SUPPLY AND DEMAND
Peaking of world oil production: Recent forecasts
Predicting the timing of a peak may not be possible, but inadequate investment could make geological considerations moot.
Robert L. Hirsch, Senior Energy Program Advisor, SAIC
Because oil is a depleting, finite natural resource, world conventional oil production will reach a maximum, or peak, after which production will decline.1 Using differing methodologies and information of widely varying quality, experts and organizations have attempted to forecast the likely year of world conventional oil production peaking. The recent range of such estimates extends from late 2005 to an apparent denial that it will ever happen. Almost all forecasts are based on differing, often dramatically differing geological assumptions. Explicit account of investment rates in new and expanded production has been relatively rare.
Because of the large uncertainties, it is difficult to define an overriding geological basis for accepting or rejecting any of the forecasts. However, the International Energy Agency (IEA) recently warned that worldwide investment in expanded oil production has been considerably less than needed to continue world oil production that is adequate to meet expected world demand. Thus, geological limits may be yielding to inadequate investment.
Peak oil presents the world with a risk management problem of tremendous complexity and enormity. Prudent risk minimization requires the implementation of mitigation measures roughly 20 years before peaking, to avoid a very damaging world liquid fuels shortfall.2 Since it is uncertain when peaking will occur or whether it will be due to geological or investment constraints, the challenge is indeed vexing.
We summarize recent forecasts for peaking world oil production. Our focus was on people and organizations that have special oil industry expertise and/or significant influence, recognizing that we may have overlooked some that are worthy of mention.
Peaking world oil production.3 According to the IEA, “Worldwide, the rate of [oil] reserve additions from discoveries has fallen sharply since the 1960s. In the last decade, discoveries have replaced only half the oil produced. Nowhere has the fall in oil discoveries been more dramatic than in the Middle East, where they plunged from 187 billion bbl in 1963–1972, to 16 billion bbl during the decade ending in 2002.4
No one knows precisely when peaking will occur, because much of the data needed for an accurate forecast is either proprietary to companies, state secrets of major oil exporting countries, or politically/economically biased. However, even large differences in estimated remaining world oil reserves would not significantly change the date of world peaking, when viewed from the perspective of mitigation. According to the US Energy Information Administration (EIA), “[Our] results [related to oil peaking] are remarkably insensitive to the assumption of alternative resource base estimates. For example, adding 900 billion bbl (more oil than had been produced at the time the estimates were made) to the mean USGS resource estimate in the 2% growth case, only delays the estimated production peak by 10 years. Similarly, subtracting 850 billion bbl in the same scenario accelerates the estimated production peak by only 11 years.5
A number of forecasters have accepted OPEC reserves estimates at face value, in part because there is no independent source of verification. This acceptance is troubling in light of the fact that past history raises significant questions about the validity of OPEC reporting.
In the words of the IEA,6 “What is clear is that revisions in official (Middle East and North Africa [MENA] reserves) data had little to do with actual discovery of new reserves. Total reserves in many MENA countries hardly changed in the 1990s. Official reserves in Kuwait, for example, were unchanged at 96.5 billion bbl (including its share of the Neutral Zone) from 1991 to 2002, even though the country produced more than 8 billion bbl and did not make any important new discoveries during the period. The case of Saudi Arabia is even more striking, with proven reserves estimated at between 258 and 262 billion bbl in the past 15 years, a variation of less than 2% (in spite of production of well over 100 billion bbl).”
However, while the lack of transparency about OPEC reserves is troubling, the fact that they made no new discoveries does not rule out major additions to reserves through extensions and revisions—which are common in many oil provinces.
THE “EASY” OIL ERA
A number of influential people have recently remarked about the end of the era of “easy” and/or low-cost oil. While their definitions vary, they believe that the world oil enterprise has entered a new, more difficult, more expensive phase. Important commentators include Samuel Bodman, US Secretary of Energy, David O’Reilly, Chairman of Chevron, Jeroen van der Veer, Shell Chief Executive, Alpha Oumar Konare, African Union Commission Chair, and Viktor Khristenko, Russian Energy Minister. It is thus reasonable to conclude that the oil business has fundamentally changed.
