Peak Oil

Key Points

Peak Oil: Facts At Your Fingertips

Peak Oil Primer: The Oil Depletion Analysis Center

PEAK OIL: MYTH OR REALITY?

(see:The Oil Crunch, securing the UK's energy future)

  • There is no shortage of oil, but there is a shortage of cheap oil ($20-$30/bbl). Peak oil occurs when production can no longer be increased.
  • Hubbert's theory predicts remaining reserves (see: Hubbert Linearization)
  • "Today around 80% of the world’s oil and gas reserves are controlled by governments through national oil companies." - Lord Ron Oxburgh Former Chairman, Shell
  • 1 bbl oil = 21900 man-hours (60 man-years) of physical labor. Oil is essential for all aspects of modern life.
  • Definition: "Peak oil production is the point at which the depletion of existing reserves can no longer be replaced by additions of new flow capacity."
  • "No oil company would drill in ultra-deep water, or through thick salt deposits, or in the high Arctic, or deal with regimes who unilaterally change contract terms, if there was anywhere easier to go to find oil."
  • IEA warns of severe crunch by 2013, others expect earlier shortfall of supplies.
  • Problem is not reserves, but in bringing capacity on line to replace depletion of existing capacity
  • Tensions likely to increase as production peaks/plateaus and demand surges
  • Production figures of all the five major international oil companies have been falling for five consecutive quarters
  • Oil company infrastructure and workforce is aging
    • Average equipment age = 30 yrs
    • Average employee age = 49 yrs
  • Three possible scenarios:
    • Plateau beginning 2013, lasting 10 - 15 years
    • Descent - new discoveries and production fail to replace existing capacity
    • Collapse - Rapid production declines from supergiant fields
  • Alternative energy investment in 2007 was $150 bn, or ~11.5% of all energy expenditures ($1300 bn)
  • IEA 2006 World Energy Outlook: Non-OPEC peak within five years, then production from Saudi Arabia, Iran and Iraq must ramp up to meet demand and production loss
  • Need to consider geopolitical risk if world is dependent on three ME countries
  • IEA: “Prospects of even tighter natural gas markets at the turn of the decade”.
  • Production has been essentially flat since 2005. Remaining oil is in geographically remote areas, production has been nationalized to a large extent and the quality of crude is decreasing.
  • Citizens of oil producing countries have benefited from low oil prices and as a result demand has increased (see: Export Land Model)
  • Consumption in Organisation for Economic Co-operation and Development (OECD) countries [North America, Europe, Australia] has fallen during previous three years, while demand in ME, China and India is growing by 5-7%/yr
  • "Exploration and development costs have more than doubled in the last three years."
  • Since 1970's oil shocks, power production and industry consumption of oil has decreased to the point that very little remaining cuts are possible making oil very inelastic.
  • Unconventional sources (tar sands, heavy oil, oil shale, coal-to-liquids) are either difficult to produce rapidly or uneconomical. (see: EROI)
  • High costs and low production rates of Canadian tar sands result in significantly lower profits. "The fact that enormous sums are being invested confirms that the companies lack more profitable investment opportunities and need this capacity to try to maintain or enhance their production flows.
  • Future production estimates:
    • Analysis of reserves and discoveries trends - Reporting has been non-transparent (see: Discoveries)
    • Flow analysis, or megaprojects (see: Megaprojects). Time between discovery and first production is ~ 6 yrs.
      • 258 new projects due on-line between 2008 and 2016
      • Analysis is very accurate for next 6/7 years, reasonably good beyond that time
      • "The conclusion of the analysis is that there will be no net increases in oil flows after 2011 even if all planned projects come onstream more or less on time and achieve the anticipated production flows."
    • 84% of world production comes from 21 countries, four (Mexico, Indonesia, Norway, U.K., Venezuela?) are in rapid decline, produce 8.7 Mbd. Countries with potential for rapid increase are Iraq, Brazil, Angola, Kazakhstan and Azerbaijan producing 8.0 Mbd
    • In 1997 46.1 Mbd was produced from increasing countries, 15.3 Mbd declining. By 2007, 36.3 was increasing, but 36.6 was declining
    • Major oil companies are in decline. Peak years: Chevron peaked (2002), Royal Dutch Shell (2003), Total (2004), BP (2005), ExxonMobil (2006). Collective peak for 23 largest companies was 2006.
    • Depletion rates ~4-4.5%/yr = 3.48-3.92 Mbd (current production 87 Mbd) must be made up from new sources. IEA expects demand to increase 1.6%/yr. Rapid price increases expected beginning 2012 to reconcile supply/demand.
  • Alternative liquid fuel sources currently contributing significant quantities:
    • Biofuels: 1.4 Mbd (1.6%)
    • Canadian tar sands: 1.4 Mbd (1.6%)
    • Orinoco heavy oil: 0.6 Mbd (0.7%)
  • Only four fields produce more than 1 Mbd: Ghawar (Saudi Arabia), Greater Burgan (Kuwait), Cantarell (offshore Mexico) and Daqing(China). Only Ghawar is not in decline.
  • Only 507 giant oilfields (>500 Mb total reserves) have ever been discovered. Current production is 87 Mbd/day meaning a 500 Mb giant would provide less than 1 weeks worth of world oil consumption. (see Discoveries)
  • Number of giant fields discovered this decade: 16 in 2000, 9 in 2001, 2 in 2002, 1 in 2003, 2 in 2004, 2 in 2005, 1 in 2006, 1 in 2007 for a total of 34 (6.7% of all giant fields)
  • "The oil boom is over and will not return. All of us must get used to a different lifestyle." King Abdullah of Saudi Arabia

