We had better start preparing for a decline in global oil supply
Are global oil supplies about to peak? Are they, in other words, about to reach their maximum and then go into decline? There is a simple answer to this question: no one has the faintest idea.
Consider these two statements: 1. “Last year Saudi Aramco made credible claims that as much as 500 billion-700 billion barrels remain to be discovered in the kingdom.” 2. “Saudi Arabia clearly seems to be nearing or at its peak output and cannot materially grow its oil production.”
The first comes from a report by Energy Intelligence, a consultancy used by the major oil companies(1). The second comes from a book by Matthew Simmons, an energy investor who advises the Bush administration(2). Whom should we believe? I have now read 4000 pages of reports on global oil supply, and I know less about it than I did before I started. The only firm conclusion I have reached is that the people sitting on the world’s reserves are liars.
In 1985, Kuwait announced that it possessed 50% more oil than it had previously declared. Had it just discovered a new field? Had it developed a new technology, which could extract more oil from the old fields? No. OPEC, the price-fixing cartel to which it belongs, had decided to allocate production quotas to its members based on the size of their reserves. The bigger your stated reserve, the more you were allowed to produce(3). The other states soon followed Kuwait, adding a total of 300 billion barrels to their reserves(4): enough, if it existed, to supply the world for 10 years. And their magic oil never runs out. Though extraction has long outstripped discovery, Kuwait posts the same reserves today as it claimed in 1985(5).
So we turn to the US Geological Survey for an answer, and find that its estimates of global oil supply are as reliable as the Pentagon’s assessments of Iraqi weapons of mass destruction. In 1981 it said we possessed 1719 billion barrels of oil(6). In 2000, 2659(7). Yet the discovery of major oil fields peaked in 1964(8). Where has it come from?
It is true to say that oil reserves are not fixed. As technology improves or the price increases, oil that was formerly too expensive to extract becomes available. But the oil geologist Jean Laherrere points out that the survey’s estimate “implies a five-fold increase in discovery rate and reserve addition, for which no evidence is presented. Such an improvement in performance is in fact utterly implausible, given the great technological achievements of the industry over the past twenty years, the worldwide search, and the deliberate effort to find the largest remaining prospects.”(9)
The current high oil prices are the result of a shortage of refineries – exacerbated by the hurricanes in the Gulf of Mexico – rather than a global shortage of crude. But behind that problem lurks another. Last week Chris Vernon of the organisation PowerSwitch published figures showing that while total global oil production has risen since 2000, the production of light sweet crude – the kind that is easiest to refine into motor fuels – has fallen, by two million barrels a day(10). This grade, he claims, has already peaked. The refinery crisis results partly from this constraint: there aren’t enough plants capable of processing the heavier grades.
And next in the queue? Who knows? All I can say is that Bush himself does not appear to share the Geological Survey’s optimism. “In terms of world supply,” he said in March, “I think if you look at all the statistics, demand is outracing supply, and supplies are getting tight.”(11) What has he seen that we haven’t?
If the figures have been fudged, we’re stuffed. That might sound extreme, but it is not my conclusion. It is that of the consultants hired by the US Department of Energy. In February this year, the department released a report called “Peaking of World Oil Production: Impacts, Mitigation, & Risk Management”.(12) I say “released”, for it was never properly published. For several months the only publicly available copy was lodged on the website of the Hilltop High School in Chula Vista, California.(13)
The department’s consultants, led by the energy analyst Robert L Hirsch, concluded that “without timely mitigation, the economic, social, and political costs will be unprecedented.” It is possible to reduce demand and to start developing alternatives, but this would take “10-20 years” and “trillions of dollars”. “Waiting until world oil production peaks before taking crash program action leaves the world with a significant liquid fuel deficit for more than two decades”, which would cause problems “unlike any yet faced by modern industrial society.”(14)
Of course, we have been here before. Oil analysts and environmentalists have warned of disappearing reserves ever since drilling began, and they have always been proved wrong. According to people like the Danish statistician Bjorn Lomborg, this is because the industry is self-regulating. “High real prices deter consumption and encourage the development of other sources of oil and non-oil energy supplies”, he says. “Since searching costs money, new searches will not be initiated too far in advance of production. Consequently, new oil fields will be continuously added as demand rises. … we will stop using oil when other energy technologies provide superior benefits.”(15)
It is beginning to look as if he is wrong on all counts. As the Economist magazine pointed out on September 10th, “demand for petrol is pretty inelastic in the short term”(16), because people still have to go to work, however much it costs. According to the analyst it cites, “it would take a doubling of petrol prices to reduce American petrol consumption by just 5%.”(17) Lomborg’s idea that companies can just go out and find new oil when demand rises suggests that he believes geology is as malleable as statistics. One day – or so we should hope – a superior technology will certainly emerge, but cheap alternatives to liquid fuels are currently decades away. Yes, the pessimists have been crying wolf for almost a century. But better that, perhaps, than crying “sheep” when the wolves appear.
