Steven Kopits, who runs the New York office of Douglas Westwood, was in Denver last week. He talked about his latest paper on peak oil and the economy with Steve Andrews and will share related remarks at the ASPO-USA conference next month.

Question: Tell us about your background.

Kopits: I’ve spent most of my career and as a strategic management consultant and investment banker. I’ve focused on the energy business for the last several years, and now I manage the New York office of Douglas-Westwood, a UK-based energy-business consultancy. We’re well known for our market research in the upstream oil and gas business. In the industry, we are considered the consultancy of record for our forecasts of offshore drilling and production, as well as for marine renewables like offshore wind. I am personally interested in macro oil markets and write frequently on issues related to peak oil.

Question: When did you learn about the peak oil story?

Kopits: I was preparing investor documentation—a prospectus for a public offering. As part of my work, I was looking at oil supply and demand issues, in particular as they related to China. When I ran the numbers, I found that projected demand turned out to be considerably greater than what the EIA was stating. Just for the sake of completeness, I thought to confirm that the oil supply was adequate to meet Chinese demand growth. Now you should keep in mind that, at the time, I thought peak oil was pure fantasy. But when I checked, supply growth promised to be much less than the EIA was indicating. I became concerned because I couldn’t find the resources on paper.

Question: Would it be fair to say that Douglas-Westwood has had a sober view of the long-term oil supply picture?

Kopits: That’s absolutely true. In fact, my views evolved as part of my relationship with the firm before I joined the company. In the past, we’ve also worked with Simmons & Co., for example, and consider them to be friends; philosophically speaking, we are in that camp. Our firm’s formal view is that we expect peak oil in the middle of the next decade. My personal view is that peak oil—at least in the sense of “practical peak oil”—is probably behind us already.

Question: Has the firm’s view of peak oil evolved much over the last three-to-five years?

Kopits: I think the supply story is proceeding more or less the way the firm had anticipated. There were no black swans in our forecast, at least in terms of the oil supply. Douglas-Westwood has been reasonably good at forecasting volumes going forward, and has been for some time. That’s part of the reason I joined the firm: they are good at what they do. The other reason, by the way, is because they’re great people. I am privileged to work for the company.

Question: What kind of feedback do you get when writing about the peak oil story?

Kopits: In general, the feedback has been very positive. I would point out, however, that we’re not vested in peak oil; we’re simply technical analysts. We analyze markets, and we report what the numbers say. When I write about peak oil, I just present charts and graphs and interpret them. Incidentally, what is interesting is the difference in feedback between Washington DC, New York and Houston regarding peak oil. When I’m on the east coast, I tend to use “peak oil” in quotes, and I am usually somewhat cautious speaking about the topic. In Houston, there’s no need to be shy. When I have mentioned peak oil to the managers for oil field services companies, they don’t flinch. They may qualify the phrase with “affordable peak oil” or “practical peak oil”, but our friends in Texas are the ones who have to find and produce oil on a daily basis, and they know it’s getting harder and harder all the time. Peak oil is not a theoretical concept in Houston; it’s a daily operating reality.

Question: But Daniel Yergin and Michael Lynch don’t seem to believe in peak oil.

Kopits: Douglas-Westwood’s perspective has differed from CERA’s for many years. Our firm’s view has held up; to date, CERA’s has not. Back in 2005, CERA predicted 101 million barrels a day of capacity by 2010; we’ll be lucky to see 90, maybe 89. On the other hand, we can’t discount the possibility that either technology will improve or that we will find oil that we did not anticipate. Look at how radically the natural gas picture has changed in the last two years—the outlook can change materially. Still, over the last five years, an investor or energy company would have received a more accurate view of the market using Douglas-Westwood forecasts.

Question: Your recent paper makes it sound as if we’ve been on an oil production plateau since late 2004.

Kopits: That’s correct. If I dispassionately just look at the numbers, the oil supply has not improved that much since the 4th quarter of 2004. And I don’t see anything on the horizon that makes it appear that we’re going to break out into a really new level of production that’s far different than what we have today. So if we’re talking about practical peak oil, my view is that it started in late 2004.

