392. BOOK REVIEW: "THE MYTH OF THE OIL CRISIS"

[This post is by Ari, my co-blogger at POD. --JD]

The Myth of the Oil Crisis (MotOC) is a very recently published book (2008) by Robin Mills on the subject of oil, natural gas, and more broadly, energy. As the title suggests, Mills tackles the notion that we are on the brink of an “oil crisis,” known online largely by the monicker “peak oil,” from which the world will never recover. If Campbell and Laherrére are the professionals that gave the peak oil movement its credentialed weight (by being professional geologists), then Mills is perhaps the antithesis for the “debunking” movement. While the book is flawed, it presents a broad optimistic view of energy reserve availability and potential for development and supply of those reserves in the foreseeable future. What makes the book most important, however, is that Mills demonstrates, using easily accessed sources, that the imminent peak arguments are highly flawed and irrational.

Robin Mills is, according to his biographical blurb, “an oil industry professional with a background in both geology and economics. Currently (as of 2008), he is Petroleum Economics Manager for the Emirates National Oil Company in Dubai. Previously, he worked for Shell.” Mills is a fairly impressive person, even not including his graduate degree from Cambridge University (in petroleum geology), Then again, so are many of those who currently write about oil depletion from the “peak oil” side. What makes Mills different? For one, he's relatively young (born in 1976). But more importantly, he is someone who is currently in the thick of the oil business in the Middle East itself. Unlike many “peakniks,” Mills actively participates in the energy production business as I write this review. He is not some “armchair analyst” like many of us, and has more of a “veteran view” than many others seem to demonstrate.

Mills sets the stage by placing the oil commentators into five camps (examples chosen by me): The Geologists (Campbell, Laherrére, Deffeyes), The Economists (Odell, Lynch, CERA), The Militarists (who are actually made up of the militarists, media, and mercantilists), the Environmentalists (Greenpeace et al.), and the Neo-Luddites (Heinberg). It is important, I believe, to note that “The Geologists” doesn't refer to petroleum geologists, per se, but because they worked at some point in their careers as professional geologists. Mills notes that they can also be referred to as “Malthusians,” which is a fairly fitting appellation. Some may object to the rather broad categories that Mills uses to group the various commentators, however. After all, some actors clearly align with more than one camp. Nonetheless, it serves as a useful way to group the widely divergent views of the oil commentary community.

Mills' book's greatest strength is its ability to deconstruct the most frightening of the peak prophecies and show how they are either incorrect, or at the very least, misguided. He is thorough in demonstrating, through both data, and clear, well-sourced arguments, how the extreme pessimists of the energy commentary community are generally incorrect in their arguments and assumptions. He even demonstrates how Hubbert, commonly hailed as a sort of “peak oil prophet” (words mine), was hardly as accurate as he is shown to be. In fact, Mills scrutinizes Hubbert in the fourth chapter, entitled “Half-Full or Half-Empty?” Hubbert, despite his supposed accuracy, was actually fairly inaccurate on a lot of important issues, as Mills demonstrates in the following bullet points:

• Hubbert actually proposed 1965 as his most likely peak date (US oil production); 1970 was a fallback if secondary recovery proved to be more successful than he expected (as it did)

• Although arguably correct on the date of the peak, he was wrong about its height: total annual US production in 1970 was 20 percent (emphasis mine) higher than he expected...

• He forecast that world oil production would peak between 1995 and 2000 at 33 million bbl/day. The true figure was 75 million bbl/day in 2000, and it has continued to rise subsequently.(MotOC pg. 42.)

