Kenneth Deffeyes speaks with Darley

Q1: Why do you think we have already passed oil peak?
When I wrote this book in the year 2001 I predicted that world oil production would go through a peak roughly in the years 2003 and 2004, and it was named 'Hubbert's Peak' after M. King Hubbert who was an American geologist hyphen geophysicist, who predicted in 1956, that American production would peak in the early 1970's. A lot of people complained and groused including his employer, Shell Oil and in the last few years I was aware that world oil production peak was coming up and after I discovered that a lot of people didn't believe it, I decided that I'd better write a book and I decided to stay very close to M. King Hubbert's methods. So I wound up with a projection that the world oil production peak would be somewhere around 2003-2004.

It was last October in a meeting out in West Texas that Henry Groppe of the Houston firm of Groppe, Long and Lattell got up, I was still shuffling my papers and he was giving his talk and he said, “The peak of world oil production is going to be the year 2000”, it would be the biggest year. And I sort of came awake, took a deep breath and began watching not just Henry Groppe, but the news about this and the oil and gas journal publishes lists of country by country world oil production in the last week of each year and low and behold in the years 2001 and 2002 the oil and gas journal numbers showed that the world oil production had not been as big as it was in the year 2000. Now 2003, this year is not off to a great start, Venezuela's been off-line, Nigeria's been off-line and obviously there's a messy war going on in Iraq right now and Iraq is off line.

So 2003 is not going to out produce the year 2000 and beyond that we've always heard that the OPEC countries and particularly Saudi Arabia had the capacity to produce another 2 million barrels a day on top of the 8 million barrels that they had been producing. However on March the 6th of this year 2003, a story came across the Dow-Jones news wire announcing from the Saudi Arabian government to Western oil companies and government's that the Saudi's would not be able to go beyond 9.2 million barrels a day and they were already producing that much. In effect, the Saudi's were max-ed out at this point. Now that doesn't mean they're out of oil, there's still a lot of oil left but their production capacity is at saturation. Now suddenly this brings up a parallel to what happened in the United States in the 1970's because we got a similarly cryptic announcement that the Texas Railroad Commission in 1972 announced, that production would not be rationed in Texas the next month and that Texas was producing wide-open and at that point those who could translate that strange announcement knew that the United States has no more surplus production capacity and we were thereafter dependent on imports. Now when the same message happened on the Dow-Jones newswire March 6th, there was no notice in the New York Times and I'm a registered Democrat, I don't really read the Wall Street Journal but no-one seems to have noticed that the Saudi's have announced that they were now at their production capacity, which in turn means that the world is now at it's production capacity and it looks very much as if the year 2000 record is going to stand.

So in one sense I'm greatly relieved that the prediction I made in the book has come true. This is the year 2003 and I said it was 2003 or 2004 and it's a great relief to be a historian and not a prophet crying in the wilderness.

Q2: What are some of the special problems with natural gas, especially in North American?
Natural gas is a rather different problem than oil. For one thing a lot of natural gas is never metered, that local farmers and local industries pick-up a used well or drill a well of their own and that gas is used without ever being metered. In contrast oil gets counted once as it comes out of the wells and gets counted again because all oil has to go through refineries. So we have a pretty good idea how much oil is produced but natural gas is not all monitored. Secondly, there's another thing that happens with natural gas, it shouldn't but it still is happening. That some gas is produced with oil in remote areas, is just flared, burned, better they burn it than not to burn it, because it's a stronger greenhouse gas than carbon dioxide but it's just burned. And these enormous flares used to be so large that the first sight that the Astronaut's could see at night looking down at the Earth was the big gas flares in North Africa and the Middle East but all around the world, some gas is still being flared. Now the strange thing is, do you count that as produced gas? It's kind of a philosophical question. Is it just a waste product just thrown away or do you count it in the sense of Hubbert's work as gas that was produced? I don't know but this leaves me unable to translate what Hubbert did for oil onto an equivalent thing for natural gas.

Now the best study that I know of about natural gas, Matt Simmons, down in Houston, who runs an investment bank, is a scholar of world oil and gas production and he took the Texas Railroad Commissions records for 50 Texas counties and looked in great detail at how many wells? How big were the wells? How long did the wells last? And he came to a conclusion similar to what a number of analyst's have claimed and even the newspaper state, that we're drilling faster and faster, more and more gas wells in order to keep producing as much gas as the year before. It's kind of like the Red Queen in Alice and Wonderland, running faster and faster and faster to stay in one place. Well, what's going on? Part of it is that the techniques for completing gas wells have gotten better. Once a well is drilled and gets tested and “Oh yes, its got gas down there.” One of the intermediate steps is to fracture the well. It's properly called hydro-fracting, but everybody calls it a frac job, and they go in with huge truck mounted pumps and pump fluid down the hole fast enough to open up a real crack in the rock and then they prop the crack open by squirting in some sand grains with the juice so when they finish the pumping, the rock doesn't close back up, it's propped open with these sand grains. Now this really improves the productivity of wells, but the correlation to that is that the well doesn't last very long. Now that's not bad news if your an investor or a company drilling gas wells because that money that comes back to you, 5 years and 10 years from now is discounted in the sense, if I'm only going to get it 10 years from now, it's value to me right now has to be discounted by an interest rate. Now there's one interest rate, that's what the bank is charging, but there's another interest rate that's sometimes used saying, well look, this is a very risky business and so it ought to earn 15%. Well, if you discount the future by 15% a year then gas that's produced 5 and 8 years from now isn't worth very much to you at the time you make the decision to drill the well. So these wells are hydro-fracted, completed and drilled rather close together because the interest is getting your money back fast.

