“…a small think tank with a knack of spotting new trends…” – Geoffrey Lean, Telegraph.co.uk.
Chapter 2. Deteriorating Oil and Food Security: The Coming Decline of Oil
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. There was no consensus on this issue, but several prominent analysts now believe that the oil peak is imminent. 7
Various approaches are used to analyze the oil prospect. Oil companies, oil consulting firms, and national governments rely heavily on computer models to project future oil production and prices. As with any such model, the results vary widely, depending on the quality of data and the assumptions fed into them.
Another approach uses the reserves/production relationship to gain a sense of future production trends. This was pioneered in 1956 by the legendary M. King Hubbert, a geologist with Shell Oil and later 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 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. 8
A third approach separates the world’s principal oil-producing countries into three groups: those where production is falling, those where production is still rising, and those that appear to be on the verge of a downturn. Of the leading oil producers, output appears to have peaked in a dozen or so and to still be clearly rising in nine. 9
Among the post-peak countries are the United States, which peaked at 9.6 million barrels a day in 1970, dropping to 5.1 million barrels a day in 2006, a decline of 47 percent; Venezuela, where production also peaked in 1970; and the two North Sea oil producers, the United Kingdom and Norway, where production peaked in 1999 and 2000, respectively. 10
The pre-peak countries are dominated by Russia, now the world’s biggest oil producer, having eclipsed Saudi Arabia in 2006. Other countries with substantial potential for increasing production are Canada, largely because of its tar sands, and Kazakhstan, which is developing the large Kashagan oil field in the Caspian Sea. The other pre-peak countries are Algeria, Angola, Brazil, Nigeria, Qatar, and the United Arab Emirates. Libya, which is now producing 1.7 million barrels a day, plans to double its output to over 3 million barrels a day, close to the 3.3 million it produced in 1970. 11
The next group are countries that appear to be nearing a period of production decline, including Saudi Arabia, Mexico, and China. The biggest question mark among the major oil producers is Saudi Arabia. Saudi officials claim that the country can produce far more oil. But the Ghawar oil field that has supplied half of Saudi oil output is 50 years old and is believed by many analysts to be in its declining years. With the crown jewel of world oil fields and other older Saudi fields largely depleted, it remains to be seen whether pumping from new fields will be sufficient to more than offset the loss from the old ones. Somewhat ominously, Saudi oil production data for the first eight months of 2007 show output of 8.37 million barrels per day, a 6-percent drop from the 8.93 million barrels per day of 2006. If Saudi Arabia does not move much above its current level, which I suspect may be the case, then peak oil is on our doorstep. 12
In Mexico, the second-ranking supplier of oil to the United States after Canada, production apparently peaked in 2004 at 3.4 million barrels per day. Geologist Walter Youngquist notes that Cantarell, the country’s dominant oil field, is now in steep decline, and this could make Mexico an oil importer by 2015. China, producing slightly more than Mexico, may also be approaching its peak year. The question is, will production actually increase enough in the pre-peak countries to offset the declines under way in the post-peak countries? 13
Another clue to the oil production prospect is the actions of the major oil companies themselves. Although oil prices have risen well above $50 a barrel, there have not been any dramatic increases in exploration and development. This suggests that the companies agree with the 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.” The bottom line is that the oil reserves of major companies are shrinking yearly. 14
Sadad al-Husseini, former head of exploration and production at Aramco, the Saudi national oil company, pointed out in an interview that new oil output coming online had to be sufficient to cover both estimated annual growth in world demand of 2 million barrels a day and the annual decline in production from older 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.” 15
The geological evidence suggests that world oil production will be peaking sooner rather than later. Matt Simmons, a prominent oil investment banker, 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, said 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. Samsam Bakhtiari of the Iranian National Oil Company both projected that oil would peak in 2007. 16
