March 22, 2008
Peak Oil By 2012?

Some analysts think we are close to world Peak Oil production.

Chris Skrebowski, a researcher for the Energy Institute in Britain, told delegates that the oil supply will peak in 2011 or 2012 at around 93 million barrels a day, that oil supply in international trade will peak earlier than the oil production peak, and he forecast: "There will be supply shortfalls in winter before peak."

Skrebowski sees a number of indicators that Peak Oil is close.

According to Skrebowski, there were eight key pieces of evidence that insisted that the world was looming ever-closer to peak oil. These included the falling rate of discoveries of new oil-fields; sustained high oil prices; the age of the largest fields; the lack of real growth potential in oil-producing countries; the current lack of incremental flows; the sustained depletion of oil reserves; nongeologic threats to future oil-supplies; and the struggle to hold production by many of the major oil producers.

He explained that peak oil was predicted to become a reality in 2011 on the basis that the world’s major oil fields were being depleted at a rate of 4,5% a year.

The production decline rates of existing fields are an important part of the equation for when Peak Oil happens. Another important factor is the rate at which new oil megaprojects come on line. Megaproject delays - which are not uncommon - could make the peak come sooner. The debate about when oil peaks is partly a debate about how many projects will stay on schedule.

Don't look for help from ExxonMobil.

But how is it that crude can still trade above $100 a barrel, three times what it sold for at the start of the decade, despite a very wobbly economy?

If you want to understand that, it helps to listen in to ExxonMobil's (XOM) presentation to analysts in New York City in early March. Halfway through the three-hour meeting, Exxon management flashed a chart that showed the company's worldwide oil production staying flat through 2012.

So $100 per barrel oil isn't enough for ExxonMobil to find ways to boost production. Only national oil companies might be able to substantially increase production. The publicly traded international oil companies can't find enough oil to produce.

Jim Kingsdale expects hoarding to become a big problem.

What about supply? The recent Deutsche Bank report notes the perverse fact that since 2003 higher oil prices have caused lower growth in oil production, a phenomenon that is related to the hoarding issue that I have long discussed. Based is on the work of Skrebowski and the opinions of Maxwell and other experts on future oil supplies I suspect the world may scrape out the capacity to meet normal demand growth of developing countries for perhaps two more years, bringing oil use by the end of 2009 to perhaps 90 mb/d. But after that, oil supply growth will stop and then start declining. It could decline slowly by, say, 1 mb/d or it could decline more rapidly by perhaps 3 mb/d. If it declines by 1 mb/d between 2010 and 2015, it will be back to 85 mb/d in 2015. Implied demand, we saw, will be about 97 mb/d after the savings in U.S. car usage.

If you are sitting on a lot of oil why sell oil in a given year once oil production is in global decline? Each next year the price will be much higher. Leaving oil in the ground is a form of investment. This is why I think the environmentalists who oppose drilling in the Alaska National Wildlife Refuge (ANWR) have done us a big favor. The oil will get pumped out eventually assuming ANWR really has a lot of oil (and it might not). Meanwhile it sits in the ground waiting to help us in the coming harsh post-peak era.

Energy analyst Charles T. Maxwell thinks gasoline prices in the US will need to more than triple to force Americans into a radical restructuring of how they live.

Maxwell said it will take $12 to $15 a gallon to get Americans to let go of what he called the “precious freedom of mobility.” As much as Maxwell laments the loss, he sees no other way for the U.S. to impose enough conservation to deal with the growing imbalance between oil demand and supply that he sees developing around 2010 and getting worse in 2012 or 2013, as the world hits a “peak” in conventional oil production.

The Energy Watch Group is even more pessimistic since the EWG claims world oil production peaked in 2006 and we are looking at steep production declines going forward.

According to the scenario calculations, oil production will decline by about 50% until 2030. This is equivalent to an average annual decline rate of 3%, well in line with the US experience where oil production from the lower 48 states declined by 2-3% per year.

