Graphically represented, after reaching the top of a roughly bell-shaped curve, oil production may flatten out for a few years but then it will inevitably decline.

Historical proof of Peak Oil is demonstrated by the work of M. King Hubbert, who, in 1956, correctly predicted that US oil production would peak between 1965 and 1970.

A growing number of very credible industry participants and analysts believe that we are now at or near the top of the curve of global oil production.

Peak Oil is not about “running out” of oil, but the curve does illustrate the quantity and pace at which humanity has extracted and used oil.

With a rising world population, and large developing countries like China and India experiencing rapid growth, between 2005 and July of 2008 demand was gradually outstripping supply. During the second half of 2008, high oil prices plus financial turmoil and the economic slump actually reduced demand for oil, thus prices crashed. But the reprieve will only be temporary because more oil is being consumed than found; despite the latest technology, few major oil fields have been discovered since the mid-1970s.

The most valuable and widely used source of energy on earth is gradually become harder to find and more expensive, setting the scene for considerable social and economic change worldwide.

Oil 202

The peak of the global oil supply refers to the uncontroversial observation that the world’s yearly production of conventional oil, a finite resource, will reach a high water mark, then probably remain in a plateau for some period before declining thereafter. What is controversial is figuring when the peak will occur. For ASPO-USA, the phrase “peak oil” refers to the hypothesis of a medium-term peak in the oil supply sometime between now and 2015.

If the medium-term peak oil hypothesis is correct, the world’s industrialized economies, which are utterly dependent on a growing liquid fuels supply, will likely face unprecedented turmoil. According to the Hirsch report[1], oil supply shortfalls will occur unless crash mitigation efforts are undertaken now to ameliorate the impacts on the economy. Unconventional liquids sources such as the oil sands of Canada or biofuels will only marginally delay the peaking of global petroleum liquids production, and fill a small part of the growing gap between available supply and unsatisfied demand thereafter. The gap must be narrowed by greater efficiency and other measures that reduce oil consumption.

The peak oil theory does not state that the world is running out of oil. The world’s remaining conventional proved oil reserves have been appraised at about 1.25 trillion barrels,[2] including crude oil, condensate and natural gas liquids (but excluding the Canadian tar sands). The world has already consumed 1.11 trillion barrels, and the world produces roughly 30 billion barrels each year. All numbers are for year-end 2006. Reserves estimates are always uncertain, and are sometimes subject to political considerations. Caution should be exercised in accepting stated reserves volumes if it is unknown how the estimate was arrived at. Therefore, non-transparent OPEC proved reserve estimates are a source of major concern. Reserves numbers change up or down over time. Produced oil should always be subtracted from current estimates each year, just as new discoveries and growth in existing reserves are added back in.

The peak oil theory does not state that conventional oil production will peak and decline when exactly half the assumed global endowment has been used up. That notion assumes that we know with some certainty what the world’s recoverable reserve volumes actually are, and that the producing countries will extract their oil in an unconstrained way. The halfway mark supposition comes from applying the derivative of a symmetric logistic function to estimate future oil production. The mathematics produces a bell-shaped “Hubbert” curve. Legendary geologist M. King Hubbert used a similar technique to successfully predict the peak of U.S. Lower 48 production which occurred in 1970. This mathematical method was first employed in 1838 by Pierre Verhulst to model exponential growth in finite systems. A mathematical variant called a Hubbert Linearization is used to estimate remaining recoverable reserves. Some analysts use these methods, others do not.

The peak oil theory does not state that the world oil production has reached its high water mark now, although some analysts hold that opinion. While it is possible that the ultimate peak or plateau in world oil production has already occurred, the evidence at present is clouded by a variety of factors. These uncertainties will be resolved in the coming years, but ASPO-USA believes the preponderance of the evidence makes it likely that the peak will arrive by 2015. In any case, the peak will only be visible in the rear-view mirror. It does not matter much if the 2015 date is off by a few years in either direction.

A Preponderance of the Evidence

Figure 1

It is unlikely that there will be agreement in the medium term about the size of the world’s proved reserves. For this reason, the peak oil perspective focuses on past production figures, current production directions, and anticipated production trends. The geological facts of life state that depletion of oil reserves must eventually be accompanied by declines in production rates. Moreover, putting new reserves into production, or full utilization of productive capacity, is affected by a variety of so-called “aboveground” factors, including OPEC policies, inflation in the oil industry that erodes investment, and geopolitical conflicts.

Here are a few key reasons why ASPO-USA believes that a peak or plateau in world oil production is likely to occur by 2015. (Figure 1 shows one possible scenario.)

