The Energy Challenge 2004 - Petroleum
Murray Duffin, Retired
The Current Situation
Recent high prices of oil have raised the visibility
of the petroleum challenge considerably, but there
is still more heat than light being generated on the
subject. For the first weeks of the recent price surge,
most writers were trying to lay blame on OPEC for
acting like robbers. In fact, as analysts are now
beginning to realize, prices have gone up in 2 stages.
The first in 2003 was simply due to the weak dollar.
During that stage, the price in Euros barely budged.
The second (2004) is due to WW demand outstripping
supply, aggravated by security concerns. The weak
dollar and the security concerns are direct results
of Bush programs, i.e. the tax reduction budget deficits,
and the war in Iraq.
The gasoline price increases we have seen recently
result from 4 primary causes.
- Worldwide oil demand is at or above installed
production capacity. There may be 2% of slack left,
all of it in Saudi Arabia and Kuwait. World economic
recovery and booming energy demand in China and
India are outstripping production increases.
- Second, the supply of low sulfur crude is even
more critical, and most USA refineries are designed
for low sulfur crude.
- Third, no new refinery capacity has been added
in the USA in nearly three decades, and with numerous
different gasoline mixes mandated by our 50 states
to minimize summer air pollution, refinery capacity
is max'd out. USA gasoline demand is up about 3%
year on year, mainly due to growing use of fuel
- Fourth is fears about middle-east instability
causing governments to increase strategic reserves,
and investors to go long.
You will hear that oil company profits are up 90%
and that is true. What you will not hear is that oil
company profits have been dismal for several years,
which is one of the reasons that no refinery capacity
has been added. Even after this nice rise, profits
are not excessive. No, I am not a spokesman for the
What most people don't know is that USA oil production
has been in decline since 1970, with the rate of decline
slowly increasing. It's at about 4%/yr. now. We now
produce only about 40% of the oil we consume, and
oil imports are the single largest item in our very
negative balance of payments. If you had to pay at
the pump to maintain the military we keep in the middle-east
to keep the supply lanes open, (not counting the cost
of the war in Iraq), instead of having it buried in
the defense budget, gasoline would be over $7.00/gal
To make things more interesting, worldwide oil production
will probably be in irreversible decline before the
end of this decade. The present high oil and gasoline
prices are just the first tremors of the earthquake
that is coming.
Some months ago Lee Raymond, the chairman of Exxon-Mobil
made a presentation that included a curve showing
historic oil production (in Mb/d) and projecting future
supply and demand. The supply curve, based on production
from present known reserves sloped downwards. The
demand curve sloped upwards. The growing gap between
supply and demand represented new sources that we
must discover to support world economic growth. Mr.
Raymond made the point that by 2020 we must find enough
new oil sources to supply 50 Mb/d. Today Russia and
Saudi Arabia are each supplying a little more than
9 Mb/d, and struggling to get to 10. Their combined
claimed reserves are about 400 Gb. One can extrapolate
that we need to find and develop1100 Gb of new reserves
during the next 15 years, or an average of about 75
Gb/yr. During the last 15 years, with plenty of incentive
to find new oil sources, we have not averaged 10 Gb/yr.
Let’s forget about economic growth, how about
just offsetting declines. If Mr. Raymond’s curve
reflects reality we would still have to find about
30 Gb/yr. How are we doing? From http://www.ems.org/rls/2004/01/28/oil_supply_short.html
we find the following:
The rate of major new oil field discoveries has
fallen dramatically in recent years. There were 13
discoveries of over 500 million barrels in 2000, six
in 2001 and just two in 2002, according to the industry
analysts IHS Energy. For 2003, not a single new discovery
over 500 million barrels has been reported. Key findings
of a recent Petroleum Review report are:
- Between 2003 and early 2007 some 8 million barrels/day
of new capacity is expected to come on stream.
- In 2005, 18 projects with a potential peak capacity
of 3 million barrels a day are due to come on stream,
slowing in 2006 with 11 new projects followed by
3 in 2007, and 3 in 2008 adding a cumulative 4 million
barrels/day of potential new capacity at their peak.
- It appears likely that from 2007, the volumes
of new production will fall short of the need to
replace lost capacity from depleting older fields.
Further confirming this trend, recent E&D results
strongly support the expectation of a near term peak
in oil production. The net present value of all discoveries
for the 5 oil majors, during 2001/2/3 was less than
their exploration costs.
