Today's update of our global oil depletion model, Peak Scenario 2200, reveals maximum All Liquids production will be 100-mbd in 2030. Its post-peak decline will average 0.5% to mid Century.
The current revision reflects two factors: (a) 40-Gb increase (RCC up, Kerogen down) in our URR estimate & (b) forecast allowance for Underlying Decline Rate Observed (UDRO) in 2050 decreased to 4. 5% per annum.
All Liquids flow will not fall below this year's pace 'til 2052 ... ensuring decades of plentiful supply. All Liquids will cross the midpoint of its 7.6-Tb URR in 2104, seventy-four years after Peak. With petroleum-based liquids exhausting in Year 2344, there appears to be only 334 years of oil left! After that date, flow will be solely dependent on renewable Biofuels.
With only three G-20 nations officially still in Recession, my 2008 forecast that most of the world would see economic expansion in 2009Q3 (including the USA) has come to fruition. Renewed Demand should see the quarterly production record set in 2008Q1 surpassed in 2010Q4, with a new monthly record shortly thereafter in 2011Q1. As we discussed, concern over future MegaProjects was grossly overblown, and in reality the majority of cancellations proved to be opportunities to re-contract at more favourable deflated costs.
The pause in annual global production in 2008 was the the 11th since 1975. Business cycle patterns indicate that we can expect similar softness in 2017, 2026, 2034 & 2043, and these potential downturns are now reflected in the PS-2200 profile.
A record 4.1-mbd of new flows were commissioned in 2009. Of this New Capacity, 2.4-mbd (2.8%) was required to offset loss of production due to Underlying Decline Observed (UDO) and the balance brought global surplus capacity to a twenty year record of 6.3-mbd.
Early 2010 stats reveal that the Underlying Decline Rate Observed for Year 2010 All Liquids is: 2.9% (2.47-mbd) Worldwide, 2.6% (0.26-mbd) in Saudi Arabia & 2.5% (0.22-mbd) in the USA. This indicates that UDRO has formed a sixth cycle top since 1970, and the recent Recession decline surge indeed peaked in 2008 @ 3.1%. With past experience, we expect the loss factor will bottom @ 2.5% in 2012, before its next cycle high (3.7%) during a probable 2017 Recession. Extrapolation of the general trend (including its 8.5 year cycles) should see UDRO rise to 4.5% by 2050.
Our mid-Century target had been as high as 9% in the past. The reduction to 4.5% results primarily from the moderation of the Underlying Decline Rate in 2009 & 2010 and further builds the case that our hypothesis that UDRO is cyclical is correct.
Target Extraction Rates :
2010: 85.6 (estimate) 2030: 100 (Peak Year & Peak Rate)
2032: extraction passes 2 trillion barrels 2044: today's 1212-Gb of proven reserves exhausted
2052: 83 (first year with flow less than today)
2060: 64 (fifty yrs from today)
2075: 56 ( 9.2-billion peak of global population)
2100: 57 (regular conventional crude exhausts in 2095)
2110: 60 (100 yrs from today) Extraction 50% of URR in 2108
2200: 54 (flows limited to GTL, CTL & BTL)
2300: 49 (flows limited to CTL & renewable BTL; CTL exhausts in 2344)
PS-2200 is a composite analysis of the 7 major components of All Liquids. Regular Conventional Crude (RCC) is the only category that is post-Peak, down 6-mbd since 2005. The 11 streams tracked as All Liquids include RCC, NGL (incl refinery gain), and the non-conventionals: GTL (gas-to-liquid), Deep Sea, Arctic, Bitumen (oil sands), X-Heavy, CTL (coal-to-liquid), Kerogen (shale) & BTL (biofuels-to-liquid) ... each with its own unique production profile.
PS-2200 is a flow based bottom-up analysis by TrendLines Research energy analyst, Freddy Hutter. It is our contribution to the 20 models that comprise the TrendLines Scenarios Avg that we track each month, illustrating industry consensus on the timing of Peak Oil.
|7,624-Gb||All Liquids URR/EUR||PEAK 100-mbd in 2030||2010 flow: 85-mbd|
|2,075-Gb||Regular Conventional Crude||68-mbd 2005||63-mbd|
|1,633-Gb||NGL-GTL-Ref/Gain||18-mbd 2038 & 25-mbd 2281||10-mbd|
|244-Gb||Deep Sea & Arctic||15-mbd 2026 & 6-mbd 2080||8-mbd|
Peak Scenario 2200 is constructed on a 7,624-Gb URR platform that spans four centuries. Six of All Liquids seven main components will have exhausted presently-economic resource by Year 2344. After that date, All Liquids is limited to BTL sourcing. The January revision reflects a 40-Gb increase (RCC up, Kerogen down) of our URR estimate.
It is a little known fact that if no further discoveries were made after today's date, present proven reserves of 1,212-Gb wouldn't be fully consumed 'til 2044. Due to the enormous time span over which economic resource is spread, it is more than probable that Demand projections will be substantially reduced due to technologic obsolescence long before any resource constraints kick in ... akin to the stone age, coal and whale oil dependence. The adoption of hybrid & electric cars will lead the movement away from fossil fuels in transportation.
