Articles

Has the world reached economic peak oil?
Posted on Monday, December 5th, 2011

This article was first published in the 3 December print edition of New Scientist and online at energyrealities.org.

Whisper it. Oil production in the US is increasing. The country where output peaked in 1970 and then shrank by 40 per cent over four decades, has turned some kind of corner. Between 2008 and 2010, production rebounded by 800,000 barrels per day to 7.5 million barrels per day, and analysts forecast more growth to come. Goldman Sachs predicts that by 2017 production in the US could reach almost 11 mb/d, just shy of its all-time high, restoring the country to its former glory as the world’s biggest producer.

One reason is a sharp increase in production of “shale oil”. In North Dakota,Texas and Oklahoma, companies are using hydraulic fracturing, or “fracking” – a controversial technique that has revolutionised US natural gas production – to extract a range of liquid hydrocarbons from non-porous shale that used to be thought unworkable.

Daniel Yergin, chairman of the US-based energy consultancy IHS CERA, argued recently in The New York Times that breakthroughs like shale oil are inevitable as oil prices rise: “Higher prices stimulate innovation and encourage people to figure out ingenious new ways to increase supply.” He goes as far as to suggest that “peak oil” – the moment when global oil production starts to decline because of geological limits – can be deferred almost indefinitely. Yet supply of oil is only part of the equation and recent economic analyses suggest a very different outlook.

Indeed, if the world is suddenly awash with oil, somebody forgot to tell the oil market. Oil remains stubbornly above $100 per barrel of Brent crude, the main international benchmark. Most analysts agree this is because supply is struggling to keep pace with demand, despite weakening western economies. But if all this extra oil is coming on-stream, how come?

Part of the reason is down to short-term unforeseen disruptions, such as the Deepwater Horizon disaster in theGulf of Mexico last year which delayed many drilling projects, and the Libyan revolution which cut global supply by almost 1.6 mb/d. The impact of these events should fade in time but there are clearly deeper forces at work. Producing oil is getting harder.

Not that it was ever easy. The amount of oil produced by existing fields is always in decline because as oil is extracted, pressure in the reservoir falls and the oil comes out more slowly. As a result, every year the industry must drill new wells capable of supplying around 3 mb/d – or 30 per cent of Saudi Arabia’s production – just to stand still. Satisfying the growth in global demand, at least when the economy is expanding, requires roughly another 1.5 mb/d annually.

Filling these holes gets more difficult as the “easy oil” gets scarcer. Companies are now exploring to the ends of the earth – from the Falklands to the Arctic– and are drilling reservoirs that are deeper, hotter and higher pressure than ever, all of which raise new engineering challenges. That has pushed costs up massively, with effects that have yet to be widely understood.

Offshore, companies are working at ever greater depths. During the 1980s and 1990s, for instance, Petrobras, Brazil’s state oil company, made most of its offshore discoveries beneath about 3 kilometres of sea and rock. In 2007, it found the Lula field, about 7 km down. Drilling Lula needed 4 km more specialist steel pipe at a time when steel prices were soaring because of higher energy costs.

Even onshore, costs are rising. Shale-oil fracking wells typically run horizontally and need four times as much steel as a vertical well. According to analysts at JPMorgan, such inflation is rampant throughout the industry. Exxon’s production investments, for instance, soared from $15 billion per quarter in the 1990s to more than $100 billion in the second quarter of 2008 – while the amount of oil and gas it produced scarcely changed.

Some of the most costly oil comes from the tar sands of Canada, with its vast open-cast mines and energy-intensive production processes. According to investment bank Barclays Capital, new projects here need to earn as much as $90 a barrel just to break even. Saudi Arabia, the only country with meaningful spare production capacity, could have produced oil more cheaply a few years ago, but not now. It has increased public spending following the Arab Spring, and now needs $95 per barrel to balance its budget. These pressures, says Paul Horsnell, director of commodities research at Barclays, mean that oil prices are unlikely to fall below these levels unless the economy collapses. He forecasts $137 per barrel in 2015, and $185 in 2020.

So if there is lots of oil down there but it is much more costly to produce, can we have as much as we want if we are prepared to pay for it? Well, that depends on what you judge to be enough and who you mean by “we”, says Steven Kopits, US managing director of energy consultants Douglas Westwood.

The trouble is, high oil prices don’t just encourage oil companies to innovate, they also damage national economies – although some countries are more resilient than others. A penetrating analysis by Kopits found that historically the US goes into recession whenever it spends more than about 4.5 per cent of its GDP on oil. Today, that would equate to $90 a barrel. That level also holds for others in the OECD club of wealthy nations, says Kopits. But the evidence suggests that China is willing to pay more; it only cuts back on oil purchases when they account for more than 6 per cent of its GDP, equivalent to about $110 per barrel.