Question: What’s your sense of when we slip into decline on the back side of this plateau?

Kopits: It’s hard to say. From my perspective, the inception of decline is less important than the gap between supply and demand. If China weren’t growing so fast, peak oil could come and go without us noticing for some time. Now, even if the oil supply grows, it will not likely catch up with demand. So we can suffer the economic impacts of peak oil even with a modestly growing oil supply. Essentially, that’s the story of oil from late 2004 until mid 2008.

Question: What sort of decline rate to you anticipate, in 2012 or whenever it occurs?

Kopits: I don’t have an independent view on that. The IEA has pointed out that decline rates appear to have increased to 6-7%, and PFC has a very interesting chart on the increase in decline rates from offshore wells over time. By the way, these sorts of developments—secular increases in decline rates, for example—are one reason that I think peak oil is upon us already. Are they proof? No, but they are suggestive. And if you work in the industry, you keep running across similar charts, indicative of a system in trouble even if they are not conclusive. At the same time, you have to keep in mind that there are above-ground constraints on production which could influence aggregate decline rates. You have to consider, for example, whether the Saudis will increase production or if Iraq will get better at administrating its oil industry. There are a lot of things we don’t know at this point that will determine decline rates.

Question: Could you tell us about your views on the US oil price threshold for recessions?

Kopits: The US has experienced six recessions since 1972. At least five of these were associated with oil prices. In every case, when oil consumption in the US reached 4% percent of GDP, the US went into recession. Right now, 4% of GDP is $80 oil. So that’s my current view: If the oil price exceeds $80, then expect the US to fall back into recession.

Question: Can you comment on why, during an economic recovery, you see oil consumption growing faster in developing economies than in the OECD countries?

Kopits: Consumption will tend to grow faster in developing economies for two reasons. First, by their nature, developing economies should grow faster than mature ones, and this has been generally true of east Asia and strikingly so in the case of China. So faster economic growth means faster growth in demand for oil. Further, oil consumption growth follows an “S”-curve. At low levels of GDP, oil demand growth is quite slow. Once a country has reached middle class income levels, per capita oil consumption stabilizes. However, in the middle, as a country becomes middle class, oil demand growth can be explosive. Take South Korea, for example. South Korean per capita oil consumption peaked in 1996; however, in the previous 12 years, the country’s consumption increased nearly fourfold. China is now firmly on the S-curve. Based on South Korean experience, we would expect Chinese oil demand to stabilize at around 50 mbpd around 2032-2035.

But where is the oil going to come from? If you have a flat—or heaven help us, declining—supply of oil, then the emerging and fast-growing economies will have no choice but to start bidding away the oil from the advanced or slow-growing economies. That is consistent with what we’ve seen in the data starting in about 2006. For China to grow, it will have to take away the oil of Japan, the US and Europe, just as it has in the last three years.

If I run out the projections, this implies that US consumption is likely to drop by about one-third, from its peak at 21 mb/day before the recession, to about 14 mb/day in 2030. That will potentially be a long and painful adjustment.

Question: In the world of oil analytics, what rules does peak oil break?

Kopits: The primary thing that we have learned—or more precisely, re-learned—in the last year is that the global economy will not tolerate oil at any price. In the first half of last year, we had some prognostications of oil at $150, $200, even $500, and they were understandable because of the supply and demand dynamics at the time. But as we’ve seen since, once our oil consumption exceeds 4% of GDP in the US, we go into recession and we cut our oil consumption. The global economy cannot sustain oil at any price. Beyond a certain threshold, the result is likely to be stagflation or recession rather than perpetually increasing oil prices.

Question: Can Humpty-Dumpty put it together again, or are we in brand new terrain because of the peak oil plateau?

Kopits: I’m a supply pessimist because I think that’s what the data best supports right now. No, for oil, I don’t think we can put it back together. That means we have to look to next closest fuel supply, and that’s natural gas. I think we’ll see the migration of natural gas into traditional oil uses such as transportation. We’re not going to solve this overnight, but we need to progressively take pressure off the oil supply. If the price of oil is high, as I believe it will be, the market will drive buyers in the direction of natural gas.

Last question: Anything on your mind that I should have asked about?

