Peak Oil: The Next 5 Years

I suppose this post should be titled, "Why you want to own long term oil futures." The following graph of "all liquids" supply and demand going forward five years gives us an basis to compare recent observations on peak oil by Matt Simmons, Charlie Maxwell and Chris Skrebowski, three very astute oil observers, and draw some conclusions. The graph represents recent IEA estimates of supply and demand. I found it in a discussion posted on HoweStreet.com. Here it is:

Supply

Overall, the chart implies ample supply in 2008, a possibility of pinched supply in 2009, a squeeze in 2010, and a serious shortfall thereafter. Let’s see how it gets there.

First, non-OPEC oil production is expected to grow about 700kb/d in 2008 and by lesser but still positive amounts thereafter. Charlie Maxwell, on the other hand, has predicted that non-OPEC supply will peak in 2008. Compared with Charlie’s vision, this chart is extremely optimistic for 2009, a bit less so for 2010, and still optimistic for 2011 and 2012 by about 500,000 b/d. Charlie believes non-OPEC crude will decline on a net basis after 2008.

Second, biofuels growth is expected to be fairly minimal in 2008, about 300 kb/d, and then decline to almost nothing. This estimate is consistent with observations that I recently posted that were first published in Oil and Gas Journal, the thrust of which is that we have already seen the easy growth of ethanol, substituting for MBTE. The argument is that future ethanol growth will be contained by limitations on ethanol distribution and mixture capacities.

Third, natural gas liquids: these are oil-like deposits found in a form like natural gas when the pressure of an old field is declining. They have been a major source of oil-like liquids in the past two or three years and are projected in this graph to grow strongly in 2008 and 2009, but to become a negligible factor thereafter. Matt Simmons has written that natural gas liquids cannot continue to grow. The graph may be especially optimistic about 2009.

The final supply category is "OPEC Capacity Growth". This category does not forecast actual production but assumes OPEC is the swing producer and forecasts only its capacity to produce. That number increases 1 mb/d in 2008 and 2010, about 500 kb/d in 2009, 700 kb/d in 2011, and 350 kb/d in 2012 for a total of 3.5 mb/d over the five years. This number seems quite optimistic unless Iraq and Nigeria settle their political disputes and channel peace into oil production improvement. Saudi Arabia has indicated it will increase supply by 2.5 mb/d over this time frame, but that claim is not universally respected.

In summary, this forecast seems extremely optimistic in terms of non-OPEC oil production, somewhat optimistic about natural gas liquids, and dependent on favorable political events in Iraq and Nigeria to meet its expectations for OPEC increases. Overall, it is substantially more optimistic than Skrebowski, who expects oil production to peak about 2010 and Maxwell who expects it to peak in 2013 but to become insufficient to meet demand in 2010. Simmons believes it has already peaked. This graph shows it continuing to grow through 2012.

For the sake of comparison, below is a chart reproduced in the Simmons piece showing the production expected by a middle eastern analysts whom Simmons calls optimistic but the best informed person of that region.

Source: Sadad Al-Husseini – 2007 Oil & Money Conference, October 31, 2007

This analysis shows oil peaking around 2011 but at a level that is only about 2 mb/d greater than 2007. That growth rate is not sufficient to satisfy demand growth.

Demand

Let’s now turn to demand. The IEA’s graph shows three levels of demand based on a low, middle and high rate of global GDP growth. Let’s just assume that the low level, 3.2%, is correct, given the recessionary environment we are entering. This level shows growth in 2008 of 1.8 mb/d, declining to a flat 1.5 mb/d for the following four years.

We know that virtually all growth in oil demand is coming from the oil exporting and the developing economies. We also know, that their dynamism is based on the social demands and positive economic stimulus provided by their export of goods, services and/or commodities. Oil demand increases are not coming from OECD countries.

Thus, regardless of economic softness that may dominate OECD countries for some period ahead, the assumption of oil demand growth in the 1.5 - 1.8 mb/d range seems completely realistic.

Conclusion

The HoweStreet piece features an extremely worthwhile interview with Simmons that is in three parts. In it, Simmons maintains that the difference between peak oil believers and peak oil optimists is that the former focus on flow rates and the latter on hydrocarbons in the ground. Industry people tend to believe that there are plenty of hydrocarbons around and increasing flow rates is a relatively straightforward matter of applying sufficient capital to get the hydrocarbons into production and that higher oil prices will do the trick.

