Renowned energy strategist sees extraordinary changes ahead
Mella McEwen
Oil Editor
Midland Reporter-Telegram
05/12/2006
As he prepared to discuss the future of the world's oil and natural gas business, Henry Groppe, a renowned oil and gas strategist and founder of the Groppe, Long & Littell consulting firm in Houston, urged his audience to keep two things in mind:
"One is the dominance of the oil and gas industry. It is part of everything in the world; it is vital to world economies and it has now passed agriculture as the biggest industry in the world. At a $60 price, the world's crude oil business is $1.75 trillion a year. Second, keep in mind that there are extraordinary changes ahead for Texas and for the United States."
Groppe, the luncheon speaker at Thursday's Fueling the Future Energy Conference, said he believes the world is facing a permanent oil shortage and is moving into a new era.
There are, he said, two dominant schools of thought on the future of the oil industry. "One is represented by my good friend Matt Simmons, who sees the imminent collapse of oil production and the end of oil as an available commodity. Then there is the Department of Energy and companies like Shell and Exxon who say production will be increased by 50 percent in the next 20 years. We disagree with both camps."
He is, he said, somewhere in the middle, noting that in 1985 he forecast oil prices would fall below $15 a barrel and in the 1990s when natural gas supply studies issued in 1992 and 1999 forecast 50 percent increases in natural gas supplies, he insisted gas production had peaked and entered long-term declines. Both predictions proved correct.
The world, he said, has entered an era of scarcity and rationing and "the question is, what price level is required to quash consumption and maintain demand?"
During the last price shocks of 1973 and 1979, he said, demand fell 10 percent, which led to the oil price collapse that hit in 1986. From 1979 to 1983, prices rose 75 percent while consumption fell 10 percent. From 1999 to today, oil prices have risen 225 percent yet consumption has risen 8 percent. Today, the developed world is barely back to the peak consumption levels reached in 1979 while growth is soaring in developing countries.
For those who believe in infinite crude supplies, "I offer a reality check," he said. If oil is in limitless supply, "why didn't we reverse the production decline in the United States? Home to a quarter of the world's production, the birthplace of much of the technology, home to the greatest collection of competitors in the industry? Yet we haven't reversed the near-50 percent decline since production peaked in the 1970s."
For a century, said Groppe, the nation's economy, society, military position in the world was based on limitless supplies of oil and gas at cheap prices. Today, with the peaking of domestic production and the nation's increasing reliance on imports, with world oil production peaking and a sharp jump in prices in a short period of time, the United States has become a part of the world with the highest energy costs, which will impact the nation's major petrochemical infrastructure. Already, industries have moved offshore because of high energy costs, he said, predicting that over the next 15 to 20 years, much of the nation's petrochemical industry will migrate to parts of the world with lower energy costs.
Energy demand is rising higher in developing countries like India and China, where he said economic growth and the rise of a middle class that wants cars and computers and washing machines "is unprecedented in history."
It is also creating a collision course between growing demand for energy by other countries and the flattening production rates of energy supplies. By the time the United States decides to take action, Groppe warned it could be too late.
"By the time we knock on every door, we'll find China and India have already made long-term arrangements," he said.
Not only must consumption be held in check but the nation must carefully study all alternative sources of energy, he said, and Texas -- and the Permian Basin -- can lead the way.
"Texas knows the most about energy and energy problems," he said. "We are facing a world in which we will have to work harder, longer and smarter. That is how we will substitute for the cheap energy we used to have."
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