1. Depletion is relentless, and eventually leads to production declines as natural reservoir pressure decreases and can not be maintained by water or gas injection. Most new fields are small (reserves < 400 million barrels) or in deepwater basins. Production declines sooner and faster in both cases. The world’s largest producing fields are also the most mature. These aging giants are now mostly depleted and in some cases have peaked (Burgan in Kuwait) or are in decline (Cantarell in Mexico). The status of Ghawar in Saudi Arabia, the world’s largest oil field, is unknown, but the prospects for this field are worrisome due to its advanced stage of depletion. Some of the new production capacity in Saudi Arabia will merely replace declines that are likely to occur by 2015. Production in Russia, the world’s largest oil supplier, will likely remain flat or decline after 2012.[3]

1. As the graph indicates, discoveries, including backdated existing reserves growth, peaked in the 1960’s. For over a decade now, the world has discovered 10 to 15 billion barrels of new oil each year, but now consumes 2 to 3 times that much. If the world’s overall production decline rate is 4%, then new conventional oil production must replace 20 million barrels per day by 2015 just to break even.[4] Unlike the period after the disruptions of the 1970’s and early 1980’s, there are no new large oil provinces such as the North Sea or Prudhoe Bay waiting in the wings to substantially boost global supplies.
2. Conventional oil production outside of OPEC (non-OPEC) is very likely to peak in the forecast period, a conclusion shared by such divergent organizations as ExxonMobil, PFC Energy and ASPO-USA. Higher levels of production from OPEC are not guaranteed for a variety of reasons. Chavez’s policies have hampered Venezuelan production, which is declining. Political conflicts in Nigeria affecting production in the Niger Delta or offshore show no sign of abating. Iraq’s production is crippled and placed further at risk should geopolitical events escalate the conflict there. Iran’s production is endangered by a lack of investment and skilled workers due to its political policies. The other Persian Gulf producers have little incentive to ignore their longer term interests by stepping up production as time goes on to meet growing global demand.
3. Unconventional oil production from the tar sands of Canada, the Orinoco Basin in Venezuela, and the Green River Shale in the United States is unlikely to surpass 5 million barrels per day by 2015. Biofuels from corn, sugar cane, soybeans, palm oil or other sources will not make a significant dent in replacing conventional oil demand.
4. The average worldwide recovery factor for all oil fields is about 35%. This means that almost 2/3rds of all the oil in place is effectively stranded ─ it is not economically recoverable using existing technology. Despite research & development efforts by the oil industry, recovery factors are not likely to increase much in the medium term. There is no applicable “miracle” technology, a silver bullet, that will increase production rates enough to offset natural declines.

For these and other reasons, ASPO-USA believes that a peak of world oil production is likely by 2015. All thoughtful analysts of the future oil supply can agree that it is at risk, but it unwise to assume that all will turn out well. Oil consumers ignore the peak oil problem at their peril.

Figure 2

Figure 2: The classic case of peak oil, showing the 1970 peak and subsequent decline in US oil production. (Source: Jean Laherrere, ASPO-France/ NGL = natural gas liquids)

For more information about ASPO-USA: www.aspousa.org

[2] Perspective on Oil Resource Estimates, by Ken Chew of IHS Energy. A presentation given to the AAPG Hedberg Research Conference, November, 2006.

[3] For Russia, An End To Growth is In Sight, by Dave Cohen. ASPO-USA, August 15, 2007.

[4] On the Likelihood of Peak Oil, by Dave Cohen. ASPO-USA, May 30, 2007. Also see Decline Rates and Non-OPEC Supply, April 11, 2007.

Mitigation Strategies

We list below certain policies and actions which can, and should, be implemented simultaneously to address the Peak Oil challenge.   We’ve put a blueprint on the drawing board that ranks current options from top to bottom according to effectiveness, urgency, and practicality.

Educate the Public - From Main Street to Wall Street to K Street: we need plain talk that tells the whole energy story and connects the dots.

Mandate Conservation and Efficiency - Modest additional gains in vehicle mpg will save millions of barrels of oil per day. Doubling fleet efficiency in a decade is achievable and critical.

Instill Net Energy as a Guiding Principle - All options should be judged on the basis of net energy EROEI (Energy Return On Energy Invested) they deliver to society.  BTUs count. Turning food into gasoline is bad policy. Fuels from unconventional hydrocarbons are high-carbon emitters, lower on EROEI.

Promote Plug-in Hybrids - Hybrid vehicles work, electric power plants work, wall sockets work.

Develop Renewables - Power the plug-ins with more electricity generated by renewable energy systems: solar, wind, waves, geothermal.  Develop programs to recycle the batteries.

Face Population Growth Issues - The U.S. is adding 30 million people each decade. Exponential population growth worldwide, with more countries seeking a higher standard of living, will greatly increase demand for petroleum products.

Implement Carbon Regulation - Could be the most effective signal to moderate consumption and address climate change.

Incorporate Future Energy Costs into Infrastructure Planning- Low density sprawl and massive highway building must be examined.

Institute Fee-Bates on New Car Purchases - Buyers of new efficient cars earn a rebate; buyers of gas guzzlers pay a fee, sending a price signal to the showroom floor.

Incentivize Enhanced Oil Recovery - Injecting CO2 in old oil reservoirs can yield more oil, sequestering the greenhouse gas.

Obtain Depletion Data from Oil & Gas Producers - Better data on current oil depletion rates exists, and public access is essential. Middle East countries do not release their information; the world needs more statistics to effectively plan for the future.

Revitalize Rail Transportation - Especially in densely populated parts of the country. Better land-use planning for essential density elsewhere.

Review Off-Limit Areas for Drilling - There may be room for some increased access; seismic and 3-D tests should be performed to evaluate those potential offshore resources.

Research Cellulosic Ethanol in Depth - We need to determine its true potential as soon as possible; effective substitutes for liquid fuels is an urgent priority.