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This piece is adapted from Chapter
2, "Beyond the Oil Peak"
THE COMING DECLINE
OF OIL
Author : Lester R. Brown
When the price of oil climbed above $50 a barrel
in late 2004, public
attention began to focus on the adequacy of
world oil supplies-and
specifically on when production would peak
and begin to decline.
Analysts are far from a consensus on this issue,
but several prominent ones now
believe that the oil peak is imminent.
Oil has shaped our twenty-first century civilization,
affecting every
facet of the economy from the mechanization
of agriculture to jet air
travel. When production turns downward, it
will be a seismic economic
event, creating a world unlike any we have
known during our lifetimes.
Indeed, when historians write about this period
in history, they may
well distinguish between before peak oil (BPO)
and after peak oil (APO).
The oil prospect can be analyzed in several different
ways. Oil
companies, oil consulting firms, and national
governments rely heavily on computer
models to project future oil production and
prices. One approach-use of
the reserves/production relationship to gain
a sense of future
production trends-was pioneered several decades
ago by the legendary King Hubbert,
a geologist with the U.S. Geological Survey.
Given the nature of oil
production, Hubbert theorized that the time
lag between the peaking of
new discoveries and the peaking of production
was predictable. Noting that
the discovery of new reserves in the United
States had peaked around 1930,
he predicted that U.S. oil production would
peak in 1970. He hit it right
on the head.
A second approach, separating the world's principal
oil-producing
countries into two groups-those where production
is falling and those
where it is still rising-is illuminating. Of
the 23 leading oil
producers, output appears to have peaked in
15 and to still be rising in eight. The
post-peak countries range from the United States
(the only country other
than Saudi Arabia to ever pump more than 9
million barrels of oil per
day) and Venezuela (where oil production peaked
in 1970) to the two North Sea
oil producers, the United Kingdom and Norway,
where production peaked in
1999 and 2000 respectively. U.S. oil output,
which peaked at 9.6 million
barrels a day in 1970, dropped to 5.4 million
barrels a day in 2004-a
fall of 44 percent. Venezuela's output has
dropped 31 percent since 1970.
The eight pre-peak countries are dominated by
the world's leading oil
producers, Saudi Arabia and Russia, producing
roughly 11 million and 9
million barrels of oil a day in the fall of
2005. Other countries with
substantial potential for increasing production
are Canada, largely
because of its tar sands, and Kazakhstan, which
is still developing its
oil resources. The other four pre-peak countries
are Algeria, Angola,
China, and Mexico.
The biggest question mark among these eight countries
is Saudi Arabia.
Its production technically peaked in 1980 at
9.9 million barrels a day and
output is now nearly 1 million barrels a day
below that. It is included
as a country with rising production only on
the basis of statements by
Saudi officials that the country could produce
far more. However, some
analysts doubt whether the Saudis can raise
output much beyond its current
production. Some of its older oil fields are
largely depleted, and it
remains to be seen whether pumping from new
fields will be sufficient to
more than offset the loss from the old ones.
This analysis comes down to whether production
will actually increase
enough in the eight pre-peak countries to offset
the declines under way
in the 15 countries where production has already
peaked. In volume of
output, the two groups have essentially the
same total production capacity. If
production begins to fall in any one of the
eight, however, world output
could decline.
A third way to consider oil production prospects
is to look at the
actions of the major oil companies themselves.
While some CEOs sound very
bullish about the growth of future production,
their actions suggest a less
confident outlook.
One bit of evidence of this is the decision by
leading oil companies to
invest heavily in buying up their own stocks.
ExxonMobil, for example,
with the largest quarterly profit of any company
on record-$8.4 billion
in the last quarter of 2004-invested nearly
$10 billion in buying back its
own stock. ChevronTexaco used $2.5 billion
of its profits to buy back
stock. With little new oil to be discovered
and world oil demand growing
fast, companies appear to be realizing that
their reserves will become
even more valuable in the future.
Closely related to this behavior is the lack
of any substantial
increases in exploration and development in
2005 even with oil prices well above
$50 a barrel. This suggests that the companies
agree with petroleum
geologists who say that 95 percent of all the
oil in the world has already been
discovered. "The whole world has now been
seismically searched and
picked over," says independent geologist
Colin Campbell. "Geological knowledge
has improved enormously in the past 30 years
and it is almost
inconceivable now that major fields remain
to be found." This also
implies that it may take a lot of costly exploration
and drilling to find that
remaining 5 percent.
This shrinkage of reserves is strikingly evident
in the ratio between
new oil discoveries and production of the major
oil companies. Among those
reporting that their 2004 oil production greatly
exceeded new
discoveries were Royal Dutch/Shell, ChevronTexaco,
and Conoco-Phillips. On a global
scale, geologist Walter Youngquist, author
of GeoDestinies: The
Inevitable Control of Earth Resources Over
Nations and Individuals, notes that in
2004 the world produced 30.5 billion barrels
of oil but discovered only
7.5 billion barrels of new oil.
The influence on oil production in the years
immediately ahead that is
most difficult to measure is the emergence
of what I call a "depletion
psychology." Once oil companies or oil-exporting
countries realize that
output is about to peak, they will begin to
think seriously about how to
stretch out their remaining reserves. As it
becomes clear that even a
moderate cut in production may double world
oil prices, the long-term
value of their oil will become much clearer.
The geological evidence suggests that world oil
production will be
peaking sooner rather than later. Matt Simmons,
head of the oil investment bank
Simmons and Company International and an industry
leader, says in
reference to new oil fields: "We've run
out of good projects. This is
not a money issue...if these oil companies
had fantastic projects, they'd be
out there [developing new fields]." Kenneth
Deffeyes, a highly respected
geologist and former oil industry employee
now at Princeton University,
says in his 2005 book, Beyond Oil, "It
is my opinion that the peak will
occur in late 2005 or in the first few months
of 2006." Walter
Youngquist and A.M. Samsan Bakhtiari of the
Iranian National Oil Company both
project that oil will peak in 2007.
Sadad al-Husseini, recently retired as head of
exploration and
production at Aramco, the Saudi national oil
company, notes that new oil output
coming on-line had to be sufficient to cover
both annual growth in world
demand of at least 2 million barrels a day
and the annual decline in
production from existing fields of over 4 million
barrels a day. "That's
like a whole new Saudi Arabia every couple
of years," Husseini said.
"It's not sustainable."
This piece is adapted from Chapter 2, "Beyond
the Oil Peak," in Lester
R. Brown, Plan B 2.0: Rescuing a Planet Under
Stress and a Civilization in
Trouble (New York: W.W. Norton & Company,
2006), available on-line at
www.earthpolicy.org/Books/PB2/index.htm.
Additional data and information sources at
www.earthpolicy.org or
contact jlarsen (at) earthpolicy.org
For reprint permissions contact rjkauffman
(at) earthpolicy.org
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