Rejecting Peak Oil

Rejecting Peak Oil: God Is, or He Is Not
by Justice Litle
The Rude Awakening
Wall Street, New York
Wednesday, November 16, 2005

Justice Litle discusses how, while Congress is wrong to call hearings on oil companies' "windfall profits" and the oilmen are right to defend private sector decision-making, Congress has its heart in the right place and the oilmen do not, especially in Rejecting Peak Oil.

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[Joel's Note: In today's edition of your Rude reading,
Justice Litle draws an analogy between Pascal's wager
concerning the presence of the omnipotent being, and the
question over the validity of 'Peak Oil" claims. Should you
throw caution to the wind as so many are wont to do? Or is
a more cautious approach worth your while? Read on to see
what Justice has to say on the topic and send your comments
to your vagabond editor at:

aussiejoel@the-rude-awakening.com

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GOD IS, OR HE IS NOT
By Justice Litle

"God is, or he is not. Which way should we incline? Reason
cannot answer." - Blaise Pascal

The big oilmen recently gave testimony in Washington. Their
multibillion-dollar profits have ruffled feathers, and the
dubious notion of a "windfall profits tax" has risen on a
current of hot air to top the agenda.

Anxious to distance themselves from the petrocrats in the
White House, Republicans have been playing the outrage card
more vigorously than Democrats (with one notable exception
- the esteemed junior senator from New York). Like me, you
may have been tempted to avert your eyes from this shameful
spectacle.

Fortunately, the hearings are more bark than bite. Congress
knows it, and the oilmen know it too. An ExxonMobil
spokesman came close to calling a spade a spade: "In
politics, time is measured in two, four or six years, based
on the election cycle... In the energy industry, time is
measured in decades, based on life cycles of our projects."
 
In other words, get on with your petty stump speeches so we
can get on with our business. This quote from an anonymous
European executive is even more blunt: "Oil companies
already give enough. In terms of substance, Washington
lawmakers will get nothing." Sen. Clinton, put that in your
pipe and smoke it.

Rejecting Peak Oil: Casually Dismissing "Peak Oil"

All theatrics aside, these hearings are interesting for
another reason. Congress is guilty of a knee-jerk,
populist, rabble-rousing response to high energy prices -
which is clearly wrong - while the oilmen defend the
virtues of private sector decision-making, which is clearly
right. Yet the ends diverge from the means: Whatever its
motive, Congress is right to show concern for America's
energy future. And regardless of free market principles,
the oilmen are wrong to be so sanguine about what is coming
down the pike.

In casually dismissing the threat of Peak Oil, the devil-
may-care attitude of the oil majors puts us all at risk.
They are like the town criers of old, yodeling out with
bored certainty: "Twelve o'clock, and all is well, and all
wi' be well and all manner a' things is well..."

As if recent history were little more than a bad dream, the
biggest-of-the-bigs acts as if cheap energy is just around
the corner. BP, for example, still uses a hypothetical
crude price of $20 a barrel to test the financial viability
of new drilling projects. BP is convinced the price of oil
will be cut in half five years from now - or at least its
actions say as much.

Few are as dismissive of Peak Oil as Exxon's imperial CEO,
Lee Raymond. He has told The Wall Street Journal that "When
oil's at $60 a barrel, at least $20 of that is
speculative." He goes on to say that a portion of crude's
price "is not supported by the fundamentals." Nor does Mr.
Raymond take bottleneck issues seriously: He refuses to
invest Exxon's money in new refineries, arguing that "You
have to think about where margins will be in 10-15 years
time." Looking to the long term is generally wise. But does
it make sense to ignore the steady trends of the past six
months, 12 months and two years? Should a long-term trend
be shrugged off as if it were a temporary spike? Does it
make sense to pretend that the sea change of globalization
and the skyrocketing demands of the developing world do not
exist?

As head of a firm with a $360 billion market cap, Mr.
Raymond is clearly no buffoon. He has reasons for speaking
as he does, and he is not the only insider to pooh-pooh
Peak Oil. It appears that for every energy expert who
believes, there is another who does not. Matthew Simmons,
who argues for Saudi Arabia's inevitable decline in his
book, "Twilight in the Desert," was recently attacked by
Jim Jarrell of the Ross Smith Energy Group, in a report
mockingly titled "Another Day in the Desert." There is no
love lost between the two camps.

Rejecting Peak Oil: Pascal's Wager

Who to believe? When it comes to long-range forecasting and
choosing among alternatives, one should weigh consequences
as well as probabilities. This is where decision theory
comes into play. Nearly 3½ centuries ago, the philosopher,
Blaise Pascal, planted the seed of modern decision theory
with a rather clever apologetics argument. Pascal posited
that it is better to believe in God than not, due to the
reward-to-risk profile behind one's choice. Embrace Him,
Pascal argues, and you either go to heaven or find yourself
none the worse for wear. Choose not to believe, however,
and one runs the risk of eternal fire and brimstone.

Why bring up Pascal's Wager? If you'll pardon the odd
analogy, believing in peak oil is a bit like believing in
God. There is plenty of theoretical evidence to make a
strong case, yet there is also plenty of ammunition for the
doubters. Like God's existence, peak oil is truth to some,
yet myth to others. And here is the rub: By the time a firm
resolution comes around, it is too late to change tack.

In this regard, Raymond's Wager bears strong resemblance to
Pascal's. Like his 17th century predecessor, the modern-day
energy CEO weights consequences above probabilities. The
key thing is that the reward-to-risk profile for a
gargantuan oil major is not what you might expect. In the
privacy of Mr. Raymond's executive chambers, the top brass
probably reasoned it out like this:

*If Peak Oil turns out to be false, we'll avoid a lot of
heartache by sticking with our $20-35 long-term forecast
 
*If Peak Oil turns out to be true, our current sky-high
profits will stay sky-high for years, and we can finance
further growth by snapping up independents

*Therefore, ramping up investment now has major downside
risk if Peak Oil is wrong, whereas we can sit tight and
still do well if Peak Oil is right. Regardless of
probabilities, the consequences favor a conservative stance

*Just one snag: we can hardly share this reasoning with the
public. To justify our lack of enthusiasm for investment
here and now, we'll have to roll out the anti-crisis
talking points.

Pascal might not be proud, but he would certainly recognize
the logic. When Lee Raymond exudes gruff conviction in
dismissing Peak Oil, it is a conviction that he is serving
the best interests of his shareholders, not a conviction
that his facts are right.

Conclusion: We cannot count on Big Oil to fully address the
energy risks ahead. Doing so is simply not in their
economic interests. Nor can we count on bumbling government
for a workable solution. The only thing we can count on,
then, is continued volatility. We will have to keep solving
our energy problems the hard way - by the seat of our
pants, with no time to spare.

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And the Markets...