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Introduction to Peak Oil

Quantity of oil produced for any given geographical area, from an individual oil field to the planet as a whole, tends to follow a bell-shaped curve. Early in the curve, production increases due to the addition of infrastructure and it reaches a pinnacle - Peak oil. Once past the summit, production declines due to resource depletion.

There are increasing indications that the peak of the entire planet's oil production is nigh. After Peak Oil, the rate of oil production on Earth will enter a terminal decline.

For example, the oil production in the lower 48 states of the US reached its peak in 1970 and has been in a terminal decline. No amount of technology has been able to reverse this trend. The peak in production trailed the peak in discovery(1930) by 40 years for the lower-48. Oil discovery on a worldwide basis peaked in mid 1960s and it has been 40 years since then.

As you can seen from the chart below, the last time the world discovered as much oil as it produced in a year, was back in the mid 1980s. The trend is clearly unsustainable. Over the last couple of years, the world is consuming three times as much crude oil compared to what was discovered during those years.

production-discovery 
Figure-1 : Oil discovery versus production : vertical bars represent discovery and the red worm charts the production. source: ASPO

In 1956, a prominent geologist for Shell Oil company, Dr. Marion King Hubbert predicted that oil production in the lower 48 states of the US would peak between 1965-1970. He was ridiculed by his colleagues for his prediction and in 1970, US produced more oil than any previous year - exactly the year when the production peaked.

In 1969, Dr. Hubbert went on to predict a peak for world oil production between 1995-2000, based on the best data available at that time. His prophecy about peaking of world oil production is known as Hubbert Peak theory. Even if Dr. Hubbert was proved too early in his prophecy, a 6-8 year margin of error is still a pretty good shot at being a prophet, given the 150 year long history of the oil age.
hubbert's chart 
Figure-2: Hubbert's peak graph from 1956 paper.

No one disputes the fact that oil production will peak some day; the disagreement usually revolves around the timing of the peak. It goes from the most pessimistic Prof. Ken Deffeyes, who believes that peak happened in 2005 to the most optimistic USGS which predicts a peak 3 decades from now.

Why is Peak Oil imminent ?