Kopits: From a policy perspective, I think it’s important to understand that we are all in this together. Peak oil is not a U.S. problem, but a global problem. It is a problem for both the consumer and producer nations. Did Saudi Arabia enjoy this recession? Did Iran or Venezuela? What about China or Japan? Peak oil recessions—and I argue in an upcoming article that this is the first peak oil recession—are painful for everyone, and are worth avoiding or minimizing. To do so, we need to think about the issues together, constructively. Also, on the policy side, there are limits to what we can do with conservation; an over-aggressive conservation program is called a recession. So, we need to think about improving the transportation energy supply, and we need to act now. Time is short. Electric cars may be fine in 2020, but we need solutions that can be brought on line within the next 2-3 years, and from my perspective, that’s natural gas.

11 thoughts on “The first peak oil recession: Interview with Steven Kopits”

  1. We’ve already tried the “natural gas as a motor fuel” thing in the 1990s with the CNG (compressed natural gas) Chevy trucks, which I was a part of. The CNG stations that BP and Shell established all closed down. You are talking about compressing natural gas into cylinders at 3,600 psi, which is a LOT of pressure, only to not even go as far as a gasoline pickup. All that pressure scares people, and they will avoid it like the plague, especially the women. There also is nothing to guarantee the continued super-cheap unconventional natural gas supply (as Simmons harps on), as all these new unconventional natural gas wells deplete just as fast as the conventional ones. The next great alternative motor fuels will be …. gasoline and diesel .. just as higher prices. The 4%/$80 barrel numbers were interesting tho.

  2. Kunstler makes good points The main one is don’t look for cheap energy to power over a billion cars world wide. Give it up. We must get out of them soon. Back to public transportation,more walkable cities so on.CNG is a pipe dream and you should not raise false hopes for that as a motor fuel. It is a disservice to all of us.same for hydrogen. It is time writers like you wake up to these facts. THERE is NO replacement for oil, plain and simple………….

  3. I don’t know what the solution is. (Actually I don’t believe there is a solution given an earth with nearly 7 billion people.) I do know the problem is too many people. We get a mind boggling number of solutions (almost a solution du jour to the energy dilemma) but rarely does anyone touch on the crucial problem.

    The energy problem has become unsolvable while we watched. World population was about to tick over to 2 billion when I was born, most of the world’s oil was being produced and used in the US. From the dawn of man until the fall of Rome world population had never been over 0.3 billion. In a brief 1000 years we increased by a factor of 23 times the previous high. How does one un-ring a bell?

  4. As I wrote in a recent Business Week comment, peak oil will probably destroy the economy years before you will starve because farmers can’t grow you food, because they can’t find any diesel fuel. That is, in my opinion, why peak oil is so dangerous. Smarter people than me think that the economy will have enough time to adjust to an coming explosion in the price of liquid fuels. No it won’t. And once peak oil becomes obvious, all kinds of bad economic failures will accelerate. You can use less gasoline, but you can only live for so long without a job. The government can’t support half the population forever. If you can figure out how things will play out, you could become richer than Bill Gates. If I had to guess, I would expect the development of a stagflation situation, similar to what happened after the first Arab oil embargo. Look how much speculators bid up the oil price in 2008. How many non-peak oilers thought that could happen? But it did, and fast. I will be very surprised if, as the current recovery progresses, the oil price doesn’t start to head right back up. How rapid the increase will be will depend on the speed of the recovery. Remember that it could take a couple of years just to get back to the level of economic output that existed before this recession began, and that a lot of oil is now in storage. So the oil price won’t immediately explode. I don’t see any problem for the next several years, but eventually, all those cars being bought in China will demand more fuel than the world’s oil wells can produce. Then, look out world. A bidding war for oil will begin, and the price will start to rise, until the price finally becomes unaffordable to enough people to reduce oil demand. That price will be higher than most people can now imagine. What will people give up purchasing before they give up using their cars, a hell of a lot. The lack of spending throughout the rest of the economy will destroy millions of jobs. Unemployed people don’t pay taxes for long, so much more government debt will result.
    The dollar could then become another big problem. I’m no banking genius, but you’ve got to figure that a huge increase in the cost of oil could lead to the creation of more and more dollars to pay for less and less oil. How will the US pay for imported oil if the dollar collapses? Remember that we now import over half of the oil that we use. How will we pay for oil imports, trade gold? Barter food? Invade Canada?(not a good plan) Trade part of the United States? Ask yourself if your government in Washington is studying these questions and formulating viable solutions. And then try to stop laughing. And remember that some of the smartest, highest paid, people on this planet thought that housing prices would never fall, and that the fancy debt instruments that they created were a great idea. How did that work out?

