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When the price of oil climbed above $50 a barrel in late 2004, public attention began to focus on the adequacy of world oil supplies—and specifically on when production would peak and begin to decline. Analysts are far from a consensus on this issue, but several prominent ones now believe that the oil peak is imminent.
Oil has shaped our twenty-first century civilization, affecting every facet of the economy from the mechanization of agriculture to jet air travel. When production turns downward, it will be a seismic economic event, creating a world unlike any we have known during our lifetimes. Indeed, when historians write about this period in history, they may well distinguish between before peak oil (BPO) and after peak oil (APO).
The oil prospect can be analyzed in several different ways. Oil companies, oil consulting firms, and national governments rely heavily on computer models to project future oil production and prices.
One approach—use of the reserves/production relationship to gain a sense of future production trends—was pioneered several decades ago by the legendary King Hubbert, a geologist with the U.S. Geological Survey. Given the nature of oil production, Hubbert theorized that the time lag between the peaking of new discoveries and the peaking of production was predictable. Noting that the discovery of new reserves in the United States had peaked around 1930, he predicted that U.S. oil production would peak in 1970. He hit it right on the head.
A second approach, separating the world’s principal oil-producing countries into two groups—those where production is falling and those where it is still rising—is illuminating. Of the 23 leading oil producers, output appears to have peaked in 15 and to still be rising in eight. The post-peak countries range from the United States (the only country other than Saudi Arabia to ever pump more than 9 million barrels of oil per day) and Venezuela (where oil production peaked in 1970) to the two North Sea oil producers, the United Kingdom and Norway, where production peaked in 1999 and 2000 respectively. U.S. oil output, which peaked at 9.6 million barrels a day in 1970, dropped to 5.4 million barrels a day in 2004—a fall of 44 percent. Venezuela’s output has dropped 31 percent since 1970.
The eight pre-peak countries are dominated by the world’s leading oil producers, Saudi Arabia and Russia. Other countries with substantial potential for increasing production are Canada, largely because of its tar sands, and Kazakhstan, which is still developing its oil resources. The other four pre-peak countries are Algeria, Angola, China, and Mexico.
The biggest question mark among these eight countries is Saudi Arabia. Its production technically peaked in 1980 at 9.9 million barrels a day and output is now nearly 1 million barrels a day below that. It is included as a country with rising production only on the basis of statements by Saudi officials that the country could produce far more. However, some analysts doubt whether the Saudis can raise output much beyond its current production. Some of its older oil fields are largely depleted, and it remains to be seen whether pumping from new fields will be sufficient to more than offset the loss from the old ones.
This analysis comes down to whether production will actually increase enough in the eight pre-peak countries to offset the declines under way in the 15 countries where production has already peaked. In volume of output, the two groups have essentially the same total production capacity. If production begins to fall in any one of the eight, however, world output could decline.
A third way to consider oil production prospects is to look at the actions of the major oil companies themselves. While some CEOs sound very bullish about the growth of future production, their actions suggest a less confident outlook.
One bit of evidence of this is the decision by leading oil companies to invest heavily in buying up their own stocks. ExxonMobil, for example, with the largest quarterly profit of any company on record—$8.4 billion in the last quarter of 2004—invested nearly $10 billion in buying back its own stock. ChevronTexaco used $2.5 billion of its profits to buy back stock. With little new oil to be discovered and world oil demand growing fast, companies appear to be realizing that their reserves will become even more valuable in the future.
Closely related to this behavior is the lack of any substantial increases in exploration and development in 2005 even with oil prices well above $50 a barrel. This suggests that the companies agree with petroleum geologists who say that 95 percent of all the oil in the world has already been discovered. “The whole world has now been seismically searched and picked over,” says independent geologist Colin Campbell. “Geological knowledge has improved enormously in the past 30 years and it is almost inconceivable now that major fields remain to be found.” This also implies that it may take a lot of costly exploration and drilling to find that remaining 5 percent.
This shrinkage of reserves is strikingly evident in the ratio between new oil discoveries and production of the major oil companies. Among those reporting that their 2004 oil production greatly exceeded new discoveries were Royal Dutch/Shell, ChevronTexaco, and Conoco-Phillips. On a global scale, geologist Walter Youngquist, author of GeoDestinies: The Inevitable Control of Earth Resources Over Nations and Individuals, notes that in 2004 the world produced 30.5 billion barrels of oil but discovered only 7.5 billion barrels of new oil.
The influence on oil production in the years immediately ahead that is most difficult to measure is the emergence of what I call a “depletion psychology.” Once oil companies or oil-exporting countries realize that output is about to peak, they will begin to think seriously about how to stretch out their remaining reserves. As it becomes clear that even a moderate cut in production may double world oil prices, the long-term value of their oil will become much clearer.
The geological evidence suggests that world oil production will be peaking sooner rather than later. Matt Simmons, head of the oil investment bank Simmons and Company International and an industry leader, says in reference to new oil fields: “We’ve run out of good projects. This is not a money issue…if these oil companies had fantastic projects, they’d be out there [developing new fields].” Kenneth Deffeyes, a highly respected geologist and former oil industry employee now at Princeton University, says in his 2005 book, Beyond Oil, “It is my opinion that the peak will occur in late 2005 or in the first few months of 2006.” Walter Youngquist and A.M. Samsan Bakhtiari of the Iranian National Oil Company both project that oil will peak in 2007.
Sadad al-Husseini, recently retired as head of exploration and production at Aramco, the Saudi national oil company, notes that new oil output coming on-line had to be sufficient to cover both annual growth in world demand of at least 2 million barrels a day and the annual decline in production from existing fields of over 4 million barrels a day. “That’s like a whole new Saudi Arabia every couple of years,” Husseini said. “It’s not sustainable.”
Adapted from Chapter 2, “Beyond the Oil Peak,” in Lester R. Brown, Plan B 2.0: Rescuing a Planet Under Stress and a Civilization in Trouble (New York: W.W. Norton & Company, 2006), available for free downloading and purchase at www.earth-policy.org/books/pb2.