As a renewable energy, BTL has virtually no end point. PS-2200 projects that BTL will attain an ultimate and permanent Peak Plateau of 4.9-mbd in 2030, and will consume a cumulative 590-Gb to Year 2344 (not incl in URR/EUR tally).
All Liquids Peak will occur at 25% depletion of presently-economic resource. The midpoint of URR will be crossed in 2104, 74 years after Peak production in 2030.
Exhaustion of the first trillion barrels of reserves occurred in 2002. The second trillion will have passed by 2032; then the third by 2064 & fourth in 2113. By then we'll have just started on the second half!
3.3-Tb of liberal augments to Kerogen, GTL & CTL cause the PS-2200's 7.6-Tb URR to vary immensely from the 4.4-Tb Avg found in our 19-model TrendLines Scenarios. Both are far higher than the recent update of our URR Composite Estimates Study with its slightly different mix of practitioners and sporting a conservative 3.8-Tb URR Avg.
In a typical profile, annual production builds over time, attains a peak, maintains a plateau, then declines. Because fields and petroleum provinces are developed over years or decades, some of the wells of a field, or fields within a province, or ultimately provinces within global production ... can be in decline or retired while others are still in growth stage or plateau. This annual loss factor is the field/province/world's Natural Underlying Decline.
IEA calculates the annual Natural Underlying Decline Rate is 5% in post-peak Regular Conventional Crude fields, and as much as 15% in non-conventional post-peak Deep Sea fields, with a weighted avg of 9%. A Producer's EOR activity can improve extraction results and diminish this loss factor. After general EOR activity, IEA calculates the annual loss is 6.7% for Conventional & Deep Sea crude categories that represent 83% of global production.
I call this net absolute figure, more applicable to our depletion studies, Underlying Decline Observed (UDO). It is expressed in millions of barrels per day (mbd) per annum. More commonly, analysis of RCC or All Liquids is conducted in percentage terms per time interval - and the Underlying Decline Rate Observed (UDRO) is appropriate. To maintain a production plateau, Production Capacity must be incrementally increased each year to match UDO loss.
Within a typical petroleum province, roughly a third of fields & wells are relatively recent and are annually ramping up their production rate. Another third are in plateau. And the balance are the mature and near-retired wells & fields where significant depletion is reflected by production decline within.
Since November 2007, Peak Scenario 2200 has uniquely provided stakeholders with regular monthly reporting of Global UDO/UDRO status, with a spotlight on the two mature provinces: Saudi Arabia & the USA.
My March 2009 analysis revealed that Global UDO first became significant during the 1970 American Recession. Chart#3 illustrates long term global annual UDO, but it is the UDRO inset (annual rates) that is most instructive. I have found that the Underlying Decline Rate Observed exhibits a tendency to ebb and flow. It became apparent that these cyclical crests correlate with all six USA Recessions within the past four decades. These cycle tops appear to reflect reduced EOR activity during economic contractions, no doubt due to Capital/Cash Flow limitations amid a reduced Demand environment.
These crests (orange line) further coincide with depletion rate peaks of the major petroleum provinces: the Persian basin (Iraq/Iran) in 1977, USA/Russia All Liquids in 1984, the North Sea in 2001 & the present deterioration in Mexico.
The highest annual surge was 6.3% of All Liquids production in 1984 in the wake of the double-dip 80's recessions. The recent cycle top of the 2001 Recession was followed by an UDRO trough of 1.9% in 2006, then the 3.1% high of the 2008 Recession. The loss factor was 2.8% in 2009, and is projected to bottom @ 2.5% in 2012 before its next cycle high (3.7%) during a probable 2017 Recession. Extrapolation of the general trend (including its 8.5 year cycles) should see UDRO rise to 4.5% by 2050.
Extension of the business cycle pattern would see further crests in 2017, 2026, 2034 & 2043. I am extremely comfortable with such a bold forecast 'cuz incredibly, these dates fall in line with our forecast for peak-related heavy depletion associated with Saudi Arabia (2014), Deep Sea (2026), NGL (2038) & global RCC (2043).
Analysis by TrendLines Research reveals that over the last 40 years, UDRO has averaged 2.7% annually. From 1970, this necessitated the construction of 119-mbd of new facilities: 79 to address UDO & 40-mbd to raise Extraction Capacity from 51 in 1969 to 91-mbd by last December. In short, the oil sector has been adding 3-mbd/yr ... or a new Saudi Arabia every three years for four decades! Terminal global production decline will commence upon Annual New Capacity no longer exceeding the UDO trend line. This intersection is set to occur in 2031.
In a more recent context, from Y2k to 2009, the Industry commissioned 32-mbd of new capacity. During that ten year span, a full 22-mbd was applied against this Underlying Decline challenge; and the remaining 10-mbd serviced new Demand & added to Surplus Capacity. This impressive task (3.2-mbd/yr) was equivalent to a new Saudi Arabia coming on stream every three years. Visually, the red line in charts #2 & #3 tracks annual Underlying Decline Observed.