Six months later, in World Energy, Mr. Raymond admitted
that we have to find enough new oil to provide 8x
Saudi Arabia’s current output, i.e. at least
5 new Saudi Arabias, or 7 Russias. How likely is that
too happen? Oil in the earth’s crust is distributed
fractally along a curve of declining field size versus
increasing field occurrence. There are very few super
giants, a few more giants, more majors, etc. down
to many, many insignificant fields. Because they are
the easiest to detect, the big ones are found first,
and they have been found. There are about 41,000 known
oil fields worldwide, of which about 21,000 are termed
very small to insignificant. The probability that
we have found so many small fields, and overlooked
any more big ones, let alone a Saudi Arabia or Russia,
is near zero.
Recent events and near future
In the 2 months since the rest of this paper was
written the price of oil has bounced off of $56.00/B.
In the past, when supply and demand were in close
balance (due to artificially constrained supply),
price has been very volatile. A 1% change in the balance
can cause a 30-50% swing in price. When supply has
been constrained below demand, price has doubled or
tripled in a very short time. Excluding a very small
slack capacity for sour crude there is a large possibility
that we are now at another tipping point. . In current
dollar terms, during the prior “oil shocks”
prices went to $70-80/B; oil is a much smaller % of
USA GDP than in 1973; gasoline is a much smaller %
of household budgets than in 1973; and China’s
labor costs are so low that energy cost increases
can easily be passed on to customers. Given these
facts, we can expect prices to continue to increase,
possibly with brief declines. Do not be surprised
if oil prices spike to => $80.00/B in the next
weeks, as cold weather raises heating oil demand.
On the other hand there is some evidence that China
and India have been building strategic reserves, and
if their capacity fills, a temporary drop in demand
could send prices back to the low 40s for some months.
Simmons expects another large demand increase in 2005,
so lower prices are not likely to last long.
The “D” Words
Analysts, economists and industry spokespersons
seem very reluctant to talk about depletion or production
decline. Chris Skrebowski of ODAC has analyzed the
2004 BP Statistical review of World Energy and has
noted that there were 32 countries that were able
to increase production in 2003, vs. 18 countries which
have been in decline for 3 years or more. In 2003
the growers had to increase production by 7.5% to
offset declines of 4.9% for the decliners to give
net world growth of 3.7%. Production from the 18 countries
now in sustained decline peaked in 1997, and had fallen
10.7% by 2003. More countries are joining the decliners
list, their rate of decline is increasing, and the
growers list is not growing, so the burden on those
still growing is increasing rapidly.
In 2003 several of the growers increased production
by near 10%, mainly by reopening wells that had been
shut in during the price declines at the end of the
last century. Now every one is operating close to
or at installed capacity, so a similar increase cannot
be repeated. To increase capacity significantly will
require large investment and some years. Declines
however continue to accelerate. It is only a matter
of time, and not much time, before growth is no longer
able to offset declines.
There is a phenomenon, well known in the oil industry,
but little publicized, that when an oil field has
been about 50% depleted, production begins an irreversible
decline. In 1956 a petroleum geologist named M. King
Hubbert applied this concept to an analysis of the
lower 48 states, and predicted a decline of production
starting about 1970. He was derided at the time, but
lower 48 USA oil production has been in decline since
1970. The phenomenon has been named the Hubbert Peak,
and the production growth and decline curve is often
referred to as a Hubbert Curve.
In 1998, using the best petroleum industry database
available, two petroleum engineers (Campbell and Laherrere)
applied a Hubbert analysis to the entire world, and
predicted a peak between 2000 and 2010. Refined analyses
since then focus on 2005 to 2010. In fact, due to
economic and political factors, there is more likely
to be an irregular plateau, with possibly several
small peaks before the decline, but an irreversible
decline by 2010 seems inevitable. There is a great
deal of real data to support such a view and little
but untenable optimism to support alternative views.
“In God we trust, others please bring data!”
We know that Middle East reported reserves grew
by about 280Gb between 1987 and 1990, with little
additional exploration, and remained constant during
the 1990s in spite of continuous production. It is
certainly more likely that reserves are overstated
than understated. Middle East reported reserves seem
to have been influenced by OPEC quotas.
The USA consumes about 25% of world oil production
and imports >60% of consumption. With growing demand
from developing countries and exploding populations
in OPEC countries, we will not be able to maintain
our present share of world oil, short of occupying
the entire Middle East. When world availability begins
to decline, our availability will decline faster.
