The Peak Oil Crisis - Sliding Down the Flagpole
Last week the US Department of Energy released the preliminary version of its Annual Energy Outlook 2006. This document, which projects supply, consumption, and prices for all forms of energy; is the official US government position on what energy resources will be available and at what cost, five, 10, 20, and even 25 years in the future.
For many years, making these annual projections was a rather straightforward exercise. There was plenty of coal, oil, and gas available, so all the forecasters had to do was project a sensible rate for GDP growth, mix in some energy efficiency gains, add a bit of inflation and out came a reasonable set of projections of what the future US energy consumption and prices might look like.
In recent years however, the traditional approach has started to come apart. Can anybody who follows the issue really imagine a product as valuable and as much in demand as oil dropping from its current $60 per barrel to $33 per barrel 20 years from now? Can anyone remotely familiar with the current oil situation really expect world production to increase smoothly from the current 84 million barrels a day (b/d) to 121 million b/d in 2025?
A few seconds with a calculator shows that, until last week, the US government was projecting world oil production will rise from the current 31 billion barrels per year to 44 billion barrels per year in 2025. This says the world would consume some 760 billion barrels during the next 20 years. This is not a serious projection. It will never happen. Most believe there are only about a trillion barrels of conventional oil left and know it is becoming increasingly difficult and expensive to produce.
In the new report, however, the first glimmerings of a change of position regarding the future of oil are starting to appear. The Energy Information Administration (EIA) projections are nowhere near reality as yet, but then these things take time.
Oil is now projected to cost an inflation adjusted $54.08 per barrel in 2025 vs. last year’s estimate of $32.95. This projected increase is to come amidst continued prosperity in the United State and Europe and continued rapid growth of the Chinese and Indian economies. Considering the price of oil is currently bouncing around $60 per barrel, has recently been up to $70, and many are talking of spikes beyond $100, $54.08 twenty years from now sounds rather conservative, if not quaint.
The EIA has reduced its estimate of world oil production in 2025 to some 111 million b/d vs. 121 million in last year’s projection. OPEC is now supposed to reach 44 million barrels per day in 2025 vs. the 55 million projected for 2025 last year. Non-OPEC production is now supposed to increase from the 52 million b/d to 67 million in 2025.
To be fair to the EIA, the estimates cited above are from the “reference case” assuming there are no policy changes and that nothing really bad (or good) happens to change the “normal” growth in oil production.
The interesting part of this story, however, is not that the EIA has started to back off from the very high production projections (and therefore low prices) they have been making. It is the rationale for doing so that is of note.
First we can dismiss the idea that peak oil will have anything to do with the major reduction in the projected world production 20-25 years from now. The Associated Press quotes the EIA Administrator as saying “the oil is there” when asked about suggestions that perhaps world oil production was peaking. To drive home the point, one of the Administrator’s press conference PowerPoints boldly asserts that the reassessment of long-term prices is “Not due to ‘Peak Oil’ considerations”. So there!
It seems the EIA reassessment, however, is based on the realization that the OPEC nations simply are not going to make the massive investments necessary to increase oil production by the amount the EIA had been projecting. There is also the notion the major oil producers are making so much money from increasing prices they don’t really need to increase production to keep making more and more.
Then there are “impediments” to investment -- unfriendly governments, insurgencies, environmental concerns -- and the incredibly high cost of producing oil from remote places such as the arctic or thousands of feet under the sea. All this adds up to the bottom line judgment that the world probably won’t be producing quite as much oil as previously estimated.
Is this reduction in estimated world production going to cause much pain? It seems not, for the EIA is projecting per capita energy use in the US will stay about the same and energy use per dollar of real GDP will drop to about half the current rate. Thus while US oil consumption will continue to grow to 27.6 million b/d by 2030, vs. 21.6 million today, there is no crisis in the foreseeable future. Domestic oil production will remain about the same so imports will continue to grow modestly
All in all the EIA projects a rosy future for energy supplies. Natural gas will come from greatly increased imports of LNG and prices will drop to a reasonable $4-5 per thousand cubic feet, and peak usage won’t occur until 2025.
It sounds great unless of course, it is a house of cards. The same PowerPoint bullet that asserts that the EIA’s reassessment is “not due to ‘Peak Oil’ considerations” goes on to say, “we are following this issue closely.”
So there you have it, the US Government officially is not yet ready to say that “Peak Oil” will have an impact in the next 25-30 years, but they now willing to admit in public that they are watching it closely. A new threshold has been crossed on the way to reality.