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The supply of oil must peak, get used to it

Written By: - Date published: 3:24 pm, January 9th, 2009 - 27 comments
Categories: economy, Environment, transport - Tags:

There is only so much oil in the world. It was all formed when, over the course of a few hundred million years, creatures living in shallow seas died and their remains accumulated and were subjected to a very particular combination of heat and pressure for hundreds of millions of years. We know where all the sedimentary basins where oil could be located are in the world ogl98020(see the map) and we know pretty much how much oil is in those basins. We also know about how much of that oil can be extracted (oil can only be extracted when the pressure in the reservoir is enough to push oil up the well and the pressure falls as oi is extracted, artifically boosting the pressure as it falls with water or carbon dioxide has unavoidable limits – I know some of you will argue with me about this, argue with the oilmen instead). From this we can calculate what is known as the ‘ultimate’ – the total amount of oil that can ever be produced.

The ultimate for the world is about 3 trillion barrels of oil, if you believe the inflated reserve numbers from  OPEC members, closer to 2.5 trillion if you don’t. We’ve used about 1.2 trillion so far and are now using a billion every 12 days and growing. Let’s assume for a moment that we can continue to produce oil as quickly as we need to meet demand. With an ultimate of 3 trillion barrels and an annual growth in demand of 2% we would be out of oil by 2037: (source)

ultimate-usgs

That’s pretty bad, running out of our major energy source in 28 years, but it doesn’t work that well in reality. Just because there is oil in the ground to be extracted doesn’t mean you can keep pulling it out ever faster. Every time you open an oil well the pressure is highest at the start and falls as soon as you start pulling out oil. The typical oil well’s production rises from zero to a very quick peak, then gradually falls away as the pressure pushing the oil out of the well decreases. On a larger scale, the easiest and largest oil reservoirs are extracted early on, followed by smaller, harder fields. The big fields start to fall and their decline cannot be countered by smaller fields coming into production. Take the example of oil production in Alaska:

alaska-oil

What applies to oil fields and oil provinces applies to countries and, ultimately, the world. The big fields are found early on (that’s not surprising, if you threw darts at a map you would expect to hit the big fields first and the oilmen are using much more sophisticated methods than that). They are also the most economic to produce from and so are used first. Smaller fields and improvements in extraction technology can keep production rates up for a while but at some point there is not enough oil coming out of new wells to replace  falling production from old ones and meet growing demand. You can keep on bringing more and more wells online but eventually there just isn’t any significant new oil to be found. Then, production must start to fall. Sure, there’s still oil being produced but there’s no longer enough to go around to meet even current demand, let alone growth.

Oil production in the US peaked in 1970 and has fallen ever since, despite vast improvements in oil-finding technology, despite improvements in extraction technology, despite far more wells, despite record investment in production by the oil companies, and five years of record-breaking prices. 

us-oil

Of the 50 countries that produce 99% of the world’s oil, 30 have now passed their production peaks and another dozen have stagnate production. That’s again despite technological improvements, more digging than ever, and record oil prices.

past-peak-oil

So when will world production peak? We won’t know for sure until several years afterward and it is likely that the world peak will be corrugated, touching a peak sparking a price super-spike like we saw last year, sending the world economy into recession, sending oil demand and price down temporarily, to be followed by another, lower, production peak and price spike when the world economy begins to recover, and so on. I’ll discuss estimates of when this expected to happen in the next post.

27 comments on “The supply of oil must peak, get used to it”

  1. infused 1

    There are also many other places where oil exists, ignoring the pollution of extracting it, but it’s becoming a real possibility now.

  2. So let me get this right, Oil is going to run out, so the price must go up, so will it be a good idea to buy shares in some major oil companies?

  3. roger nome 3

    As per usual, a very well-written and thought-through piece Steve.

    One minor contention:

    As infused indicates, it would be more accurate to say “conventional oil reserves”, instead of “oil reserves” in the context of this post.

    Even so, the projections i’ve seen show that non-conventional oil reserves (oil shale and oil sands) will not stop peak-oil from happening. They require Natural Gas in their production process, which is also reaching a peak in the places its needed (North America), and shipping it is very expensive.