Cycles aside, the magnitude of loss will generally rise as Peak approaches. Viewing the future by our measure, 73-mbd of new capacity will be required to attain our 2030 target of 100-mbd. 15-mbd of this will raise production from 85 today to 100-mbd. The other 58-mbd will address UDO loss over the next 21 years. Added to the 79-Gb to cover 1970-2009 decline loss, we calculate a total 137-Gb of Capacity will be dedicated to this loss phenomenon over the full six decades.
The oil sector presently maintains a seven-year trend for New Capacity of 3.5-mbd/yr, thus already exceeding the rate required to attain our 2030 target. And, perhaps even a less difficult task considering the record breaking 4.1-mbd pace of new flow installed in 2009! Based on present URR Estimates and subject to capital availability, the Industry can maintain this activity level until inevitable resource constraints begin to restrain new development (blue line in chart inset) after 2050.
Below, PS-2200 is compared to the short time frame practitioner estimates for All Liquids UDRO:
1.5% - CERA (2009-2030 avg)
1.9% - Adam Brandt (2007 - sole peer-reviewed contribution)
1.9% - IEA (2008-2030 avg)
2.9% - Freddy Hutter's Peak Scenario 2200 (Feb/2010, 4.5% by 2050)
4.1% - Matt Simmons (2009-2030 avg)
4.2% - EIA (2009-2030 avg)
4.2% - Jeff Rubin (2009)
4.5% - OPEC (2008)
4.6% - Deutsche Bank (2009, rising to 8% by 2030)
4.7% - Chris Skrebowski (2010)
5.0% - Total (2009)
5.2% - Schlumberger (2009-2030 avg)
5.25% - Sadad al Husseini (2009)
7.0% - UK Energy Research Centre (2009)
9.0% - consensus at theOilDrum & PeakOildotcom (2009)
CERA has determined that flow from currently in-place Capacity will deteriorate by only 31-mbd in the next 21 years. In its recent WEO-2008, IEA presumes 45-mbd of new Capacity is required to sustain a plateau 'til 2030. Because our estimate is 58-mbd, I have little doubt that both their most current forecasts of Peak Oil (CERA's 113-mbd in 2035 & IEA's 104-mbd in 2030) will face further downward revisions in the near future as it becomes clear that they have gravely underestimated the UDO loss factor for All Liquids. Early in the decade, CERA & IEA had Peak Rates of 128 & 121-mbd respectively! As they have grasped the scope of their failure to account for underlying decline, we can better understand their pattern of annual downward revisions over the last five years.
The PS-2200 findings surrounding the nature of Underlying Decline vary considerably from the consensus McPeakster hypothesis. Chatter at PeakOildotcom & theOilDrum proposes that All Liquids UDRO rose fast & furious from 0% in 2002 to 9% in 2009. Their simplistic musings are void of any explanation for the above mentioned 78-mbd of new facilities built from 1970 to 2009 that failed to increase production! The 7% figure adopted last Summer by the UK Energy Research Centre is similarly a fabricated figure from thin air. Acknowledgment by McPeaksters that their scary scenarios are groundless will not occur anytime soon. These groups are agenda-driven and facts just get it in the way...
Finally, let's give this loss factor some overall context. The USA sports a 2.5% All Liquids UDRO as an 86% depleted petroleum province in 2010. Less mature Saudi Arabia at 40% Depletion, has a 2.6% All Liquids UDRO this year. Both are reasonably good proxies as to what will be faced on the global scale in the domain of Underlying Decline. With worldwide Depletion at a mere 16%, it is almost certain that global UDRO will not exceed 5% 'til mid-Century on the journey to ultimate exhaustion in Year 2344. All Liquids will commence terminal decline when annual Underlying Decline Observed inevitably starts to exceed annual New Capacity installations.
All Liquids 2009 Underlying Decline Rates Observed: 2.9% (2.47-mbd) and troughing Worldwide; 2.6% (0.26-mbd) & rising in Saudi Arabia; 2.5% (0.22-mbd) and rising in the USA.
The higher resolution of our PS-2200 "2035 Outlook" (chart#2 above) allows an illustration of two hypothetical scenarios:
(a) an ultra conservative All Liquids trajectory with an apparent 88-mbd Peak in 2016, declining to 30-mbd by 2035 (hashed lime line), assuming an 3.4% Avg Underlying Decline Rate Observed. As a Worst Case Scenario, it assumes that the oil & gas sector will never augment the announced-to-date MegaProjects.
(b) the more probable production profile whereby the present Megaproject trend of 3.5-mbd/yr is deemed to continue unabated 'til resource constraints impede new additions after 2049 (post-2013 solid lime line). End-of-Year Supply surges to a 100-mbd Peak in 2030.
In practical terms, recent history (since 1970) has shown that the pessimistic projection line incrementally rises thru time to meet the growth trend line. Hence The Wedge shown continually gets pushed into the future.