It is quite possible that Deffeyes, Youngquist, and Bakhtiari are close to the mark. The International Energy Agency (IEA) reports that world oil production in 2005 of 84.39 million barrels per day rose to 85.01 million barrels per day in 2006. For the first nine months in 2007 output averaged 84.75 million barrels per day, slightly less than in 2006. Whether output in the last three months of the year will rise enough to take the annual output above the 2006 level remains to be seen as of this writing. Whether it does or not, there is a clear loss of momentum in production growth that, in the face of rising oil demand, will almost certainly translate into higher oil prices in the near term. 17
Yet another way of assessing the oil prospect is simply to look at the age of the major oil fields. Of the top 20 fields ever discovered in terms of oil reserves, 18 were discovered between 1917 (Bolivar in Venezuela) and 1968 (Shaybah in Saudi Arabia). The 2 more recent discoveries, Cantarell in Mexico and East Baghdad Field in Iraq, were discovered during the 1970s, but none have come since then. Even Kashagan, the only large find in recent decades, misses making the all-time top 20. With so many of the largest oil fields aging and in decline, offsetting this with new discoveries or stepped-up production at existing fields using more advanced extraction technologies will become increasingly difficult. 18
If 2006 does turn out to be the historical peak in world oil production, and if the output trend follows a bell-shaped curve, one where the shape of the curve on the ascending and descending sides is more or less symmetrical (as with the classic Hubbert’s Peak curve), then we can use the recent historical trend to estimate the likely future trend. In recent decades, politics and prices influenced oil production levels, but we may now be moving into an era of aging oil fields where geology will largely determine production trends.
Based on this, to project oil production from the peak year 2006 to 2020 we simply go back 14 years, to 1992. Output that year averaged 67 million barrels per day. It then climbed to 85 million barrels per day in 2006, an increase of 18 million barrels per day. If the production decline is symmetrical, then output per day in 2020 would again be 67 million barrels, a drop of 21 percent. Assuming a 1.1 percent annual rate of world population growth from 2006 to 2020, for a total growth of 16 percent, oil supply per person would drop by a staggering 32 percent in just 14 years. In stark contrast to this projection of 67 million barrels per day in 2020, based on the Hubbert’s Peak curve, the IEA is projecting world oil output in 2020 at 106 million barrels per day. 19
If production did peak in 2006 and if future production does follow the Hubbert curve, what are the options? One is to look for oil in even more remote places. Some of the estimated 5 percent of conventional oil not yet discovered may be in the Arctic. With the prospect of an ice-free Arctic Ocean within a few decades, countries bordering the Arctic are beginning to think about oil exploration within the region. Looking for oil in the polar region will raise scores of geopolitical issues, including who controls what parts of the Arctic and what environmental regulations should cover the development of any oil discovered there.
Aside from conventional petroleum, which 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. Only about 300 billion barrels of this may be recoverable, however. 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. 20
Oil shale concentrated in Colorado, Wyoming, and Utah in the United States holds large quantities of kerogen, an organic material that can be converted into oil and gas. In the late 1970s the United States launched a major effort to develop the 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 extracting oil from shale requires several barrels of water for each barrel of oil produced, water scarcity may limit its revival. 21
The one project that is moving ahead is the tar sands project in Canada’s Alberta Province. Launched in the early 1980s, it is now producing 1.4 million barrels of oil a day, enough to meet nearly 7 percent of current U.S. oil needs. This tar sand oil is not cheap, however, and it wreaks environmental havoc on a vast scale. 22
Producing oil from tar sands is highly carbon-intensive. Heating and extracting the oil from the sands relies on the extensive use of natural gas, production of which has already peaked in North America. As peak oil analyst Richard Heinberg notes, “Currently, two tons of sand must be mined in order to yield one barrel of oil.” The net energy yield is low. Walter Youngquist notes, “It takes the equivalent of two out of each three barrels of oil recovered to pay for all the energy and other costs involved in getting the oil from the oil sands.” 23
Thus although these reserves of oil in tar sands and shale may be vast, gearing up for production is a costly, climate-disrupting, time-consuming process. At best, the development of tar sands and oil shale is likely only to slow the coming decline in world oil production. 24
One of the influences 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 can double world oil prices, the long-term value of their oil will become much clearer.