  5. The Business Week article is down the page in the Europe section titled, ” The Race for Riches Under the North Pole” It is well worth reading and not great news.

  6. Well, I think we need to draw a breath and relax a bit.

    First of all, we’ve just come through the first peak oil recession, and aside from some nasty economic dislocation, we are still pretty much all here. we havent’t starved to death; the world has not ended. My enduring memory of the recession will be trying to get to the airport in Houston, stuck in a massive traffic jam. So, that’s one view of the first peak oil recession.

    Second, even if US consumption falls to 14 mbpd, we’ll still be ahead of per capita oil consumption in Europe today. That’s not great news, but it’s not end of days, either.

    Third, we have 100 years supply of natural gas, and if we could power our automobiles with it today, we could have high octane (115-130) fuel for about $1 gallon equivalent, and probably not more than $2 on average for the next several years. At Colorado State’s Energy Conversion Lab, they converted a pick-up to nat gas, with the result that it i) improved acceleration by 3 sec to 60; ii) reduced gasoline-equivalent fuel consumption, and iii) had super clean emissions. (The US manufacturer also made a similar conversion, with exactly the opposite results, I might add.) So we have a good solution at hand, lacking only greater fuel distribution and public acceptance for wide-scale market penetration.

    I believe the most important thing from a domestic perspective is constructive engagement with the issue, focusing on relatively near-term, lowest cost, practical solutions. On the international front, we need to be in dialogue with other countries about managing the oil supply at the medium term (3-5 years), and most importantly, we need to keep in mind that US energy, economic and military security is best served by insuring China has enough energy to grow. We need to be outward-looking and engaged, building a basis for common action on shared challenges.

    I don’t mean to minimize the challenges of peak oil, but as long as we don’t ignore the issue and let it fester, there is need for concern and action, but not despair.

  7. OK, but here in SE Michigan, I’m not sure we *are* all still here. My enduring memory of this recession – so far – is lots of people losing their jobs and their homes.

    And if this is the first peak oil recession, what will the others be like? I’m not convinced that this is as bad as it can get.

    I’ve only known one person who drove a natural gas car, and he wisely ended up moving to Canada. Do you see enough happening to mitigate coming problems? I looks to me like our most common coping mechanisms so far involve job loss, housing loss, bankruptcy, and increased government debt to slightly increase fleet fuel economy.

    Oh, and don’t worry about me needing a deep breath. I have a very steady job, bike to work, and have about a fifth of my retirement funds in the energy sector.

  8. And every time we have a peak oil recession, the gov can just come along with more multi trillion dollar bailouts…..right. Hey, I have an idea, why don’t we just print 10000000 trillion dollars and distribute it to everyones bank accounts equally, making everyone super rich…….then it won’t matter how high the price of petrol gets……we can all afford it…….solving the problem once and for all……and if not once and for all……just print more later when needed. Gee I’m smart.

  9. Well I listen to all the doom and gloom and I am not worried about our future.
    For starters we are in this bloody oil mess because of our Goverment policies in the last 40 years.
    If gasoline were eight dollars a gallon in the US like it is in Europe from Goverment taxes by golly SUV’s and gas hogs in the US would go away faster than road kill on interstate 95. Decades of political oil money from oil companies to our Congressman and Senators means cheap gas and oil.
    So watch out oil companies because the Chevy Volt and peak oil is your worst nightmare. The end of cheap gas and oil means the end of cheap gas and oil period.
    I have two sons that are draft age and I hope and pray that oil companies in the future will not have the most US Military behind them to invade counties for cheap oil.

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