Peak Oil: The Next 5 Years 21 comments
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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.
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This article has 21 comments:
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.
I agree with you though, a breakthrough would be very welcome.
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.
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.
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.
For the record........not one drop of abiotic oil has ever been extracted or discovered or proved to exist anywhere in the world. Just because some oil happens to have been found at unusually deep depths does not mean it is non biological in origin. So far all the oil found has biological markers indicating that it is fossil in nature.
Do your research and stop listening to ancient unproven rubbish theories that are being recycled due to desperation of some people to believe that salvation is at hand.
I'm now evaluating the investment case for oil via an ETF (USL), and was wondering what your thoughts on this article are a year later? Was it just demand that turned out to be lower than predicted, or was supply also unexpectedly high?
Which parts of the analysis here were correct and are still valid going forward, and which parts would you revise?
There was a so-called discussion going on where I work about peak oil, and I just had to sit back and laugh at the "debate" that was going on. The ignorance was staggering. They didn't even realize that they had no clue what peak oil really means, they were reacting to what they thought it meant based on mass media headlines, without doing any of their own digging or reading or researching. That's because most Americans don't read, which is another matter altogether.
PAY ATTENTION to what BrucePile said! For once and for all, peak oil is not about WHAT'S LEFT IN THE GROUND! It's about WHAT CAN BE GOTTEN OUT OF THE GROUND AT THE CURRENT COST AND RATE OF RETURN OF ENERGY! Get it!
There are bloggers all over the place talking about shale oil, tar sands, etc. etc. etc., that there's plenty of oil in all forms, it will never run out, etc. etc. etc. You cannot count these types of natural resources when talking about peak oil. Peak oil describes one thing, and one thing only, and this is the point that most of the American sheep and most of the world completely misses - Peak oil describes the peak at which ECONOMICALLY INEXPENSIVE AND PLENTIFUL OIL IN SHALLOW FIELDS CAN BE EXTRACTED FROM THE GROUND. The entire, and I mean ENTIRE world economy is based on this principal. Once easily obtainable crude oil hits a peak of production, there is an irreversible decline in the ability of the world to get it out of the ground and supply it cheaply at a steady rate. The reason why gasoline, electricity, natural gas, etc. are available at relatively reasonable costs that most people can afford most of the time without serious hardship, is directly based on the ease and rate with which the oil countries of the world can get oil up and out of the ground. It's as simple as that.
What the world doesn't get is that around 1860-1900 our fate was sealed because oil was "chosen" as the primary natural resource our world would use to power itself. And it's been doing so since the early 1900's. The problem is, noone thought about it in terms of a finite resource, we have built practically every technology we have today with oil as its main resource.......FUEL, PRACTICALLY ALL PLASTICS, FERTILIZERS, PESTICIDES, RUBBER, TIRES....without crude oil none of these products could exist. There are 700 MILLION internal combustion vehicles on this planet. Each one of them used 15% of all the oil it will consume in its lifetime just to produce! Are you getting what I'm saying? Even if the world begins to shift now to alternative energy sources NOW, may I ask how you begin to replace 700 million vehicles with new technology? Shifting an entire planet's energy infrastructure takes decades, and yet the world has been cruising along consuming oil and tying every single technology that exists into it, and worse acting as if oil is simply an endless resource. The US and the rest of the world hasn't even begun to shift our infrastructure to a new energy resource. If you feel good when you hear news stories about wind, solar, hydro, you are fooling yourself. NONE of these alternative energy resources can do for our world, in any combination, what oil has done for our world. Oil is everything. And if it is peaking, then it's already too late. We won't have to worry about pumping the last barrel out of the ground. We'll never get that close. The world will economically implode in on itself long before oil runs out.
The other key thing most people simply cannot comprehend, and this is even more important - is that when an oil peak is reached, that is when the peak of production is reached for easily obtainable shallow crude oil that can be pumped quickly - from that point onwards the expense of pumping what oil is left in the ground GOES UP........and as the expense of pumping what's left goes up, SO TOO DOES THE COST of ALL the energy that that oil provides. As it becomes more expensive to get at what's left, the more the energy will cost that we use. It's as simple as that. And our economy is not structured to handle that curve. It's not even structured to function in any way wihout oil. From about 1910 until now, 2009, we've had access to the shallow crude in enough quantities to make it possible to provide it to the world at stable prices. That will change quickly and harshly as it costs more and more to pump what's left out of the ground.
To put it quite simply - most people think of oil as a perfectly sane and natural source of energy, we're so used to having everything when we want at the prices we can afford it at, that we don't understand the implications of what's coming.
The reality is this. Planet earth made a huge mistake one hundred years ago. It put all its stakes in a finite resource and then had the arrogance to believe it would be cheap and endless, forever. Oil is neither of those things.
What will cause the collapse of civilization is not oil RUNNING OUT. We'll never get that far. What will collapse is the world economy, simply because as we travel down the reverse slope as oil declines, the cost of it will become so high that it will in turn cause energy prices to spike so sharply around the planet that it will FORCE upon civilization huge upheavals, simply because most of the world will not be able to afford to buy energy. And when that happens, you will see civilization revert back to what it was perhaps sometime in the 1700's or 1800's. It HAS to. Think about it! If gas was at $25 a gallon right now and home heating oil was $50 a gallon, civilization would change whether it wanted to or not! The basic fact that suddenly billions of people would no longer be able to afford the energy that before was able to be gotten cheaply, that simple fact alone will cause economies to collapse completely. They HAVE to. The "corection" to the planet that those kinds of prices will bring can only result in civilization downgrading to a level it was at some point before oil was ever discovered. I.E., civilization as we know it NOW will be gone.
On Feb 15 04:51 PM the tick wrote:
> 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