expensive and certainly that has been the experience. I’m looking at just gasoline prices here in the United States; we’re less than 30 cents away from taking out the peak that was reached in May of last year and we're only 42 cents away from taking out the peak in gasoline prices reached in the fall of 2008. So as the cost of fuel gets to be more expensive and goes into the cost of production, what happens to the global economy? 

I mean we've been on the ascent of globalism for the last half century, so you have a company like, for example, Apple Computer. It’s based in Cupertino, California. They market, they design and engineer the products, but the products are made in China. The raw materials are brought in from various parts of the world. 

Will that kind of globalized manufacturing work when energy costs begin to rise? Because it costs money to ship goods. [14:43]

COLIN: I couldn't agree with you more and I think we face a — you know, this globalism, this doctrine of globalism says the resources of any country belong to the highest bidder. That’s the general principle upon which they work, but as I already said, I think countries will increasingly turn to conserve whatever they have for their own use. 

And some may come out of it relatively well. I mean Colombia in the Andes has plenty of scope for hydropower and solar power and things, and they might wake up one day and say, My God, this is better than shipping all this oil around the place. So I think we do face an absolute radical change in the way of life and we won’t be flying as much as we were before, but that was sort of an excess in any case. [15:26]

JIM: You know, the surprising thing however is that, like here in the United States, we seem to dismiss this idea. We now are enamored with shale gas and shale oil, and you have our politicians and some in the industry talking about the US becoming eventually energy independent, which I think is an illusion, number one.

And number two, we have optimists out there: Daniel Yergin, I’ve just finished reading his new book The Quest and he seems to believe that we're going to be okay for the next two decades; that somehow technology, which continues to improve, you know, he cites horizontal drilling, fracking. And that basically we’ll stumble our way into, let’s say the next two decades, where by the year 2030, we reach this magical, undulating plateau for the next couple of decades that follow. But any time oil prices go up, they put him on the cable channels and he’s sort of reassuring; he might tell you, Yeah, we might higher prices here, we’ve got a little bump that we have to get through. But the answer is always the same, we've got nothing to worry about and we’ve got plenty of energy. [16:40]

COLIN: I wouldn't agree with that assessment at all. The sooner we face up to the reality — we're not running out of oil and this is something I should stress. We're passing this peak and the decline on the other side of peak is only two or three percent a year; it’s not a cliff. And there’s an argument raging, is the peak last year, next year, 10 years out, whatever it is, and that — you know, Yergin says it’s not coming for a long time and then this undulating plateau and so on and so on. But I think that misses the point. The critical point is not so much the exact date of peak, but the vision of the long decline on the other side of it. So this new technology and this fracking can add a little bit, but nobody would be fracking for oil if there were any remaining alternative easier options. I mean fracking, they drill these wells horizontally, they pump all this fluid into it and they increase a little bit of permeability into the rocks which manages to tap oil. But the life of these wells is a year or two at the most; they’re very expensive. This is something entirely different from the oil that we've known in the past. And sure, there is a lot of that oil there, but it’s not going to really change the overall pattern that we have because the overall pattern is dominated by this cheap, easy stuff we've known up till now. [17:58]

JIM: If you were an oil company — and it seems to be that most of the geologists fall into the peak oil camp because it’s obviously you guys were going around the world looking for new places to poke holes in the ground, so the world has been geologically mapped for the most part by oil companies. What do you think they are saying internally inside their boardrooms? [18:20]

COLIN: Well, there used to be these seven major international oil companies called the Seven Sisters. And in earlier years, they were following very strict stock exchange rules about the size of the reserves they reported. So in reality, they were underreporting what they had and this delivered a nice pattern of annual growth. So that gave a good image to the stock market and everything else. And it was entirely legal and straightforward, and indeed, reasonable that they should be cautious about what they reported. But as you know, over the last 10 years or so, the Seven Sisters found it easier to acquire reserves by buying each other rather than by exploration. So the Seven are now reduced to four. And I think that delivers a message.

You also find the major oil companies are selling off secondary refineries, secondary marketing chains and I think internally, although they perhaps don’t quite come out and say in so many words, they begin to appreciate the limits to their supply and they’re trying to cut their downstream activities to match what they expect to come in. And if you look at the world picture today, you’ll find most exploration today is being done by these small companies that nobody had heard of a few years ago. So the major companies have really, you know, their days have come to an end — well, not come to an end, but they’re facing the sort of slow decline of contraction, which is reasonable and may well be very profitable, but it’s a shift in the general strategy from the past. [19:51]

JIM: But yet, if we take a look at other agencies — and I’m not just talking about the BP — the EIA and of course the IEA. I’m just looking at their February report, Colin. They’re talking about global oil demand is forecast to climb to almost 89.9 million barrels a day in 2012, a gain of almost 800,000 barrels per day, or almost a one percent increase on the year. Now, that gain is coming mainly: 1.2 million barrel increase in non-OECD countries and a decline of 400,000 barrels a day in OECD countries. 

