"Are We 'Running Out'? I Thought There Was 40 Years of the Stuff Left"
Oil will not just "run out" because all oil production follows a bell curve. This is true whether we're talking about an individual field, a country, or on the planet as a whole.
Oil is increasingly plentiful on the upslope of the bell curve, increasingly scarce and expensive on the down slope. The peak of the curve coincides with the point at which the endowment of oil has been 50 percent depleted. Once the peak is passed, oil production begins to go down while cost begins to go up.
In practical and considerably oversimplified terms, this means that if
2005 was the year of global Peak Oil, worldwide oil production in the year 2030 will be the same as it was in 1980. However, the world’s population in 2030 will be both much larger (approximately twice) and much more industrialized (oil-dependent) than it was in 1980. Consequently,
worldwide demand for oil will outpace worldwide production of oil by a significant margin. As a result, the price will skyrocket, oil dependant economies will crumble, and
resource wars will explode.
The issue is not one of "running out" so much as it is not having enough to keep our economy running. In this regard, the ramifications of Peak Oil for our civilization are similar to the ramifications of dehydration for the human body. The human body is 70 percent water. The body of a 200 pound man thus holds 140 pounds of water. Because water is so crucial to everything the human body does, the man doesn't need to lose all 140 pounds of water weight before collapsing due to dehydration. A loss of as little as 10-15 pounds of water may be enough to kill him.
In a similar sense, an oil based economy such as ours doesn't need to deplete its entire reserve of oil before it begins to collapse. A shortfall between demand and supply as little as 10 to 15 percent is enough to wholly shatter an oil-dependent economy and reduce its citizenry to poverty.
The effects of
even a small drop in production can be devastating. For instance, during
the 1970s oil shocks, shortfalls in production as small as 5% caused the price of oil to nearly quadruple. The same thing happened in California a few years ago with natural gas: a production drop of less than 5% caused prices to skyrocket by 400%.
Fortunately, those price shocks were only temporary.
The coming oil shocks won't be so short lived. They represent the onset of
a new, permanent condition. Once the decline gets under way, production will drop (conservatively) by 3% per year, every year. War, terrorism, extreme weather and other "above ground" geopolitical factors will likely push the effective decline rate past 10% per year, thus cutting the total supply by 50% in 7 years.
[1]These estimate comes from
[2], not the least of which is Vice President Dick Cheney himself. In a 1999 speech he gave while still CEO of Halliburton, Cheney stated:
By some estimates, there will be an average of two-percent annual growth
in global oil demand over the years ahead, along with, conservatively, a
three-percent natural decline in production from existing reserves. That
means by 2010 we will need an additional 50 million barrels per day.
Cheney's assesement is supported by the estimates of numerous non-political, retired, and now disinterested scientists, many of whom believe global oil production will peak and go into terminal decline within the next five years, if it hasn't already.
Many industry insiders think the decline rate will far higher than Cheney anticipated in 1999. Andrew Gould, CEO of the giant oil services firm Schlumberger, for instance, recently stated that "An accurate average decline rate of 8% is not an unreasonable assumption." Some industry analysts are anticipating decline rates as high as 13% per year. 13% yearly decline rate would cause gobal production to drop by 75% in less than 11 years.
If a 5% drop in production caused prices to triple in the 1970s, what do you think a 50% or 75% drop is going to do?
Estimates coming out of the oil industry indicate that this drop in production has already begun. The consequences of this are almost unimaginable. As we slide down the downslope slope of the global oil production curve, we may find ourselves slipping into something best described as a "post industrial stone age."
[1] Monday, April 23, 2007
Five Geopolitical Feedback-Loops in Peak Oil
Energy Intelligence Note: April 23, 2007
It is quite common to hear “
experts” explain that the current tight oil markets are due to “above-ground factors,” and not a result of a global peaking in oil production. It seems more likely that it is geological peaking that is driving the geopolitical events that constitute the most significant “above-ground factors” such as the chaos in Iraq and Nigeria, the nationalization in Venezuela and Bolivia, etc. Geological peaking spawns positive feedback loops within the geopolitical system. Critically, these loops are not separable from the geological events—they are part of the broader “system” of Peak Oil.
Existing peaking models are based on the logistics curves demonstrated by past peaking in individual fields or oil producing regions. Global peaking is an entirely different phenomenon—the geology behind the logistics curves is the same, but global peaking will create far greater geopolitical side-effects, even in regions with stable or rising oil production. As a result, these geopolitical side-effects of peaking global production will accelerate the rate of production decline, as well as increase the impact of that production decline by simultaneously increasing marginal demand pressures. The result: the right side of the global oil production curve will not look like the left…whatever logistics curve is fit to the left side of the curve (where historical production increased), actual declines in the future will be sharper than that curve would predict.