Viewing the future by our measure, 73-mbd of new capacity will be required to attain our 2030 target of 100-mbd. 15-mbd of this will raise production from 85 today to 100-mbd. The other 58-mbd will address UDO loss over the next 21 years. Added to the 79-Gb to cover 1970-2009 decline loss, we calculate a total 137-Gb of Capacity will be dedicated to this loss phenomenon over the full six decades.
It takes up to 7 years to bring to fruition very large (MegaProject) capacity facilities. The Autumn 2008 Credit Crisis jeopardized some planned ventures, and may have deferred what were imminent announcements as stakeholders used the opportunity of a Recessionary environment to rewrite contracts and MOUs in a deflated pricing regime.
To prevent Terminal Decline in the coming two decades, Producers need only monitor the UDO trend and commit to a Capacity construction program that consistently matches or exceeds that loss. As seen in Chart#3, Industry has generally and stalwartly installed sufficient new Capacity to meet this challenge ever since 1970. From a recent low of 2.6-mbd installed New Capacity in Y2k, this metric has been on a steady rise, culminating in 4.7-mbd of facilities last year.
Resource availability for capacity additions poses no constraints before 2050. With 1212-Gb of proven reserves, the Industry doesn't need a newly discovered barrel of oil 'til Year 2045.
Actual annual production will be affected by Price & Demand forcings. We have attempted to project these nuances by adjusting for future Recessions and high price periods. Today's 6.3-mbd of global Surplus Capacity will max out at 8.1 in 2012, and will not exhaust 'til 2023. Unfortunately, the moderating effect of that spare capacity on crude prices is likely to be outweighed by ever rising costs and further USDollar debasement ... as elaborated upon within our Barrel Meter discussions.
the Peak ... & Terminal Decline
Continuing Production growth versus a reversal into terminal decline is completely dependent on the delicate balance between Annual Underlying Decline Observed (UDO) and Annual New Capacity. To complicate matters, we have shown that UDO does not rise incrementally each year as universally assumed. UDRO rocketed to a 6.3% high after America's double-dip 80's Recessions, but then drifted way down to 1.7% by 1999. Add unpredictable OPEC interference to the fray, and Producers have their work cut out in monitoring quota & UDO losses and stalwartly making up the difference ... and more.
Over the past four decades, new installations have averaged 3.0-mbd/yr. The current (7-yr) trend rate is an even better 3.5-mbd/yr. 2009 performance was a record 4.1-mbd in newly commissioned flows. OTOH, the long term Avg for UDO is 1.9-mbd, with a current loss factor of 2.47-mbd in 2010.
Presently, Producers can extract at will from any of the seven categories of conventional & non-conventional resource. Terminal Decline can be averted so long as New Capacity out paces Underlying Decline. But, it appears that this race ends in 2031 when the secular rise of Underlying Decline Observed finally surpasses the long term average of annual New Capacity installations.
On a second battle front, Producers must face inevitable resource constraints. Adding to the Regular Conventional Peak of 2005, the Deep Sea extraction rate starts to decline in 2027, followed by NGL in 2039. Dwindling proven reserves will one day reach the point where the annual New Capacity 7-yr trend rate of 3.5-mbd is in jeopardy and can no longer be maintained. We calculate that event will occur in Year 2051.
Thus at this point in time, it seems that rising annual UDO will cause the eventual demise of rising production (in 2031), and resource constraints will be the factor for post-peak production escalating from a soft decline rate to a harsher one (in 2051). This is apparent visually in Chart#1, where we can see that the post-peak track approaches a precipice upon RCC commencing its R/P 9 (Reserve/Production Ratio) environment caused by the inability of the sector to any longer replenish proven reserves. Deep Sea resource will exhaust in 2046. NGLs meet their final demise in 2057. The latter days of the century will see the exhaustion of Regular Conventional Crude in 2095.
The combination of rising UDO & faltering New Capacity will result in a manageable 0.5% post-peak production Decline Rate in the era between 2030 & 2050. It is this precise time frame at which efforts towards mitigation and substitute energy sources must be aimed. Fortunately, the downturn will be short-lived.
Rising non-conventional liquids production will eventually bring about a flow trend reversal. After a 55-mbd trough in 2089, global production will surge back in a multi-decadal battle towards an ultimate secondary peak. It can be seen in Chart#1 that Arctic, Bitumen, X-Heavy, GTL, CTL, & Kerogen streams are all in vigorous growth mode. Renewable Biofuels will of course augment these flows.
As the second largest component of All Liquids, the current unfolding of a decline profile for Regular Conventional Crude is fundamental to the timing of Peak Date. RCC peaked at 68-mbd in 2005. The recent Severe Recession was instrumental in its 2.4% extraction decline rate since. It sported a mere 62-mbd flow rate in 2009, but at TrendLines, we are committed to a premise that the harsh decline loss associated with the economic contraction are over for a couple of generations.
Colin Campbell, Matt Simmons, Jeff Rubin & the rest of the McPeakster fraternity profess that the stream of light sweet crude has nowhere to go but down - and down real fast. Alternatively, PS-2200 foresees a virtual plateau - commencing in 2010!