The disparity, says Kopits, arises because Chinese society assigns more value to a barrel of oil. Gaining a barrel can transform the lives of Chinese people – allowing them to travel by car for the first time, for example. In the west, losing a barrel merely means trading in a gas-guzzler for a more fuel efficient model.

But oil is so useful that nobody cuts back voluntarily, meaning prices must rise to excruciating levels to force rich western consumers to economise. The first “peak oil recession” started in 2009, says Kopits. It took oil at $147 a barrel and the deepest recession since the 1930s to prise oil from the grip of consumers in OECD countries. Since early 2008, OECD oil consumption has fallen by 4 mb/d, while non-OECD consumption – mainly inChina– has gained 6 mb/d. Global oil production rose 2 mb/d during that period, so developing countries have consumed all the additional supply plus that given up by industrialised economies. “China is bidding away the OECD oil supply,” says Kopits, “and recessions are the mechanism by which that oil is being transferred from weaker economies to faster growing economies.”

With China embarking on rapid “motorisation” – car sales in China leapfrogged those in the US in 2010 – the outlook is for repeated oil price spikes and recessions. We appear now to be entering the second peak oil recession, says Kopits, and others will follow. For the time being this is a problem for the west, but prices could rise to levels that are unsupportable even for China. On this view, peak oil is as much an economic construct as a geological one.

Analysts at Deutsche Bank are more optimistic, and predict that a final oil price spike to $175 in 2015 will lead to rapid electrification of transport and relieve pressure on the oil supply. But Kopits is doubtful that we can escape so easily. “Buckle up,” he concludes, “we’re in for a bumpy ride.”

This article was sponsored by Statoil. All content was commissioned and edited independently by New Scientist.



7 Comments on “Has the world reached economic peak oil?”

Hugh Sharman Says:
December 5th, 2011 at 2:34 pm

Quite right too David! That’s a pretty fair analysis. Of course, if ever there was a totally daft time to slap oil export sanctions on Iran (3.5 million bopd), this is it! Whom the Gods wish to destroy, they first make mad!



Suncor Open Thread/Updates, December 11 News/Links « pala open source Says:
December 11th, 2011 at 6:09 am

[...] Has the world reached economic peak oil? [...]



Jeffry Winpogrifish Says:
December 11th, 2011 at 8:13 am

A good analysis, however negating to mention the 2 mbd increase in supply was from all oils, not crude. Crude oil has been on an undulating plateau of production since May 05, and is why oil price has risen to its recent highs of approx 98 for WTI and 108 for Brent, vs. the 25-30 dollar price experienced in the booming 90′s.

The question is this; If oil price is this high on a plateau of production, what will it rise to once production descends?



Doug Stewart Says:
December 11th, 2011 at 5:14 pm

Nice to see a well argued rebuttal to Yergin’s fuzzy math and conclusions. I certainly do not look forward to the energy challenges ahead, but I will be facing them anyway, so I’d rather face reality with reality rather than wishful thinking, or more likely, corporate propaganda. It’s sobering that governments around the world have no good answers for the peak oil questions, and just choose to kick the can down the road. I’ll be very pleasantly surprise if we get through this with civilisation intact.



Dan Ellis-Jones Says:
December 12th, 2011 at 4:23 am

I completely agree. I have long said that the geological or physical peak in oil production is less important to the economy than when the markets decide that oil is a scarce commodity, and price it as such – an market-based peak, if you will. Not that I like the idea much, but it is a sad reality. We are now in an oil-constrained world, where economic growth will butt up against higher oil prices which will stop the growth and cause a contraction. Each cycle I believe will be shorter and will move us further along a downward trend. Oil production in the USA may be rising – but it’s still the end of CHEAP OIL.



Harquebus Says:
December 12th, 2011 at 5:24 am

High oil prices filter through the manufacturing industry making the expensive oil more expensive to get.



Dan Feix Says:
December 12th, 2011 at 10:29 am

This article is a very good explanation of our current situation. Energy is going to be expensive.
But, since we waste a lot of energy, it could make a solution easier. We don’t need to invent a whole new industry to use energy more efficiently. There are solutions available today.

In buildings the US could save energy in heating/cooling by retrofitting older buildings with increased insulation. New buildings using passive solar designs could be more efficient. There are lighting systems available which can cut energy usage by over 50%.

For transportation fuel, we could replace large heavy vehicles with more fuel efficient ones. We could use natural gas instead of gasoline and save over 50% on the price per btu.

All of these things would need some money up front but the payback will be quicker as the price of energy keeps going up.

The other thing we would need is a little leadership from our politicians.





Post a Comment




Get new articles by email:




Delivered by FeedBurner


Search


RSS FT Commodities News
Categories
Blogroll
Copyright © 2010 David Strahan | Ecological Hosting | Cover Design by Darren Haggar Site by JPD Studio