Still other analysts see peak oil between 2010 and 2012.

A decline in production in 2008 would be far more disruptive than a decline in 2012. Investments in reaction to the current high oil prices will gradually yield substitute energy sources in the coming years. We are better off if the world stays on an oil production plateau so that gradually rising prices send increasingly louder signals that we need to develop alternatives, implement conservation measures, and restructure our lives to need less energy.

We need nuclear, solar, and wind power and great batteries for transportation.

Share |      Randall Parker, 2008 March 22 12:12 AM  Energy Fossil Fuels


Comments
Phil said at March 22, 2008 4:01 AM:

Oh dear, Randall, you're showing your biases again.

"The Energy Watch Group is even more pessimistic" because they call the peak at 2006.

Now that's what I call optimism, myself.

Because the sooner it peaks and the faster it declines, the better for the planet it will be.

Ken Caldeira and his colleagues say we need to stabilise at zeo carbon emissions, and soon:

http://www.agu.org/pubs/crossref/2008/2007GL032388.shtm

That paper is behind a paywall, alas, but there is an interview with Ken Caldeira here:

http://www.beyondzeroemissions.org/2008/03/07/ken-caldeira-zero-emissions-carnegie-climate-change

James Hansen et al also have unpleasant things to report (or debate) - "Target Atmospheric CO2: Where Should Humanity Aim?":

http://www.columbia.edu/~jeh1/2008/TargetCO2_20080317.pdf

Building all those nukes is going to be a bit problematic too:

http://bloomberg.com/apps/news?pid=20601109&sid=aaVMzCTMz3ms&refer=home

Peak containment vessels, anyone?

Our mad dash for nukes is yet another example of Garret Hardin's "Tragedy of the Commons" ( http://dieoff.org/page95.htm ) type of thinking. Each nation attempting to ramp up nukes is doing their sums in the same way that the commoner does his, lookinbg only at the marginal costs and benefits to them, ignoring that everyone else is also rishing in the same direction.

Expect more bottlenecks than just pressure vessels.

Phil


Phil said at March 22, 2008 4:15 AM:

I apologise for all my typos above.

One other issue you raised needs a lot of thought - hoarding.

For a long time I've been of the opinion that the best thing a country rich in natural resources can do with them is to sit on them and consume everyone else's.

The downside is, that you leave yourself open to invasion by others seeking to exploit your treasures.

So, there's a fine line to be drawn there. Hoard too much, and others will come and take it regardless. Don't conserve and export everything, and you'll be left without.

The best strategy, it seems, would be to reduce your and others' dependence on these resources. That reduces the dual risks of over-consumption and resource wars.

Phil

odograph said at March 22, 2008 6:33 AM:

Did you see interesting counter-argument at Calculated Risk?

What it says at first sight is that in a period with low investment returns and rising oil prices, leaving oil in the ground becomes a better "investment" in comparison. I mean, if you'd sold oil at $50/bbl a few years ago and then put your surplus in stocks or bonds, you'd likely have a loss today. On the other hand, if you'd left the oil for this year you could have sold at $100/bbl, a "100% return."

It that seems like shaky logic, remember this: Those of us who lean toward peak oil certainly do see future oil as worth more than current oil. If we were in charge, we certainly would defer production for higher returns later.

So the question (in this difficult field of economics-not-geology) is how the actors are acting? Are they sitting on production to enhance their return? Or must we assume (in peak oil eat-its-tail fashion) that they are pumping at capacity because they are at peak, and too foolish to profit from it?

Randall Parker said at March 22, 2008 9:33 AM:

odograph,

Some countries aren't going to be able to afford to hold back oil. But imagine what happens if, say, the Saudis decide they really can hold back oil. After all, their revenues are soaring right now. They could hold back 1 million barrels a day and prices would go up immediately. Due to that price rise they might even come out ahead.

Also, there are many levels at which hoarding takes place. If you know that gasoline is going to cost more every week are you going to drive until your tank is empty? Or fill up more often?

