Outlook 2008 (9 sectors to watch): Energy

"We are all peakists now." So said one luminary. And with China sopping up any extra oil, expect prices to remain high.

The waves generated by the prospect of $100-a-barrel oil are rolling through the global economy. Coal companies are running hip-looking TV ads promoting clean coal. Gasoline has sold for more than $4 a gallon in parts of the United States. And riots over fuel price increases have flared up in some of the world’s poorer nations.

What’s up with the price of oil in the year ahead? Many hope it will fall back from recent highs if speculators pull out of oil markets in front of a possible U.S. recession, which would reduce demand. But that forecast too easily dismisses one salient fact: the price of oil has stayed high even as OPEC had raised its production levels.

Why? Well, China seems able to sop up any extra oil that comes on the market. Yet a big concern is the feared ongoing decline in many large oilfields. The world gets most of its oil from just 322 of its 40,000 fields, and concerns are mounting that some of those big fields will not be able to keep producing cheap oil in amounts we’re used to.

Richard Gilbert, a Toronto-based author whose new book, Transport Revolutions, looks at the change coming in the transportation industry as a result of peaking production of crude oil, concludes that by 2025 the world will be pumping 17% less oil than it is now. “The big argument a year ago was that the real price of oil was 20 bucks and what brought it up to 50 or 60 was the fear factor,” says Gilbert. “Well, that doesn’t wash. There’s not more fear than there was a year ago, but now we’re at $100. The thing that increasingly makes sense as an explanation is that we are reaching a limit in our ability to produce the oil.” Gilbert agrees with James Schlesinger, the first U.S. energy secretary and secretary of defence under Gerald Ford, who recently declared, “We are all peakists now.”

Dr. Michael Smith, at Energyfiles Ltd., a global oil and gas forecasting service, has reached a similar conclusion. At a presentation to the Canadian Energy Research Institute, he foresaw a peak and subsequent decline in world oil production. “A number of organizations and commentators have stated that oil demand will continue rising — reaching 120 million barrels per day and higher at some time during the 2020s,” says Smith. “My analyses of geological and engineering data strongly suggest that such demand levels will never be met.” He is convinced geological constraints to production are already feeding high oil prices. Today, the big projects available are technically challenging ones in deep water and the Canadian oilsands. “The growth bubble will burst in five to 10 years,” Smith says. “I have no doubt that my analyses, which are as detailed as any, are correct — within a decade the world will be seeing permanent year-on-year declines in availability of fossil oil fuels.”

In the short term, at least, high oil prices are good for Canadian companies producing the stuff. That’s not so good for businesses that have to buy oil-dependent services. Gilbert advises it is time for companies to think about transitioning away from fossil fuels. “People have to understand that the prices of oil are not going to go down again, and there is a real chance that they will go up very, very high,” he says. “That really is the message governments and business have got to start reinforcing.