NOTABLE RECENT FORECASTS
To understand peaking forecasts, it is important to know the types of liquids each forecaster has considered. This is not always obvious. Over 95% of current world oil production is of relatively light, “conventional” oil. Unfortunately, conventional oil definitions vary among forecasters. While it always includes onshore and shallow offshore light oil, it might not include light oil from deepwater offshore oil fields, natural gas liquids, arctic oil and/or refinery gains, etc.
Worldwide, unconventional oil is produced at relatively modest levels, compared to about 85 million bopd consumed. Unconventional oil includes heavy oil, oil sands, Gas-To-Liquids (GTL), Coal-To-Liquids (CTL), shale oil, biomass-to-liquids, etc. Heavy oil/oil sands is the largest contributor of unconventional oil but contributes less than 3% of world liquid fuels supply; the contributions of GTL, CTL and biomass are considerably less. Here, we are interested in the broad range of peak oil forecasts; finer scale differentiation between conventional and unconventional oil in the various forecasts was beyond our scope.
The tables listed here show peak oil forecasts by time period. Since some forecasters opine that peak oil may be here now, it is reasonable to ask how that might be possible, when the world is not yet aware that it now exists. The answer is that a peak is not necessarily knife-edge sharp. Experience from oil fields and large oil producing regions demonstrates that maximum oil production is sometimes characterized by a few-year-long gentle rollover.
|TABLE 1. Important recent peak oil forecasts ranging to 2012.
|TABLE 2. Important recent peak oil forecasts ranging from 2012 to 2022.
|TABLE 3. Important recent peak oil forecasts ranging beyond 2022.
At the other end of the spectrum, the EIA position on world oil peaking is particularly notable, because EIA has become progressively more optimistic in recent years. In the year 2000, EIA developed 12 scenarios for world oil production peaking, using three U.S. Geological Survey (USGS) estimates of the world’s conventional oil resource base (low, mean, and high probability) and four annual world oil demand growth rates. Their resulting peak year forecasts ranged from 2016 to mid century.7 In a subsequent study,8 EIA reconsidered its earlier work and concluded the following: “In any event, the world production peak for conventionally reservoired crude is unlikely to be ‘right around the corner’ as so many other estimators have been predicting. Our analysis shows that it will be closer to the middle of the 21st century than to its beginning.” Recently, EIA verified that it still does not forecast oil peaking before 20309, thus remaining among the most optimistic about future world oil production.
CERA has also become increasingly more optimistic about future world oil production: “Barring unforeseen events, there is no reason to believe capacity couldn’t meet demand well after 2030, CERA researchers said.”10 In a recent analysis, CERA said, “The much-discussed ‘peak oil’ is not imminent, nor is the start of the ‘undulating plateau.’”11
RECENT INVESTMENT-RELATED WARNINGS
In their recently released World Energy Outlook (WEO), the International Energy Agency (IEA) sounded a sharp warning with regard to future world oil production:45 “The energy picture has changed appreciably since the 2004 Outlook, the last major update of the IEA’s global energy projection. The realities of the energy market have become harsher and the relative competitive position of fuels has changed. Oil and gas prices this year have been between three and four times higher than in 2002, and this is reflected in a new oil price assumption for the projections. But world economic growth has remained robust, as the recessionary effects of higher energy prices have been more than offset by other factors.”
“‘WEO 2006 identifies under-investment in new energy supply as a real risk,’ said Mr. Mandil, (Claude Mandil, IEA Executive Director). To quench the world’s thirst for energy, the Reference Scenario projections call for a cumulative investment in energy-supply infrastructure of over $20 trillion in real terms over 2005–2030—substantially more than was previously estimated. It is far from certain that all this investment will actually occur. There has been an apparent surge in oil and gas investment in recent years, but it is, to a large extent, illusory. Drilling, material and personnel costs in the industry have soared, so that, in real terms, investment in 2005 was barely higher than that in 2000.”