With an estimated 998-Gb of RCC resource still on hand & impressive results already from Enhanced Oil Recovery (EOR) activities, projections by PS-2200 indicate that the harsh decline rate is at end NOW.
Consistently for several years, the McPeakster hypothesis has been that on its present downward 2.4% track, RCC production is on a path to below 61-mbd in 2010 on its journey to a lowly 37-mbd by 2030. On the contrary, our model projects a mere 0.6% avg annual decline path that maintains undulating levels of at least 54-mbd thru to 2030. Herein lies the foundation for the 17-mbd difference between our long term forecasts.
The fate of the All Liquids Peak rests on these diametrically opposed premises. One of the two camps (optimist vs pessimist) should become quite empowered in the coming weeks. 2010 is the watershed year. Will extraction sink under 61-mbd (maintaining the dismal trend) or hold above 62?
Returning briefly to the competing practitioners, the Campbell Depletion Model projects a sea change softening of the RCC production decline rate to only 1.3% after 2030, then incrementally drifting back to 2.7% by 2060. In very different fashion, the Hutter PS-2200 holds its RCC virtual plateau 'til a precipitous vault over the cliff in 2051 into a 10% decline rate. See our depiction of both current RCC projections for their contrary profiles.
At 10-mbd, Saudi Arabia continues to be the World's leading All Liquids Supplier nation. Before last Autumn's OPEC-mandated restrictions on member quotas, KSA's year-to-date production was surpassing its 2005 Annual Record. Its Monthly & Quarterly records set in 2006 were also in jeopardy.
Saudi Aramco starts 2010 with an unrivalled 4.2-mbd Surplus Capacity. As OPEC relaxes quote restrictions with time, Aramco can use this spare capacity to ramp up production; even the remote possibility of new records. "Remote" because this huge surplus capacity is masking the reality that the Kingdom has just passed a major milestone: the Peak of its Maximum Sustainable Capacity (NYSEARCA:MSC).
KSA MSC reached a record 12.5-mbd in 2009. MegaProject analysis indicates that there are insufficient new facilities in the visible horizon to outpace the Underlying Decline factor. My estimation of their URR has been drastically reduced over the past two years to 290-Gb. The discrepancy between this linearization-indicated potential versus the 900-Gb resource base touted by the Kingdom is rather disturbing.
TrendLines calculates Saudi UDO to be 0.26-mbd/yr (2.6% of 2010 All Liquids). Based on this metric, the completion of announced MegaProjects will mean MSC of only 12.0-mbd by the end of 2015. Saudi Arabia must reduce its UDRO and/or install an additional 0.6-mbd in new facilities before 2016 to avoid 2009 being deemed its MSC Peak.
This historic event is consistent with our analysis that KSA will cross the midpoint of its URR in 2019. Regardless, its base is relatively large and the nation will continue to be the globe's number one All Liquids supplier for two generations. Production Capacity will not breach the 8-mbd threshold 'til 2038. The unrivalled Surplus Capacity makes it impossible to forecast Saudi peak production. Aramco has many strategic options and is vulnerable to OPEC mandates. See our separately released 5th Annual Saudi Outlook for further discussion.
Volatility of Crude Price
2.4-mbd of new capacity was required to offset 2009 global Underlying Decline Observed. Fortunately, the energy sector has been bringing much more than that on stream each year ... a record 4.1-mbd of new flow last year, as seen in Chart#3's inset. The explosion in new facility development this decade is one of several factors responsible for the recent $94/barrel collapse in the USA contract Crude Price. Regardless of OPEC quota antics in latter 2008, savvy market traders ignored their quota cuts and instead reacted to the more important revelation that "real" and abundant Surplus Capacity was returning to the global system.
From October 2006 to July 2008, the McPeakster fraternity was successful in originating/disseminating web-based rumours that Saudi Arabia's Ghawar giant field was in terminal decline. PeakOildotcom, theOilDrum, Matt Simmons & Jeff Rubin (CIBC WM) were the main players that wrongly translated a reversal of Saudi extraction to be a harbinger of overall global decline.
But, as the Kingdom increased production from 8.7-mbd to 9.5, the hoax by these perpetrators was exposed. Prices plummeted as traders raced to eliminate their silly Depletion Fear Premium as a pricing component. At the height of the July 2008 Price Bubble, the later invalidated FEAR factor had rose to $30 of the $131/barrel contract price. Embarrassed Producers were the beneficiary of this manipulated situation, as witnessed by their burgeoning windfall profits.
The combination of the Russian incursion into Georgia and the record purchase of American Treasury securities/instruments during the 2008 Summer Credit Crisis led to a 20% jump in the USDollar. With this, geopolitical events thus eliminated almost the entire $30/barrel Dollar Debasement component that had built up in July 2008.
