Analyzing the Global Oil Supply: 2012 Is the Year for Peak Oil

 |  Includes: DBO, OIL, USO
by: Devon Shire

I first want to make sure that we are on the same page as to what Peak Oil actually means. Here is the definition from Wikipedia which is basically how I understand it:

Peak oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline. This concept is based on the observed production rates of individual oil wells, and the combined production rate of a field of related oil wells. The aggregate production rate from an oil field over time usually grows exponentially until the rate peaks and then declines—sometimes rapidly—until the field is depleted. This concept is derived from the Hubbert curve, and has been shown to be applicable to the sum of a nation’s domestic production rate, and is similarly applied to the global rate of petroleum production. Peak oil is often confused with oil depletion; peak oil is the point of maximum production while depletion refers to a period of falling reserves and supply.

So just to be clear. We aren’t running out of oil. The problem is that we are at the point where we just can’t increase the rate at which we extract it. Since 2005 we have more or less been on a plateau when it comes to daily oil production. We are holding at the current level and running awfully hard just to stay there.

Supply Challenges – All the Easy Stuff Was Found Decades Ago

And why is it so hard to stay at or increase the current level of oil production ? Because we basically stopped finding conventional super-giant high production rate oil fields forty years ago. To be exact,our peak year of oil discoveries was 1965. Every year production rates from those super-giant fields decline and we have to bring many smaller fields on production simply to offset the declines. It is a treadmill that keeps going faster.
Here is a chart from ASPO Ireland that details oil discovery by year:

[Click to enlarge]

Click to enlarge

When you look at this chart, is it not common sense that as the production from the super-giant fields discovered in the 1960s declines, we simply do not have a sufficient inventory to replace it ?

What makes this more troubling is the fact that the technology we are now using to try and find new oil fields is exponentially superior to what we had at our disposal in the 1960s. And the economic motivation to find more oil has also been vastly increased because of the once unbelievable $100 per barrel price that it sells for.

Despite huge leaps forward in technology and financial incentive, we now every year discovery new oil reserves in an amount that is a fraction of the 1960s. We have reached our maximum rate of daily oil production. The only real question is how long can we hold it and how fast will the subsequent decline be ?

Demand Growth – The Other Side of the Problem

Our daily oil supply is already becoming a problem given current levels of oil demand and oil demand is the other problem we have. Demand is growing relentlessly, and that growth is coming from the billions and billions of people in emerging economies who are hungry for the Western lifestyle. Just as I think our supply challenges are obvious given our lack of recent success in finding new oil, I think the demand challenges are equally obvious. Consider the following numbers:
United States Daily Oil Consumption – 18.8 million barrels
United States Population – 309 million
United States Barrels per Person Per Day - .06
China Daily Oil Consumption – 8.3 million barrels
China Population – 1.33 billion
China Barrels per Person Per Day - .006
India Daily Oil Consumption – 3.1 million barrels
India Population – 1.18 billion
India Barrels per Person Per Day - .0026

The daily per barrel consumption statistics are startling. A Chinese person uses about 10% of what an American does on a daily basis. An Indian person uses less than 5%. If China and India’s per capita consumption levels were to increase to just 20% and 10% of America’s respectively world daily oil demand would increase by over 11 million barrels.

And it isn’t just China and India. Oil demand is growing in Brazil, the Middle East and everywhere that people are improving their standard of living or their population is growing.
2012 The Supply/Demand Challenges Are Going to Hit Hard

The Great Recession of 2008/2009 gave us a bit of a break and postponed the problem. After looking at the most recent information from the IEA, I think 2012 is where the reality of what we are facing is going to really hit home.

In July the IEA provided an outlook for 2012 oil demand. Here are their numbers for quarterly oil demand:
Q1 2012 – 90 million barrels per day
Q2 2012 – 89.5 million barrels per day
Q3 2012 – 91.75 million barrels per day
Q4 2012 – 92 million barrels per day
When you see anything over 90 million barrels per day, I think alarm bells should be going off, because here is the IEA recap of June 2011 daily oil supply:
"Global oil supply in June increased by 1.2 mb/d from May, to average 88.3 mb/d, with OPEC crude rising by 0.8 mb/d to 30 mb/d as Saudi Arabia boosted supply."

Here is the problem. Current daily oil production is 88.3 million barrels per day and the second half of 2012 expected daily oil demand is 92 million barrels per day. Current production is a 3.7 million barrel per day shortfall from where we need to be in 2012. Where can the oil to make up this shortfall reasonably be expected to come from ? 3.7 million barrels per day is 40% of Saudi Arabia’s current total oil production and they are currently banging up against the most oil they have ever produced on a daily basis. Does anyone really think they have another 3.7 million barrels of spare capacity ?

There is no way that the world can supply 92 million barrels a day of oil consumption. The only way to balance supply and demand therefore is on the demand side. And the only way to kill enough demand is with a high price.

You may have noticed in the IEA statistics above that current daily oil supply is already under current daily oil consumption. We are eating into inventories around the globe. We can’t see it in the American inventory numbers, but that is because American oil demand growth is not the issue. It is the growth in the emerging economies. Get your oil stocks now folks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.