Oil may have a lesson for goldOil may have a lesson for gold
By: Tim Wood
Posted: '20-MAY-04 19:00' GMT © Mineweb 1997-2004
NEW YORK (Mineweb.com) -- Hubbert's Peak is becoming a popular term now that oil prices have breached $40 per barrel. Perhaps there's a lesson to be transposed to the precious metals business.
Hubbert's Peak asserts that oil, like many natural resources, is a finite resource. Production will peak and begin to fall off until the resource is depleted. Although the oil price is carrying a rich terrorism premium, there is increasing fear that Hubbert's Peak is finally here as a global phenomenon, underpinning permanently high prices.
We've become complacent because technology and price tended to fix the problem. Lateral drilling, 3-D geology and other advances made it possible to find new sources of oil. Also, strange things are happening in deep sea oil fields where unexplained replenishment is occurring. That helped oil output to grow again through the 1990s toward a new peak above 80 million barrels per day.
Hysteria mongerers like Paul Ehrlich haven't helped, persistently making false resource shortage predictions . The apocalypse's own professor was so despondent in 1971 that he anticipated having to become a survivalist within a year. He's just written his latest doomsday effort, One With Nineveh. So much for the world coming to an end before disco could get as out of hand as it did.
Back to reality. China and India are growing like America was a little under a century ago. That requires oil. Lots of it. There is still a lot of oil left in the world, but the cheapest most accessible sources have been tapped according to Hubbert's Peak aficionados. Add to that Middle Eastern turmoil with Saudi Arabia at severe risk of a coup that might install anti-Western ascetics who would like nothing more than to cap well heads thereby starving the infidels and the decadent Saudi royal family in one move.
There is also the Royal Dutch Shell oil reserve scandal, which has raised suspicion about the quality of global reserves in aggregate. A primary reason for this is that OPEC determines output quotas based on reserves so there is a bias toward inflating the numbers, as was the case with Shell in Nigeria. There are growing concerns that Saudia's primary fields are crippled, whilst Iraq has run its giant fields on the basis of maximizing cash flow, not sound engineering. Similar problems afflict the gas industry.
All indications are that by the end of this decade it will cost a whole lot more to get oil because it must come from deep sources or Canadian tar sands that are themselves energy intensive. Whilst $40 a barrel may be a bit rich, $30 a barrel looks like it's here to stay in the absence of rapid uptake of competitive nuclear, solar and hydrogen alternatives, or environmentalists being defeated to allow substantive exploration and production in the US. There is also significant potential for the price to gap up if there is a severe or cumulated disruption in supplies, which could come from several sources - political instability, depleted tanker capacity, aging refineries with inadequate capacity.
Hubbert's Peak can be reasonably transposed onto the gold industry.
The world's dominant gold producer, South Africa, is in accelerated decline as mines go deeper and become more life threatening, exacerbated by rising pay limits. Andisa Securites analyst, Dr David Davis, said recently that the strong rand could cut SA gold production in half, or by 200 tonnes, by 2010.
There is no sizeable alternative to South Africa with American, Canadian and Australian production also aging or more prone to regulatory interference. China and Russia are carrying a lot of hope, hence the hype, but in aggregate future ounces will be increasingly expensive to find and pour, plus be in inhospitable places. The industry has not made big discoveries in recent years, finding instead the sort of scrappy deposits that are closer to the mean but less useful to the large consolidated companies.
The difference, of course, with oil is that there is 13 years of gold supply sitting in central bank vaults; already being actively released. There are those who infer that the stocks are neutralized by an equivalent short position, but the evidence for it remains circumstantial. Physical consumption trends are also not pleasing, which could extend overall supply life.
The gold market actually needs South Africa to drop that 200 tonnes of production because it would sterilize the impact of 480 tonnes (15.4moz) in potential new annual production to 2010 from 37 large gold projects (+250koz). There is possibly another 10 tonnes a year due from mines that will output less than 250,000 ounces a year.
Not all of those gold projects will definitely go ahead, but it's clear that for at least the next 10 years there remains a large supply that could sustain production at current levels. Indeed, many of those ounces appear to be on the wrong side of Hubbert's Peak - they will be increasingly expensive and difficult to turn to account without a technology revolution.
Also, there is every reason to worry that geologists are unlikely to find deposits to match industry bellwethers like Telfer, Alto Chicama and Pascua Lama, the only long-life mega mines on the immediate horizon that are not too vulnerable to shocks.
By 2010 we'll have a very good idea of whether or not Hubbert's Peak holds for gold. Just as oil production slumped into the late 1970s only to grow again through the 1990s, so did gold. Both products are seen to have hit peak production around the turn of the millennium with sharp declines about to start. Gold has no tar sands and shales to fall back on though. Dr Martin Murenbeeld is one of the experts forecasting a severe decline in gold production over the next 7-8 years, based primarily on fitting production to a lagged price curve