There’s been a lot of discussion about claims that world oil output is going to reach a peak some time soon. If you look at the recent numbers, there’s a pretty good case to be made that world all output has already reached its peak at about 73 million barrels a day, a level reached in mid-2004, and sustained for the past two years.
Now there are lots of local factors that explain weak output in particular countries (not mentioning the War!). Still, if the claims made by those who think oil output can keep on growing were correct, I would have expected the massive increase in prices (from a brief low of $10/barrel and a medium-term price of $20/barrel in the late 1990s to $75/barrel today) to produce a substantial expansion in supply.
This argument is pretty robust to whether oil producers believe that there is plenty of oil (implying that prices will come down again) or not. If prices are going to come down, then there’s a strong incentive to pump more in the short term, use secondary recovery from depleted wells and so on. If prices are going to stay high, there’s a strong incentive to bring large new fields online, even if they are in high cost locations. As far as I can see, neither of these things is happening.
Supposing that oil output has peaked, the obvious point to be made is that Peak Oil isn’t so bad. Sales of Hummers are plummeting, apparently, and lots more people are using buses (at least in Brisbane). And of course, the less oil there is to burn, the easier it will be to stabilise CO2 emissions (though we can’t just rely on Peak Oil – apart from anything else, there’s almost unlimited coal in the ground, far more than we can burn without frying the planet in the process).
Even if supplies have peaked (or, more plausibly, flattened out at the top of the curve), I doubt that prices will go much higher than this, though $100/barrel is certainly possible. If current prices are sustained, a lot of alternatives will become cost-competitive, as already seems to be happening with biofuels in the US, and long-run demand reductions will be substantial.
Theis graph from the US DOE illustrate the long-run increase in oil output and the recent stagnation. (Looking at the data, I’m pretty confident that the time scale for the monthly data is out by a year – it should be 2004-6.)
{ 35 comments }
Stephen Johnson 08.23.06 at 7:22 am
The one caveat that I would offer is that the delay between rise in price and increased capacity coming on line is fairly substantial. IIRC, capacity is largely limited by refining capacity, not wellheads, and those take some time to bring online.
I’m not saying peak oil is or isn’t true – I honestly have no idea whether it is, but that struck me as one reasonably plausible flaw in the argument.
Certainly, one would expect that sustained high prices and possible shortages might result in serious alternatives being pursued and demand reduced as a result, but that would require that people are rational actors, which seems a bit of a dubious proposition to me here in Houston, Texas
(And yes, I do work in the Oil patch.)
Ciao, y’all
Tom T. 08.23.06 at 7:23 am
Isn’t there a generally acknowledged bottleneck in refinery capacity (at least in the US, and particularly after Katrina)? Perhaps the incentive to bring new supplies of crude on line is tempered by the concern that there will be no ready means of refining that additional supply for the consumer market.
james 08.23.06 at 7:45 am
Their are new oil fields being brought on-line. Unfortunatly the largest of these is the tar sands in Canada. The cost to extract the oil in many of the new fields is more than the extraction costs in the existing fields.
SamChevre 08.23.06 at 7:48 am
It’s possible we’re at peak oil–I’m not taking a side in that argument. But I don’t think your argument works, in light of the history. In the 1970’s and early 80’s, everyone thought oil prices would stay high, and brought new fields and new methods in; then the price crashed, and the entire industry nearly went bankrupt. Anyone running an oil business remembers that–probably has friends who lost everything in the 80’s–and is going to be more cautious than almost anyone else about assuming that oil prices will stay high.
Jane Galt 08.23.06 at 8:07 am
It’s pretty generally agreed by the oil analysts that I interview that domestic OPEC politics, not capacity, is what’s keeping production increases modest . . . OPEC is still smarting from the memory of $10 a barrel oil, Iraq is . . . well, we all know, and Iran and Venezuela are diverting much-needed investment to domestic spending.
However, outside of OPEC, new production is being brought on line, and many people expect 2007 to see a robust supply expansion. All we’re seeing is the lagged effect of tight capacity left over from the last bust, not a permanent phenomenon.