Here are five geopolitical processes, each a positive-feedback loop, and each an accelerant of declining oil production:
1. Return on Investment: Increased scarcity of energy, as well as increased prices, increase the return on investment for attacks that target energy infrastructure. Whether the actor is an ideologically driven group (al-Qa’ida), or a privateer (youth gangs in the Niger Delta), the geologically-driven declines increase the ROI for
attacks on
energy, which will drive both decisions to act, as well as targeting decisions for that action. This is a positive feedback-loop because attacks on energy infrastructure and supply drive up the price, which further increases the ROI for such attacks. John Robb's analysis of the September attacks on Mexican oil and natural gas pipelines
suggest an ROI as high as 1.4 million percent.
2. Mercantilism: To avoid the dawning “bidding cycles” between crude oil price increases and demand destruction, Nation-States are increasingly returning to a mercantilist paradigm on energy. This is the attitude of “there isn’t enough of it to go around, and we can’t afford to pay the market price, so we need to lock up our own supply.” Whether it’s the direction of a pipeline flow out of Central Asia, defending only specified sea lanes, or influencing an occupied nation’s laws on Production Sharing Agreements, there are signs of a “
new energy mercantilism” all around us. This is a positive feedback-loop because, like an iterated “prisoner’s dilemma” game, once one power adopts or intensifies a mercantilist attitude all others must follow suit or lose energy share. It will act to accelerate oil production declines because mercantilism prevents the most economically efficient production of a resource, accelerating the underlying problem of diminishing marginal returns. The rise of mercantilism is highlighted by the recent coverage of the
race to
control the
Arctic, and its potentially vast hydrocarbon reserves.
3. “Export-Land” Model: Jeffrey Brown, a commentator at The Oil Drum, has proposed a geopolitical feedback loop that he calls the
“export-land” model. In a regime of high or rising prices, a state’s existing oil exports brings in great revenues, which trickles into the state’s economy, and leads to increasing domestic oil consumption. This is exactly what is happening in most oil exporting states. The result, however, is that growth in domestic consumption reduces oil available for export. In states, such as Mexico, where oil production is also in decline, the “export-land” model predicts that oil exports will decline much faster than oil production—and this is exactly what is happening, with the
latest PEMEX report showing 5% production decline year-on-year, but 11% export decline. Ultimately, the effects of the “export-land” model itself suffers from diminishing marginal returns—when exports shrink sufficiently, the oil-export revenue per capita will actually begin to decline (eventually reaching zero, no matter how fast prices rise), at which time the force behind rising domestic consumption will be eliminated. The likely unwillingness of governments to allow their valued oil export revenues to be totally consumed by rising domestic consumption will create pressure for domestic rationing, price-hikes, or uneven distribution of oil and gas domestically. We are already seeing this as many oil exporting countries are scaling back the subsidized pricing of domestic gasoline. The inequalities that will arise out of domestic rationing will act as a catalyst and accelerant to the last two feedback loops...
4. Nationalism: Because our Westphalian system is
fundamentally broken, the territories of nations and states are rarely contiguous. As a result, it is often the case that a nation is cut out of the benefits from its host state’s oil exports. This will be especially apparent when the “export-land” effect reduces the total size of the pie to be divided, or as domestic rationing is introduced to maintain export revenues. As a result, nations or sectarian groups within states will increasingly agitate for a larger share of the pie. We see this already within Iraq, Iran (Khuzestan), Nigeria (Delta State), Bolivia (indigenous groups), etc. This process will develop local variants on the tactics of infrastructure disruption, as well as desensitize energy firms to ever greater rents for the security of their facilities and personnel—both of which will drive the next loop…
5. Privateering: Nationalist insurgencies and economies ruined by the downslide of the “export-land” effect will leave huge populations with no conventional economic prospects. High oil prices, and the willingness to make high protection payments, will drive those people to become energy privateers.
We are seeing exactly this effect in Nigeria, where a substantial portion of the infrastructure disruption is no longer carried out by politically-motivated insurgents, but by profit-motivated gangs. This is the ultimate positive feedback-loop: infrastructure disruption further degrades any remnants of a legitimate economy, increasing the incentive to engage in energy Privateering, and compensating for any diminishing marginal returns in Privateering caused by enhanced security or competition from other privateers.
We may see some or all of these effects in any given area, and are already seeing this in some trouble spots. Some states, like Iraq, have been thrown into full-fledged “Nationalism” and “Privateering”-driven geopolitical disruption by the actions of an outside power—in this case, the US invasion was itself largely the byproduct of a shift towards energy mercantilism. This is just one illustration of the synergistic interrelationship among these feedback loops. The important take-aways are these:
1. So-called “above-ground factors” are driven by the geological reality
2. These geopolitical processes are positive feedback-loops
3. They will accelerate the decline in global oil production beyond that predicted by models derived from logistics curves.