The clear implications of the graph of IEA projected flows and the actually less optimistic graph by Sadad Al-Husseini - neither of which are thought of as peak oil adherents - is that there will be a serious supply problem by 2011.

Moreover, if one modifies the IEA graph to adjust for what appears to be significant over-optimism in regard to non-OPEC production, it seems clear that the ability of global oil flows to satisfy demand will become quite problematic in 2009. Furthermore, unless Iraq and Nigeria begin increasing production soon, flows may not be sufficient in 2008.

If Al-Husseini is correct, and the growth in oil supply is fairly minimal during the period we have now entered, we can much better understand why the price of oil now seems stuck near $100 despite reduced driving and an economic slowdown in the U.S. that could expand to other parts of the OECD.

Comments

[locke]

Eventually, we will be driving plug-in hybrid cars day-to-day, and we will take electric trains for any long-distance trips.

The transition may be hard, but the end result will be a cleaner and more peaceful world, because we won't rely on energy imports.

Peak oil is good news for owners of power plants, coal, or uranium mines, and battery makers.

[the tick]

Brazil just hit an oil reservoir estimated at 70-100 billion barrels... abiotic oil ... deep hydrocarbons that are not organic in origin lie below the earths surface... a little out of the box thinking please... lets end the luddite mentality

[Kunst]

Even that may be optimistic. Where will the electricity come from? Natural gas will drop with oil. There is a lot of coal available, but it has significant environmental costs and may not be able to ramp up enough to replace oil in additional to all our other energy needs. Nuclear is questionable because we are also running out of uranium. It may not be possible to sustain even our current level of total energy consumption. For the near term, conservation is probably our best bet. Longer term, we had better hope for a breakthrough new energy source, just as oil was 100+ years ago.

[locke]

Kunst, everything I have heard suggests that we have enough coal and uranium for generations. Where have you read differently?

[User 137633]

We aren't going to run out of oil, Kunst...we may however run out of cheap/easily extracted oil. Shale, tar sand,etc...there's more than enough for our lifetimes and beyond...it's just expensive to get to with technology as it is right now.

I agree with you though, a breakthrough would be very welcome.

[BrucePile]

The thing so many people don't understand about all the bounty of nonconventional oil (tar sand, deepwater, shale, coal-to-liquids, etc.) is the basic matter of energy flow rate. Conventional oil has been coming to us for all these decades from shallow, pressurized reservoirs handing out about 80 or more barrels of energy for each barrel spent in getting it. Now that figure is estimated to be about 10 and it's dropping fast. That's for conventional oil. For what is added to this to get the total liquids figure (what we normally call global "oil" production - the 85 million barrels/day) you add the shale, sand, NGL, bio-fuel, CTL, and a large array of very low EROEI (energy returned on energy invested) oil substitutes. Most of these EROEIs are running around 3 or less compared to the 80 of yesteryear's conventional oil and 10 of today's oil meaning that they actually displace very little oil. They take about as much oil to make as they replace. It's really difficult to match the energy flow rate of the past when you have to expend enormous amounts of energy digging up, grinding up, heating up, and manufacturing what was so freely taken before. So we have essentially the conventional oil production curve, which has already peaked by most informed experts, plus just the high EROEI add-ons like NGL trying to keep pace with the still growing demand curve. Add to this the fact that only about 46 million barrels/day of that 85 total is actually exported from the country producing it to be bid on by the big oil importers and models showing that post peak export decline rates always are significantly higher than total production decline rates, and you have more of an oil shortage than you may think.

[jack2]

surely in 25 to 50 years alternative energy will have a significant role but what do we need to get there. most alternatives are an absurd hoax intended to "tickle the ears" of the masses. mostly net energy negative(including oil shale and oil sands). so, all we need to avoid returning to the 19th century or earlier is 100 hundred Trillion dollars, fifty years and tremendous quantities of Fossil Fuels! oh, and the huge need for water(a looming crisis already here) for the oil sands and shale development. who dreams up this Balderdash? probally the abiotic theory folks. see you in the year 1859.

[Kunst]

My understanding is that uranium production has been declining and we are using up the supply from nuclear weapons reprocessing.

Coal we will have for a long time, but coal doesn't solve all problems. Hard to run airplanes on it, for example.