Another volatile forcing behind the 2008 Crude Spike was related to the growing tightness in Surplus Capacity. Albeit there was still 2-mbd apparently available, much was not useful as since mid-decade there had been an even greater tightness in spare refinery capacity - and what there was, could not handle the heavier crudes available. The result was that the Surplus Capacity component of Price inflated to $35 in the Summer of 2008. Today, traders understand that global surplus capacity exceeds 6-mbd.
Average Upstream costs (exploration & lift) also had accelerated growth of late. On a production weighted basis, this was a $24 component that season. Inventory tightness varies mostly on a seasonal basis, and sat at $10 per barrel at that crucial juncture.
The final remaining factor is the controversial speculation-hedging activity. It prodded the spot price rise in two ways: one was the sheer total futures contracts volume and the other was non-commercial long contracts vs the shorts. Contrary to overwhelming popular opinion, our research attributes only $2/barrel to this activity at the peak of the bubble. Futures contracts are mere side bets to the real action ... and can no more affect the Crude Price than sports betting can affect ball game scores.
Together, the above factors served to spike up the Price $94 from its level of $37/barrel at January 2005. By late December 2008, it had collapsed to that same level. To understand the mechanisms behind the topping action, it should be known that as energy costs approached certain Oil/GDP ratios, which I call the Demand Destruction Barrier, alternative & conservation measures kicked in to halt the Price inflation. High prices enhanced the Recession in play.
We are presently witnessing another detachment of Crude Price from its fundamentals. The present status of the forcings described above (sans Spec/Hedging & Windfall Profits) would indicate that a Price of only $42/barrel is in order today. Hence a steep correction is expected.
Over the past five years, the USA Contract Crude Price was on average 39% greater than that indicated by its fundamentals. Even in the headiness of July 2008, Price exceeded fundamentals by only 34%. But after this metric bottomed at a mere 4% premium during the depths of the Price collapse in December 2008, all hell has broken loose. By January 2010, Crude Price had skyrocketed to 77% over fundamentals.
The restoration of spare capacity and inventory in the system will assist in keeping the monthly average Price under $100 until 2012Q3. Spikes to triple digit territory may return in 2011Q4 ... but are not sustainable.
I have been clear since late 2008 that the greatest contributor to higher Crude Prices until the 2012 Presidential Election will be the return of the secular debasement trend of the USDollar.
The irresponsible fiscal mismanagement of the US Gov't Budget continues to be the foundation for the devaluation. Lacking intervention, the current price run will again meet the Demand Destruction Barrier and descend. $151/barrel in 2013Q2 is our current target for the occurrence of that episode.
In the meantime, Price appears to have two other dances with destiny. The same Oil/GDP ratio that helped collapse New Car Sales in 2007Q4 upon $85/barrel crude & $3/gallon gasoline will haunt the auto industry in the not-to-distant future. $97/barrel oil & $3.42/gal gasoline in 2012Q3 is the post Recession threshold. The risk of a re-collapse of the auto sector is very real - almost imminent. Similarly, sustained oil price over $106/barrel (2012Q4) will probably see the onset of Recessions in several G-20 nations - and will wreak havoc in the export sector. But prior to all these events, watch for a correction to $60/barrel in early 2010 as Inventories swell once again.
Interpretation of how these and other factors play a part in pricing structure can be viewed in our Barrel Meter Chart presentation. This month we augmented our 1-Yr, 5-Yr & 10-Yr Price Targets with a 25-yr version: $302/barrel.
McPeaksters ... & their myths
In 1972, the Club of Rome attempted to shock stakeholders and policy makers with its Limits to Growth study forecast of All Liquids Peak Oil: 117-mbd in 1995. Their attempt at awareness that natural resources are finite and in jeopardy with a growing global population was underscored in 1974 with M K Hubbert's similar prediction: 111-mbd in 1995 (excl NGL, deep sea, polar, Orinoco & tar sands).
With OPEC manipulation invalidating these projections, Colin Campbell attempted to update the long term prospects for oil. The Irish geologist stunned many when in 1989 he declared that All Liquids flow (65.5mbd) would never again re-attain its 1979 pre-crisis Peak of 67-mbd (see all 3). Well, the record was indeed obviously smashed (85mbd today), but the uncertainty & price volatility caused by such pessimistic views by well-intentioned professionals required addressing by the energy sector.
In that regard, we saw OECD's IEA, USA's EIA, OPEC and major IOCs step forward with their own annual long term projections in an attempt to set the record straight and stabilize the marketplace. It didn't happen. As the ranks of McPeaksters were swelled by a growing element from the lunatic fringe, their well-intentioned message was hijacked and discourse deteriorated to the realm of economic and social collapse as the world runs out of oil. As the rhetoric escalated, we thought if would be constructive to provide a platform for these opposing views of the future.
And TrendLines depletions studies were born...
A new Annual Production record of 85.4-mbd was set in December 2008. With this, 2009 marked the 20th consecutive year that McPeaksters mistakenly proclaimed that "Peak Oil was last year and dire consequences are imminent." 2010 is poised to become #21! The next quarterly production record is set for Q4, and a new monthly record should become reality in 2011Q1. Note that All Liquids extraction was a mere 66-mbd at the time of their first declaration that oil had indeed peaked in 1989!
