Recently I was exposed to the concept of peak oil. This is the concept that at a certain point in time oil production reaches a plateau and then steadily declines. This concept can be applied to a single oil field, a country, or global world production. Every oil field follows a similar bell curve. As production begins, the bell curve steadily increases, eventually reaching an apex. This apex is called peak oil, and it does not last very long. Inevitably, production begins to decline, thereby creating the downward bell curve.
In the United States, peak oil occurred in 1970. That year, we produced 10 million barrels per day. The apex only lasted a few months and then production began to decline. Today we produce less than 5 million barrels per day and the decline continues unabated.
I knew that oil was a limited finite resource and that sometime in the future oil production would not meet world demand. I knew that day was approaching, but I always assumed it would not occur until at least 2015 and possibly 2025, and that by that time we would have a substitute. I was too optimistic.
I've read five books on the subject and countless internet articles. Trust me, I did my homework. My research led to three conclusions:
1. Within 3-5 years we will reach global peak production.
2. Within 3 years high oil prices will have begun creating economic havoc.
3. High oil prices will eventually collapse the economy.
The focus of my research tried to answer one question: When will we reach global peak production? The answer is soon (by my estimate within 3 years). Yes, new production is coming online, but there are a limited number of projects that will begin production in the next three years. These projects must offset annual production decreases at existing fields of at least 2%, and a projected annual demand increase of 2%.
To meet the expected 2% annual demand increase for the next three years (2006-2008), production must reach 90 million barrels per day. This will require an increase of 11 million barrels per day of new production (5.5 million barrels a day to meet new demand and 5.5 million barrels per day offset declining production at existing fields).
Can global oil production increase 11 million barrels per day over the next three years? Unlikely. What is much more likely is that peak oil production will never reach 90 million barrels per day, but something closer to 87. If you want an estimated time for peak production, my bet is 2007. This will also likely be the year when oil reaches $100 a barrel. We are literally on the precipice of $100 a barrel oil.
Let's look at the data:
Global demand was 77 million barrels per day in 2002. At the end of 2005, demand had risen to 83.5 million barrels per day. Thus, daily demand has increased on an annual basis of more than 1.5 million barrels per day since 2002. Furthermore, we can expect demand to increase 2% annually for the next three years. The result will be demand reaching 90 million barrels a day by the end of 2008.
Here are the calculations:
2006: 83.50 + 2% = 83.50 + 1.67 = 85.71
2007: 85.71 + 2% = 85.71 + 1.71 = 87.42
2008: 87.42 + 2% = 87.42 + 1.75 = 89.71
The problem we face is that to meet demand for the next three years we will have to annually produce an additional 3.4 million barrels per day to meet demand (1.7 million barrels per day for increased demand and 1.7 million barrels per day to offset production declines at existing fields. There are enough projects to meet demand in 2006, but 2007 becomes problematic, and 2008 becomes very unlikely.
Why is this happening? We stopped finding oil. Peak discovery was in 1965. Since then, discovery has steadily decreased. Buy 2010 discoveries will be paltry, likely only 3-4 billion barrels.
In 2004, 29.9 billion barrels of oil were consumed worldwide, while only 7.6 billion barrels of new oil reserves were discovered. Thus, we consumed 4 barrels for every barrel found.
In 2005, 30.4 billion barrels of oil were consumed worldwide, while only five billion barrels of new oil reserves were discovered. Thus, we consumed 6 barrels for every barrel found.
Perhaps the most significant evidence of peak oil is the decline of oil discoveries since 2000. For, without discoveries there will be no new production.
Year ------- Major Discoveries ---- Barrels Discovered
2000 ------- 13 ------------------ 17.9 (billion)
2001 ------- 6 ------------------- 10.4
2002 ------- 2 ------------------- 10.9
2003 ------- 1 ------------------- 7.7
2004 ------- 0 ------------------- 7.6
2005 ------- 1 ------------------- 5.0
With so little oil being found, there is not going be enough new projects to meet future demand.
Approximately 95% of all oil has been found. Thus, only about 100 billion barrels of conventional oil are left to be discovered (3 years supply). Of this 100 billion, there is likely only one or two major fields that will produce more than 100 thousand barrels per day. World demand has become so huge that this is a drop in the bucket.
There are approximately 1.3 trillion barrels of oil reserves claimed by oil companies (this does not include the Tar Sands in Canada or the extra heavy oil in Venezuela, which are considered unconventional). This number is inflated because OPEC countries over-estimate their total in order to get larger production quotas. It is projected that it will take 35 years to consume all of the remaining reserves. However, most likely, we only have 20 years of plentiful supply (oil available for sale on the global market). Once we get towards the end, there is going to be very little exporting.