Geologically driven decline follows a classic logistics curve, with a "long tail" of declining production continuing indefinitely. Geopolitical positive feedback-loops not only have the potential to accellerate that rate of decline, but can potentially drive it to zero in short order. Oil production requires certain threshold levels of economic functioning, security, and rule of law to proceed. These positive feedback-loops have the potential to cut off the "long tail" of declining production abruptly. It practically dogma in peak oil circles that peak oil doesn't mean the end of oil production, just the beginning of inexorable declines. In light of the potential impact of geopolitical feedback-loops, it may be time to reassess that idea, at least on a regional basis.
[2]
BP challenges ASPO in bet over peak oilSubmitted by Mikael Höök on Tue, 2008-06-10 19:37.
Press releasesBP Plc Chief Executive Officer Tony Hayward is putting money on the line to dispute the theory of peak oil, according to his counterparty in the wager Kjell Aleklett, a professor at Sweden's Uppsala University.
Hayward bet Aleklett the price of one barrel of oil in 2018 that global crude production will be greater than the current daily output of 85.5 million barrels, the professor said during his speech at the Asia Oil and Gas Conference in Kuala Lumpur. Total supply was 86.8 million barrels a day, including natural gas liquids such as propane.
I am upset that the bet is so low, only the price of one barrel of oil, Aleklett said to laughter from the audience at the oil conference in Kuala Lumpur.
Read more:
Bloomberg NewsLibya: "The easy, cheap oil is over, peak oil is looming" Submitted by Mikael Höök on Tue, 2008-06-10 11:31.
Headline newsGlobal oil supplies are adequate and there are no moves within OPEC to hold an emergency meeting to discuss record oil prices, Libya's top oil official said on Sunday.
When asked about the record oil price of over 139 dollar/barrel, Shokri Ghanem, head of Libya's National Oil Corporation, said the following:
"I think it will go higher," said Ghanem, who is also head of Libya's OPEC delegation. "That is a trend that will continue for some time."
Oil was becoming more difficult and costly to produce, and global supplies were nearing their peak, Ghanem explained.
"The easy, cheap oil is over, peak oil is looming," Ghanem also said in the interview.
In last year Ghanem stated that it may not be possible to boost global supply beyond 100 million barrels, from about 87 million bpd now.
Read more:
ReutersOil Makes History with near 11 Dollar JumpSubmitted by Mikael Höök on Fri, 2008-06-06 21:04.
Headline newsThe price of oil jumped almost $11 in one day today - rising $10.75 to settle at $138.54 per barrel - the biggest gain in dollar terms in the history of the market and the highest since trading began in 1983. This is an increase of 8.41%.
Analysts attributed the dramatic increase in part to Israel’s statement that an attack on Iranian nuclear sites may be “unavoidable”.
Also, the dollar was weakened by a rise in the US unemployment rate, expectations that the European Central Bank may hike interest rates and Morgan Stanley predicting crude prices may reach $150 by 4 July.
Read more:
Upstream OnlineMore On Russian Oil ProductionSubmitted by Mikael Höök on Fri, 2008-06-06 08:42.
Headline newsThe problematic situation for oil production is Russia is developing even more. Now all oil companies, except one, have problems with production.
LUKOIL has admitted for the first time that its production is falling. It fell 3.3 percent in the first quarter of the year. The company said it would have the situation resolved by the end of the year. Gazprom Neft has not been able to do so for two years, however, even after taking such radical steps as firing the head of its main production arm Noyabrskneftegaz. Rosneft is now the only Russian oil company that is not having trouble with production.
Read more:
KommersantBEYOND OIL: SHANGHAISubmitted by Kjell Aleklett on Wed, 2008-06-04 21:10.
Headline newsThe School of Architecture at the Royal University College of Fine Arts in Stockholm is a forum for post-graduate education in architecture and urban studies. The school dates back to the end of the 18th century and is the oldest institution for architectural studies in Sweden. Today, the school concerns itself with current issues relevant for the general public and investigates how these are connected to an architectural and urban discourse. It provides one-year courses and one of these courses deals with RESOURCES.
The course that started in September 2007 had the theme “Beyond Oil – Shanghai” and the 18 students were architects, urban planners, landscape architects, and a cinematographer, a designer, a graphic designer and a industrial designer. They have been working for one year with the project:
“Post-oil has been the major plot-device in our story about the city. China and Shanghai have been the setting. We have tried to imagine what life will be like in Shanghai in a post-oil future – 2030.”