Slocum 08.23.06 at 8:50 am
Certainly, one would expect that sustained high prices and possible shortages might result in serious alternatives being pursued and demand reduced as a result, but that would require that people are rational actors…
But it doesn’t — at least no more rational than usual. It requires only that businesses and investors see the opportunity for profits (in alternative sources of energy) and for consumers to change behavior in response to energy costs, which they’re clearly already doing — for example, not only have new SUV sales in the U.S. tanked, but it is becoming very difficult to give used ones away:
http://www.detnews.com/apps/pbcs.dll/article?AID=/20060823/AUTO01/608230370
dsquared 08.23.06 at 9:37 am
However, outside of OPEC, new production is being brought on line, and many people expect 2007 to see a robust supply expansion
Well if you’re bringing new capacity on in 2007, and you have reason to think that other players are going to do the same, then why would you not accelerate your pumping and pull out all the stops to maximise the flow now while prices are high? John has a plausible sounding theory (they aint because they caint) and I don’t see many contenders.
Peter 08.23.06 at 9:47 am
SUV resale values may have dropped, but they’re still pretty high compared with many other vehicles. For instance, according to the linked chart from the Detroit News the resale value of a 2005 Chevrolet Suburban is now $26,800. While that’s down over $3,000 in a year, it’s more than many new 2007 vehicles. And not econoboxes, either. For that price you can get a decent-sized sedan such as a Toyota Camry or a Chrysler 300, or a minivan if you need the Suburban’s seating capacity.
Jane Galt 08.23.06 at 10:02 am
Because building new capacity involves sinking new wells and building new drilling rigs, and they are in fact pulling out all the stops, but there’s a limit to how fast you can build new capacity, particularly since one of the key shortages with the industry pumping flat out is experienced engineers.
stostosto 08.23.06 at 10:02 am
An observation: The graph doesn’t correspond with numbers for total world oil production found at bp.com. There you will find that total world production has risen fairly steadily from 1983 (56,595 tbd) through 2005. Also, the level differs from the graph. The development in recent years in thousand barrels daily:
2001: 74,736
2002: 74,382
2003: 77,091
2004: 80,198
2005: 81,088
Non Sequitur Boy 08.23.06 at 10:23 am
I agree with stostosto. The 2005 BP numbers are even below some other estimates.
dsquared 08.23.06 at 10:33 am
Because building new capacity involves sinking new wells and building new drilling rigs,
there is a lot of scope to vary the amount you pump out of a currently operating field, and it doesn’t appear to be being used
Laura 08.23.06 at 10:41 am
Great blog on this topic, The Oil Drum.
abb1 08.23.06 at 11:22 am
I say – politics. The Bushies are in cahoots with OPEC to keep the prices high. Coalition Provisional Authority in Iraq was created in April 2003 and already in the September 2003 Iraq rejoined OPEC. Why else would they want to do it? Not too difficult to connect the dots.
Prof. Goose (TOD) 08.23.06 at 11:59 am
Laura was kind enough to mention The Oil Drum up above. We do a lot on peak oil, alternative energy, etc. I’ll point you to a few posts if you’re interested:
of course, our “first time here?” intro.
“The Politics of Oil: The Discourse Must Change” (this is a press release we sent out a while back that we hope helped the discourse…)
Our recent analysis of the Deep Ocean Energy Resources Act (DOER)
A recent post debunking venture capitalist Vinod Khosla on the efficacy of ethanol.
Enjoy…PG
Prof. Goose (TOD) 08.23.06 at 12:00 pm
ah, sorry for the screw up…darned lack of a preview button… sorry.
kharris 08.23.06 at 12:59 pm
Nothing new in the discussion here, including its lack of conclusiveness. No mention of the forward curve. No mention that if refinery capacity is the problem, that represents a limit on demand for crude, so should arguably lead to lower spot crude prices, which is not what we’ve seen. No mention of inventories, which are in pretty good shape worldwide and would account for any shyness about boosting output. No mention of the lack of transparency in oil production and production stats from a number of major producers, which make any claims based on those stats somewhat tenuous.
