“…a small think tank with a knack of spotting new trends…” – Geoffrey Lean, Telegraph.co.uk.
Chapter 2. Beyond the Oil Peak: The Coming Decline of Oil
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. The results from these models vary widely according to the quality of data and the assumptions fed into the models. Here we review several different analytical methods.
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. As a result of this example and other more recent country experiences, his basic model is now used by many oil analysts. 2
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 production, which peaked at 9.6 million barrels a day in 1970, dropped to 5.4 million barrels a day in 2004—a decline of 44 percent. Venezuela’s production has dropped 31 percent since 1970. 3
The eight pre-peak countries are dominated by the world’s leading oil producers, Saudi Arabia and Russia, producing roughly 11 million and 9 million barrels of oil a day in the fall of 2005. Other countries with substantial potential for increasing production are Canada, largely because of its tar sands, and Kazakh- stan, which is still developing its oil resources. The other four pre-peak countries are Algeria, Angola, China, and Mexico. 4
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. 5
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, this may well tilt the global balance to decline. 6
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. 7
Closely related to this behavior is the lack of any substantial increases in exploration and development in 2005 even though oil prices are 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. 8
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. The bottom line is that the oil reserves of major companies are shrinking yearly. 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. 9
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. 10
Sadad al-Husseini, recently retired as head of exploration and production at Aramco, the Saudi national oil company, discussed the world oil prospect with Peter Maass for the New York Times. His basic point was 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.” 11
Where are companies looking for more oil? Aside from conventional petroleum, the kind that can easily be pumped to the surface, vast amounts of oil are stored in tar sands and can be produced from oil shale. The Athabasca tar sand deposits in Alberta, Canada, may total 1.8 trillion barrels. Of this total, however, it is thought that not more than 300 billion barrels is recoverable. Venezuela also has a large deposit of extra heavy oil, estimated at 1.2 trillion barrels. Perhaps a third of it can be readily recovered. If Venezuela’s heavy oil is developed on a large enough scale, its oil production could one day exceed its 1970 historical peak. Oil shale concentrated in Colorado, Wyoming, and Utah in the United States also holds large quantities of kerogen, an organic material that can be converted into oil and gas. 12
How much oil can be economically produced from oil shale? In the late 1970s the United States launched a major effort to develop oil shale on the western slope of the Rocky Mountains in Colorado. When oil prices dropped in 1982, the oil shale industry collapsed. Exxon quickly pulled out of its $5-billion Colorado project, and the remaining companies soon followed suit. Since this process requires several barrels of water for each barrel of oil produced, water shortages in the region may limit its revival. 13
The one project that is moving ahead is the tar sands project in Canada’s Alberta Province. This initiative, which began in the early 1980s, is now producing a million barrels of oil per day, enough to supply 5 percent of current U.S. oil use. This tar sand oil is not cheap, however, and it wreaks environmental havoc on a vast scale. Heating and extracting the oil from the sands relies on the extensive use of natural gas, production of which has peaked in North America. 14
Thus although these reserves of oil in tar sands and shale may be vast, gearing up for production is a costly, time-consuming process. At best, the development of tar sands and oil shale is likely only to slow the decline in world oil production. 15
2. Vidal, op. cit. note 1; Jeffrey Ball, “Dire Prophesy: As Prices Soar, Doomsayers Provoke Debate on Oil’s Future—In a 1970s Echo, Dr. Campbell Warns Supply Is Drying Up, But Industry Isn’t Worried—Charges of ‘Malthusian Bias,’” Wall Street Journal, 21 September 2004.
3. DOE, EIA, “Table 11.5 World Crude Oil Production, 1960–2004,” International Energy Outlook 2004 (Washington, DC: 2004), at www.eia.doe.gov/emeu/aer/txt/ptb1105.html; Vidal, op. cit. note 1; International Energy Agency (IEA), IEA Data Services, at data.iea.org, updated August 2004.
