An oil supply tsunami alert
By Kjell Aleklett
The oil market is vibrating and crude oil prices are bobbing up and down like a float on the water. The fact that the price of crude oil shows signs of approaching US$60 per barrel while the production cost for the same barrel fluctuates between $1 and $10 suggests that conventional economic theories are not valid any longer; something new is in the air, and the question is how to interpret today's price movements.
The proponents of the peak oil theory - predicting that future world oil production will soon reach a peak and then rapidly decline - have been telling the world since 2001 about the dangers ahead. It was first thought that the peak would come in 2010, then it was revised to 2008, now it seems the peak might come even sooner. The exact year depends entirely on the demand and we will not know when we have peaked until we have crossed the threshold.
Very few have listened to these alerts though the signs have been so glaring that even a blind hen would notice them. Fifty years ago, the world was consuming 4 billion barrels of oil per year and the average discovery was around 30 billion. Today we consume 30 billion barrels per year and the discovery rate is approaching 4 billion barrels of crude per year.
If we make an extrapolation of the downward discovery slope from the last 30 years, we find that about 134 billion barrels will be found over the next 30 years. That would not be a bad achievement, being more than double the North Sea, which is the largest new province found since the Second World War. But it comes far short of providing sufficient new oil discoveries to meet the International Energy Agency (IEA) scenario, which visualizes the consumption of 1,000 billion barrels over the next 25 years, even though some of that amount may be drawn from reserves left over from previous discoveries.
Each oilfield has a time when it reaches maximum production. One of the 40 largest oilfields in the world is the mighty East Texas field. They discovered the field in 1930 and reached maximum production several years later. After production reached 160 million barrels per year in 1936, it started to decline and production was only 60 million barrels per year at the end of the 1960s, when new technology was applied. By injecting water into the field, production rose to 80 million barrels but since then the production has continued to decline and is now producing less than 10 million barrels per year.
Studying the production pattern from existing oilfields, experts around the world agree that the annual decline averages 3-5%. This means that all oilfields which today produce 84 million barrels per day (mbd) will next year produce 80.6 mbd and in year 2030, 30 mbd. In the World Energy Outlook 2004, the IEA predicts that we will need 121 mbd in 2030. In other words, we need to find more then 90 mbd in new production. "The world needs 10 new Saudi Arabias." Some might call me a doomsayer, but if so, I'm accompanied by Sadad Al Husseini, as this is a citation from him. He was until recently vice director of Saudi Aramco, the largest oil company in the world.
Of the 65 largest oil-producing countries in the world, 54 have passed their peak production, just like in East Texas, and are now in decline. Indonesia, a member of the oil-exporting club OPEC, can't produce its OPEC quota. But the most astonishing thing is that the country now can't even produce enough for its own consumption, and imports oil. Six years from now, five more countries will peak in their oil production. Cantrell in Mexico is the second largest oil-producing field in the world. Next year, it is expected to start declining and the production of Mexico as a whole will fall. China for the last five years has been fighting hard to keep its production steady and in all likelihood, won't keep it up for long.
By 2010, the following countries have the potential to produce more oil than they have ever produced before: Saudi Arabia, Iraq, Kuwait, United Arab Emirates, Kazakhstan and Bolivia. These countries will have to cover the decline in 59 countries and the increased demand from the rest of the world. Can anyone provide information showing that this is possible?
In the beginning of the 1980s, Saudi Arabia produced 9.6 million barrels per day. According to the scenarios of the IEA World Energy Outlook 2004 and the US Energy Information Administration's (EIA) International Energy Outlook 2004, Saudi Arabia must produce 22 mbd by 2030. Sadad Al Husseini just calls it "plug-in" numbers and claims "the American government's forecast for future oil supplies are a dangerous over-estimate". The largest oilfield in the world, Ghawar, is in decline. Despite this, Saudi Aramco says production can be increased to 12 mbd in 2015. They are not talking about 22 million barrels per day.
In 1979, Iraq produced 3.4 mbd. The official reserve data claims that Iraq has 112 billion barrels. The Association for the Study of Peak Oil & Gas (ASPO) thinks one-third of the reported reserves are just "political barrels". The reserves of Iraq were recently discussed in London and the number that has leaked out through closed doors is 46 billion barrels. If this is the case, it will be hard for Iraq to reach its former peak production. It's time to ask if the Middle East can return to the peak numbers from the 1970s.
Recently a report titled "The mitigation of the peaking of world oil production" said: "World oil peaking represents a problem like none other. The political, economic, and social stakes are enormous. Prudent risk management demands urgent attention and early action." If you start a serious program today it will take 20 years before completion. A real tremble was felt from the Goldman Sachs alert, which predicts the price ceiling for a barrel of crude to reach $105. "We believe oil markets may have entered the early stages of what we have referred to as a super spike period," Goldman Sachs said. That's peak oil for you.
Scientists and government authorities that noticed the earthquake which caused the recent tsunami in Asia are blamed for not issuing an alert. It's time for energy authorities around the world to make an "oil supply tsunami alert". The vibrations that we now feel might turn into a wave of unthinkable magnitude. If we start doing something right now we might be able to build a breakwater. If not, we'll face an event that could change life, as we know it, forever.