Conclusions are being drawn on all sides which do not account for circumstances in the petroleum market. Maybe nobody knows? Sure seems that way, ’cause there is big money to be made by getting this question right, and so far the debate continues with little sign it is making progress.
gmoke 08.23.06 at 1:26 pm
Production is one side. Demand is another. If demand outstrips production then, effectively, peak oil is already here no matter how much oil there is in the ground.
My understanding is that, presently, supply and demand are roughly the same. Demand is growing and production to feed the supply side is not. The rate of new discovery is not keeping up with the rate of demand growth. We should adjust ourselves to living in a peak oil world. It is a prudent course of action.
That’s only one of the reasons why I say that Solar Is Civil Defense.
Prof. Goose (TOD) 08.23.06 at 2:30 pm
It is true that there are supplies of heavier (read: more costly to refine) crudes, especially in Saudi Arabia and Venezuela. However, even with those supplies, SA has been unable to increase its supply (a rational action in the face of the profits they could be making at the moment, no?) to the world market over the past couple of years, even in the face of increasing demand. This fits with Matt Simmons’ hypothesis that the Saudis have overestimated their recoverable reserves and the evidence of some of the largest fields (namely Cantarell, Abqaiq, and others) that are depleting at faster than expected rates.
The other piece of the puzzle is that all alternatives lack the energy return on investment of light sweet crude oil, which is why we at The Oil Drum advocate R&D&I in as many different alternatives as possible NOW–while we have the petroleum to use to optimize those alternatives, as opposed to further going over the peak of the curve and wait for innovation and alternatives that provide less energy to come on line and be scaled into the economy.
stuart 08.23.06 at 3:06 pm
Supply and demand arent the same, they measure different things. Consumption and supply in the long term are equal, as otherwise you eventually run out of product to sell or end up with an excess to store.
Supply is determined by costs and perceived future prices (and alternative investments that the same capital could be used for), as future prices are very uncertain at this time (people are alternately predicting problems raising the price to 100+, or a reduction back to half the current price, depending on various factors) this means that the oil companies are being somewhat cautious in investing, particularly in high cost oil fields. And obviously the cheaper fields are largely already pumping.
Demand for oil, while somewhat inelastic to price changes in the short term, is less so over longer periods; businesses and individuals need time to adjust to price movements. Of course new consumers of oil are being created rapidly in India and China particularly, so even if price rises caused reduction in demand in developed economies it is fairly likely not to matter anyway.
Of course the short term inelasticity of oil demand tends to mean you get fairly large spikes and troughs in the price due to the insensitivity, which can obscure the long term trends. Add this to the previously mentioned opaqueness in the industry of production and known reservoirs – lets not put too fine a point on it, all the OPEC countries blatantly lie about their reserves. This makes for a very unstable market considering how critical it is in the modern economy.
mpowell 08.23.06 at 4:38 pm
I think the whole idea of talking about peak oil production doesn’t make sense. As the world economy grows, demand for oil increases. As we run out of oil, the cost of extracting more oil goes up- but as our techniques improve, the cost goes down again. These two forces will generate a long term price and production trend. The production trend could flatten and drop and then go up again as their is no rule of linearity in either supply or demand. But if production flattens out, that doesn’t say anything about how close we are to running out of oil. And as long as there is oil in the ground, there is a level of demand that will increase production.
The question of whether this is a local or global production maximum is mostly interesting to an environmentalist. The economist is more concerned w/ the actual price of oil in the short and long term. In the short term, many other factors influence the cost of oil, and 3 years counts as the short term, here. We are not going back to $20/barrel oil, but there is a lot of oil left to be had at $50/barrel.
Purple Avenger 08.23.06 at 5:11 pm
The cost to extract the oil in many of the new fields is more than the extraction costs in the existing fields.
Of course. The Saudi extraction cost is somewhere in the range of $3/bbl, tar sands somewhere in the $15/bbl range.