Also, look oil companies. Once they know that oil prices are going to go up for an extended length of time at a rate that is faster than inflation or faster than their cost of money it makes sense for them to fill up those big storage containers.

Importing national governments hoard as well. Look at the US Strategic Petroleum Reserve. That's hoarding. The Chinese are building something similar.

David Govett said at March 22, 2008 10:54 AM:

Funny how monopoly laws don't apply to OPEC. Guess only the little guy need abide by the law.

odograph said at March 22, 2008 1:31 PM:

It's unknown how much Saudi has been holding back, right?

Look, I don't know the answer here, but I am confident of one thing: peak oil is primarily an economic discussion.

That may seem shocking, because yes we know that underlying everything (literally) is the geology of oil. But pause a moment and reflect, at any given time, when observing their controlled reserves, humans make economic judgments about how much production to make, and how much to defer.

There is entirely too much "everybody is stupid but me" in peak oil circles, and their logic depends too much upon it.

If the big producers, like Saudi, see peak coming, they should shepherd their resources. To repeat, we would. We'd all have to be more stupid than is reasonable to assume, to do otherwise.

Of course, such shepherding won't prevent peak oil. I might only smooth it, and give us that good old "plateau."

odograph said at March 22, 2008 1:35 PM:

David, a US entity ... for odd historical reasons it was the Texas Railroad Commission, for years (in the early part of this century) it had the power to set oil prices in the US. We "invented" OPEC. They just took the idea and ran with it.

parky said at March 22, 2008 3:19 PM:

What bemuses me is the response to the idea of peak oil. There are some that argue that oil is continuing to be produced by some geological process - however that is not a large group. Assuming oil is a finite resource, at some point it will become more expensive by ordinary market processes. The question then becomes "when". The recent run up in oil prices has been attributed to the weak dollar - which is certainly -in part- true. Any objective look at the decline in the dollar vs oil reveals that the price increase in oil is substantially greater than the inflationary decline against other currencies would call for. Other currencies are being affected by inflation and high energy prices as well.

The concept is a frightening one. Hoarding, reducing demand by price increase, etc. are actually forcing behavior changes even if the reason for the change is not recognized.

Ironically, the global warming responses, are in some respects congruent with, and complementary to the responses to energy shortages.

God made this earth and put us on it about 6,000 years ago. It's time for him to come through again

Randall Parker said at March 22, 2008 3:31 PM:

David Govett,

The US government can't enforce antitrust laws against sovereign governments. OPEC is made up of governments.

Most of the remaining oil in the world is under the control of governments. The national oil companies do most of the oil production. That is true in Venezuela, Mexico, Iran, Kuwait, Saudi Arabia, UAE, and most other big producers. The United States and Canada are therefore exceptions in the oil industry. So if you want to think through oil economics on the supply side you have to think thru incentives as (mostly non-democratic) governments see the incentives.

odograph,

The Saudis have little extra production capacity. They are very quietly reactivating oil small oil fields that they capped off decades ago.

parky,

Go check out graphs of oil prices in Euros and you will see that most of the run-up in oil prices is not due to the decline in the value of the dollar.

odograph said at March 22, 2008 4:09 PM:

"They are very quietly reactivating oil small oil fields that they capped off decades ago."

Sounds like something out of the peak oil echo chamber, where as I say, the assumption is made that ever Saudi action must be stupid.

They must stupidly be selling that oil at $100, when $200 is right around the corner, right?

(People have been stupid in the past, and no doubt will be again (look at the US debt to income ratios), but it troubles me to have a theory that requires stupidity in your counter-party.

odograph said at March 22, 2008 4:13 PM:

BTW, on the commodities run, I like James Hamilton's summary. Like the dollar's fall, it probably isn't the whole explanation for oil, but it seems likely as a contributing factor.

I was also stay away from saying a price "is" or "isn't" anything. We are always guessing, and that self-knowledge keeps us safe.

