This book was a fascinating read.  In doing this review, I surfed around the internet to see if there were any reviews of it.  Sadly, there were no in depth discussions of the book anywhere.  Many sites just cut and pasted from author’s  posting on Amazon.com.  So I feel pretty smug about being one of the first in the world to read this book and communicate my impressions of it.  It’s a real rush to be ‘first’ in anything online.

The reason this book was chosen is because many of my clients and contemporaries depend upon, to a greater or lesser extent, the production, sale, refining and marketing of oil and gas.  And even while some of them may not be directly involved in the oil and gas industry, many of them have oil and gas companies as clients.

Here we go!

Author Dr Stephen Gorelick wrote this book as a means of trying to resolve contradictory messages we receive from the oil companies:

  1. We have reached, or will reach peak oil (the point where production can no longer keep up with demand) within the next 10 -20 years.
  2. Oil is a finite resource, but because it is so large, a peak will not occur for many decades to come.

The difference between these points of view lead to two separate courses of action which, from a business perspective, are antithetical to one another.

If Case 1 is true, then a sensible approach would be to continuously build business capacity to deal with ever-increasing demand.  As the value of the commodity increases, so does the revenue per unit.

However, if this course of action is pursued and Case 2 were correct, then large increases in capacity in firms across an industry would lead to gluts in supply — and a crash in the price of oil.  The ROI for larger capacities, both in terms of human resources and machines, would telescope outward, making a company’s attempt to recoup its investment virtually impossible.

Hence the need for an understanding of oil prices and whether or not peak oil is around the corner.

The first part of the book, Dr Gorelick examines the global oil landscape, taking oil production and slicing and dicing it by estimated reserves, commodity, usage, countries producing and countries consuming over time.

The second part of the book examines the current theory of peak oil and and several arguments that support it.

The third part of the book offers counter-arguments to the theory of peak oil and attempts to clear up misconceptions regarding oil supply and demand.

Nutshell Quote: “The amount of exploitable global oil, estimated as reserves or endowment, is at an all-time high and has risen consistently since values were first reported.  This is so even though the discovery of new giant oil fields has fallen since the 1970′s,” — Oil Panic and the Global Crisis p. 220.

Price Changes and Production do Not Reflect Scarcity

Dr Gorelick reviews how oil prices have changed in the recent past and how impacts external to supply (OPEC, war, technological advances) have affected the price of oil.  Even when estimated reserves are recalculated, this also impacts price.  Effectively, he shows that price and even production levels have nothing to do with the scarcity of oil.

Indeed, he correlates quite closely how the increase in oil prices matches the increase in oil worker wages and how the decrease US domestic oil production in the 1970′s has more to do with with the creation and use of  supertankers (>200,000 tons) to economically transport Middle East oil.

Once Dr Gorelick disabuses us of the notion that price and production have anything to do with the actual supply of oil, he then attempts to draw conclusions from historical behaviors of other commodities.  If we can evaluate the behavior of other resources, we may be able to predict with greater accuracy the behavior of oil in the future.

He compares oil production and demand with other resources to see if we can draw conclusions about resource usage historical patterns.  Some of the examples, I found, were relevant while others  left me shaking my head and none gave me any confidence in predicting the behavior of oil pricing and supply in the future.

One particular example is his view of tobacco production.  He shows how tobacco production from 1860 – 1990 follows the same bell curve as the peak oil curve and does so, not because of resource scarcity, but due to consumers pursuing a more healthy lifestyle. The argument seems to be that the existence of a peak oil – style curve can be created via a number of different situtations — not just resource scarcity.

I found this particular argument to be somewhat disingenuous.  It is like comparing apples and oranges.  In fact, it may be better to compare crude oil production to rock music than to tobacco.

The greatest contribution of this book is the way Dr Gorelick addresses contemporary issues that affect oil and gas supply: the industrialization of China and India.  He refutes the idea that demand from these nations will greatly outstrip world production and lead to oil shortages, price spikes and rapid resource depletion.

I’m not totally convinced by his argument, but it did force me to reexamine this issue in a new light.  Given that many books and movies look to the next global war being fought over access to resources, I hope that he’s right.  However, even if the danger of peak oil is many years away, what oil we do have is not evenly distributed.  This means that military actions by large oil consuming nations will continue for the foreseeable future.

Perhaps my biggest takeaway from the book is how energy efficiency leads to cheaper energy prices and how cheap energy prices increase consumption.   It illustrates that, if oil scarcity is a myth (as Dr Gorelick contends), then any energy efficient measure is its own worst enemy.  It is only through artificially fixing the price of oil at a point that makes the adoption of energy efficient technology will we truly move toward reducing our dependency on oil.

All in all, I found Oil Panic and the Global Crisis a very good read.  Because it is filled with the latest in resource statistics, it may serve as a good reference when evaluating the impact of new technologies and resource agreements.

On the down side, he only briefly considers the ecological and health costs associated with continued oil usage, making him one amongst many economists to consider environmental damage an externality.

According to this book, the cycle of boom-bust-glut of the oil energy market will continue.  Those of us who work in the industry or have oil companies as clients will continue to be subjected to this volatility.

From a business planning perspective, it may be helpful for a company to develop separate operating plans: one for boom times and one for the bust/glut times.

Needs of a Business During Boom Times

  1. Rapid expansion of production capacity to deal with demand, along with the administrative infrastructure required to run the business efficiently.
  2. Extensive lines of credit to make the necessary investments to get the maximum amount of oil to market at a particular price point.

Needs of a Business During Bust Time

  1. Rapid restructuring to cope with a sudden decrease in commodity pricing.   Large accounts receivable become a liability as other companies impacted all along the supply chain.
  2. HR support required to transition laid off workers.
  3. Cash flow required to take advantage of opportunities to acquire poorly-positioned competitors in market.

Needs of a Business During Recessionary Times

  1. Investment in secondary line of business not directly related to the oil and gas business.  At CCR Energy Services, for example, we serviced pressure safety valves for apartment buildings in addition to servicing the oil and gas industry.
  2. Ideal time to look into business restructuring to best take advantage of the inevitable upsurge in the price of oil.

While the cycle of boom/bust/recession is not unique to the Alberta economy, it is without a doubt one of the most pronounced cycles of any economy in North America.

Question:  How does your company deal with the boom/bust/recession cycle?