However, the Saudis are pocketing a huge dollop of profit when the market price is $70/bbl.
At current prices, there’s plenty of room for large scale tar sands development if the conventional oil pumper’s profit is removed and applied towards the domestic sands extraction cost delta.
If we went full bore on sands, and took a big chunk of US demand out of the world market, you’d see world oil prices fall back into the $40/bbl range…maybe lower.
John Quiggin 08.23.06 at 7:18 pm
“No mention of inventories, which are in pretty good shape worldwide and would account for any shyness about boosting output. ”
But if knowledgable people expect prices to fall, why are they adding to inventories?
jakeb 08.23.06 at 8:00 pm
Well, there is a limit that may come before oil actually runs out–if the energy cost to extract a barrel of oil becomes greater than a barrel of oil, it will not be worth the cost. There is no inherent reason to assume that technology will continue to improve on the same accelerating curve as the energy required to get it forever. Particularly as the impetus to create such technology diminishes as the probable returns do.
I’m reminded of the reports that the Saudis were pumping 7 million gallons of seawater into the Ghawar field 18 months ago, and getting 90% seawater back from some wells. That doesn’t make that field sound very healthy.
Prof. Goose (TOD) 08.23.06 at 8:15 pm
Purple Avenger,
One thing we ask people to do over at The Oil Drum is link to their sources. Your statements are quite ill informed.
Tar sands refining is also much more costly and potentially environmentally damaging than the refining of light sweet crude. If you actually want some sources, I’ll point you to this post:
http://www.theoildrum.com/story/2006/6/19/234011/719
and there are quite a few others at TOD on oil/tar sands, oil shale, CTL, LNG, ethanol and the like. I think you’ll find that NONE of them are the energy panacea they are made out to be.
I hope we all spend a little more time learning about where our energy comes from. The sooner the better.
Prof. Goose (TOD) 08.23.06 at 8:18 pm
By the way, to respond to another comment above: no one is saying that we’re running out of oil. We never will. However, with depletion rates and water cut rates as they are, with no real finds of large fields in our future…all of the easy oil is out of the ground.
This also raises the questions of the true fungibility of oil as supply diminishes. How many countries, especially those that want to no longer ride bicycles as a way of life, are willing to fight for that resource? How many countries are willing to give that resource to the highest bidder? How much are we going to have to change our habits and our way of life?
All important questions that I hope folks will consider the answer to.
Purple Avenger 08.23.06 at 8:43 pm
Tar sands refining is also much more costly
Ummm, isn’t that exactly what I said?
For all reasonable values of 3 and 15, 15 is always a lot more than 3 ;->
What you’re (willfully perhaps?) ignoring is removing the usual Opec profit from the equation when we get it from a local source. That Opec profit is a significant percentage of the price of a barrel of oil.
All that is necessary for shale/sands to be an economic winner for the public is for that Opec profit to exceed the extraction/refining cost delta — THEN the sand/shale product, at the pump, becomes cheaper than the Opec product.
Q: if it can’t be competitive — as you seem to be implying, then why is anyone working on it at all? That would just be money thrown down a rathole.
derrida derider 08.23.06 at 9:01 pm
This is interesting stuff. If there are now fewer easy ways to ramp up production quickly because the most accessible large reservoirs (aka cheapest, but that’s not my point here) are runnning low, then the short-run supply curve has become more inelastic (ie production responds less immediately to price signals).
Coupled with the known inelasticity of short run demand, this is a recipe for prices becoming highly unstable (though not necessarily higher on average). Relatively small supply or demand shocks (a local war, an OPEC member defecting, Chinese demand for cars, etc) will cause much larger movements in price – both up and down – than they did in the past.