Mills also demonstrates that the Hubbert curve, despite being seen as a sort of sacred truth of petroleum geology, fits many countries' production curves rather badly (notably the UK and Iraq) (pp 40-41.) He also-- rather adeptly, in my opinion-- demonstrates that peakniks are extremely pessimistic relative to nearly every other professional estimate of reserves. In fact, where Campbell says that the world has a total endowment of around 2000 billion bbl of oil, even the second most pessimistic estimate (Bentley) gives the world over 3000 billion bbl of oil-- that's a significant difference! Moreover, both Campbell and Bentley are over 1000 bbl behind the most conservative “non-peaknik” estimate of over 4000 billion bbl by CERA (supposed "Pollyannas," no less!). A key difference, Mills notes, is that everyone but The Geologists allows for significant reserves growth. An example of this is the reserve growth of around 69 billion bbl from the 2000 USGS review to its 2005 self audit, which amounts to nearly half of Campbell's YtF (yet to find)! If nothing else, the book demonstrates rather clearly that the peaknik community is beset in all directions by an institutionalized form of pessimism that rarely follows reality.

Another strength of Mills' book is the credence he pays toward economic factors. He shows, throughout the book, that economic factors play a significant role in energy production. One of the often ignored (or derided) factors in energy is the capital needed to keep it running smoothly. The Geologists see geography as the ultimate factor in deciding energy availability, but they are far too willing to ignore the fact that even assuming you have a powerful physical limitation in place, you cannot drill oil if you lack rigs and manpower. Unfortunately, we live in a world today where the physical and human capital needed to run the oil industry has become significantly scarcer than in decades past-- this is largely a consequence of the previous decades of incredibly cheap oil. These same low prices drove OPEC to reduce production as well, which allowed oil commentators (Simmons, for example) to say that Saudi Arabia is in a state of decline. Unfortunately for Simmons, KSA was merely responding rationally to low prices by reducing production. The reader will see a lot of this kind of debunking throughout the book. For some, it will be interesting to see the shriller voices of energy commentary dismantled. For many readers of this blog, however, it will be a rehashing of what has been said here by JD and others. Nonetheless, it is important stuff, and Mills does a good job of taking out some of the more pernicious fallacies with sound economic thinking.

Other topics that Mills deals with are unconventional oil, backdating (one of the more irritating traits of The Geologists), natural gas, geopolitics, demand, and finally the environment. I am glad to say that he does a good job of dealing with unconventional oil (it's not as impossible to produce as some say), backdating (basically, contemporary reserve growth is moved back in the past in order to make it look like we ain't finding more!), natural gas (energy of the future, he argues), and demand (not necessarily going to grow exponentially forever.) I was less impressed with his environmental arguments, mostly because I think he arrives from a strange foundation (The Stern Report). Regardless of my misgivings with his use of what I see as an unnecessarily alarmist paper, I believe it is a positive step to see petroleum executives treating CO2 emissions as a serious issue.

However, like I said at the beginning, there are problems with MotOC. For one, it is somewhat too technical for most laypersons to read without some difficulty. Mills does a commendable job with explaining the terminology as best as he can, but I sometimes found myself flipping to the glossary to relearn terms that I had forgotten from previous chapters. I also found myself occasionally having to reread sentences to figure out what Mills meant because he occasionally inserted sentences of length and complexity that would make Proust weary. While this is fine for an academic market that is used to dealing with long, convoluted prose, the book seems to be marketed more broadly toward a “well-educated” market. While Mills' sometimes awkward prose is not an overly serious issue, it does detract from the experience.

Overall, however, I recommend this book to the “armchair energy analysts” and anyone else who is interested in the topic of energy markets. It may not be groundbreaking for those of us who read this particular blog on a regular basis, but it is a useful text in the sense that it puts a great deal of important data at your fingertips, as well as giving a great deal of insight into the market itself. It is a challenging read, but it is definitely worth the time spent. I doubt it will turn any “doomers” or “peakniks” into optimists, but it will definitely put a lot of things into context for both “debunkers” and those sitting on the fence about the future. It is also, in my opinion, a good text to recommend to friends who stumble on to the “peak oil” scene for the first time, if only to give them insight into how flawed most of the doomsday arguments really are.

by Ari