(see PEAK OIL: ALTERNATIVES, RENEWABLES, AND IMPACTS C. J. Wirth)

  • Global production is peaking and will begin to decline until all recoverable oil is depleted in a few decades
  • Alternative sources of energy will replace only a small fraction of the gap between declining production and increasing demand
  • The U.S. is highly dependent on imported oil for transportation, food production, industry, and residential heating. The nation will experience the impacts of declining oil supplies sooner and more severely than much of the world.
  • Conservation efforts in the U.S. cannot significantly alter the depletion rate because global demand is so high
  • U.S. coal production is also peaking leading to higher electricity rates
  • Within a few decades, the U.S. will lack automobile, truck, air, and rail transportation, as well as mechanized agriculture, adequate food and water supplies, electric power, sanitation, home heating, hospital care, and government services.
  • Alternative technologies: ethanol, biodiesel, biomass gas-to-liquid, coal gas-to-liquid, and hydrogen supply ~1% of annual U.S. consumption of petroleum products and cannot be ramped up quickly. Optimistically, could be increased to 4% by 2015.
  • Peak Oil:
    • First oil recovered was on land, easy to reach, under pressure and low sulfur content (sweet crude)
    • Remaining oil is offshore or farther from markets, lower quality and requires more money and energy (see EROEI) to extract
    • Rate of extraction will therefore drop until the energy required to extract the oil equals the energy content of the recovered oil
  • Hubbert correctly predicted U.S. oil would peak in early 1970's. This created the conditions for the energy crisis of the 1970's.
  • Hubbert predicted world peak production would occur in 1990s - 2000s. Consumption curtailment of 1970s pushed peak off somewhat
  • Of the 65 largest oil producing countries, 54 are past peak The oil supply tsunami alert
  • USGS and international energy agencies have been basing their reports on unreliable data from oil producing countries The Countdown for the Peak of Oil Production has Begun – but what are the Views of the Most Important International Energy Agency
  • Effects of peak natural gas are localized due to high expense of liquefying and transporting LNG.
  • Britain and U.S. are past natural gas peak which will lead to simultaneous energy crises. Natural Gas: how big is the problem?
  • A review of studies, commissioned by the National Energy Technology Laboratory of the U.S. Department of Energy, found that most independent studies concluded that the peak would occur by 2012.
  • Kenneth S. Deffeyes notes with the high profits generated by oil prices between $50 and $85 per barrel after 2005, “virtually all producers pumped every possible barrel.” (Need update through 2008)
  • PEAK OIL: THE END OF THE MODELING PHASE A.M. Samsam Bakhtiari
  • Oil Megaprojects forecasting estimates declines of 3% per year beginning in 2009 Oil Megaproject Update (July 2008)
  • Rembrandt Koppelar estimates 8% decline in existing oil production:
    • The end of the era of giant oil fields, where there was a sustained base of production of 40 million barrels per day, which is going to fall away
    • The end of a sharp increase in production thanks to deepwater, which is going to go away with an equally sharp decrease
    • The fact that the world has produced more reserves in the past three years than have been added from discoveries and reserve growth
    • The effect of above ground factors on production, which will lead to higher declines, because from 2009/2010 onwards there will be a significant gap between personnel supply and demand, there is a problem to scale up sufficient oil rigs for exploration and production, unrest and geopolitics are delaying new oil fields developments, and keeping production down in several countries such as Iraq, Venezuela and Nigeria, which is not likely to change for the better in the future
  • U.S. General Accountability Office and the World Energy Council, have concluded that extracting carbon from oil shale is not economically viable because its production consumes great quantities of energy and requires major capital investments.
  • In April 2008, Fatih Birol, chief economist at IEA, indicated that rising oil prices were not reducing demand and increasing supplies, as was the situation historically.
