Has 'Peak Oil' Arrived

By Rick Moran

A Vice President of Russia's largest independent oil company says that oil production in that country has peaked and in the future will begin declining:

Russian oil production has peaked and may never return to current levels, one of the country’s top energy executives has warned, fuelling concerns that the world’s biggest oil producers cannot keep up with rampant Asian demand.

The warning helped on Tuesday to push crude oil prices to a fresh all-time high above $112 a barrel, threatening to stoke inflation in many countries.

US crude oil West Texas Intermediate surged in London trading to $113.06 a barrel, above last week’s record of $112.21 a barrel. It later traded 125 cents higher at $113.01 a barrel.

Leonid Fedun, the 52-year-old vice-president of Lukoil, Russia’s largest independent oil company, told the Financial Times he believed last year’s Russian oil production of about 10m barrels a day was the highest he would see “in his lifetime”.

Russia is the world’s second biggest oil producer. Mr Fedun compared Russia with the North Sea and Mexico, where oil production is declining dramatically, saying that in the oil-rich region of western Siberia, the mainstay of Russian output, “the period of intense oil production [growth] is over”.

Part of Russia's problem has been nearly 40 years of pumping those Siberian wells at full capacity according to many oil experts. This was a result of the Communists (and later the Russian Republic's) desperate need for hard currency. That and the fact that the Soviet's especially used very inefficient means to pump the oil out of the ground.

Now the Russian oil industry is more productive but their primary fields are becoming less viable due to decreased pressure at the wellhead which makes it harder to get the oil that is still down there. Recovery of the remaining oil will be more expensive but at more than $100 bbl it is certainly worth it.

The question about other big fields like the North Sea and Mexico is one of investment in new facilities versus the likely return. There is also opposition in some countries because of the environmental risks. Hence, declining output from those two major suppliers will be significant as the current fields gradually decline.

The Middle East is a different story. The spigot in Saudi Arabia and the Gulf States is not wide open despite jawboning from Bush and other western leaders. Analysts estimate that another 2 million bbl could be pumped if the Arabs so chose. Why should they when customers keep bidding up the price of what they're already taking out of the ground?

If the west goes into recession, demand will fall off and prices will ease - how much is anyone's guess. At that point, the current solidarity on price of oil producing states may fall apart and it will be every country for itself, pumping more oil to keep market share and profits up.

We are not at peak oil yet, not even close. There are huge reserves in several places around the world including Africa, the Gulf of Mexico, Alaska, and South America. The problems today with high prices have much more to do with politics as they have to do with the world running out of oil. Unrest in Nigeria, war or the threat of war in the Middle East, Venezuela playing politics with supply, and a large increase in demand have combined to set the speculators in the commodities markets off on a frenzy. Many analysts see a speculation "premium" of at least $25 bbl - probably more now with this recent spike in oil prices.

The key is to dampen the speculators enthusiasm. Unfortunately, it may take a US recession for that to happen.