Plentiful supply does not mean that demand is being met. For, demand will exceed supply long before we run out of plentiful oil, thereby disrupting the supply chain and causing economic havoc. This will likely occur this decade, although reaching peak oil does not necessarily mean there will be shortages. As we reach peak oil, the price will soar thereby depressing demand. This will allow supply and demand to find an equilibrium thereby reducing or possibly preventing shortages. This kind of market mechanics is the reason many economists dismiss peak oil in the near term. They expect the high price of oil to reduce demand and allow other energy sources¯that are currently not economical¯to provide our energy needs.
Peak production is also evident by the fact that production is either declining or on the precipice of decline in every country except Canada, Venezuela, and the Middle East (where the majority of reserves remain). Soon the Middle East (Canada and Venezuela's increases are minimal on an annual basis) will have to increase production dramatically on an annual basis to meet world demand. At a certain point this will not be possible and global peak production will be reached.
U.S. Government economic planners currently project global peak production to be around 2015. This seems way too optimistic to me. The current excess worldwide production capacity is estimated to be only 1.5 million barrels per day. In fact, only one country, Saudi Arabia, claims any excess production capacity. With future demand requiring at least 3.4 millions barrels per day of new production each year, this leaves new projects to meet demand.
Most researchers agree that peak oil is imminent. Here is a list of forecasts:
2005 ---------- Ken Deffeyes (Oil Geologist/Author "Beyond Oil")
2006 ---------- T. Boone Pickens (Oil Executive)
2006-2007 ----- A. M. S. Bakhitari (Iranian Oil Executive)
2006-2007 ----- Matthew Simmons (Banker/Author "Twilight in the Desert")
2007 ---------- Colin Campbell ((Oil Geologist/Author "The Coming Oil Crisis")
2007 ---------- Anonymous Pemex Oil Geologist (Oilcast #28)
2008 ---------- C. Skrebowski (Petroleum Economist)
Before 2010 --- David Goodstein (Cal Tech Professor/Author "Out of Gas")
After 2010 ---- World Energy Council
2016 ---------- EIA (US Government Energy Information Administration)
After 2020 ---- CERA (Cambridge Energy Research Associates)
In Saudi Arabia, which claims to hold a quarter of all global reserves (conventional oil), six giant fields produce 90 percent of their oil. All of these giants are old and likely past their peak production. In 1982, OPEC countries stopped releasing production and reserve numbers on a field by field basis. In effect, they became secretive and have remained secretive. For this reason, we can only estimate (guess) when each field will reach peak. What we do know is that they have had ongoing technical problems with each of their maturing giants. They have depended on water injection for decades and are now experiencing recurring high water cuts. In essence, they are pumping too much water out of the ground instead of oil.
From what I read in "Twilight in the Desert" by Matthew Simmons, the Saudis are struggling just to maintain production, let alone have the ability to increase it. According to Simmon's analysis, he thinks it is likely that one of their giants is on the precipice of decline. If they lose one giant, they will likely go into production decline as a country. Whereas, U.S. Government planners are expecting Saudi Arabia to increase their production to meet worldwide demand, even the Saudis have claimed that the best they can do by 2009, is 12.5 million barrels per day.
Production Decreases:
Currently 116 large fields produce nearly 50 percent of production. Most of these fields are old and in depletion. The fields below show the common theme of production declines at the world's giant fields. (numbers are production in barrels per day)
Oseberg (Norway) -------- 1994 (800 thousand) ---------- 2002 (200 thousand)
Brent (North Sea) -------- 1984 (450 thousand) ---------- 2001 (80 thousand)
Prudhoe (Alaska) -------- 1981 (1.6 million) ---------- 2000 (500 thousand)
Romashkino (Russia) -------- 1970 (1.6 million) ---------- 1998 (250 thousand)
Forties (North Sea) -------- 1977 (500 thousand) ---------- 2000 (50 thousand)
Samotlor (Russia) -------- 1978 (3 million) ---------- 2001 (300 thousand)
Daqing (China) -------- 2000 (1 million) ---------- 2006 (600 thousand)
Canterell (Mexico) -------- 2003 (2 million) ---------- 2009 (600 thousand)
Norway (All Production) -------- 2000 (3.1 million) ---------- 2005 (2.5 million)
U.K. (All Production) -------- 2000 (2.9 million) ---------- 2005 (1.7 million)
USA (All Production) -------- 2005 (5 million) ---------- 2010 (3.5 million)
When you look these numbers you can understand why the annual production decline is at least 2%. Once we get to 2010, the annual decline will be even higher. The reason for this is because we stopped finding giant fields after the 1970s. Most of the large producing fields today are old and mature and declining.
