The coming decline of oil
Amongst the billions of words brought forth by the climate debate over the past years, remarkably few have touched on an issue that ticks behind it like an unexploded time-bomb. This is the probability that world oil production will reach a peak sometime during this decade and then start to fall, never to rise again.
An abundant and growing supply of cheap oil has been one of the fundamental drivers of increasing prosperity during the past century. At the same time, supply failure or the fear of its failure has been a principal source of economic hardship, geopolitical manoeuvring, and war. Equally, an imminent peak and decline of this industrial lifeblood promises severe economic difficulties and political tensions across the planet that will leave few untouched.
These world-wide upheavals may outweigh in scale and gravity any impacts on climate-related questions such as greenhouse gas mitigation strategies and emissions reduction targets. But they will nevertheless upset these considerably.
If oil runs short in the next few years there will be strong pressures to use more coal (including coal-based liquids for transport) and to step-up production of hard-to-extract non-conventional oils from shales and tar sands. Both moves would greatly increase carbon dioxide and other greenhouse gas emissions per unit of energy produced.
Pressures to save oil would also build up, for example, by more efficient use and faster deployment of renewable energy alternatives such as biofuels. The big question here is whether these greenhouse gas-reducing and oil-saving responses can do enough in time to compensate for oils decline.
With so much at stake, it may seem odd that so little has appeared in the media let alone, the climate debate about these concerns.
And why are increasing numbers of oil experts now pointing to an imminent decline of global oil output?
Are they just crying wolf or limits to growth again, as in the 1960s and 1970s? Or do they have convincing arguments up their sleeves this time?
Half way to the ultimate
To start with the obvious, the planet has a finite endowment of oil. Petroleum experts call this quantity the ultimately recoverable reserve, or simply the Ultimate. At any time, the Ultimate equals Cumulative Production + Reserves (proved, probable, possible) + Yet-to-Find. One set of estimates for conventional oil at the end of 1999 was, in billions of barrels (Bb): Cumulative Production 820, Reserves 827, Yet-to-Find 153, with an Ultimate of 1800.
On these estimates, cumulative production will be around 900, or half way to the Ultimate, in the year 2003. Ominously, in view of events since 11th September 2001, about half the Yet-to-Find lies in just five Middle East countries: Iran, Iraq, Kuwait, Saudi Arabia and the United Arab Emirates.
The halfway point to the Ultimate is a crucial milestone. Strong historical evidence for many oil basins shows that oil production peaks and starts to decline when about half the recoverable resource has been consumed. This is a matter of oil reservoir physics rather than production technology or economics.
The idea was first proposed by the United States oil geologist M King Hubbert who predicted, in 1956, using two estimates of that countrys oil Ultimate, that United States oil production would peak in the early 1970s. Hubbert was widely ridiculed by the oil industry, but was proved right when United States oil production peaked and began to fall in 1971.
Hubberts model was taken up in the 1970s and early 1980s by competent authorities including Esso, Shell and the World Bank. Using a global Ultimate of around 2000 Bb they all independently predicted a conventional oil peak close to the year 2000. However, the forecasts overlooked the slowdown in global oil demand growth following the 1970s oil price shocks. Correcting for this postpones their predicted peak to about 2010.
In the mid-1990s, several independent analysts applied the same method to improved reserve data and broadly agreed that non-OPEC (Organization of Petroleum-Exporting Countries) oil production would peak about now, while global production would peak around 2005-2010.
Once oil production does peak, the analyses suggest that production will fall each year by about two million barrels per day. Daily production is now about 74 million barrels, so the fall will be some 2.7 per cent annually. That means a huge and highly disruptive shift from present-day growth in oil use. Although the current growth rate is running at only 1.1 per cent per year for the world, and 1.3 per cent for the OECD (Organization for Economic Cooperation and Development) industrialized countries, annual growth has been 2.1 per cent for the world less the former Soviet and East Europe block, 2.8 per cent for Latin America, 5.4 per cent for India and 7.5 per cent for China.
Meanwhile, as non-OPEC producers lead the way over the oil peak and down the other side, the world will become even more dependent than now on the handful of Middle East suppliers. Towards the end of this decade or, if you like, during the first Kyoto Protocol commitment period of 2008-12, even they will be unable to turn up the taps much, or at all to meet almost inevitable supply-demand shortfalls.
Expert denials and support
Many energy experts are blind to this looming problem or deny it. There is virtually no mention of it, for example, in the summaries of the three-volume Third Assessment Report, published by the Intergovernmental Panel on Climate Change in 2001. The volume on Mitigation says nothing about oil supply in its summary of Gaps in Knowledge and concludes that fossil fuel scarcity, at least at the global level, is not a significant factor in considering climate change. All of the Intergovernmental Panels greenhouse gas emission scenarios have increasing global oil production to at least 2020, with steady oil prices.