Imagine a world where natural gas availability has
suddenly dropped by half, and oil availability has
gone into irreversible decline, and we have done nothing
in advance to compensate. That is the world we face
with the present Congressional energy bills, and it
will lead to an economy that will make the Great Depression
look like a picnic. We can alleviate that probability
by addressing energy conservation and efficiency,
and developing renewable electricity alternatives
vigorously, starting now, but that is the polar opposite
of the emphasis of present pending legislation!
So far, in their speeches Vice President Cheney
and Secretary Abraham have looked out 10 to 20 years,
but not beyond 20 years. By 2030, oil availability
will be <50% of our peak year (which should occur
before 2010), and before 2040 there will be no availability
for general energy needs. The pittance remaining will
be allocated to chemicals and agriculture. What kind
of world will we leave our children if we have not
succeeded in developing a new electricity based energy
economy long before 2030? What chance do we have to
succeed if we not make good strides by 2010? What
can we gain by the present policy of focusing on accelerated
depletion of severely limited supply side resources?
For detailed petroleum information visit
http://www.peakoil.net/, and look particularly
at the newsletters archived there. For a presentation
on Saudi Arabia oil prospects go to: http://www.globalpublicmedia.com/TRANSCRIPTS/index.php?name=MATT.SIMMONS&origin=/&transcript=2004/07/Simmons.2004-07-09
or try the tiny URL at: http://tinyurl.com/5bx3t.
Poor information and silence
Understanding the Petroleum challenge is hampered
by a lot of non-information, misinformation, disinformation
and confusing information. There are numerous myths
floating around, a few of which need to be addressed.
Fortunately the most insidious myth of all, the implied
myth of silence on the subject, is now dying. High
oil and gasoline prices have recently led to a growing
spate of articles in the printed media, and frequent
mention on TV. Most recently the topic has been featured
in business-oriented magazines like Business Week
and Fortune, both in August 2004. The ability of government
and industry to keep the issue under wraps is rapidly
In their year 2000 report, the USGS (United States
Geologic Survey) project estimated ultimate recovery
(EUR) of 3,000 Gb, with “potential” discovery
plus reserve growth adding 1,300 Gb to reserves from
1996 through 2025. The word “potential”
is not defined. They seem to have taken USA reserve
growth history and applied it to recently reported
world reserves, a statistically invalid approach.
With 8 years of the period in question now elapsed,
actual reported discoveries are less than 30% of the
needed run-rate. Reserve growth is not reported, but
the highest number that could be inferred is <
80% of the needed run rate, and the likely number
<30%. Both are in decline. A cumulative number
by 2025 above 300Gb (vs. 1300) seems very unlikely.
To increase available oil (discovery plus reserve
growth) by 1,300 Gb in 30 years, as the USGS projects,
means an average increase of 43 Gb per year. This
is more than four times the experience of the 90s,
and would mean sustaining the highest level ever achieved
during a single decade, over three decades. Such a
projection simply does not stand the test of reason.
The USGS underwent a Congressional investigation and
was found guilty of misleading Congress after the
1973 oil shock. It is clearly time they were subjected
to a new investigation.
Many economists pin their hopes on “non-conventional
oil,” generally shale oils, tar sands, Orinoco
bitumen and very heavy or very deep oils, not recoverable
or refineable by conventional technology. To do so
they forget recovery rate. For sure, such resources
are vastly larger than known conventional oil. However,
after decades and billions of dollars of effort, shale
oil recovery has been abandoned. Tar sand and bitumen
recovery are now about 1% of total oil consumption,
and even with economy breaking investment, are unlikely
to exceed 10% of present world demand by 2020. Tar
sand recovery is also an environmental nightmare.
Further, it has been estimated that no more than 1/6
of unconventional resources will ever be energetically
recoverable. Unconventional oil will never be a solution.
At best it will slightly reduce the rate of decline.
Others believe that enhanced recovery technology such
as pressurization, water or steam injection, and horizontal
drilling will greatly increase recoverable oil. For
fields that have been in decline for long enough to
project the EUR, and for which enhanced recovery has
been employed, recovery has briefly improved, and
then decline has resumed on a steeper curve, leading
to the same EUR. Enhanced recovery usually accelerates
depletion, but does not increase available oil.