This will happen regardless of the fact that there may be near-unlimited oil that is profitable to extract at the long-term average price but which needs a long lead time to bring on-stream. That long-term average price might not change much, but the variance around it will increase markedly.
macropelias 08.24.06 at 2:31 am
In response to the comment about Tar Sands (I own a bunch of Canadian Oil Sands stock myself), unfortunately they are only profitable in terms of yielding decent dividend payments when the oil price is above and holding above 50-55 USD. The cost increases during the last 18 months due to lack of staff/equipment have been enormous. Unfortunately also, I think the ecological costs, in partcular regarding the water supply are not factored in into the variable production costs. Going forward, I think the tar sands production expansion will be physically and economically limited by the actual economics on the cost side, the ecological costs and the potential carbon dioxide taxes around the corner. The existing players who have already expensed most of their investments may be Hold targets however.
glenn 08.24.06 at 8:45 am
abb1, and everyone else who’s interested, why don’t you flip the question in reverse?
IF the Bush administration KNEW we were at peak oil, say the Saudies coghed up the truth, what do you think Bush would do? Seeing as how it’s reasonable to think that a global shortage of oil could wreck the US/global economy, why not invade, say, Iraq and try to control their supplies. At the same time, perhaps allow Libya to come back into the global fold, and oh, by the way, if a Chinese oil company were to buy an American producer, we just won’t allow that to happen.
I’m NOT a conspiracy theorist. I sure as think it’s highly unlikely the Administration has engineered high oil prices (it certainly can’t do anything else right, so why that?), but I DO think that it would be in a position to know about oil production within OPEC and outside of OPEC and you get to thinking….the Iraq war is such a farcical thing, perhaps this makes some sense.
abb1 08.24.06 at 10:17 am
Why would it be difficult to engineer? The California energy crisis in 2000 was engineered easily by taking some generating capacity off-line; and that’s in a much more regulated environment. This is not rocket science.
kharris 08.24.06 at 10:52 am
“But if knowledgable people expect prices to fall, why are they adding to inventories?” This misses the point.
For starters, at least the way I understand markets to work, there will always be a difference of opinion regarding future prices relative to today’s price. Otherwise, today’s price would be different than it is. If all knowledgable people expected prices to fall (with a little room to account for borrowing rates), then today’s price would be lower. Only some knowledgable people expect prices to fall.
But back to missing the point. There is a strong flavor of “I have the answer” in this discussion. Nobody does. My point is that notions like “people don’t add to inventories if they expect prices to fall” assume too little ambiguity. The oil market is not behaving in ways that lend confidence to simple “if this, then that” analysis. In the case of oil inventories, if one thinks that the most likely outcome is for prices to fall, but that a still reasonably lchance that prices will be boosted by supply interuptions, then building inventories may still be a good choice. Arguing that this is not so because futures markets provide a reliable hedge is not satisfactory when your customers prefer actual product to compensation.
Martin Bento 08.24.06 at 11:21 am
Glenn, too bad you’re not a conspiracy theorist. You seem to be dancing up to a valid insight and then scurrying away. Oil is the best explanation for Iraq, and indeed the best reason for doing it. From a certain cynical perspective, grabbing control of the mideast oil spigot makes tremendous sense (and explains the sabre-rattling against Iran without requiring another hypothesis). Before long, I think we’ll hear Republicans explicitly *defending* Iraq as a war for oil, which will at least lay out the cards.
Morgan 08.25.06 at 3:46 pm
This site is well worth a visit:
http://www.thepeakist.com/
Dan bednarz 08.26.06 at 8:27 am
It’s closer to 84-85 mbd and holding steady –pretty much waht Hubbert predited fifty years ago.
Peak oil’s not so bad? Please consider the descent, that’s when it gets very bad. Hank Aaron’s home run totals in his final years: 47, 34, 40, 20, 12, 10. Translate this decline to oil. Tar sands are not oil –you can –with much energy invested– get liquid fuel from bitumen. These costs have accerated and maybe by 2015 tar sands will produce 3mbd -not much to offset decline from peak.
And coal is not limitless –for instance much of what’s left is brown coal –lignite– and a lot is under bulidings, etc. What about the release of pollutants? And the cost of liquifaction? This is not an answer, it’s a perpetuation of in-the-box analysis.
Too much economics here and too little appreciation of geology and exponential math. Definitely read the OilDrum for conceptual blockbusting in action.
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