4. Neil Chatterjee, “‘Peak Oil’ Gathering Sees $100 Crude This Decade,” Reuters, 26 April 2005; Javier Blas and Isabel Gorst, “Oil Production in Russia Stagnates,” Financial Times, 2 June 2005; Justin Blum, “Alaska Oil Field’s Falling Production Reflects U.S. Trend,” Washington Post, 7 June 2005; DOE, EIA, “Table 2.2 World Crude Oil Production, 1980–2003,” International Energy Annual 2003 (Washington, DC: 2005); Heather Timmons, “Shell Makes Another Cut in Reserves; Profit Jumps,” New York Times, 4 February 2005; DOE, EIA, “Kazakhstan,” EIA Country Analysis Briefs, (Washington, DC: updated July 2005); IEA, op. cit. note 3.
5. DOE, EIA, “Saudi Arabia,” EIA Country Analysis Briefs (Washington, DC: updated January 2005); Chatterjee, op. cit. note 4; Adam Porter, “Expert Says Saudi Oil May Have Peaked,” Al Jazeera, 20 February 2005.
6. DOE, EIA, op. cit. note 3; IEA, op. cit. note 3.
7. Michael T. Klare, “The Energy Crunch to Come,” TomDispatch, 22 March 2005; Jad Mouawad, “Big Oil’s Burden of Too Much Cash,” New York Times, 12 February 2005; Timmons, op. cit. note 4.
8. Mouawad, op. cit. note 7; Mark Williams, “The End of Oil?” Technology Review, February 2005; Vidal, op. cit. note 1.
9. Klare, op. cit. note 7; Timmons, op. cit. note 4; Walter Youngquist, letter to author, 29 April 2005.
10. James Picerno, “If We Really Have the Oil,” Bloomberg Wealth Manager, September 2002, p. 45; Klare, op. cit. note 7; Kenneth S. Deffeyes, Beyond Oil: The View from Hubbert’s Peak (New York: Hill and Wang, 2005); Richard C. Duncan and Walter Youngquist, “Encircling the Peak of World Oil Production,” Natural Resources Research, vol. 12, no. 4 (December 2003), p. 222; A. M. Samsan Bakhtiari, “World Oil Production Capacity Model Suggests Output Peak by 2006–07,” Oil & Gas Journal, 26 April 2004, pp. 18–20.
11. Peter Maass, “The Breaking Point,” New York Times Magazine, 21 August 2005.
12. Robert Collier, “Canadian Oil Sands: Vast Reserves Second to Saudi Arabia Will Keep America Moving, But at a Steep Environmental Cost,” San Francisco Chronicle, 22 May 2005; Vidal, op. cit. note 1; Walter Youngquist, “Survey of Energy Resources: Oil Shale,” Energy Bulletin, 24 April 2005; William Brown, DOE, EIA, discussion with author, 9 August 2005.
13. “US: Caution Warranted on Oil Shale” (editorial), Denver Post, 18 April 2005; Gargi Chakrabarty, “Shale’s New Hope,” Rocky Mountain News, 18 October 2004; Walter Youngquist, “Alternative Energy Sources,” in Lee C. Gerhard, Patrick Leahy, and Victor Yannacone, eds., Sustainability of Energy and Water through the 21st Century, Proceedings of the Arbor Day Farm Conference, 8–11 October 2000 (Lawrence, KS: Kansas Geological Survey, 2002), p. 65; Cavallo, op. cit. note 1.
14. DOE, EIA, “United States EIA Country Analysis Briefs (Washington, DC: updated January 2005); Collier, op. cit. note 12; Thomas J. Quinn, “Turning Tar Sands into Oil,” Cleveland Plain Dealer, 17 July 2005; “Exxon Says N. America Gas Production Has Peaked,” Reuters, 21 June 2005.
15. Judith Crosson, “Oil Prices Prompt Another Look At Shale,” MSNBC, 23 November 2004; Youngquist, op. cit. note 12; Youngquist, op. cit. note 13, p. 64; Vidal, op. cit. note 1.
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