As far as oil goes, BrucePile is correct. Keep in mind that we don't have to "run out" of it. We will never pump the last barrel of oil. Long before then, we will reach the point where it takes more ENERGY (specifically oil, since oil rigs are generally self-contained) to get a barrel out of the ground than the energy that barrel supplies. At that point, we are done, no matter what the money situation.

[DougM]

Uranium production was down because prices crashed when all the material from recycling weapons hit the market. That's reversed now, and uranium reserves have grown considerably. The current once-through process in the US is extremely wasteful. Other nuclear-powered countries like France and Japan reprocess the waste to recover and reuse unburnt fuel. With breeder technology, we can run our entire civlization on nukes for 1000s of years by burning the otherwise-unfissionabl... U238 and Thorium.

Coal won't last forever but it will last a long time. We could run our entire civilization on coal alone for 80 years - since our nuclear, hydro, oil, and gas reserves won't suddenly go to zero, I think we can count on coal to last a very long time. We can run planes on coal - coal gassification can be used to produce hydrogen, syngas, or even liquid fuels. The airforce recently started testing jet engines that run on a coal-derived fuel.

Solar energy is an enormous resource we've barely tapped. An area about 1/7 the size of Nevada could power our entire electric grid on solar energy alone. There are unsolved problems of storing power for later use, as well as cost issues, but the reality is that all of humanity's current 400 quads of annual energy use are less than 1% of the solar energy that runs through the earth every year. I haven't even mentioned wind (a form of solar power) or geothermal energy.

In short, expensive energy yes, possible adverse environmental consequences if coal is used yes, collapse of civilization due to exhaustion of energy resources no.

[GKM]

Very well said Doug M.

We need to ask ourselves a question though. Why is it that we need to use so much energy? The cheapest and most efficient solution in the long run is conservation. North Americans use about 60% more energy than the average European nation. Think about how much that costs us and saves them on an annual basis. This is an almost entirely unnecessary situation.

We need to sow the seeds of more conservation and the most effective approach to that is a price shock unfortunately. I think we'll see another one of those this coming summer and it will be interesting to see how much that impacts the psyche of energy guzzling North American's going forward.

[DougM]

Yes I should have mentioned that there is such a shocking amount of waste currently baked into the system that we could withstand a fairly large drop in primary energy production through conservation alone. I have to disagree that conservation is the best long run solution. I think it's the best short run solution, but we'll eventually reach the point of diminishing returns. At that point we'll have to have ramped up nukes, solar, etc. - we can't conserve our way to zero without mass starvation and a collapse of technology.

[mkreisel]

Start taking trains and buses, and you will see how quickly the oil consumption drops in this country.

[jack2]

absurd--trains and busses. and who is going to tell the American people? Congress or the President. they won't even utter the word conservation for a start to fixing the looming disaster. you can't tell Americans to think about any sacrifice, especially "happy motoring" (love the phrase jk). Congress favorite past time is telling the masses it is all the fault of Big Oil. by december 31 2010 gasoline will be 9 to 10 dollars a gallon. what will they then. no courage to tell people the Truth. resource wars will only prolonge the "American Way"-a birthright. oil is needed to manufacture myriad yet 95% of production is used for our transportation system. oil-a finite resource. nothing will ever replace the density of it as an energy source. using oil for transportation is like burning a Picasso for firewood. (unknown oil executive) ps R. Bartlett and several others who founded the peak oil caucus in Congress are exceptions. now that's courage--telling the truth.

[wogie]

Looks like we (the US) won't have enough coal to last a very long time. Last spring the National Acadamies revisited the coal reserve question. With present and foseeable technology they concluded we have about 100 years of coal AT THE PRESENT RATE OF CONSUMPTION. However, forecasts of demand indicate that consumption rate will grow very significantly -- hastening the exhaustion of reserves.

[yobs]

Plugging something in only seems cleaner because you don't see any exhaust coming out of your appliance. Go to a coal power plant and see what your clean electric power looks like. I'm not a coal basher, but look farther than your outlet. Trains, I've never had a job where a train would take me to or even nearby. Maybe we should hire the guys from Monsters Inc. They seem to have a good thing going.

[YouThink]

Then maybe jobs will have to move closer to trains. Think Japan. Should give you a bad feeling. BTW, you'll probably need the petro for farming, e.g. eating.