Randall Parker said at March 22, 2008 5:34 PM:

odograph,

The Saudis are in a difficult position. Their considerations:

1) The Saudis don't want their buyers to think that development of substitutes is an urgent matter since substitutes decrease the demand for oil.

2) They need more money for a growing population and because they were living beyond their means for a while.

3) Unlike in the 1980s they find they can't cheaply keep lots of extra production on hand to allow themselves to be swing producers.

4) Some of them are better off in the long run pumping the oil later. Mind you, if you are a high royal in their 70s or 80s a long time horizon might not be your top concern. So they are not united on what is the trade off between selling now and selling 5, 10, 20 years later.

5) But as the price of oil rises still higher they'll actually gain more flexibility to cut back production since their revenues will rise even more. The question at that point is whether they will have spare capacity to shut down or will their production already be in significant decline?

odograph said at March 22, 2008 5:48 PM:

Right, but all of those things would pale in comparison to looming production shortfalls.

1. "Alternatives" can only hurt them if they have a lot more oil to sell, and they don't get to sell it into a global shortage.

2. They must be smart enough to realize a revolution around the corner would be very, very, bad. It is too much to assume that everyone above middle-management (those who see the reserve data) have a plan in place to bug-out to the Bahamas.

3. Or, they discovered that we will pay $100+ readily, and those alternatives are not in fact easy to come by

4. Back to number 2.

5. You can't know that hasn't happened.

(a lot of the peak oil position is self-referential. events are interpreted in terms of a "secret but known peak" and alternate explanations are rejected ... )

Bottom line - we don't know the far future (a decade plus) but we can make some observations about our current world. In our current world producers are not obviously hoarding, and so the probably do not see short term declines.

odograph said at March 22, 2008 5:53 PM:

Shorter: for us to believe that a drastic production drop is looming in the very near term, we must also believe that every oil producer (in the world!) is very stupid.

Randall Parker said at March 22, 2008 7:56 PM:

odograph,

In the late 1970s and early 1980s lots of oil companies overinvested in developing oil fields and got burned by the glut. Were they all stupid? They all made the same mistake. Or how about all those American home builders who all made the same mistake and built too many houses? Were they all stupid? Or how about all those investment banks who bought so many dodgy securities and lost huge sums? Were they all stupid? Again, they all made the same mistakes and big mistakes. Everyone is dealing with imperfect information and herds together make the same big mistakes together.

What I can't know: Sure, the Saudis might have already peaked due to depleting fields. Or maybe they decided to lower production in order to sell more oil later when prices will be higher. I can't be certain about why their production is below its peak of 2 or 3 years ago.

I think one thing that OPEC learned in the last 5 years is that they didn't have to worry about $40, $50, $60 a barrel oil causing a big decline in demand. Rising Asian demand is even less sensitive to price than American demand. Economic growth, especially in China, pushes up total demand even as European and American demand stops growing.

Randall Parker said at March 22, 2008 7:59 PM:

Odograph,

I do not see unconventional sources of oil substituting in sufficient quantity for conventional oil. Shell isn't going to get oil shale extraction started until 2015 and Shell's possible quintupling of Alberta tar sands extraction still doesn't add up to a million barrels of oil per day:

The Anglo-Dutch oil group is producing 155,000 barrels a day from tar sands, had plans to raise this to 500,000 barrels and has just formally applied for a licence to enable it to raise that figure to 770,000.

The exploitation of tar sands is controversial because the methods used can be highly water and power intensive as well as being far more carbon intensive, but Shell said it had halved the energy intensity of its tar sands operation in four years.

David Govett said at March 23, 2008 1:19 AM:

If the U.S. Gov't can't apply U.S. antitrust laws against OPEC, why can the EU apply its antitrust laws against Microsoft and other U.S. companies? Quite profitably, I might add.

odograph said at March 23, 2008 2:03 AM:

Well, all we can do is judge stupidity against the data we have. We had data on the housing bubble (and the dangers of excess debt), and many of us acted accordingly. As is classic in any bubble some others saw it, but tried to get in and out before it popped (a few yes didn't even see it). The book "Irrational Exuberance" dealt pretty well with that data, a few years before the "pop."

