The world is facing the looming reality of “practical” peak oil that is likely to be well short of geologic reality, according to Tom Petrie, vice chairman of Merrill Lynch & Co. Inc.


He recently traveled to the Middle East and spoke on his perspective to A&D professionals in Houston during NAPE Expo 2008. He added that, following his trip to the region, “it’s real clear (OPEC) is thinking in terms of $70 or higher as the irreducible minimum they want to defend at this time.”


He doesn’t expect oil prices below $60. “We are in for a challenging period—an exciting period—and one where the floor is likely to be somewhere in the $70 to $80 range and not likely back down to below $60.”


On the other end of the price spectrum, OPEC’s ability to cap commodity prices when they move higher is limited, he said, but it demonstrated in 2006 its ability to put a floor on falling prices. “We saw $75 oil that in a very short time went through $60 like a hot knife through butter. When it got to $50, the Saudis doubled their cutbacks versus what they committed to OPEC and we were back to $60 in very short order.”


On peak oil, in spite of long-term estimates of global resource potential, geopolitics and nationalistic politics will trump geology for access to those resources, he said, particularly in the Arctic and the Caspian Sea region where large remaining potential exists.


“We’re fast approaching an historic inflection point in our global energy balance,” he said. “Whatever the ultimate timing, practical peak oil is becoming broadly recognized as a real issue.”


Petrie cited the “gang of three”—Iran’s Mahmoud Ahmadinejad, Russia’s Vladimir Putin and Venezuela’s Hugo Chavez—as having the most near-term geopolitical influence on access to resources in key regions of the world.


These leaders “clearly believe that ‘less is more’ and that less is more is in their national interests. It’s clear that…we probably have a much higher (resource) potential than is likely to be realized.”


Middle Eastern countries are also gravitating their interest toward a power block developing in their “front yard” between Russia, China, Iran and India, and away from traditional ties to the West.


“This is something that didn’t exist in the Cold War but is very real today. It’s directing the attention of this region much more to the East than was ever the case (before). That’s why new and evolving resource priorities in this region are trumping the historic relationships that the U.S. and Europe have enjoyed in the Middle East.”


Saudi Arabia intends to become a major supplier of aluminum to Asia in the next 10 years, he said, involving energy-intensive development consuming half a million barrels of domestic energy not present today. “The implication is pretty obvious. We’ve got to factor in the extraordinary growth of energy consumption in the [Middle East] region.”


On the contrary, some economists recognize a pattern of behavior relating to plunging oil prices in the 1980s and a similar trend in modern statistics. But Petrie refutes that argument due to challenges in the deepwater Lower Tertiary plays, security in Iraq and access to the Caspian Sea.


Resource maturity in big old fields will also help mitigate this possibility, he said. World basins approaching 30 years old decline about 5% a year, resulting in a 16-million-barrel decline in daily output in five years. “I haven’t seen a finding of that combination of countries yet in the remaining resource potentials to be tapped, much less fully developed in that time frame.”

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