ChevronTexaco's CEO banking on peak oil situation

San Francisco Chronicle

David Lazarus
April 8, 2005

There's been a lot of ink spilled this week about the risk ChevronTexaco's chief exec, David O'Reilly, has taken in paying about $16.4 billion for rival Unocal and its oil resources.

Because Unocal's stock has soared 75 percent over the past year, the thinking goes, ChevronTexaco could find itself with a white elephant on its hands if currently sky-high oil prices end up coming back to earth.

Well, I'm prepared to say this much: O'Reilly isn't stupid. He knows more than most people about world oil markets.

So if the head of San Ramon's ChevronTexaco is prepared to gamble more than 16 billion bucks on oil prices staying at stratospheric levels, I'm ready to give him the benefit of the doubt.

And reading between the lines, that means only one thing.

Peak oil.

We're basically there.

Peak oil is a controversial notion that's been floating around the oil industry for decades. It concerns the inevitable moment when world oil production hits its peak and, from that point on, reserves are on an ever- dwindling downward spiral.

Peak oil means prices will inexorably push higher and higher in the face of surging demand. This in turn will have a catastrophic impact on oil- addicted economies around the planet and, according to some prognosticators, could lead to wars over remaining supplies.

Amos Nur, a professor of geophysics at Stanford University, told me that if we're not at peak oil right now, "we're in the neighborhood."

ChevronTexaco and the other oil majors know this as well, he said, and this is why they're scrambling to secure as much global reserves as they can.

"There's no question in my mind that they are aware of this and that they are right," Nur said. "Oil prices are not coming back down."

Not everyone, of course, accepts that the dire peak oil scenario is about to play itself out. The U.S. Energy Department, for example, is forecasting that world oil production won't peak until 2037 or so.

"The world production peak for conventionally reservoired crude is unlikely to be 'right around the corner' as so many other estimators have been predicting," department researchers said in a report last year. "Our analysis shows that it will be closer to the middle of the 21st century than to its beginning."

If so, then ChevronTexaco's O'Reilly has made a spectacularly bad bet with the Unocal deal.

I'm guessing, though, that he has a better fix on conventionally reservoired crude than do government bureaucrats. There's a reason O'Reilly pulled down nearly $10 million in compensation last year.

So if we're hitting peak oil sooner than later, what are the ramifications?

First off, oil was trading Thursday around $54 per barrel. This price level led Wall Street investment bank Goldman Sachs, a major energy trader, to warn last week that "oil markets may have entered the early stages of what we have referred to as a 'super spike' period."

By Goldman's reckoning, this could result in oil trading as high as $105 per barrel, which would have a ripple effect on everything from gas prices ($6 per gallon) to manufacturing costs.

Meanwhile, global oil demand is forecast by the International Energy Agency to rise by 2.2 percent this year to an average of 84.3 million barrels a day.

The United States now accounts for about a quarter of world oil consumption (with more than half that total imported from OPEC and other overseas producers).

But China's supercharged economy is proving equally thirsty for oil. By some estimates, annual oil consumption in China is growing seven times faster than in the United States.

Stanford's Nur believes that runaway demand from China (and to a slightly lesser extent India), coupled with America's reliance on oil imports, will lead to an almost certain clash of interests once we've passed the point of peak production.

"Each country has the same national security policy -- to get as much oil as it can for itself," he said. "If this isn't managed well, we could have a military conflict."

The problem is that even though no one disputes the inevitability of peak oil -- global resources are finite -- precious little is being done today to prepare for this outcome.

For his part, President Bush has called for accelerated development of more fuel-efficient vehicles, including hydrogen-powered cars.

But the White House had budgeted just $1.7 billion for research into hydrogen technology over the next few years, compared with the nearly $6 billion being spent every month in Iraq (which just so happens to have the world's second-largest oil supply).

"There are still many things we can do," Nur said. "But every day that passes, it's going to get more difficult."

Without a coordinated global commitment to managing the consequences of peak oil, he said, the scope of the looming problems is almost too vast to contemplate.

"We're running out of time," Nur concluded. "Look at how oil prices are going up. We're already in panic mode."

History shows that when others are panicking, it's the ones who keep a cool head that end up profiting.

ChevronTexaco's O'Reilly is spending a lot of money on Unocal.

He's keeping a very cool head indeed.

David Lazarus' column appears Wednesdays, Fridays and Sundays. He also can be seen regularly on KTVU's "Mornings on 2." Send tips or feedback to dlazarus@sfchronicle.com.

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2005/04/08/BUGA4C50P61.DTL