Estimated Production Increases (Next 3 years):
Currently there are only a limited number of new projects around the world scheduled to begin production in 2006-2008. If these projects cannot reach 11 million barrels per day, then will have likely reached peak oil and demand will not be met.
Location ------------------ Potential New Production in barrels per day
Deep Water --------------- 2-4 million.
(Brazil, Gulf of Mexico,
Angola and Nigeria)
Saudi Arabia --------------- 1-2 million.
Azerbaijan --------------- 400-800 thousand.
Canada --------------- 250-300 thousand.
Kazakhstan --------------- 200-500 thousand.
Iran --------------- 200-400 thousand.
Libya --------------- 100-500 thousand.
Russia --------------- 100-500 thousand.
Abu Dhabi --------------- 100-300 thousand.
Iraq --------------- 100-300 thousand.
Venezuela --------------- 100-200 thousand.
Australia --------------- 50-150 thousand.
Indonesia --------------- 50-150 thousand.
Congo --------------- 50-100 thousand.
Vietnam --------------- 50-100 thousand.
When you compare these new projects (5 to 10 million barrels of potential production) in tandem with global demand and production decreases over the next three years (11 million barrels), we are headed for peak oil production. I think production could reach 87 million barrels per day, but 90 million is unlikely. Every project would have to go perfectly, or else Saudi Arabia would have to make up the difference.
It is difficult to find information about projected production for future projects. One source I found, Jeff Rubin, the Chief Economist at CIBC Word Markets, predicts new oil production to be 3.5 million barrels per day in 2006, 3 in 2007, and 3 in 2008. If you add these up, he is expecting 9.5 million barrels of increased production over the next three years. If his numbers are right, the key for reaching peak oil before 2009 will be the net depletion rate. If this rate stays close to 2% then peak oil will not occur until after 2008.
Another source I found was Oilcast #28 on OilCast.com. This audio file includes an interview with a PEMEX engineer. He has a few insightful comments. 1) Peak oil will be somewhere between 85 and 90 million barrels per day. 2) The Saudi's are already producing at maximum capacity. 3) It is unlikely the Saudi's will produce much more than what they are currently producing.
If new projects do not meet demand, that leaves Saudi Arabia to fill the void. The producer of last resort. They claim that they will be able to increase production 2 million barrels per day over the next three years. I have my doubts.
In 1978 (the last year Aramco was ran by International Oil companies such as BP), Aramco publicly released reserves on a field by field basis that totaled 110 billion barrels in proven reserves. In 1979, Aramco changed from foreign stewardship to Saudi Aramco (The Saudi Royal Family). In 1982, after the formation of OPEC, the Saudis increased their reserves to 150 billion barrels, although they had not discovered any new fields. Today, they claim 260 billion barrels in proven reserves, yet have never provided any documentation to substantiate their claims.
What we do know about Saudi reserves is that no oil has been found in any significant quantities since 1978 (90% of their production is coming from old fields). In addition, we know that they have produced more than 75 billion barrels since 1978. So, if we are to believe their numbers, Aramco should have stated their reserves at 335 billion barrels (260 + 75) in 1978! This number is so inflated as to be ridiculous. The correct number is closer to 125.
When you put this smaller reserve number in perspective, you realize that Saudi Arabia is not the producer of last resort. In fact, it's possible that they have already passed peak production, which for them was 10.5 million barrels per day in 1980.
All OPEC countries have lied about their reserves in order to have larger quotas. It is considered normal business practices for OPEC members. Proof of this transgression was recently found in Kuwait. Petroleum Intelligence Weekly recently reported that Kuwait has 48 billion barrels of reserves, and not the 99 billion that they have claimed publicly. I would bet this is the same for all OPEC countries. This begs the question, how far off are the OPEC claimed?
Some people point to the huge unconventional reserves in Canadian Tar Sands as a producer or last resort for the global market. Current Tar Sand production in Canada is about 800 thousand barrels day and is increasing about 10 percent per year. They expect to produce about 2.5 million barrels a day by 2015.