    These issues are fairly well detailed in in a recently completed peak-oil PHD Thesis.

    http://publications.uu.se/theses/abstract.xsql?dbid=7625

  4. infused. I addressed that in the first paragraph. The ultimate is known with a fair amount of precision. If you’re referring to oil sands, I’ll be getting to that in the post on alternatives – suffice to say it’s not as good as it seems. Yup, there’s maybe a trillion barrels, most of it in Alberta, but you have to extract it and at a rate to replace falling conventional oil production. Even at best, they estimate the oil sands could supply 4 million a day by 2030, which is less than 5% of current oil production, and that would take more water fresh water in the extraction process than is avialable inthe whole of Alberta. Already, production from the oil sands uses quarter of the province’s fresh water.

  5. Brett. The major oil companies’ production has already peaked. I’ll be getting to that.

    roger nome. yeah, I thought about referring to conventional vs non-conventional but thought it would be adding too much to one post… I’ll come to non-convetional oil soon enough.

  6. coge 6

    Steve, if oil has peaked why has the price virtually halved over the last year & what’s happened to the $10 a gallon scaremongering? I’m off to fill up the tank.

  7. Zorr 7

    coge: Nothing ever happens in a vaccuum. The current financial crisis is what smashed those prices down as demand dropped through the floor.

  8. coge. Read the final parapgraph.

    I’m going to give a quote written in 2006 in my next post that predicts precisely what has happened – a super-spike tipping the world into recession followed a price collapse.

    This is the start of a cycle. When the global economy stats to recover again, the price will super-spike again on rising demand and force the economy back into recession. That’s what I’m talking about in the final para.

    Whether or not we are at peak oil it is indisputable that peak oil must occur, it is a mathematical and geological fact, and it must occur in the coming years.

  9. Might have to invest some spec stock then, a wee penny dreadful.

  10. RedLogix 10

    There is one other major clue that is often overlooked, and one that for the right wing objectors to the Peak Oil idea might find resonates better with their way of thinking.

    For much of the last year or so while oil prices were going through the roof, one of the most frequent explanations given was not that there was a shortage of crude, but a shortage of refining capacity to convert crude oil into usable product. Think about what this means for a moment.

    While the production of crude is controlled by a whole range of countries, cabals and corporates… the refining of oil is pretty much the sole province of the major oil companies. Oil is their core business, they know more about it than anyone, and they make decisions based on what is best for their shareholders. Refineries are very large and very expensive things, and they are most profitable when run at close to design capacity. Which according to statements made by their operators, must have been the case for much of the last few years. (Now it is also true that limited refinery capacity was certainly not the only factor involved, but it must have been a contributing factor.)

    Logically if current capacity was not enough to meet demand, and there was a future opportunity to increase profits by adding more, you would be flat out busy building new refineries. Yet by it’s own admission the industry is NOT doing so. The only rationale for this is that they KNOW that the capacity they currently have is all they will ever need.

    In other words, Peak Oil… now.

  11. coge 11

    Brett, NZ refining (NZR) was looking attractively priced last time I looked. You won’t be surprised who the major shareholders are.

  12. Coge:

    Thanks for the tip, I will have to do some research.

  13. jake 13

    Peak oil is a realiy of course – there is a point at which oil must run out – but you are certainly well ahead of the curve in pronouncing it as an event that’s upon us. Every time petrol prices spike you yell “peak oil” – but I never see you retract those claims.

  14. RedLogix 14

    there is a point at which oil must run out

    Everytime you read someone saying something like this, you just KNOW that they haven’t bothered to read even the most elementary basics on the subject.

    Why are these people such hard work?

  15. Shona 15

    Jake read “Half-Gone ” by Jeremy Leggatt the world’s foremost oil geologist and CEO of the UK’s largest alternative energy company and get up to speed on this thread. Brett if you were even remotely on to it you would have bought your shares before now instead of wasting our time tossing on here.

  16. Shona:

    Oh I have bought, there’s a couple of companies that look good also, and they ain’t the alternative energy ones, remember all the hype about biotech companies, and have a look at what happen to them.

  17. RedLogix 17

    John Michael Greer has been writing cogent and sane articles on ‘Long Emergency’. Subtract out the unfamiliar word ‘Druid’ if you will, but his discussion is carefully constructed and his conclusions make a whole lot of sense to me. If nothing else his preamble summarises the essential concepts cleanly.