7. U.S. Department of Energy (DOE), Energy Information Administration (EIA), “Select Crude Oil Spot Prices,” at www.eia.doe.gov/ emeu/international/crude1.html, updated 20 October 2007; John Vidal, “The End of Oil Is Closer Than You Think,” Guardian (London), 21 April 2005; Alfred J. Cavallo, “Oil: Caveat Empty,” Bulletin of the Atomic Scientists, vol. 61, no. 3 (May/June 2005), pp. 16–18.
8. Vidal, op. cit. note 7; M. King Hubbert, “Nuclear Energy and the Fossil Fuels,” paper presented at the spring meeting of the Southern District Division of Production, American Petroleum Institute, March 1956.
9. DOE, EIA, “Table 4.1: World Crude Oil Production, 1970–2006, Selected Countries,” at www.eia.doe.gov/emeu/international/oilproduction.html, viewed 14 September 2007.
10. Production figures are for crude oil, including lease condensate, from DOE, op. cit. note 9; Vidal, op. cit. note 7; DOE, EIA, “Petroleum (Oil) Production,” International Petroleum Monthly, at www.eia.doe.gov/ ipm/supply.html, updated 12 July 2007.
11. DOE, op. cit. note 9; Klare, op. cit.note 4; Paula Dittrick, “CGES: OPEC Pushing Limits of Oil Production Capacity,” Oil and Gas Journal, 20 October 2004.
12. Neil Chatterjee, “‘Peak Oil’ Gathering Sees $100 Crude This Decade,” Reuters, 26 April 2005; Adam Porter, “Expert Says Saudi Oil May Have Peaked,” Al Jazeera, 20 February 2005; James D. Hamilton, “Running Dry?” The Atlantic, October 2007; IEA, op. cit. note 3.
13. DOE, op. cit. note 9; Vidal, op. cit. note 7; Walter Youngquist, geologist, letter to author, 12 September 2007.
14. Michael T. Klare, “The Energy Crunch to Come,” TomDispatch.com, 22 March 2005; Jad Mouawad, “Big Oil’s Burden of Too Much Cash,” New York Times, 12 February 2005; Mark Williams, “The End of Oil?” Technology Review, February 2005; Vidal, op. cit. note 7.
15. Peter Maass, “The Breaking Point,” New York Times Magazine, 21 August 2005.
16. James Picerno, “If We Really Have the Oil,” Bloomberg Wealth Manager, September 2002, p. 45; Klare, op. cit. note 14; 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 Resource 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 and Gas Journal, 26 April 2004, pp. 18–20.
17. IEA, op. cit. note 3; IEA, Oil Market Report (Paris: May 2007).
18. Fredrik Robelius, Giant Oil Fields—The Highway to Oil (Uppsala, Sweden: Uppsala University Press, 9 March 2007).
19. IEA, op. cit. note 3; IEA, Oil Market Report (Paris: July 1993); U.N. Population Division, World Population Prospects, op. cit. note 2; IEA, World Energy Outlook 2006 (Paris: 2006), pp. 85, 492.
20. 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 7; Walter Youngquist, “Survey of Energy Resources: Oil Shale,” Energy Bulletin, 24 April 2005.
21. 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 7.
22. Collier, op. cit. note 20; Alberta Energy and Utilities Board, Alberta Energy Resource Industries Monthly Statistics, at www.eub.ca, viewed 8 August 2007; BP, BP Statistical Review of World Energy (London: June 2007).
23. “Exxon Says N. America Gas Production Has Peaked,” Reuters, 21 June 2005; Collier, op. cit. note 20; Richard Heinberg, “The End of the Oil Age,” Earth Island Journal, vol. 18, no. 3 (Fall 2003).
24. Youngquist, op. cit. note 20; Youngquist, op. cit. note 21, p. 64; Vidal, op. cit. note 7; WWF-Canada, “Oil Sands Pushing Canada Further from Kyoto, WWF and UK Think-Tank Warn,” press release (Toronto: 6 June 2007).
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