Endless Oil: Peak Production vs. Oil Price

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 |  Includes: BP, OIL
by: Ferdinand E. Banks

”Endless Oil” is the title of a piece in BusinessWeek (Jan, 18, 2010) that was written by Stanley Reed. It was interesting for me because I remember a time when BusinessWeek would not have published a tissue of nonsense like that article. Perhaps even more important, I was surprised when I saw the names of some of the persons whose opinions were cited. All I can say is that my dream tonight might involve encountering them in a seminar room or conference; then they would find out the true state of the world oil economy.

Let me begin with the narrative that all of my energy economics students must know perfectly after my second lecture. The Russian oil output is probably close to peaking, and in any event the director of one of the largest Russian firms says that his country will never produce more than 10 million barrels per day (= 10mb/d). This number may be slightly wrong, but it happens to be one-tenth of the amount (= 100 mb/d) that the present CEO of Total (the French oil major) says is the absolute maximum for world production. (Another Total executive recently suggested 95 mb/d).

If this is not sufficient, consider the following. The discovery of what we think of as conventional oil peaked in 1965. In the early 1980s the annual consumption of oil became larger than the annual discovery, and at the present time only about 1 barrel of (conventional or near-conventional) oil is discovered for every 3 consumed. According to a BP (NYSE:BP) document, of 54 producing nations only 14 still show increasing production. 30 are past peak output, while output rates are declining in 10.

Non-OPEC countries produce 60% of world oil, and that output has peaked. It is also my opinion that while Russia may not join OPEC – or be allowed to join – it will go along with OPEC’s production agenda. OPEC is the arbiter of the world oil economy today and in the future, although that topic is too complex to be taken up in this note. Output in the U.S. peaked in 1970 at 9.5 mb/d, and production turned up when the giant Prudhoe field in Alaska came on line, but the previous peak was never attained. Instead the new peak was 7.5 mb/d. Today it is less than 6 mb/d, and steadily falling. North Sea oil (Norway + UK) peaked just before the end of the 20th century, and the super-giant Cantarell Field in Mexico – the third largest in the world – peaked slightly before that. Its decline is steeper than students of Mexican oil could possibly have expected.

Roughly two years ago the Saudi oil minister stated that his country would soon be producing 15 mb/d of oil in the not too distant future, and that output could be held for 50 years, but Saudi production has almost certainly peaked at less than 10 mb/d, despite what appears to be exceptional efforts to raise it to 10 mb/d after about 2005. Of course, as far as I am concerned, it does not make any difference what an oil minister or foreign oil expert says about Saudi intentions. Thirty years ago or so it was decided that (sustainable) Saudi production would never exceed 10 mb/d, although a surge output of 2 mb/d might be made available.

One of the persons cited in Mr. Reed’s article is Leonardo Maugeri, a senior executive of the Italian oil major ENI. He states that “there will be enough oil for at least 100 years.” Actually there will be enough for a thousand or more, but not enough to keep our Volvos in the fast lane up to the skiing and partying in the Midnight Sun at Riksgränsen in the North of Sweden. There should, however, be enough though for the lamps of China and Beverly Hills.

Peter Jackson, a director of Cambridge Energy Research Associates, has ostensibly reviewed data from the world’s biggest fields, and his conclusion is that 60% of their reserves remain available. This is the figure that Amy Jaffe gave me at a conference in Rome some years ago, and before the discussion ended I think that I convinced most of her audience that she did not know what she was talking about. In her opinion the “oil recovery rate” (from oil in place) would climb rapidly, and eventually could amount to more than 50%. In my oil book, written 30 years ago, the figure was 32%, and according to the article being discussed, it is still below 35%. I will admit however that at the time I wrote my book, I too believed that a large increase in the recovery rate would soon take place, however when an American businessman in Vienna called me a fool for entertaining that thought, I smartened up.

There was also some talk in the BusinessWeek article about “simple methods” that permit mature oil fields to uncover and produce additional oil. I discussed these in many articles and lectures, and the word I probably used the most was "disappointing." Unfortunately, the example given by Mr. Reed for these simple methods was Indonesia, whose output before WW2 was especially impressive, but which now is strictly a has-been. I don’t recall when the output of that country peaked, but I do recall someone saying that Indonesia will never again be an important oil producer.

Mr. Reed’s article was apparently written with the help of colleagues in Washington and Beijing, and this is the thing that is really sad, because the issue is no longer "peaks" but prices, and this should be appreciated by everybody – especially our political masters. I can identify four oil price shocks before the apparently sustainable rise in oil prices that began about 2004. Each of those four shocks was followed by economic downturns, and recovery was progressively slower. As for the sustainable rise from 2004 to the winter of 2008, this is a large but unfortunately unappreciated source of the macroeconomic misery we are experiencing today.

Like most teachers and researchers, I too have a forecast for the global oil production peak but, as far as I am concerned, when the price of oil can climb the way that it did a few years ago, that forecast is no longer interesting.

REFERENCES

Banks, Ferdinand E. (2010). ‘Oil, Money and Economic Theory. Energy Politics (forthcoming).

_____. (2010). Energy, Environment, and Economic Theory. London, New York and Singapore: World Scientific.

_____.(2007). The Political Economy of Energy: An Introductory Textbook. . London, New York and Singapore: World Scientific.