The worst case scenario presented in the 2030 Outlook (chart#2) typifies the pessimistic position of the McPeaksters. Starting in 1989, well-intentioned souls within that fraternity have put forward bottom-up projections; but each and every one has failed the test of time. The list includes Colin Campbell, Richard Duncan & Walter Youngquist, Samsam Bakhtiari, Chris Skrebowski, Stuart Staniford, Anthony Eriksen & Matt Simmons. Their upward revisions have become commonplace.
This list will grow when Outlooks at the verge of invalidation also pass into posterity: Jeff Rubin (2008), Sadad al Husseini (2011), Robert Hirsch (2011), Fredrik Robelius (2013), Chris Skrebowski (2014) & Rembrandt Koppelaar (2014).
The common denominator among these stalwart practitioners is a failure to recognize within their models one or both of two guiding principles: that rising crude price expands URR; and that the very long lead time for MegaProjects leaves upcoming new capacity outside their visible horizon.
Rising URR has the most impact. TrendLines 21-model URR Estimates Avg reveals that the All Liquids resource pool has doubled from 1.9T-Gb in '89 to 3.8-Tb currently. The première failed Outlooks by M King Hubbert (34-mbd in Y2k) & Colin Campbell (66-mbd Peak in 1989) are directly attributable to very low URR estimates (1.25-Tb & 1.873-Tb respectively).
Generally, for every $1/barrel increase in Crude, another 67-Gb of resource is added to URR. It irks McPeaksters to no end that Michael Lynch (& Morry Adelman) had it right back in 1997: As goes Price ... so goes URR & Peak! EIA has openly supported Lynch's 1989 position that as Crude Price generally rises from $10 toward $40/barrel, the economic non-conventional resource would expand to 5-Tb over a 25 year time frame (2014). In that regard, the average URR in our monthly 20-model Depletion Scenarios update is presently 4.4-Tb.
A related common flaw wrt URR is the failure of some Outlooks to account for exhaustion of the designated resource. The error of too low a Peak and/or an overly aggressive post-peak Decline Rate creates a visible "dogleg", examples of which can be seen in our depiction of full peak-to-exhaustion production profiles in the TrendLines Peak Oil Depletion Tier-2 Scenarios, and especially visible in our annual tracking of the Colin Campbell Depletion Model.
To avoid the visible horizon dilemma, one must sacrifice some degree of purism, and implement a best efforts factor for ongoing MegaProject activity. Avoiding this practice plagues practitioners to constant upward revisions as Producers announce new facilities.
The 2035 Outlook of our Peak Scenario 2200 (chart #2) includes a hypothetical worst case scenario that assumes no further MegaProject construction other than those announced to 2022. It assumes UDRO will Avg 3.4% per annum; and thus Global Supply deteriorates to 30-mbd by 2035. The resultant "Wedge" naturally seems ominous. In reality however, that Wedge started way back in 1970, and has been stalwartly in-filled by Producers almost every year. The sector recreates a new Russia every three years!
History reveals that the conservative bottom-up trajectory shown in the 2035 Outlook within PS-2200 slowly rises over time to merge with the historic trend line ... a trajectory that assumes continuation of the 3.5-mbd New Capacity trend until resource constraints make their presence known after 2050. The ever present Wedge keeps moving outward. The predator of continued growth will be rising Underlying Decline ... not a failure to continue to the New Capacity trend.
A more recent strategy by McPeaksters like PeakOilDotcom, theOilDrum, EWG, Jeff Rubin (formerly with CIBC World Markets) & Robert Hirsh, has been their misleading adaption of "the Wedge" by a false tweaking of it to make it look more SCARY. Whereas our Wedge includes a notation that Underlying Decline began in 1970 and has been addressed thru the decades, their new & improved SCARY WEDGEs imply it is a new 2009 phenomenon. To enhance the SCARY WEDGEs, some have incorporated erroneous global Underlying Decline Rates as high as 9%. "Next year" is always the first year of terminal decline. And 'cuz new records are set, the chart is always "redrawn" every year!
Whether via the SCARY WEDGE or general web-forum discussion, McPeaksters have taken to misleading the public, the Media & policymakers by substituting the IEA's All Liquids annual 1.9% UDRO with higher rate subsets from within the IEA WEO-2008 Outlook. The detailed study within the Outlook mentions pre-EOR underlying decline rates of 15% (deep sea), 10% (2030 worldwide), 9% (2007 worldwide), and post-EOR observed rates of 8.6% (2030: conventional, deep sea, arctic & NGL) & 6.7% (2007: same). These subset ratios have no place in their All Liquids Wedge charts.
Scrutiny by TrendLines Research has embarrassed some McPeaksters into replacing the misleading figures above with more conservative figures. In turn, they have employed a 4.5% UDRO stat borrowed from their long time Nemesis: CERA. But even in this action of desperation their activity hides behind a screen of dishonesty: 4.5% is from an aged CERA study. It is commonly known within the sector that in April 2008 CERA adopted a new and lower 2.1% UDRO rate for All Liquids. Last month, CERA further revised its 2009-2030 avg loss downward to 1.5%.