    DeIndustrialisation

  18. Shona 18

    Brett,The best prices for oil industry shares were during the lead up to the American election during Sept /Oct 2008 , they have recovered somewhat since.You are investing indirectly in alternative energy technologies by buying oil shares. The oil industry has been buying up and using alternative technology for over 30 years. And has become increasingly more efficient and cleaner as a result. e.g the solar panels on every BP service station.( wouldn’t it be great if these were made in NZ ?but no we spend nothing on solar research hence the imported technology is very expensive)Those inventions that prove to be a real threat to their stranglehold on our industrial progress are mothballed . The Electric Car being a prime example. The battery from this car while originally mothballed by General Motors is now in the hands of the Chinese , hopefully they will mass produce it so backward western countries like NZ can use it.

  19. Peter Wilson 19

    Hmm. I’m not so sure about solar, at least in the photo voltaic panel form. The energy costs of producing solar panels are massive, and are then essentially drip fed back to you over the life of the panel (20-30 years or so). In a future with less energy, the manufacture of such high technology items may not be possible, or if it is, it will be at a vastly reduced scale. So, I don’t see photo-voltaics providing the large scale solution we need.

    I talked a bit about electric cars before, and again I have my doubts. The primary problem is the energy costs of manufacturing the batteries. High capacity batteries generally contain large quantities of rare earth minerals, all of which have to be mined and refined. Take lithium for instance (a component of most electric car batteries), there simply isn’t enough of it available in the earth’s crust to repower the planet’s vehicle fleet.

    What we need to do is to depower the majority of industrial civilisation, whilst diverting remaining energy to science. If we make an energy breakthrough, then it will have more impact if we’ve learnt to use less energy. This means climbing back down the ladder of progress, adopting “obsolete” technology which can be maintained at a lower energy level and with more human labour. I don’t think the politics of this have even been conceived.

    I do recommend that people get a copy of John Michael Greer’s The Long Descent, which covers all of this pretty well.

  20. Julian Garrett 20

    Just one thought – do you not think the oil companies know exactly what is going on a doing an enormous amount of string pulling.

    Firstly – Power generation. There are a lot of estimates about how our energy requirements could be supplied by solar/renewables. The solar sahara project withich has been given the tentative backing of Brown and Sarkozy is predicted to be able to meet a fair proportion of Europes power requirements. Nuclear power is back on the agenda again.

    Secondly – As conventional sources decline, one by one, industries are researching the alternatives. There are certain industries that depend completely on oil, whilst others can be converted over to other sources, think cars vs power generation. The alternatives do exist, mostly in a somewhat embrionic form, but you can expect that they will rapidly gain traction from here on as the technology brings the cost for kWh down. Big oil will haver their hand in there too, slowing things down.

    Thirdly – Redlogix, I dont quite get your logic behind the lack of refining capability. If the oil companies think they have just enough refining capacity to get by then why build more – demand is still reasonably high and therefore the prces stay high. It doesn’t necessarily follow that building more will increase profits – an oversupply will lead to price falls…

  21. RedLogix 21

    Julian,

    Oil refineries take billions of dollars and many years of project planning to bring on line. Logically the oil companies should PLAN to build enough capacity to meet projected demand. If you are not doing that, and demand exceeds capacity (which is what they say has happened), then you really have to ask why. Here are some possible reasons:

    1. They severely underestimated demand. Possible, but demand has been growing at a fairly predictable rate (about 4% pa) for some considerable time now, and it would have been inconceivably imcompetent for them to have failed on this.

    2. They wanted to restrict supply so as to push up prices (essentially your argument). Plausible, but a risky tactic, inviting competitors and alternatives to undercut them. Could also trigger a global recession and cause prices to crash. Not smart.

    3. The industry has a fairly good idea what the peak rate of crude production will ever be, and they know that they currently have enough capacity to refine it at that rate. Logically not much incentive to build any more (beyond replacing or upgrading existing plant).

    Which do you think is the most reasonable explanation?

  22. Mr Magoo 22

    RedLogix:
    That was a nice argument, but misses point 4 entirely.

    4. Refineries are brought online as soon as feasibly possible and produce as much as possible within OPEC/other quotas. Any shortage is brought about us cookie monstering any available oil.