In interviews associated with the WEO 2006 release, IEA executives further affirmed the impending difficulties: “This energy future is not only unsustainable, it is doomed to failure [because of] underinvestment in basic energy infrastructure,” According to Mandil, “...In short, we are on course for an energy system that will evolve from crisis to crisis”.46
“Mr. Birol, the IEA economist, said in an interview that he expects the oil industry’s production capacity will slightly outstrip demand through the end of this decade ‘if all the projects see the light of day.’”47
Another recent warning comes from the prestigious Aspen Institute:48 “It is not a question of what exists below the ground, but the adequacy of the investment environment above ground and the progress made on demand reduction that will lead to wise choices. As access to resources increasingly is taken out of the control of market forces and placed under the control of governments and government-controlled entities, the ability to supply energy markets increasingly becomes a government decision rather than a market decision.
“Unfortunately, government decisions often are swayed less by what is best for the market and consumers than by what is in the best interests of individual nations or political ideologies. As politics intrude more and more into future energy decision making, the collective security of consumers and producers erodes and can fall prey to political whims and disruptive policies based on non-energy goals. Bold steps to alter course are required.”
SUMMARY AND CONCLUDING REMARKS
It is noteworthy that a number of industry insiders have now expressed the view that the era of easy, low-cost oil is past. This, in itself, heralds a fundamental change in the world oil outlook. A number of knowledgeable individuals and organizations have provided forecasts for when world conventional oil production might reach a peak. It is clear that there is no consensus among the forecasters, which is not surprising because of different methodologies and the fact that various oil reserves estimates are open to considerable question.
Because of the large uncertainties, it is difficult to define an overriding geological basis for accepting or rejecting any of these forecasts. Some commentators suggest that self-interest may have impacted some of the forecasts; others speak of over-optimism, over-pessimism, political pressure, lack of understanding of petroleum geology, etc. Some forecasters explicitly discuss the issue of underinvestment in exploration and production, which could lead to markedly different future world oil production, while others do not. None of the forecasts take explicit account of terrorism or resource nationalism,49 both of which are very uncertain but could have profound impact.
The recent IEA and Aspen warnings about worldwide underinvestment in upstream oil development is a matter of deep concern. Indeed, it is one thing to estimate what might be available underground, but it is quite another for the needed investment and skills to be brought to bear on a timely basis to overcome existing oil field depletion, as well as to provide production growth that the world demands.
The wide range of peak oil forecasts makes peak oil policymaking particularly difficult. One option would be to await a consensus of forecasters, but that is very unlikely in light of their strongly held divergent views. Another option is to wait until the problem is obvious before taking action, particularly since there seem to be so many other public policy problems demanding immediate attention.
Peak oil presents the world with a risk management problem of tremendous complexity and enormity. From our earlier report:50
The risks of premature versus late mitigation are asymmetric:
Mitigation actions initiated prematurely will be costly and could result in a poor use of resources. Late initiation of mitigation may result in severe consequences. Mitigation will require an intense effort over decades. This inescapable conclusion is based on the time required to replace vast numbers of liquid fuel consuming vehicles and the time required to build a substantial number of substitute fuel production facilities. Our scenarios analysis shows:
Waiting until world oil production peaks before taking crash program action would leave the world with a significant liquid fuel deficit for more than two decades. Initiating a mitigation crash program 10 years before world oil peaking helps considerably but still leaves a liquid fuels shortfall roughly a decade after the time that oil would have peaked. Initiating a mitigation crash program 20 years before peaking appears to offer the possibility of avoiding a world liquid fuels shortfall for the forecast period.
The obvious conclusion ... is that with adequate, timely mitigation, the economic costs to the world can be minimized. If mitigation were to be too little, too late, world supply/demand balance will be achieved through massive demand destruction (shortages), which would translate to significant economic hardship.
There will be no quick fixes. Even crash programs will require more than a decade to yield substantial relief. It is our sincere hope that readers will look beyond the conflicting forecasts and focus on the consequences of underestimating the enormity of the peak oil problem. Effective mitigation means taking decisive action well before the problem is obvious.