Reserves to production (R/P) ratio
Another frequently quoted statistic is reserves to
production (R/P) ratio. Recent BP/Amoco statistics
provide an R/P of about 38 years, based on 2002 production
rates and known reserves. Optimists note that this
ratio has been near 40 years for at least two decades.
There are several problems with this argument:
- We are not discussing the end of oil (total exhaustion
of reserves); we are talking about the end of cheap
oil, the post-peak decline, when half the original
endowment is still available.
- The implicit premise of the R/P is that production
can be held constant until oil is exhausted and
then drop abruptly to zero. Petroleum doesn’t
work that way.
- The USA R/P ratio has been near constant for
three decades, while both R & P have declined
in lock step.
- When low on gasoline, you can continue to accelerate
your car until the tank hits empty. Increasing production
does not imply that we are far from peak availability.
The scariest probable myth of all is stated reserves.
It is likely that at least some of the reserve increases
claimed by OPEC in the late ‘80s were political,
not geologic. The virtually unchanged reserves during
the last 15 years, while about 120 GB have been produced
by OPEC, is simply not credible. Real world reserves
might well be 200 to 300 Gb less than claimed, and
the world production peak might well be in 2004.
- As T Boone Pickens has recently noted, sub $30.00/B
oil is a thing of the past. Sub $40.00/B will not
be experienced often or for long.
- We are much more likely to see $80.00/B oil than
$30.00/B oil in the near future.
- There are no fossil fuel supply side answers
to the challenge of high oil prices.
- We had better start developing demand side and
renewable solutions while we still have abundant
fossil fuel to develop them with. There is no second
- Present industry and government awareness and
responses are contrary to our needs, and must be
changed, - urgently.
- Up to now the Power and Gas segment has not perceived
petroleum as their concern. Declining petroleum
completely changes their future also, and they need
to wake up to the fact.
PS: This just in,
Some of the industry's most informed participants
believe there is little that can be done to increase
worldwide oil production. Earlier this year, British
Petroleum announced that it will be returning to shareholders
all cash flow it receives in excess of $25US per barrel.
For every dollar the company receives in excess of
$25US per barrel, BP will adjust its dividend or increase
its share buyback program to return the cash flow
to shareholders. BP has essentially given up its effort
so increase production or even keep production flat.
Instead, the company has chosen to give shareholders
back their capital with interest.
Other key Internet sources include:
Nice addition to your series.
It is unfortunate that, if people and governments
and corporations all do all the right things
and exert a concentrated effort to substitute
fossil energy with alternatives then by definition
no crisis should occur and all the oil lobbies
will say "See I told you so. Next time leave
It's already too late to hope to pass on a
world to the next generation in the same condition
we received it, but we should at least try to
leave it a viable one.
Biblical wisdow in planning for change: Noah
did not wait until the water was at his knees
before saying: "Hey, maybe we should start to
think about building a boat." Joseph did not
wait until the 7 good years were over before
starting to plan and save for the 7 bad years."
The end of cheap oil will last for more than
the 7 bad years Joseph faced, or the 40 flooded
days Noah faced. We need to keep as much petro-chemicals
as we can for as long as we can, for making
Transportation will be the first area effected
by oil depletion. As Gal Luft suggested recently,
plug-in hybrid electric vehicles (PHEV) need
to be promoted. Also, pure plug-in electric
vehicles (PEV) without alternative engines.
There are many ways to make electricity.
|Edward A. Reid,
The position of Secretary of Energy is currently
open. How committed are you to retirement?
Good article full of sound factual material
backed with excellent analysis.
Of course, all who know me know that my question
to you is going to involve nuclear fission.
Why do you refuse to mention it in the same
discussion as your comments about conservation
and renewables? Surely it occurred to you that
fission might mitigate some of the potential
hazards of a peak in oil production.
I would be a very frightened American if I
thought that we were approaching the peak without
any possible alternative other than to do without
in combination with reverting to dependence
on power systems dependent on the vagaries of
Rod Adams www.atomicinsights.com
Philo - I like your analogy. Maybe we can get
the religious right on board. Edward - You are
the second to make that suggestion, but you
are making it to the wrong guy. I would serve
without salary, if I had the President's full
support, but neither the request nor the support
are likely. Rodney - I am trying to paint a
holistic pictute of the global energy challenge,
including the available responses. Petroleum
should have been the second article, followed
by coal and nuclear. If you read them in that
order your question is partly answered. There
is more to come. Murray