My Daughter

My Daughter
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Wednesday, August 17, 2005

The Collapse of Ghawar

Not until the monstrous Saudi oil field of Ghawar collapses will there be an investment in older and smaller oil fields to increase production.

Why? Because there cannot be any chance of the price of a barrel of oil collapsing. It has to remain high. The industry has learned this lesson all too well.

The markets’ ability to anticipate this collapse is limited by the lack of transparency. No one really knows how much oil is still recoverable. Saudi Arabia keeps these necessary numbers under wraps. If the market doesn't anticipate the peak, the price signals needed to stimulate research and development may not arrive until after it is too late. And if the rate of Ghawar’s decline in production is high, that may be a moot concern.

Anticipating the peak is complicated further by the fact that multinational oil companies have relatively few places where they can increase production significantly — many OPEC nations forbid foreign investment in production. Non-conventional sources, like oil shale and tar sands, have their own production and scalability problems. The reserves may be enormous, but the ability to produce at conventional rates of production is a fantasy, not to mention the increased costs, both in dollars and impact on the environment—especially global warming.

Cheap, readily available fossil fuels, (primarily oil) means goods can be imported and exported at little extra cost while less than 2% of the work force feeds those that produce the goods and services. We can scurry to and fro with great mobility and freedom in our AC cooled SUV’s, shuttling soccer teams to practice and old couches to the dump.

These energy sources are rapidly becoming ever more expensive and less and less available. The planning for the peaking of world production should have been started the day we realized the US had peaked in oil production in the 1970’s. It should have been a major wakeup call, but we just hit the snooze button for 35 years.

Foresight does not rule our thinking, and the lessons from hindsight are seldom recalled. Until it becomes a crisis, we just seem to fail to act.

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