Peaked oil

We're all in the game of prediction these days. So allow me to offer a few.

First, if you have that unfortunate disposition of being exposed to news on a regular basis, you will hear about a particular study, possibly even a specific article in the Guardian about it.

World oil production has already peaked and will fall by half as soon as 2030, according to a report which also warns that extreme shortages of fossil fuels will lead to wars and social breakdown.

The German-based Energy Watch Group will release its study in London today saying that global oil production peaked in 2006 - much earlier than most experts had expected. The report, which predicts that production will now fall by 7% a year, comes after oil prices set new records almost every day last week, on Friday hitting more than $90 (£44) a barrel.

Now, I want everyone to remember these empirical predictions:

1. Oil production peaked in 2006
2. Production will fall by 7% a year from now on

For I am predicting that both will turn out to be wrong, and there's nothing more frustrating than predictions that are used to dredge up panic which are then forgotten after the allotted time has passed and the predictions proved inaccurate. Well, maybe there are more frustrating things than that, but it's definitely in the top 3.

My third prediction is that many will miss this little detail in the Guardian article itself:

The results are in contrast to projections from the International Energy Agency, which says there is little reason to worry about oil supplies at the moment.

Let us emphasize: there is no consensus here. The International Energy Agency's findings are at odds with this little German group.

Now, let's talk about putting your money where your mouth is.

However, the EWG study relies more on actual oil production data which, it says, are more reliable than estimates of reserves still in the ground. The group says official industry estimates put global reserves at about 1.255 gigabarrels - equivalent to 42 years' supply at current consumption rates. But it thinks the figure is only about two thirds of that.

The "official industry estimates" are coming from companies who rely on that data in order to make profitable decisions. Should they really be off by a whopping 33%+, it would be a catastrophe for them--they would be investing with expectations of returns way above what they would actually get.

Simply put, they would go out of business. Their very livelihood depends on their ability to get the most accurate data possible.

Moreover, the Futures Contracts show that for the near future at least, we should be expecting a steady decline in the price of oil--not something one would expect it production were really crashing and burning. (If you don't know what a Futures Contract is, I assure you that it isn't gambling or prophecy--see the Wikipedia article for details)

So, to summarize:

1. The EWG has concluded that oil production peaked in 2006 and will fall by 7% a year from now on, so let's all remember that and see whether or not their predictions have any accuracy to them.
2. I predict that they will be wrong, but that it won't necessarily do them any harm politically or financially.
3. Studies done by the International Energy Agency contradicts the EWG's findings, there is no consensus among experts.
4. Industry estimates and the Futures market run counter to the EWG's findings as well.
5. When next you hear about this study, the information will stop at "The EWG has concluded that oil production peaked in 2006 and will fall by 7% a year from now on"