The setting of yet another new annual production record in 2008 has McPeaksters in utter disarray and void of credibility. The foundation for their flawed methodology and talking points is evident in a comparison of our UDRO analysis positions. An inset within chart#3 compares the PS-2200 analysis with its 2.7% Avg Rate over the 1970-2010 span with the misguided McPeakster seven-year determination and its consensus of an incremental rise from 0% to 9% since 2002. This an utter fabrication.
Another factoid absent from McPeakster sites and presentations is that NGLs and the five component non-conventional streams are all in "growth mode". Today, Regular Conventional Crude is only 73% of All Liquids production. Having peaked @ 68-mbd in 2005, and down to 62 in 2009, nobody disputes the Decline occurring in its post-plateau fields and provinces.
None of the category flows comprising the "other 27%" of All Liquids Production are expected to Peak prior to 2026. By 2025, they will make up 42% of All Liquids production. Yet the McPeakster fraternity is consumed with narrow discussions surrounding Regular Conventional Crude and ignores the rising significance of NGL & non-conventionals.
Misinformation surrounding the use of The Scary Wedge by McPeaksters is not a new phenomenon. It is a mere ploy akin to tactics used by the Lunatic Fringe elements within the Global Warming fraternity. Remember Al Gore's stepladder stunt? Or his compelling conception of Atlantic waters lapping the lower stories of Manhattan skyscrapers?
Rational Climate Change debate has been harmed irreparably by the alarmist "imminent global warming" exaggerations by agenda driven zealots. Sound familiar? In general they hate cars, big industry, metropolitans, red meat, forestry and mining. furs and population growth. They revel in the prospect that their dire forecasts of TEOTWAWKI will transform society to sustainable agrarian communes. The current hysteria is a remnant of the old Zero Population Growth proponents.
The Lunatic Fringe would have folks believe that PEAK OIL will collapse global economies and have us all living on Mennonite/Amish style farmsteads. Fiat currencies will fail; armed hordes will roam the Americas; subdivisions will be bulldozed as non-farmers rebuild the inner cities; and finally, their Die-Off theory promotes a sustainable society where 5 Billion souls will be wiped off the face of the Earth. This mix of anarchists & survivalists has been preparing since 1989 to be part of that last 1 Billion!
Fortunately, with history as our guide, there was no such calamity when in 1980, 1981 & 1982 global oil production declined by a staggering 5%/yr. Global GDP advanced at 1.7% regardless. Averaged over these three years, the USA did not have negative GDP growth.
It is noteworthy that due to declining fertility rates, the global population projection curve mimics somewhat the PS-2200 production profile. The UN has reasonable confidence that there will be a worldwide peak of 9.2 Billion earthlings in 2075, declining to 8.3 in 2175, somewhat correlating to the All Liquids flow profile. This downturn is expected albeit no respected Agency foresees a peak in total global energy in the foreseeable future. Renewable & Nuclear alternatives are poised to more than surpass the decline in fossil fuels. The demise of mankind is thus grossly over estimated.
As a final word on McPeaksters, their rhetoric seems to have overwhelmed the few well-intentioned geologists that were early to the discussion. Far too many within this fraternity are extremists from the Lunatic Fringe. It is a psychosis. They are clinically depressed souls that seek the collapse of society so that they alone may rise in the aftermath. Many of them have long ago been marginalized and/or disowned by family, friends, co-workers and neighbours.
They dwell in Internet forums seeking affirmation from likeminded survivalists. Mostly of the Boomer demographic, many are dismayed that the idealism of their youth has not come to fruition. Some are burdened with the additional baggage of a failed marriage(s) and dotcom or real estate investments. The clock is ticking, and their future is bleak.
The prospect of collapsing economies, fiat currencies, institutions and the rule of law allows them a glimmer of hope for a second chance at life. Surely their decades of preparation: the mountainside cabin, the rifles, ammo, pickup, chainsaw, lotsa cans and a ton of dry goods will be recognized and rewarded by the bestowal of leadership in a new "amerika". These folks need pity, and lotsa help ... not patronization. The mainstream Media rightfully dismisses them.
Finally, a word to all the idiots in lala land that believe solar & wind power is about to save our asses & the planet: every year, the EIA updates its forecast for the mix of primary energy that can be expected in 2030. The 2009 version of its Int'l Energy Outlook reveals that only 3.3% of the global mix will be solar & wind based. Let's repeat that: 3.3%. Adding biomass & hydro, Renewables are 11% of the total tally. The balance is comprised of All Liquids (32%), Coal (28%), Natural Gas (23%) & Nuclear (6%). Latte drinkers with a man crush on the Prius Hybrid were no doubt elated with the news that after 12 years of worldwide sales, Toyota sold its millionth vehicle in May 2009. Well sorry suckers, the Ford Mustang did that in 18 months! And Camaro/Firebird did it 42 months...
Disclosure: (no positions)