Now we are at the moment just keeping up, the gas market for the United States is actually a North American gas market, that Canada the United States and Mexico are all producing gas, all using gas and there's a lot of pipeline traffic back and forth. From outside of North America a small amount of gas comes in refrigerated, in tankers and there are 3, I think we're bringing on a fourth liquid natural gas terminal. Largely processed gas that's coming from North Africa but the fact with this exception of the liquid natural gas that we're a regional market of pretty much self-contained North America means that we have to worry about how much there is, whether we can keep up? This last winter we came very close to having a disaster. Natural gas is supplied for a number of industrial uses as well as for heating houses but it's a very scary thing to have to take a gas supply to a city off-line because all those little pilot lights are supposed to turn off when the gas goes off and you've got to go back in and hold the button down and light it, and if 90% of them work, the other 10% cause explosions and it's very scary and fortunately we've not had to take a city off of it's natural gas supply. What did happen this last winter, we had a lot of cold days in a row, the natural gas suppliers have some customers that they can shut-off , the customer gets a lower price for the gas but comes a crisis time the customer is shut off. So they shut-off all these customers, so called interruptible contracts to keep the cities on line. We got below the 1 trillion cubic feet of storage level which is the little red thing on the dashboard saying low fuel. We got to that limit and went under that limit but fortunately, finally it warmed up and we did not go into a major crisis. Now that would have gotten everyone’s attention. I think we have to consider it like one of those meteorites that go by the Earth and didn't quite hit us, great! but look, pay attention. That the natural gas supply for North America came close enough this last winter to a disaster, that we need to start worrying about the total natural gas supply. Now some analyst's are now seeing that the total natural gas production in North America is declining and they only say there's disagreement to how fast the decline is coming on. I personally don't have an opinion yet. I haven't worked with the data, so I don't have an opinion, but I'm watching very carefully and I'm a little bit scared that we're going to have a gas crisis in North America that might even be more immediately important than the global oil crisis that's beginning now to effect the whole world.

Q 3: Why do you think that there is so much resistance to the peak oil message?
M. King Hubbert, when he first proposed this he was working for Shell Oil Company in Houston and right down to 15 minutes before he went on the platform to give the talk in 1956, Shell was on the phone on down to the last 15 minutes saying “Don't do it, don't do it.” He went ahead and did it and there was an enormous amount of criticism. Hubbert was a very stubborn fellow, very self-confident and he thought that he would be correct some day and fortunately lived long enough to not only see it happen but to become something of a folk hero and the peak in geologic time under which we were finding all the oil was called Hubbert's pimple because it was tiny compared to the geologic time that it took to make the oil. So Hubbert essentially got through with an excess of self confidence. The trouble I have with this is feeling that people don't change their minds very often about this, that I wrote in my book, that almost everyone I know, when you first explain to them about Hubbert's peak they have one of two reactions. “Oh yea, of course it's got to be that oil is finite and that we're going to run out of it someday.” And other people say, “Oh, no, no, no, no, we've heard those stories before, they've all been wrong, we'll find new technology, we'll drill a little deeper.” They've got a long list of excuses. In fact my first chapter is a list of excuses on the way I think they won't work. So I also pointed out that the number of people that changed their minds about this after hearing more about the data is essentially zero. Nobody changes their mind, it's that initial impression. Yes this has to be or this is nonsense, so it's very difficult and I claim my book is essentially a failure because I was not able to get the attention of some senate staffer who would read it and say to his Senator or his boss, “Look sir, we might use this in our next campaign.” So, it's not gotten on the national agenda and I hear mountains of pain from the European's similarly that they've not been able to get the attention of their governments. So one possibility is that it simply goes until there is a crisis, something ghastly happens, and we'll all say, “Didn't we tell you, you know $24.95 plus tax for a copy of Hubbert's Peak.” But it's a surprising thing, and it must be somewhere deep in our psychology.

The other aspect of it is that almost everyone expects that a good news story will last for a week, well okay maybe a big news story will last for a month, but it will go away. The only example I know of one that lasted longer was when there were the hostages in Iran and Walter Cronkite every night at the end of the CBS evening news says this is day 162 of the captivity of the Americans in Iran, and that was only because of his effort because that story would have died and they would have been forgotten after a month because all news stories end in 7 days or 30 days. This one is permanent, it's a whole change in attitude to say that this particular resource, all resources are finite but oil happens to have run-out earlier than most and so we're going to have to do with less and less oil and it's more of a paradigm change, more of taking a different look at the world then it is a news story and our news media are not very good at selling a change in outlook, a change in paradigm. They're much more interested in news and something that will preferably go away so they can talk about something else next month.

Q4: Shell says we have 20-35 years more conventional oil. Hubbert himself worked for Shell, so what do you make of it when Shell, and other industry people say we've got 25 years?
Well, one of course is that some of these are off-hand comments and obviously we don't have access to the internal company reports that argue through what it is, what it would take. Again some of this has to do with what kind of news is considered news and gets people's attention. It was about 2 years ago that the president of Royal Dutch Shell gave a talk to a bunch of financial people in New York City and he said, “Shell can see to the end of conventional oil and we're going to put 5 billion dollars into wind and solar energy.” Now, he didn't say what year that oil was going to run out but there was a beginning to place their money on bets on things other than oil. This story did not, it went on the news wires, was not covered in the New York Times, was not covered in the Wall Street Journal. So I can imagine what it takes to get the attention of editors in particular and I suspect that some editors are telling their writers, our readers aren't interested in that and this perception gets around, no, no, don't ask the boss again to run a story about oil depletion. So it's a strange business and it's been a hard sell and Hubbert fortunately saw his, and my motivation to take my pills everyday and go to the doctor and take care of myself is, I want to live long enough to see this one run over the top so I'll have the satisfaction of seeing all those economists have to digest a healthy meal of crow.