  • Several factors contribute to the Peak Oil crisis:
    1. Demand for oil is outstripping the supply of oil, demand has been increasing by 1.8% per year since 2005.
    2. U.S. EIA estimates demand growth from 85 Mbd to 97 Mbd by 2015, and 118 Mbd by 2030. The IEA expects 50% growth in demand by 2030.
    3. As soon as oil production begins to decline, the gap between supply and demand will widen and continue to widen, driving oil prices higher and higher as nations compete for dwindling supplies of the oil needed to maintain their economies.
    4. Conservation efforts in the U.S. would be offset by increased consumption by other nations
    5. Production costs grow exponentially as depletion progresses
    6. As depletion progresses more and more energy must be expended to extract, transport, and refine lower quality oil that contains less and less energy. Come on in - the quicksand's fine: my part in the energy crisis Chris Shaw
    7. Many oil exporting nations are experiencing both depletion and increased domestic consumption, these exporting nations will soon reduce exports. OPEC's Growing Call on Itself, Jeff Rubin
    8. Resource nationalism, war, sabotage, terrorism, and political instability threaten oil supplies. As the GAO noted, 60% of world oil reserves are “in countries where relatively unstable political conditions could constrain oil exploration and production.”
    9. Former CIA director James Woolsey (LOE) has explained how easily armed attacks could cut oil supplies from the Middle East.
  • The combination of declining oil production, increasingly more expensive oil production, and increasing world-wide demand for oil will generate enormous price increases in gasoline, diesel, heating oil, transportation, construction, manufactured goods, food, and all products that use oil for their production or transportation.
  • Rising inflation, high unemployment, and instability in financial markets will persist and deepen over time.
  • High unemployment will result in mortgage payment defaults and tax delinquencies. With many homes up for sale, housing prices will plummet.
  • Due to declining tax revenues, governments will lack the resources to provide basic services.
  • Oil currently accounts for about 43% of the world's total fuel consumption, and 95% of global energy used for transportation. (Peak oil primer)
  • For every one joule of food consumed in the United States, around 10 joules of fossil fuel energy have been used to produce it. Eating Fossil Fuels
  • As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented. (see Hirsch Report)
  • "The world has never faced a problem like this. Without massive mitigation more than a decade before the fact, the problem will be pervasive and will not be temporary. Previous energy transitions were gradual and evolutionary. Oil peaking will be abrupt and revolutionary." (Hirsch Report)
  • All alternative liquid energy sources combined could yield at most the equivalent of a few million barrels of oil per day, and most provide electric power which does not completely solve the liquid energy problems

The Peak Oil Crisis: Parsing the Numbers

  • The Director of The International Energy Agency said … investment in new oil production has fallen so low that whenever an economic recovery occurs, the oil to support the recovery is unlikely to be there. Supplies will be inadequate and prices will rise much as they did last summer choking off the recovery.
  • The CEO of France's major oil company, Total believes that the lack of investment in future oil production due to the economic slump has eliminated the chances of world oil production ever getting much beyond the levels we saw in the last two years. In a nutshell, the near-steady growth in the world's oil production that we have witnessed for the last 150 years is over.
  • Worldwide production of crude oil which makes up about 85 percent of the hydrocarbons sometimes called "all liquids" has remained on a plateau moving between 73 and 74 million barrels a day (b/d) for the last four years.
  • In recent months, OPEC has been cutting production, but the non-OPEC all liquids production seems to have been growing. This has resulted in a decline in output of about 500,000 b/d last month out of a total production of about 85 million b/d.