Now, if we actually had data as little guys maybe we could start to second-guess all the oil companies (and OPEC), but we don't actually.

But many of us assume stupidity based on assumed oil reserves?

odograph said at March 23, 2008 2:09 AM:

BTW, I recognize that oil prices are trending higher. I think that all the economic reasons above are factors, as well as reserve depletion, and globalization, and increased world-wide demand. The "easy oil" has been steadily consumed.

I don't expect prices to fall much. I expect a long-term upward march.

Brett Bellmore said at March 23, 2008 5:33 AM:

"If the U.S. Gov't can't apply U.S. antitrust laws against OPEC, why can the EU apply its antitrust laws against Microsoft and other U.S. companies? Quite profitably, I might add."

Because it's a lot easier to pirate software than a physical commodity like oil, so the EU has a much larger club to wave at Microsoft than it does at the Saudis. If push comes to shove, and Microsoft says, "Screw your crazy court rulings, we're not shipping to Europe anymore!" the EU just stops enforcing Microsoft's rights in Europe, and the computers keep running. Try doing the same to the Saudis, and the lights go out.

David Govett said at March 23, 2008 11:05 AM:

Fortunately, developments in nanotech and biotech labs will obviate Saudi oil. The Saudis better hope no bio/nanohacker is developing an oil-consuming nanobot with built-in GPS functionality to limit its range. Say, that's a good idea for a start-up.

Randall Parker said at March 23, 2008 12:09 PM:

David Govett,

1) Microsoft is a company, not a government.

2) Microsoft needs to do business in the EU. By contrast, the UAE and Saudi Arabia as governments do not need to do business in the EU. They can sell their oil at their loading docks on their own sovereign territories.

3) Antitrust law does not regulate governments.

As for nanotech and biotech contributing to energy solutions: Yes, eventually. But today I just went for a walk and saw diesel fuel priced at $4.179 per gallon at a Shell station a quarter mile from where I sit here typing. That price is going to go much higher ($5, $6, $7, $8+ per gallon) before nanotech and biotech bring its price back down again.

averros said at March 23, 2008 12:39 PM:

It's been Peak Oil for 50 years now.

What I love about those experts is that they pontificate about oil, but not one of them knows where the oil comes from.

Randall Parker said at March 23, 2008 1:35 PM:

averros,

Hubbert made a very specific prediction in the 1950s and he was right 15 years later. He also didn't predict global peak until this decade.

50 years of Peak Oil for the entire world? No. Lots of Hubbert Linearization estimates have predicted some specific countries - starting with the US.

odograph said at March 23, 2008 9:09 PM:

From Wikipedia:

"In 1974, Hubbert projected that global oil production would peak in 1995 at 40-GB/yr 'if current trends continue' [2] Various subsequent predictions have been made by others as trends have fluctuated in the intervening years. Hubbert's theory, and its implications for the world economy, remain controversial."

I think Hubbert's method is very useful, and I don't actually fault him for being wrong on that one.

Looking at it like that, making it about Hubbert in 1974, is not very useful.

What's useful, in my opinion, is understanding the peak oil community's reaction to that "would peak in 1995 at 40-GB/yr." In particular, why is the response to run the curve again, and again, with new data?" Or to try variations on the method?

If it worked as a predictor, we'd have our answer.

Really we come back to the future being uncertain, and the unfortunate truth that simplifications and heuristics like Hubbert's Curve cannot be absolutely reliable.

David Govett said at March 23, 2008 9:17 PM:

What many of you fail to consider when discussing the price of oil is our old friend: inflation. In real terms, the price of oil does not increase much, thanks to inflation. Were it priced in Euros, however, the story would be different.