So they’re saying this is going to be the third consecutive year of rising oil consumption and yet I’m looking at their report in the OECD Industry Oil Stocks, they’ve declined in the most recent month by 41 million barrels to let’s say 2.6 billion barrels of spare capacity. So what does that tell you? I mean it seems like every month or every year we're getting more and more evidence from these agencies that things aren’t looking that good, and yet they continue to project increased demand and supply. [21:06]

COLIN: Yeah. It’s a very fascinating thing. I mean the IEA, the International Energy Agency, which is the premier world authority, you know, they’ve been aware of this peak oil business at least for 10-15 years internally. But it’s very difficult for them to admit it publicly and they’re under pressure from their member governments and so on. But gradually, as you say, they begin to admit to it. I mean there’s a famous saying from the IEA from this man, Fatih Birol, who is one of their managers, Let us leave oil before it leaves us. 

So if you read between the lines and in the subtext and so on, you do find a sort of shift in position to come to accept what we're talking about. But when they extrapolate demand into the future, I bet they’re simply extrapolating past trends rather than facing up to the reality of the constraints of the future. So I think there is a lot of sort of historical mindset behind these various reports that come out. And you know, it’s a big thing for an international agency like that to come out and admit up and down what we're talking about. It’s — and there would be pressures, political pressures against it for doing so. But I think you begin to see a sort of awakening that’s there, sort of behind the scenes so to speak. [22:19]

JIM: You know, Colin, I thought they came close to admitting this when they published their 2008 report where they had looked at 800 oil fields and studied the depletion rates; they came out and said the depletion rates were much higher than originally thought and without almost admitting that we were at peak oil, they basically said, We’re headed for trouble unless we take some immediate steps in terms of investment. I thought that was pretty close as you get to an admission. [22:49]

COLIN: I agree with you. It’s getting more and more difficult for these things to obscure the situation and hide it and present some kind of optimistic thing and you know, in a certain sense, the International Energy Agency sees itself as representing the consumers in the face of OPEC, so they don’t want to admit to a resource constraint which would strengthen the hand of OPEC. So there are many political strategies and so on, and I’m not saying there’s anything wrong with this, but one’s just got to understand what’s going on. [23:18]

JIM: Let me ask you this: Given the fact that inside the IEA they’re well aware of peak oil — and I suspect governments are, given the fact that they don’t want to alarm the population that this is upon us. Colin, I think the other thing that you would think they would do is start coming and maybe they frame it in terms of a jobs program, but they come out and say we're going to build high speed rail, we're going to invest a lot of money in R&D with electrification of cars; in other words, they would be taking steps to prepare the economy for this eventuality, but they’re not doing that and yet they’re very much aware of what’s lying underneath the surface. So there seems to be an inconsistency between those two. [24:09]

COLIN: Well, I couldn't agree more. I think you’re absolutely right. And you know, I sympathize with the government and politicians. They can’t come out and say this in black and white in the way we've been talking because they’re elected and you know, this is sort of doomsday message for many people. I mean, on the other hand I think if they did — and I think they will before long — come out and kind of admit what we're talking about, they’ll be surprised at how many people understand them. If they say this is imposed by nature, this is not a trick by Arabs or oil companies or anybody else, this is simply a thing imposed by nature. 

I mean nobody accuses the government of the results of an earthquake. This is something delivered by nature and the reaction to an earthquake is everybody runs around and helps each other as much as they can. So we're really facing sort of an earthquake in an energy sense and I think, as you say, gradually they’re getting closer to admitting to this and there will be a certain moment when they’ll see political advantage in coming clean with it all. And indeed, there will be political advantage. [25:11]

JIM: Well, let’s just hope, Colin, that at least a leader somewhere in the Western world has the courage to come out and face this issue and deal directly with the citizens because I think, as you just mentioned, in an earthquake when something like that happens, everybody pitches in, they volunteer, they try to help one another as a community. And I think if that politician was brave enough to speak forthrightly on this issue I think the response from the public would be overwhelming, but it doesn't seem like in an election we're getting much of that. So let’s just hope for the best in the future that we’ll find that one person, I don’t know, a Winston Churchill or somebody who emerges that tackles this issue. 

Colin, you have written a piece called Playing With Fire, which is very profound. And if our listeners would like to read that piece, we’ll be publishing it on our site.

All right. Well, listen, Colin, as always, I appreciate you coming on the program. Keep up the good work. I think we have to get the message out there and I think the more that people become economic or at least energy literate, the better off we’ll be as a community. [26:19]

COLIN: It’s true and there’s so many simple things that people can do and get to enjoy doing it and like doing it. They’ve just got to have a shift of attitude, which can happen quite quickly if more people like yourself publicized this message.

JIM: Well, we’ll keep doing our best and I hope you’ll keep coming back and talking to us. We've been speaking once again with retired geologist Colin Campbell. 

Colin, thanks for coming on the program. 

COLIN: It’s a pleasure. Goodbye for now. [26:45]