By Steve Andrews
“False optimism leads to very poor investment decisions.”
On CERA’s lead panel in February 2004, Robert W. Esser, senior consultant and director on global oil resources, predicted global oil production capacity would expand by 20 million barrels/day from 2004 through 2010. (CERA doesn’t forecast production; they forecast production capacity, which is essentially unverifiable.) That’s nearly 3 million b/d of capacity growth every year for seven straight years from 2004 onwards. It didn’t happen.
Per Figure 1, actual production of global petroleum liquids grew by 5.7 million b/d (BP data) during that period. Then consider the 4 million b/d of spare OPEC capacity that the US EIA shows for 2010; except there were also at least 2 million b/d of spare OPEC capacity in January 2004, at the start of the forecast period. So net, CERA missed their forecast by well over two thirds.
On the production side, CERA spoke optimistically about projected gains from the Gulf of Mexico, West Africa, Brazil, the Caspian area, Canada, Venezuela, Iraq, Nigeria, Algeria, Ecuador, Sudan and Russia. Indeed, production increased in 11 of those 13 nations for a net gain of 6.7 million b/d. But on the bad news front, the rest of the world lost 1 million b/d of oil production during CERA’s forecast period, hence the 5.7 million b/d net gain. Declines badly undercut forecast gains.
On the demand side, CERA actually worried that “should this spurt in output exceed projections of a very large increase in world oil demand this decade, then persistent downward pressure on oil prices might result.” For the record, when CERA made that comment, oil prices were upwards of $30. But while nearly everyone was wrong about oil prices a decade ago, CERA was also wrong about the key demand driver: China. CERA forecast that China’s demand growth for oil would slow to 5 percent in 2004, compared to what eventually occurred: record-breaking growth of nearly 17 percent. And while CERA talked about volatility in Chinese demand going forward, China’s record-setting growth rate for oil demand continued throughout CERA’s 2004-10 forecast period.
If this was a personal forecast which I had blown this badly (and I’ve blown a couple), no one would notice. But this enormously flawed vision was widely circulated. CERA gets press coverage, but the press isn’t checking CERA’s track record, and this 2004 prediction is just the tip of the iceberg.
In 2005, CERA dialed back their optimism only slightly. They projected world oil supply capacity still growing 16.4 million b/d from 2004 through 2010—a reduction of 3.6 million b/d from their original forecast. They projected world demand in 2010 at 94 million b/d, leaving 7.5 million b/d of idle capacity. Note this comment about related impacts on prices: “We generally expect supply to further outpace demand growth in the next few years, which could result in oil price weakness around 2007-08 or thereafter.”
In 2006, CERA projected potential world oil capacity growth of 21.3 million b/d—from 88.7 million b/d in 2006 to 110 million b/d 2015. We’re less than two years away from year-end 2015, yet total petroleum liquids production will likely run in the 90 million b/d range. Clearly, CERA’s was an exceedingly pollyanish view, rather like a best case in a perfect world.
Now square CERA’s long-standing optimism bias on future world oil supplies with the recent spate of sobering news from Wall Street on the financial travails of the large investor-owned super-majors. Mark Lewis has done a nice job highlighting the near tripling of oil and gas capacity expansion costs since 2000—from $250 vs. $700 billion; three quarters of that was spent on oil, yet oil supply rose only a modest 15% (BP data). Increasingly blunt reports from analyst shops like Sanford Bernstein add to the growing contrarian chatter. Solid coverage in the UK of Richard Miller’s recent paperThe Future of World Oil Production opened a few eyes about limits. But those voices still have a steep hill to climb.
That’s in part because, starting in September 2011, CERA went on the offensive as chief cheerleader of an overly optimistic, US-led oil abundance storyline. It features the US’s record-breaking shale oil bonanza—an amazingly successful yet term-limited reality. Viewed at the global level, for the last few years the brouhaha about our shale oil bonanza has been the tail wagging the world oil supply dialogue.
CERA’s oil supply predictions should have earned deep skepticism from the press and policy makers. That hasn’t happened yet. It’s overdue.
But please keep the larger backdrop in mind: Without a serious revisiting of the questionable optimism that dominates any dialogue related to longer-term world oil supplies, without a harshly realistic scrub of the facts, we face unnecessarily large energy policy risks.
Steve Andrews is a retired energy consultant and a contributing editor for Peak Oil Review. He can be reached at firstname.lastname@example.org .
–“World Oil & Liquids Production Capacity to Grow Significantly through at least 2015: CERA Update,” CERA Private Report, August 2006
–“The future of oil supply,” Richard G. Miller et al, Philosophical Transactions of the Royal Society, 12/15/13