Diablevert said at March 23, 2008 11:58 PM:

"Shorter: for us to believe that a drastic production drop is looming in the very near term, we must also believe that every oil producer (in the world!) is very stupid."

An excellent point.

However, I have an apple. If I take it to school with me tomorrow, I should be able to trade it for a Ho Ho. But I am hungry now.

Or in other, more comprehensible, words, it may be that the smart play is to horde now in order to trade later for significant gain. But that depends a great deal on how much ones needs the money now. If i know that my single most important export, the sole prop to my economy, is going to be a lot more scarce in 10 or 15 years, then I should probably try and save as much of it as I can, true. But I should also attempt to diversify my economy so that when that dark day does come and decline sets in I don't find myself up shit creek without a paddle. And that would mean I'd need to spend money _now_, on infrastructure, education, investments, etc. So there may be a limit to how much I can afford to horde.

Especially because the other thing scarcity will do is inspire a search for substitution, and if a successful substitute is found then 10 or 15 years from now prices might not be anywhere near high enough to make up for the decline....Skiing, anyone?

Bob Badour said at March 24, 2008 6:32 PM:

Diablevert,

One has to put the http:// part in or the url gets taken relative to futurepundit...Skiing, anyone?

averros said at March 25, 2008 2:11 AM:

Randall - when you quote a specific expert which happened to make a good prediction, you make a simple logical mistake. You fail to take into account all those zillions of experts who were totally wrong. Even if they make absolutely random predictions, there are pretty good chances than some of them will guess something right. It does not mean that they will stay right, or that their successful predictions is anything other than a statistical fluke.

To predict availability of oil, there should be a theory of its origin. There are several. Some of them say that oil is not going to run out any time soon, and that we tapped only the surface deposits. *None* of these hypotheses was conclusively proven, and several have no strong contrary evidence.

See, for brief explanation: http://en.wikipedia.org/wiki/Abiogenic_petroleum_origin

Bob Badour said at March 25, 2008 6:28 AM:

averros,

Interesting. If petroleum is abiotic in origin, perhaps humanity really can put enough CO2 into the atmosphere to destroy the world. Otherwise, we are limited to re-introducing the warmer (and in my view quite attractive) climate of the early dinosaurs.

Randall Parker said at March 25, 2008 4:25 PM:

averros,

I think the evidence for fossils as sources of petroleum is pretty overwhelming.

But regardless of how the oil got there the rate of discovery has greatly declined and has been below consumption for many years.

averros said at March 26, 2008 2:25 AM:

> Perhaps humanity really can put enough CO2 into the atmosphere to destroy the world.

Or not. Do not forget that what plants are mostly made of is (surprise) CO2. Increasing it increases plant growth - dramatically.

Besides, the history of Earth knows periods of much much higher CO2 concentrations - which didn't cause catastrophes.

> I think the evidence for fossils as sources of petroleum is pretty overwhelming.

That's until you look at the evidence from the other side. It is just as overwhelming. Or underwhelming. None of these theories are very good in predicting where the oil is; that's why oil prospecting is such large business. In any case, the abiogenic theory served USSR quite well for a long time.

> But regardless of how the oil got there the rate of discovery has greatly declined and has been below consumption for many years.

Well, the availability of _easily accessed_ oil is diminishing for a simple reason - the easiest deposits are exploited first. Do not forget that "discovery" means discovery of commercially feasible reservoirs with the current technology and prices - this definition changes with time. And it still says nothing about total deposits. (BTW, Cambridge Energy Research Associates say that there's not going to be any decline in world oil production until 2050).

In any case, the oil problem will go away as the new technology displaces oil burning as the prime energy source. We stopped using buggies for transport not because of horse shortage or running out of hay.

Randall Parker said at March 26, 2008 4:32 PM:

averros,

Read about the CERA track record on oil price predictions.

By contrast, the CEOs of ConocoPhilips and Total both say that the world will never see 100 million barrels per day of production.

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