A study on peak oil,51 just released by the independent, non-partisan Congressional General Accountability Office, concluded that “Most studies estimate that [world] oil production will peak sometime between now and 2040. This range of estimates is wide, because the timing of the peak depends on multiple, uncertain factors that will help determine how quickly the oil remaining in the ground is used, including the amount of oil still in the ground; how much of that oil can ultimately be produced given technological, cost, and environmental challenges, as well as potentially unfavorable political and investment conditions in some countries where oil is located; and future global demand for oil. Demand for oil will, in turn, be influenced by global economic growth and may be affected by government policies on the environment and climate change and consumer choices about conservation.”
“... an imminent peak and sharp decline in oil production could cause a worldwide recession. If the peak is delayed, however, [various] technologies have a greater potential to mitigate the consequences.”
This work (except for the GAO Addendum) was sponsored by the U.S. Department of Energy, National Energy Technology Laboratory, under Contract No. DE-AM26-04NT41817. The author is indebted to NETL management for their encouragement and support. Helpful comments were provided on an earlier draft by Ken Kern, SAIC, Larry Kummer, UBS, and Roger Bezdek, MISI. Their assistance is greatly appreciated.
This report was prepared as an account of work sponsored by an agency of the United States Government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process disclosed, or represents that its use would not infringe privately owned rights. Reference therein to any specific commercial product, process, or service by trade name, trademark, manufacturer or otherwise, does not necessarily constitute or imply its endorsement, recommendation or favoring by the United States Government or any agency thereof. The views and opinions of authors expressed therein do not necessarily state or reflect those of the United States Government or any agency thereof.
1 The distinction between conventional and unconventional oil is discussed in Section IV.
2 Hirsch, R.L., Bezdek, R., Wendling, R. Peaking of World Oil Production: Impacts, Mitigation & Risk Management. DOE NETL. February 2005.
3 This section is excerpted from Bezdek, R.H., Wendling, R.M., Hirsch, R.L. Economic Impacts of U.S. Liquid Fuel Mitigation Options. DOE/NETL-2006/1237. July 8, 2006
4 International Energy Agency, World Energy Outlook 2005, November 2005, page 132.
5 Wood, J.H., Long, G.R., and Morehouse, D.F., �World Conventional Oil Supply Expected to Peak in 21st Century.� Offshore. April 2003. http://www.eia.doe.gov/pub/oil_gas/petroleum/feature_articles/2004/worldoilsupply/oilsupply04.html, or http://www.eia.doe.gov/neic/speeches/Caruso061305.pdf .
6 International Energy Agency, World Energy Outlook 2005, op. cit., p. 125.
7 DOE EIA, Long Term World Oil Supply, April 18, 2000.
8 Wood, J. H., Long, G. R., Morehouse, D. F., Long-Term World Oil Supply Scenarios. DOE EIA. Posted: Aug. 18, 2004.
9 Morehouse, D., Private communication. June 1, 2006.
10 Strahan, A., �Global petroleum capacity to rise 25 percent by 2015,� Bloomberg Aug. 8, 2006.
11 Jackson, P. M., Esser, R. W., �Expansion set to continue�Global liquids capacity to 2015,� CERA. Aug. 2006.
12 �Boone Pickens warns of petroleum production peak,� EV World. May 4, 2005.
13 http://www.defense-and-society.org/fcs/crisis_unfolding.htm. Feb. 11, 2006.
14 Bailey, A. �Has oil production peaked?� Petroleum News. May 4, 2006.
15 King, B. W., �No more business as usual,� Energy Bulletin. Aug. 11, 2006.
16 Simmons, M., �For some time, I have suspected that peak oil is probably here.� Private communication. Aug. 30, 2006. also: CFA Society of St. Louis, Brentwood, MO., slide 23, �World should assume we are at peak for oil and gas,� May 24, 2006.