Peak Oil: Global Oil Production’s Peaked, Analyst Says (WSJ)

  • Global production of petroleum peaked in the first quarter of last year, says analysts Raymond James, which “represents a paradigm shift of historic proportions."
  • Raymond James’s notes that non-OPEC oil production apparently peaked in the first quarter of 2007, and given precipitous falls in oil output from Russia to Mexico, there’s not much hope for a recovery.
  • OPEC oil production actually fell even as oil prices were above $100 a barrel, a sign of the “tyranny of geology” that limits the easy production of ever-more crude.

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Rebuttals:
Estimates are totally worthless unless one can actually produce the oil. As Matt Simmons says, data trumps all theories. Non-OPEC has now fallen off its five year plateau. August non-OPEC production was almost 2 million barrels per day below its 05 peak. We don't really know how much OPEC can produce but I suspect they were near their peak before the current round of cuts. At any rate it is now doubtful that OPEC could grow fast enough to offset non-OPEC collapse.

The current world situation is just awful and the primary cause is sudden stoppage of the growth in oil supply that happened in 2005. The world's economy has only two states, growth or recession. Because the energy supply stopped growing then all industry stopped growing. The end of growth is the beginning of collapse.

High oil prices were the result of the end of energy growth. And the current collapse of oil prices is the direct result of the demand destruction brought about by those high prices. Now prices are much cheaper but there is less oil being produced now and industry cannot rebound without more oil. It will be a "Catch 22". If industry recovers then oil prices will be driven back up, driving the economy right back down again.

An ever growing energy supply combined with very cheap prices is the only thing that will pull the world's economy back up again and that will never happen….again.

Ron Patterson

I am beginning to believe it is an advantage to NOT work in the oil industry to understand oil. These people have been wrong, are wrong, and are about to be VERY wrong with their understanding of what peak oil means. Peak Oil has many definitions, but the most common is the all time high in world annual production of crude oil. Resources have little to do with it. (There are probably 10 million earthworms on my property -but even with a team of people and the best equipment I might only get a fraction of them). Higher prices and higher technology have little to do with Peak Oil, which has to do with cheap, reliable flow rates. There is not the slightest evidence that market theories (or activities) has helped find any more oil and gas (in the United States) since price-induced drilling increases had essentially zero impact on the production (or finding) of oil and gas.

Lets scrap the word 'peak oil' for the moment. To the economists and cornucopians at Exxon, the API, the EIA, etc. I ask these questions:

1)Do you expect oil production costs to get cheaper over time?

2) Have we past the point of cheap oil? (which is what matters - who cares if we can get an extra 20 mbpd if it takes more energy, more steel, more water and costs $500 per barrel)

3)Will the energy and other resources you use to procure oil and natural gas increase or decrease in the future?

4)Irrespective of resource or reserves, what will be the highest, reasonably low priced (say under $80 cost), FLOW rate that you can consistently provide that is not subject to geopolitical disruptions at the margin? (i.e. is there a perpetual cushion in case something goes wrong)

5)What is the error band and confidence interval you assign to your above answers? Are you willing to stake the future of industrial civilization on your answers? Even if there is a 5% chance that the resources you see translate to regular, cheap, flow rates of high quality oil, that is too big of a risk for society to take (and I think it is much higher than that).

You people are asking the wrong questions, because you've been focused on what you believe is the most important aspect of the problem - where IS the oil. That is a small part of the many more important questions, yet the group think and myopia has created an enormous blindspot. A couple months ago, if I would have told you the Federal Reserve would DOUBLE its balance sheet since the end of September, would anyone have believed me? Well, they did. Rules and facts change. Correlations that worked in the past are now uncorrelated. What was uncorrelated in the past is now completely correlated. Thats why economics isn't science. Its based on a moving target. Economists at the oil companies are trained to think in resources and price, not in energy costs and externalities. They will not see this Black Swan until it bites them in the ass.

Nate Hagens


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