  23. randal 23

    the sooner the better in my opinion
    the wolrd is overrun with people like insects all relying on oil to produce goods for their temporary happiness and gratification and the ultimate destruction of the planets ability to feed what people will be left after the car age is over

  24. Chrisburger 24

    I know I “left” this site not long after joining about a month back but clicked on to see if commentary is still as it was and had to chuckle over this one. So, for one time only…

    In regard to the oil (and all commodities) price spike of 2008, this can be directly attributed to an excess of liquidity in the financial markets. Massive savings from newly developing countries that have underdeveloped financial markets meant the money travelled the world trying to find a home in a store of wealth. The housing bubbles in many western economies were fuelled by this money but peaked in 2006 and were, in any case, an inusfficient storer of wealth, whereupon other stores of wealth were required (this also explains the creation of new mortgage-based investment engines that poisoned the entire banking system). Thus the boom in commodity (not just oil) prices, which had very little to do with supply and demand.

    So please do not confuse the recent price spike with the peak oil theory without first considering the fianncial metrics behind the scenes. What we should be most concerned about is developing financial markets to stave off another price spike once liquidity returns to the financial system. But I suspect peak-oilers will just get in a muddle again and claim it’s the end of the world and so forth.

    If oil spikes without a corresponidng increase in other commodities, then there’s a sign that we may (MAY) hit peak oil (and this would require detailed analysis of supply and demand stats). If, however, we have a repeat of 2007/08 where everything from metals to grains to dairy to oil went through the roof, then it’s just another abberation that will fuel a bubble and ultimately burst.

  25. Shona 25

    Back from time at the beach and glad to see I’ve stimulated a bit of discussion on alternative energy.
    Peter I Googled Greer’s work looks like it’s worth a read but his theory of catabolic collapse is nothing new for those of us who’ve spent the best part of their lives trying to live sustainably and gaining many useful skills in the process.
    The viability of manufacturing PV cells in NZ should have been tackled decades ago.
    We have abundant deposits of high grade silica in NZ and the problem with PV has always been achieving the magical 30% efficiency from cells made from silicon made of naturally occurring minerals and not expensive lab grown silicon. NZ averages 2000 hours of sunshine per annum. and spends nothing on solar research and development, if we are going to weather the collapse well we need to have our own solar industry. We need to develop the knowledge and skills base immediately.
    Germany averages 1300hours of light/sunshine p.a. and generates between 18 and 22% of it’s electricity from solar. Solar is not THE solution to our energy crisis but PART of the solution and no where near as costly as Nuclear power.
    The Google sponsored research on thin film technology has achieved 40% efficiency and an average of 33%.
    Australian CSIRO scientists who specialised in solar research over the last 20 years(all publicly funded research now there’s a quaint notion) are almost all working for the Chinese now building their first Solar tower power station.i don’t know what has happened to the Aussie solar tower project.
    To the best of my knowledge the battery for the electric car was revolutionary, so much so that the Chinese indulged in industrial espionage to get it.

  26. SPC 26

    Chrisburger

    But the thing is

    1 peak oil will more likely occur during an economic expansion phase (thus all other minerals will be rising in value at this time)

    2 peak oil price values would cause a stagflation impact which would collapse the price of other minerals – and the falling demand for oil would also impact on the oil price.

    Peak oil is not a fall in the supply of oil, just an inability to provide greater supply when growth occurs. So we will recognise peak oil’s day by the fact that every period of growth that then occurs will end with an oil price rise which ends it.

    This will parallel growth which places rising value pressure on other minerals also. This applies whether financial liquidity is cited as the cause of the economic growth or not.

    (note that the resort to ethanol is placing pressure on land for food supply – which is why commodities here are now part of the economic growth cycle, and not just because of rising population levels or the developing worlds demand for middle class diets).

  27. tsmithfield 27

    One aspect I think has been overlooked is the effect of incremental increases in non-oil technology on the remaining reserves. As non-oil technologies increase incrementaly as a percentage of total energy requirements, the remaining oil lasts progressively longer. We don’t need an overnight solution to replace oil technologies. Just an incremental one that replaces oil at a rate fast enough to keep putting off the day of reckoning. If this process continues we will eventually reach a point where oil is no longer needed and will be left sitting in the ground.

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