There is a large quantity of Tar Sands in Canada. Current proven reserves are estimated to be 350 billion barrels. Potential reserves are projected to be as much as 2 trillion barrels. The problem is that it takes a long time to increase production of unconventional oil. Also, as more oil production comes online after 2015, production declines elsewhere will be intensifying. Even if Canadian Tar Sands production increases to 5 million barrels per day by 2025, this won't have much impact on global supplies.
Another producer with large potential production is Venezuela. They have potentially 1 trillion barrels of reserves in extra heavy unconventional oil. Their heavy oil production should increase dramatically. As oil prices increase, there is going to be a lot of investment in Venezuela. We should see 1-2 million barrels per day of heavy oil production sometime in the next decade. Like the Canadian Tar Sands, it will be a slow process to expand production.
Peak oil could be delayed until 2010, with small increases in 2008 and 2009. If this happens then we could see something like the following:
2007: 87 million barrels per day
2008: 88 million barrels per day
2009: 89 million barrels per day
However, demand will not be met in 2008 and 2009 and prices will be high, somewhere between $80 and $100. This is the best case scenario, with peak oil reaching around 90 million barrels per day in 2009 or 2010. On a positive note, if we don't have war in the Middle East, oil production could remain in the 80-88 million barrels a day range until around 2015, when there will begin a large drop off in production.
One factor that could delay peak oil beyond 2007 is curtailed demand from high prices. It looks like demand is going to increase less than the forecasted 2% in 2006. This could conceivably extend the peak to 2009. However, depletion could easily increase more than 2% annually, making any demand increase difficult to reach and thereby inducing peak oil.
Anyway you look at, peak oil is imminent. Demand is going to increase about 1 million barrels per day annually the rest of this decade and depletion is going to fall about 2 million barrels per day. Sometime soon it's not going to be possible to produce 3 million barrels of new oil in a calendar year. Let me make it easy to understand. This year we will produce about 3 million new barrels worldwide. Last year we only found 5 billion barrels, the least amount in decades. If we developed all of these 5 billion barrel reserves and they came online in the normal 3-7 year period, they would not produce 3 million barrels of new oil, but around half that much.
One thing I have learned from researching peak oil is that oil shortages are not inevitable in the short term. Oil companies could meet global demand for the rest of this decade and beyond. This possibility could occur if prices are high enough to significantly decrease demand. Once gasoline hits $5 to $7 per gallon, less people will be driving and demand will go down. This could prevent shortages. However, once peak oil is reached, there is nothing that will prevent high prices.
If prices are going to increase dramatically once we reach peak oil, at what point do these high prices collapse the economy? What can the economy absorb? $100 a barrel? $200? All of my research leads to one conclusion: we're screwed. We have become utterly dependent on cheap oil and it's about to get expensive. Initially, inflation is going to skyrocket as businesses increase their prices to pay their shipping/delivery bills. Consider how many delivery trucks are needed to move goods in this country. Consider global transportation costs for imported goods. I don't see how we can get through this without economic havoc.
The magnitude of the approaching oil crisis is beyond the average person's comprehension. It is such a huge problem that it is difficult to conceptualize the ramifications. For instance, how do we commute to work when it costs too much to drive? How do we pay for our food, gas, and electric bills when they double and triple from increased energy costs? It's mind boggling. All I know is that the world is about to change dramatically and know one seems prepared.
If you think there is a substitute for oil, there isn't, at least not one that can maintain our way of life. Substitutes are so lacking that the situation is dire. Ethanol and other biofuels are promising, but the volumes of production are unlikely to meet demand. Solar and wind are good choices, but they will take years of investment to have an impact. Hydrogen must be converted into an energy source, which requires energy.
It will be decades until an efficient conversion process is found. Nuclear is unlikely because of the huge cost and time required to build plants. Liquefied coal is also a long term possibility, but it will require new plants and billions of dollars of investment.
In the United States, our economy is incredibly dependent on oil. Approximately 95% of transportation fuel comes from oil, and currently there is no suitable replacement. We will eventually find one, but it does not exist today. We have become dependent on cheap oil and it is about to become expensive and in short supply. We've been making plans for a world that is no longer going to exist in its current form.
The way I see it, our only option is to start over. We have to create a new world based on less energy requirements. Although I am not excited about the prospect, I do see an opportunity to build a sustainable civilization. The shift towards this new way of life is not a decade away, but years. We are helplessly in the final months of cheap abundant oil.
TimesCast: Covering the Oil Spill and Other Top Stories(April 29, 2010)