17 Energy Trends and Implications for US Army Installations. ERDC/CERL TN-05-1, Sept. 2005.
18 Groppe, H., Peak oil: myth vs. Reality. Denver world oil conference. Nov. 10, 2005.
19 Goodstein, D., Out of Gas�The End of the Age of Oil. W. W. Norton. 2004
20 Bentley, R., The Case for Peak Oil, DOE/EPA Modeling the Oil Transition, April 21, 2006.
21 An Updated Depletion Model, The association for the study of peak oil and gas �ASPO� newsletter no. 64�April 2006.
22 Skrebowski, C., Peak Oil�The emerging reality, ASPO-5 Conference, Pisa Italy, July 18, 2006.
23 Drivers of the Energy Scene, World Energy Council, 2003.
24 Meling, Leif Magne, Statoil ASA. Oil Supply, Is the Peak Near? Centre for Global Energy Studies. Sept. 29-30, 2005.
25 Pang, X., Meng, Q., Zhang, J. and M. Natori, The Challenges Brought By The Shortage of Oil And Gas In China And Their Countermeasures, ASPO IV International Workshop on Oil and Gas Depletion, May 19-20, 2005.
26 Koppelaar, R., World oil Production & Peaking Outlook. Stichting Peakoil-Nederland, 2005.
27 Laherrere, J., Private communication. Sept. 11, 2006, Includes all liquids.
28 Volvo web site
29 ASPO NEWSLETTER no. 65, May 2006.
30 Motavalli, J., End of an Era, Cosmos, April 2006.
31 Traviati, Mario, et al., Oil Supply Analysis: From �Upstream� Incapacity to Spare Capacity: It's Now a Better Story �Downstream,� Merrill Lynch, Oct. 12, 2005.
32 West, R., Energy Insecurity, Testimony before the Senate Committee on Commerce, Science & Transportation. Sept. 21, 2005.
33 Maxwell, C. T., �The gathering storm,� Barron's. Nov. 14, 2004.
34 A Baseline Study on Oil Dependence in Ireland. Amarach Consulting, Ireland. Dec. 2005.
35 MacroEnergy Long Term Outlook�March 2006. Wood Mackenzie.
36 Bergin, T., Total Sees 2020 Oil Output Peak, Urges Less Demand, Reuters, June 7, 2006.
37 Davis, G. �Meeting Future Energy Needs,� The Bridge, National Academies Press, Summer 2003.
38 Oil Output set to peak, but no fuel shortage-UBS. REUTERS. 24 August 2006
39 Morehouse, D., Private communication. June 1, 2006.
40 �Barring unforeseen events there is no reason to believe capacity couldn't meet demand well after 2030, CERA researchers said.� Strahan, A. Global Petroleum Capacity to Rise 25 Percent by 2015. Bloomberg. 2006-08-08
41 www.exxonmobil.com. http://www.exxonmobil.com/Corporate/Files/Corporate/OpEd_peakoil.pdf
42 Lynch, M. Private communication. August 30, 2006. �That's a good representation.� �My view is definitely formed by a mix of resource economics theory and empirical evidence.�
43 As Profit Rises, BP Chief Seeks To Allay Anger. Washington Post. July 27, 2006.
44 Neil Chatterjee, op. cit.
45 The World Energy Outlook 2006 Maps Out a Cleaner, Cleverer and More Competitive Energy Future. International Energy Agency. News Release - November 7, 2006.
46 IEA says demands on OPEC crude to increase �substantially': IEA. Platts--7Nov2006
47 Bahree, B. Investment by Oil Industry Stalls. WSJ. November 8, 2006.
48 Johnston, J.B., Forum Chair. ENERGY MARKETS AND GLOBAL POLITICS. The Aspen Institute. 2006.
49 Resource nationalism refers to countries appropriating oil fields developed by institutions based outside of their borders. Examples include Venezuela, Bolivia, Algeria, Ecuador, Russia, etc.
50 Hirsch, R.L., Bezdek, R., Wendling, R. Peaking of World Oil Production: Impacts, Mitigation & Risk Management. DOE NETL. February 2005.
51 Uncertainty about Future Oil Supply Makes It Important to Develop a Strategy for Addressing a Peak and Decline in Oil Production. GAO-07-283. February 2007.
Robert L. Hirsch is a senior energy program advisor for SAIC. Previous employment includes senior positions at the Energy Research and Development Administration, ARCO, Exxon, EPRI, APTI and Rand. He is a past chairman of the Board on Energy and Environmental Systems at the National Academies. He has a PhD in engineering and physics from the University of Illinois.