The latest (November 2001) projections by the United States Department of Energy take a similar line. From now to 2020, world oil consumption will rise by 56 per cent; OPEC production will nearly double; and more surprisingly, non-OPEC production will climb by 34 per cent.
Other experts are more pessimistic or at least uncertain. The influential, Paris-based International Energy Agency is a good example. It delayed adopting the Hubbert model until its 1998 World Energy Outlook.
The 1998 assessment used a generous United States Geological Service estimate of 2300 Bb for the world Ultimate, but even so predicted that non-OPEC oil production was more or less at peak, and that world production of conventional oil would decline from about 2015. This was a startling conclusion at the time and was published only after considerable internal pressure.
For its June 2000 Outlook, the International Energy Agency changed tack. Using a much larger United States Geological Service Ultimate (which many experts consider spurious), it concluded that rising oil demand could be met out to the year 2020.
A year later, the International Energy Agency altered course again. Its 2001 Outlook concludes that the oil reservoirs of OECD countries will soon peak and decline, throwing the world into increasing dependence on a small number of Middle East suppliers. Massive infrastructure additions will be needed to offset this outlook by bringing more natural gas to market and burning coal more cleanly.
Why are there such differences amongst the experts? And why such a blanket of indifference or ignorance amongst politicians, the media and many economists?
The answers are elusive but can probably be found hovering near some common misconceptions about oil production and reserves. Also to blame are profound differences between oil geologists who recognize physical constraints on reservoir production and traditional economists who assume that higher prices will solve all resource constraints: the dollar-inspired Cornucopia model of the Earth. The chief misconceptions seem, briefly, to be the following.
What reserves? Published oil reserve data indicate how much oil might be produced from known fields, with stated degrees of probability. These are proved plus probable reserves. In contrast, total recoverable oil includes oil recoverable in fields that have not yet been discovered. Many people confuse the two quantities, saying for example that 30 years ago we had 30 years of supply remaining; now we have 40 years remaining. Estimates of 2000 Bb for the worlds total recoverable (or Ultimate) have hardly changed over the past 40 years. It is this fixed endowment that makes the near-term decline of conventional oil inevitable.
Proved versus Proved + Probable Reserves. Oil companies are legally bound to report only their proved reserves. Many of them state in their annual reports that these have grown over the year because extractions have been more than replaced by discoveries and by expectations of greater oil recovery from known fields. This is good for the companys share price. However, the amount of oil in place the proved + probable reserve has not changed one bit. Reserves have simply been re-categorized as reported oil is moved from probable to proved reserves.
Reserves to Production Ratio. An enticingly simple number used by oil analysts is the amount of oil in proved reserves divided by annual production. The global figure for 2001, according to British Petroleums Statistical Review of World Energy, is 39.9 years. So whats the problem if we have enough oil for 40 years at our present rate of use (and more will be found as we use it up)? But the Reserves/ Production ratio says nothing at all about physical constraints on the rate of oil production and hence about the Hubbert decline model. A simple calculation shows that the global reserves indicated by todays Reserves/ Production ratio of 40 would only be two-thirds used up over the next 40 years if production started falling today at 3 per cent a year. However, production in 40 years time would be less than one-third of todays level.
Non-conventional oil. Many analysts seem to believe that the immense reserves of non-conventional oil from the Canadian Athabaska tar sands and the Venezuelan Orinoco heavy oil deposits will be brought on stream and save the day. Their recoverable reserves are each about 300 Bb: large, yes, but taken together no more than 22 years of current global oil consumption. Severe extraction problems including lack of technological readiness, low energy content, high water needs and emissions of carbon dioxide and other pollutants make it improbable that these resources can come on-stream fast enough to compensate for the decline of conventional oil. The International Energy Agencys 1998 World Energy Outlook concluded that 19 Mb per day of non-conventional oil would be needed by 2020 to meet global oil demand but so much production was unlikely.
Coda: climate mitigation to the rescue?
In October 2001, the Royal Dutch/Shell company launched its long-awaited global energy scenarios. They contained some big surprises.
At the launch, Shells chairman Phil Watts told the world that it must prepare for the end of the Hydrocarbon Age not because of oils imminent decline (this was not mentioned) but because climate-friendly alternative energy technologies will win over consumers in the coming decades. Oil which now provides 40 per cent of the worlds primary energy will fall to barely 25 per cent by 2050. Natural gas, plus renewables and low-pollution, high-efficiency consumer technologies, will pick up the slack as oils dominance dwindles.
So with one stroke of the wand, the worlds second largest energy company has conjured up the win-win solution of all time. Technology will take care of oils decline while massively cutting greenhouse gas emissions. And, the real master stroke, no need to worry that oils decline will create supply shortfalls, price surges and economic havoc not least amongst oil company share prices.
With just a touch of cynicism, let alone bemusement, one can only hope and pray they are right.
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