Henry Groppe: IEA to blame for $100 oil spike (with transcript)

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16 Dec 2007 |
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David Strahan, former BBC journalist and author of The Last Oil Shock, interviews oil analyst Henry Groppe about the recent spike in oil prices. Download the mp3 or stream the audio (30 minutes), or read the transcript.

When the oil price soared to over $99 per barrel earlier this year, the cause was not surging demand, nor speculation, nor even impending peak oil, but a forecasting error by the International Energy Agency. That's according to a presentation by veteran analyst Henry Groppe, one of the most independent thinkers in the oil patch, at an investment conference organized by 13D Research in New York last week.

In an interview for GPM and lastoilshock.com, Mr Groppe went on to argue that Saudi Arabia can maintain current production for up to two decades, global peak oil will come in 2008, but that prices will nevertheless remain between $65 and $85 per barrel until around 2015.

The IEA was inadvertently responsible for record oil prices this autumn because of its bullish forecast – issued in September 2006 - that non-OPEC oil supply would grow by 1.8 million barrels per day the following year. According to Groppe, it was this that prompted the cartel to forestall an expected glut by cutting quotas by 1.7 mb/d in late 2006. However the IEA forecast proved wildly over-optimistic and the Agency now says non-OPEC output is likely to grow by just 500 thousand barrels per day. So when seasonal demand picked up this autumn "there wasn't enough oil" and prices soared.

The IEA has a history of over-estimating non-OPEC supply, but this time the predicted increase was the largest since 1984, a time when massive over-supply forced Saudi Arabia to slash output from 10 mb/d to 2.25 mb/d. This, says Groppe, "got the Saudis' attention".

Groppe's analysis challenges the growing belief that Saudi Arabian production cuts in recent years have been driven by geological constraints. The Houston-based consultant is convinced that the kingdom can maintain 8-9.5 mb/d for as long as two decades, and that it will also build a cushion of spare capacity. However he also believes global oil production will peak in 2008 because of steep declines elsewhere.

But in another challenge to conventional wisdom, Groppe insists that global peak oil is consistent with an oil price of $65-$85 until around the middle of the next decade – barring geopolitical spasms. That's because around 15 mb/d of oil consumption in the developing world is still used for electricity generation and other non-transport purposes for which there are much cheaper alternatives such as coal. The substitution of such fuel oil is already under way, particularly in China, and will allow oil consumption in the transport sector to keep rising despite the cap on overall production. It was the elimination of this kind of oil use in the US and Europe that led global oil consumption to drop by 8 mb/d between 1980 and 1985.

Groppe is a Houston-based contemporary of M. King Hubbert who founded the consultancy Groppe, Long, Littell over 50 years ago, and who claims to have forecast every major discontinuity in the oil market since then. If he is right about the role of the IEA in the recent price spike, it would be ironic that the OECD's energy watchdog, which routinely calls on OPEC to pump harder, should have scared the cartel into producing less. It would also be ironic that OPEC had been misled by the IEA, since Groppe's analysis has also exposed how OPEC's official production numbers are often falsely inflated by as much as 2 mb/d.

In a separate development, the IEA recently confirmed that it is reviewing its reliance on oil resource forecasts from the United States Geological Survey that are widely regarded as wildly over-optimistic.

David Strahan is an award-winning investigative journalist and documentary film-maker who, since the early 1990s, has reported and produced extensively for the BBC's Money Programme and Horizon strands. Strahan is the author of The Last Oil Shock: A Survival Guide to the Imminent Extinction of Petroleum Man and is a trustee of the Oil Depletion Analysis Centre.

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AudioHenry Groppe: IEA to blame for $100 oil spike (audio) (length 30 min): download, stream
Read transcript: English

Groppe on the IEA and the Saudis

David- I recently read your interview with Mr. Groppe. It was enjoyable and insightful and I have the greatest respect for Mr. Groppe and his firm. However, upon reflection, I believe there are some serious holes in his conclusions about the Saudis and their role in the run-up of energy prices in 2007. To begin with, Mr. Groppe mentions that he has been going to Saudi Arabia for over 50 years and ( I assume) his firm has done consulting work there for decades. Mr. Groppe also tells us in this article that his firm has evaluated oil sales to other countries ( a better yardstick than export numbers given by OPEC members and Non-OPEC exporters). I agree, and applaud the valuable work his firm does. He also goes on to compliment the Saudi Government's decision made many years ago to use Exxon business models in drilling, production, processing and industry evaluation. All very good. And finally, he exposes the ignorant and bumbling manner that the IEA uses to come up with their forecasts. Sounds spot on. Mr. Groppe has done business in The Kingdom for 50 years, and his company has compiled an enviable database of really accurate production data. I cannot believe that they ( the Saudi Oil Ministry) did not have the very data he developed!!! If you were the oil minister you would pay serious attention to that data that Mr. Groppe probably provided..... and probably was able to provide to them on a monthly basis. I think they know what the real non- OPEC numbers were and I think their own commercial intelligence activities and data gathered by Mr. Groppe's firm and others would lead them to the conclusion that the IEA's numbers were badly inflated.....AS USUAL. These are very tough, rational people and they certainly have the resources (and the will) to use them to that end. If it was not a simple miscalculation... what was it? Perhaps a way to break the Russians with their leveraged economy? A way to draw a huge amount of additional speculative capital into alternative projects-e.g. the Canadian Oil Sands.... and then resume normal production volumes after lower prices reduced the viability of the projects ( or any expansion of them)? A way to destabilize our over-leveraged capital structure and then purchase components of our economy very cheaply? I apologize if I seem to be espousing conspiracy theories. However, there are many examples of how producers ruthlessly attempted to destroy their competition over the last 100 years by alternately contracting and expanding supplies. I think they have studied these case histories every bit as closely as any current production data or sound management techniques. Best regards, Sicilian