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Daniel Yergin’s 2004 and 2005 Predictions for Oil Prices, Production and Exports – Three Strikes and You Are Out?

Daniel Yergin, whom the media have consistently designated as one of the world’s premier experts on energy matters–and who has a consistent track record of predicting higher oil production levels–has been very visible of late, especially with a full page essay in the Wall Street Journal, focused on why concerns about Peak Oil are misplaced.

I thought that it would be useful to review how some of Mr. Yergin’s prior predictions regarding oil prices, production and exports in the 2004/2005 time frame have turned out, now that we have several years of post-2005 price, production and export data. Following is a brief summary.

Three Strikes

In late 2004, Daniel Yergin erroneously predicted that we would be back down to a long term price ceiling of about $38 in late 2005. Strike One.

In 2005, Mr. Yergin erroneously predicted that there would be a “Large, unprecedented buildup of oil supply in the next few years.” Strike Two.

In 2005, Mr. Yergin erroneously implied that rising demand from China and India could be easily accommodated, presumably without adversely affecting other importers, because of an “Unprecedented buildup of oil supply.” Strike Three.

So, three strikes and you are out? Surely multiple media outlets have taken note of how catastrophically wrong Mr. Yergin has been? If they have, I haven’t seen any evidence of it in the mainstream media.

Following is a more detailed analysis of Mr. Yergin’s 2004/2005 predictions, versus actual data.

2004 – Predicts oil price drops to $38 per barrel

In a November 2004 column by Rich Karlgaard in Forbes Magazine, Mr. Karlgaard described how he asked Daniel Yergin what the price of oil would be one year later, in November 2005. Mr. Yergin replied that it would be back down to $38, as increasing production drove the price down about $10 per barrel from the November 2004 price of about $48.

It turned out that the November 2005 West Texas Intermediate (WTI) spot crude oil price was $58, a $10 increase over the November 2004 price and $20 more than Mr. Yergin’s predicted long term price of $38. In fact, Mr. Yergin’s predicted price ceiling of $38 has so far been the price floor, since post-2004 monthly spot crude oil prices have so far never fallen below $39 per barrel.

The average annual WTI oil price in 2005 was $57, and for 2006 to 2010 inclusive annual oil prices have all exceeded the $57 level that we saw in 2005, with four of the past five years showing year over year increases in annual oil prices.

2005 – Predicts “Large, unprecedented buildup of oil supply

In a July 2005 Washington Post column, Daniel Yergin dismissed concerns about Peak Oil and predicted that there would be a “Large, unprecedented buildup of oil supply in the next few years.”

In the column, Mr. Yergin quantified the possible increase in production, stating that we could see as much as a 20% increase in global total liquids production from 2005 to 2010. He was technically talking about “Capacity,” and he includes biofuels, which have a low net energy component, in his total liquids number.

However, I think that Mr. Yergin’s intent was pretty clear. He was predicting a robust increase in global total liquids production, and he explicitly stated that “Such growth over the next few years” would relieve the current pressure on supply and demand. I fail to see how the theoretical capacity to produce oil would relieve the current pressure on supply and demand.

When we look at the actual numbers for total petroleum liquids production, it is clear that Yergin was wrong about a “Large, unprecedented buildup of oil supply.”

Global total petroleum liquids production rose from 74.7 mbpd (million barrels per day, BP database) in 2002 to 81.5 mbpd in 2005 (an annual rate of increase of 2.9%/year). At this rate of increase, global total petroleum liquids production would have been over 94 mbpd in 2010, a volumetric increase of about 13 mbpd (or 16%) over the 2005 rate.which would have been consistent with Mr. Yergin’s prediction, but that is not what happened.

The data show that global total petroleum liquids production effectively stopped growing in 2005, and production has averaged 81.5 mbpd for 2006 to 2010 inclusive, with production ranging between about 81 and 82 mbpd for 2005 to 2010, except for 2009.

We don’t have to look very hard for an analogue to recent global production numbers. The EIA shows that North Sea crude oil production hit 5.8 mbpd in 1996 and then averaged 5.8 mbpd for 1997 to 2002 inclusive, before falling off the seven year plateau in 2003. Note that the North Sea region was developed by private companies, using the best available technology, with virtually no restrictions on drilling. In other words, peaks happen, even in the best of circumstances. The following chart shows North Sea crude oil production in 1996, in blue, lined up with global total petroleum liquids production in 2005.

North Sea Crude Oil vs. Global Total Petroleum Liquids

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2005 – Predicts plenty of oil for China & India (“Chindia”)

Mr. Yergin also implied that there would be plenty of oil supply to meet the increasing demand for oil imports from the Chindia region, presumably without adversely affecting other oil importers. He was half right. Chindia’s combined net oil imports did increase from 5.1 mbpd in 2005 to 7.5 mbpd in 2010 (BP), but it came at considerable cost to other importers.

A colleague and I recently compiled a database for 2002 to 2010 that tracks Global Net Exports of oil (GNE), which are simply defined as domestic production less domestic consumption of total petroleum liquids. We compiled data for the top 33 net oil exporters in 2005 (exporters with 100,000 bpd or more of net exports), which accounted for 99%+ of total net exports, primarily using the BP database, with some minor input from the EIA for smaller countries.

The database shows that GNE increased from 39.1 mbpd in 2002 to 45.5 mbpd in 2005 (a 5.1%/year rate of increase). At this rate of increase, GNE in 2010 would have been at about 59 mbpd in 2010 yielding a volumetric increase of more than 13 mbpd over 2005. This increase would have provided ample room to accommodate increasing demand from Chindia, but that is not what happened.

The database shows that GNE fell from 45.5 mbpd in 2005 to 42.6 mbpd in 2010, a volumetric decline of about three mbpd.

More importantly, what I define as Available Net Exports (ANE), which are GNE less Chindia’s combined net oil imports, fell even more sharply, from 40.4 mbpd in 2005 to 35.1 mbpd, a volumetric decline of about five mbpd.

So while the Chindia region, and many other developing countries, were able to increase their net oil imports from 2005 to 2010, most developed oil importing countries, such as the US, were forced, via price rationing, to take a declining share of a falling volume of Global Net Exports.In fact, if we extrapolate current trends, it would appear that the US is well on its way to achieving -freedom‖ from our reliance on foreign sources of oil – just not in the way that most Americans would want. If current trends continue, rising prices would force us to consume a declining share of a falling volume of Global Net Exports.The following chart shows GNE and ANE for 2002 to 2010:

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Deafening Silence in the Mainstream Media

Given the deafening silence in the mainstream media regarding Mr. Yergin’s many well-documented failed predictions, I am beginning to think that the mainstream media can’t afford to damage Mr. Yergin’s credibility. He is their designated expert on why Peak Oil must be some kind of hallucination – why we can’t believe what we are seeing. In fact, Mr. Yergin’s usefulness to the media will probably only increase as evidence for a near term peak/plateau in global production, and a peak in Global Net Exports, continues to accumulate. I suspect that we can look forward to even more instances of Mr. Yergin telling us why we can’t believe our lying eyes.

Jeffrey J. Brown is a licensed Professional Geoscientist and a member of the ASPO-USA Board of Directors. He has discovered several oil and gas fields in West Central Texas, and currently manages an exploration program searching for oil and gas fields in this region. Jeff has conducted analysis of the Peak Oil issue for several years, and has written andcoauthored several articles on Peak Oil related topics, with a special emphasis on world net oil export capacity.