Here are some of the reasons why I believe the peak has either happened or is just around the corner.
  • USGS: is the only organization private/public/government that has an estimate that high. They were caught off-guard when oil production peaked in the lower-48.
  • Biggest growth in demand is coming from Middle-east itself. Saudi Arabia was a country of 6 million people in 1970 and today, the population is 22 million. Production has never reached the 1970s high again. Saudi Arabia threatened to increase production and their production didn't budge even in the aftermath of hurricane Katrina.
  • Estimates about the coming scarcity of crude oil come from numerous sources, not the least of which is Vice President Dick Cheney himself. In a 1999 speech he gave while still CEO of Haliburton, 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 on the order of an additional 50 million barrels a day."
  • US Government had done a study on the peaking of production, headed by a gentleman by name Robert Hirsch. Findings of this study is alarming. A copy of this report here.
  • Europe's only major oil field in the North Sea has peaked and the production is in decline. Britain will be a net importer of Oil by 2007-08 for the first time in more than couple of decades. Decline rates in North Sea has been dramatically high so far.
  • World's second largest oil field in terms of daily output - the Cantarell field of Mexico has peaked according to the Mexican National oil company Pemex. The field could experience steep declines in production up to 8-10% every year. According to this report, 2006 production is already 13% below the 2005 level.
  • China has been transformed from being a net exporter of oil to an importer 10 years ago. China's major oil field, Daqing has probably peaked. The recent economic growth in that nation has added pressure to the demand side.
  • Matt Simmons a successful investment banker and CEO of Simmons and Company International has put his whole career on the line on the peak oil theory. He has gone through several society of petroleum engineers papers and have come to the conclusion that Saudi will not be able to hit their 1970s peak again. Trouble in Ghawar,  World's largest oil field - Ghawar Is Dying.
  • World oil discovery peaked in mid 1960s. Since the oil production in the lower 48 of US peaked about 40 years after the peaking of discovery, there are reasons to believe the same thing could happen to World oil production.
  • Reputed oil industry insiders other than Dick Cheney and Matt Simmons throwing their weight behind peak oil include billionaires Richard Rainwater and Boone Pickens.
  • Financial analyst Jeffery Rubin—chief economist for the respected CIBC World Markets—foresees a peaking in world oil production between now and the end of the decade. Eric Sprott, Sprott Asset Management, has over $1 billion of his firm’s assets invested in areas that will benefit from peak oil.
  • Sadad al Husseini, Saudi Aramco’s former head of exploration and production, wrote 2005 fall that world oil production would peak and plateau by 2015, at between 90 to 95 million barrels a day.
  • PhD academics like Dr. Al Bartlett (University of Colorado-Boulder) plus Robert Kaufmann and Cutler Cleveland (Boston University) have for at least two decades been pointing to upcoming problems associated with peak oil.
  • Former President Bill Clinton and Vice President Al Gore both referenced peak oil. First in June 2006, Gore spent a minute talking it up on CNN’s Larry King Live. Then in early July 2006, Clinton—in an interview with Atlantic Monthly—gave substantial credence to the peak oil concept. He also wondered why he had never received a peak oil briefing, given its strategic importance.
  • Looking at the latest available data, OPEC production has beenmore or less flat since 2004.
  • Many OPEC nations have manipulated oil reserve data. Under the quota regime of the OPEC cartel, the OPEC countries were allowed to produce oil in proportion to their reserves. During the oil crash of the 80s, many OPEC nations found themselves short of hard currency and upwardly revised their oil reserve data to increase their quota. In 1984, Kuwait doubled their reserves on paper, without ever finding a single new field of oil and the other OPEC nations followed suit. All these nations have produced billions of barrels of oil since then and has not found any significant amount of oil, but surprisingly, their reserves reported has remained the same ever since 1990. They have never deducted what has already been produced from the data. When the 7 sisters were running Saudi Aramco, the estimated oil reserves in Saudi Arabia were 110 billion barrels, There has been no significant discovery in that country since the Saudis nationalized Aramco, but the oil reserves were revised up to 260 billion barrels. Same thing can be said of all other nations belonging to the OPEC cartel.
  • To quote former head of National Iranian Oil Company, Dr. Ali Bakhtiari, "It goes without saying that when assaying Middle Eastern oil reserves, one should tread carefully. Because, on the one hand, oil reserves' estimation is both a science and an art; and on the other hand, seen from the point of view of most Middle Eastern countries, oil reserves are more political than geological. Thus, nonscientific views come to prime over science and further enhance the various types of shades that have led to an overall opaque situation in the Middle East."
  • Dr. Bakhtiari wrote this in the context of a discussion in which he estimated total oil reserves in the Middle Eastern group of major oil-producing nations (Iran, Iraq, Kuwait, Saudi Arabia, and the United Arab Emirates) as about half, or even less, than what the respective national governments claim. Isn't it fitting that Kuwait is the first country to admit that they don't have as much oil as they have always claimed ?
  • Major oil companies are joining the alternative fuels bandwagon, like for e.g. BP - calling itself Beyond Petroleum and making significant investments in alternative energy. Chevron is running a conservation web site titled "Will you join us?"
  • Half of the World's population residing in India and China were completely absent from the prosperity of the Industrial world. But that has been changing over the last decade or two. Close to 40% of world's population live in those countries alone. As you will see from the chart, crude oil consumption in those two enormous countries alone are on a tear. China is at least 10-15 years ahead of India on the path to prosperity.
India and China
  • Now, if all goes well in India, then the demand for goods, services, and, hence, commodities will continue to increase very substantially for another 10-20 years. As can be seen from the chart, Indian oil consumption has just recently started to turn up. Should its demand now accelerate, which is very likely, then China's and India's oil demand could double in the next eight years (see chart). Demand from China and India for oil already doubled in the last 10 years.
China and India 2
  • World oil production has been flat at around 84.5 million barrels per day ( bpd ) since late 2004, amidst record high oil prices. While it is too early to say if oil production peaked just under 85 million bpd, the longer the production stays flat to down, it will indicate the arrival of peak production.
  • Reputed petroleum geologist Chris Skrewbowski has published a work known as Mega Projects 2004. Mr.Skrewbowski has looked at all new projects expected to produce more than 100,000 barrels per day in production. According to mega projects, declines from existing fields are balanced by oil coming from new projects until 2007, but not beyond 2007.
  • Canada's oil sands will not prevent peak oil. Uppsala Hydrocarbon Depletion study Group, Uppsala University, Sweden, has made a study of a crash program scenario for the Canadian Oil Sand Industry. Even in a very optimistic scenario Canada's oil sands will not prevent Peak Oil. If a crash program were immediately implemented, it may only barely offset the combined declining conventional crude oil production in Canada and North Sea.
  • Geologists Colin Campbell and Jean Laherrere published a work in 1998 scientific American titled End of Cheap Oil.
  • Industry analysts like PFC Energy; Groppe Long & Littell; and Petrie Parkman & Co. Last fall, Tom Petrie said he expected peak oil by around 2010 and that he would be “shocked” if world oil production didn’t peak by 2015. In PFC Energy’s 2004 presentation on peak oil, they show world oil production peaking in the 2014 time frame; their 2006 study, to be presented at the ASPO-USA conference next month, likely points to a slightly earlier date. Henry Groppe sees world petroleum liquids production peaking by 2010.
  • U.S. Congressmen Roscoe Bartlett (R-MD) and Tom Udall (D-NM) sound seriously concerned about peak oil, have been speaking out and writing about the issue, and have enlisted over a dozen colleagues to join them in the House Peak Oil Caucus.

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