Oil's recent slide and the slackening demand that an economic slowdown's expected to bring have stimulated hopes that crude could soon safely stabilize below the $100 range.
But beneath seesawing supply and demand lies the deeper question of just how much oil the planet has in the first place — and how much it will have in the future.
The answer to that question supports — or undermines — the theory that we are in the midst of an ever-tightening supply that will lock prices into a permanent, rising arc. That, in nutshell, is what's meant by the term "peak oil".
It’s an issue that matters, especially to major energy players who are in a race to disprove the theory and trying to bring on-stream more oil fields than are currently being depleted.
John Hofmeister, president of Royal Dutch Shell's US operations, shared his thoughts on the supply issue on CNBC’s Squawk Box on Thursday. He took aim at the peak oil theory as popularized by Matthew Simmons, the author of "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy." (See the Hofmeister interview at left.)
“The peak oil theory has really swamped the world — God bless Matt Simmons,” Hofmeister told CNBC.
Simmons is mistaken, said Hofmeister, because he is overly focused on a single country: Saudi Arabia, the world's largest exporter and OPEC swing producer.
Although Saudi Arabia is a dominant player, the Shell executive said focusing solely on Saudi Arabia leaves out the all other places around the globe where Big Oil — ExxonMobil, Chevron, BP and the like — and national oil companies are busy exploring for untapped oil reservoirs.
Those reservoirs could include the vast — but currently restricted — reserves of the US Outer Continental Shelf, which holds an estimated 100 billion barrels of oil and natural gas. Tapping into such a large supply would slash the $500 billion US sends overseas for each year for oil imports.
As things stands, however, only 15 percent of those reserves are currently exploitable, a good part of that off the coasts of Louisiana, Alabama, Mississippi and Texas.
Simmons is also off the mark, Hofmeister contends, because he excludes unconventional sources of oil such as the oil sands of Canada, where Shell is already active.
The Canadian oil sands — a natural combination of sand, water and oil found largely in Alberta — is believed to contain 1 trillion barrels of oil. Another 1 trillion barrels are also trapped in rocks in Colorado, Utah and Wyoming.
Given all that, we asked Simmons, who is chairman of Simmons & Co. International, a specialized energy investment-banking firm based in Houston, to respond to Hofmeister's comments and explain how his peak oil scenario can be avoided.
CNBC: What's your response to critics like Hofmeister?
Simmons: There is a kind of schizophrenia within the likes of Shell where the chairman basically says, "We think by 2012 global demand will exceed conventional supply" and yet Hofmeister basically says the idea that we are ever going to have peak oil is ridiculous.
CNBC: But he's suggesting you are leaving out unconventional sources of energy in your calculations.
Simmons: They make the distinction [between conventional and unconventional], but they don’t seem to make the connection about the vast difference of flow. They are so hung up on the total estimated volume. Once they start in a project they say, "Well, the reserves last forever so we can book a million barrels of reserves."
The energy that is consumed to get oil out of the oil sands of Canada — in massive amounts of potable water and natural gas — is so vast you are really turning gold into lead. What you get out is a very low quality amount of oil that has to be upgraded and diluted with high quality oil to get synthetic crude. What I can’t figure out is why the executives of these oil companies don’t understand that.
CNBC: And what about the reserves on the Outer Continental Shelf?
Simmons: That’s sort of irrelevant because we have such an unbelievable shortage of deep-water rigs. We are totally out of deep-water drilling rigs. There are about 100 that are struggling to get built. Four will ready by the end of next year.
And none of that deep-water stuff they are talking about has been properly tested to know if it is even commercial. It’s in such remote areas that we just don’t have the tool kit to realistically bring it on stream before maybe ten years from now — maybe 6-7 years from now.
CNBC: What about other major finds such as the major off-shore discovery Brazil has made that is estimated could be the third largest oil field in the world?
Simmons: There have only been five wildcat wells drilled there. That’s like me saying I have drilled a well in Kansas, and another in Colorado and in New Mexico and in the panhandle of Texas and if they are all part of one giant oilfield, it is the biggest oil field ever in the Western Hemisphere. That’s an enormous "if."
You can claim that, but the proof of that would only be after you drill about 100 wells and flow test them all. And what we know is that 99 percent of those types of reservoirs never connect.
CNBC: You still think there are production difficulties in Saudi Arabia, but what do you expect will be the impact on production worldwide?
Simmons: Yes, and it’s why we have such a hard time growing production any more, and unfortunately demand doesn’t understand that. We are basically having to run faster and faster to stay in place as too many areas go into steady and steep decline.
You look at the North Sea … the last 7-8 years, Norway and the UK have been declining a rate of about 17-18 percent per year. And once you get a field down to its last 10 percent, then it levels out and goes into a long steady state of gentle decline — that is the state of Prudhoe Bay today.
CNBC: So, what is your prognosis for prices?
Simmons: I think prices have to go way higher. The sooner people get used to the fact that we are still living in a fool’s paradise, the better ... you just can not argue that $100 a barrel is expensive when you realize it is 15 cents a cup — do you know anything other than crude oil that sells for 15 cents a cup? I know wine doesn’t, bottled water doesn’t.