The Hirsch report has no truck with those who believe in the magic of the markets. “High prices do not a priori lead to greater production. Geology is ultimately the limiting factor”.(18) There are plenty of oil shales, tar sands and coal seams available for turning into liquid fuels, but it would take years and a massive investment before enough came online. Hirsch compares the projections of the oil optimists to those of the gas optimists in the late 1990s, who promised “growing supply at reasonable prices for the foreseeable future” in the US and Canada.
Today the same people are bemoaning the deficit. “The North American natural gas market is set for the longest period of sustained high prices in its history, even adjusting for inflation … Gas production in the United States (excluding Alaska) now appears to be in permanent decline”.(19)
“The bottom line,” Hirsch says, “is that no one knows with certainty when world oil production will reach a peak, but geologists have no doubt that it will happen.” Our hopes of a soft landing rest on just two propositions: that the oil producers’ figures are correct, and that governments act before they have to. I hope that reassures you.
1. Energy Intelligence, 2005. High Oil Prices: causes and consequences (« La hausse des cours du pétrole : causes et conséquences »).
2. De Matthew Simmons, 2005. Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. Quoted by Peter Maass, 21st August 2005. The Breaking Point. New York Times
3. Adam Porter, 15th July 2005. How much oil do we really have? http://news.bbc.co.uk/1/hi/business/4681935.stm
4. Jean Laherrere, 2nd May 2000, Is USGS 2000 Assessment Reliable? http://energyresource2000.com
5. Adam Porter, ibid.
6. J.W. Schmoker and T.S. Dyman, 2000. Chapter RV, U.S. Geological Survey, World Petroleum Assessment 2000
7. U.S. Geological Survey, 2000. World Petroleum Assessment 2000. Executive Summary.
8. Cited in Aaron Naparstek, 2nd-8th June 2004. The Coming Energy Crunch. New York Press Volume 17, Issue 22.
9. Jean Laherrere, ibid.
10. Chris Vernon, 26th August 2005. OPEC reveal global light sweet crude peaked.
11. George W Bush, 16th March 2005. Press conference.
12. Robert L. Hirsch, Roger Bezdek and Robert Wendling, February 2005. Peaking Of World Oil Production:Impacts, Mitigation, & Risk Management. US Department of Energy. This is now available at http://www.hubbertpeak.com/us/NETL/OilPeaking.pdf
13. Richard Heinberg, 30th July 2005. Where is the Hirsch Report?
14. Robert L. Hirsch, Roger Bezdek and Robert Wendling, ibid.
15. Bjorn Lomborg, 2001. The Skeptical Environmentalist. Cambridge University Press.
16. No author, 10th September 2005. No Safety Net. The Economist.
17. Philip Verleger, the Institute for International Economics.
18. Robert L. Hirsch, Roger Bezdek and Robert Wendling, ibid.
19. Hirsch et al are citing Cambridge Energy Research Associates, Spring 2004. The Worst is Yet to Come: Diverging Fundamentals Challenge the North American Gas Market. In 2001 they said “The rebound in North American gas supply has begun and is expected to be maintained at least through 2005. In total, we expect a combination of US lower-48 activity, growth in Canadian supply, and growth in LNG imports to add 8.95 Bcf per day of production by 2005.” (R.Esser et al. Natural Gas Productive Capacity Outlook in North America – How Fast Can It Grow? Cambridge Energy Research Associates, Inc. 2001.)