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Another Peak Oil Fad, Part 1

August 20, 2013

For 70 years, environmentalists have predicted the world would see diminishing supplies of oil after reaching a peak in production. The peak never occurred and the peak oil fantasy has been put to bed, at least for the foreseeable future, by the emergence of large quantities of unconventional oil as the result of fracking.

Now, environmentalists are suggesting there will be a demand peak instead of a supply peak, where supply outstrips demand.

The Economist magazine devoted two articles and three full pages to this new fantasy. Reading the articles, one could picture environmentalists salivating over a peak in demand, with the demise of the major oil companies, such as Exxon-Mobil, when prices collapsed.

This new fad may be a consolation prize, where, if fracking can’t be stopped, environmentalists can take solace in the pending demise of the major oil companies.

There is one problem with this new fad … it won’t happen.

There may be periods of imbalance in supply and demand, but what’s new about that?

The new fad flies in the face of both the International Energy Agency (IEA) and the US Energy Information Administration (EIA) forecasts of growing demand.

The EIA forecasts world demand will grow from 87 million barrels per day (Mb/d) to 112 Mb/d in 20401. The IEA has a similar growth forecast.

Drill Rig. Photo from EIA

Drill Rig. Photo from EIA

 

This infers a growth in supply of 25 Mb/d in 2040. Where will this increase come from, especially if supply is to outstrip demand, as the demand peak fad requires?

Let’s do a back of the envelope analysis to see where we are headed until 2020, and then think about the period 2020 to 2040.

North America, 2020 vs 2013:

 

Increase in supply +5 Mb/d
   
Increase in demand -1 Mb/d

Total excess supply

+6 M/b/d

The increase in supply primarily comes from unconventional sources in the U.S. and Canada, while. Mexico’s output is likely to decline slightly. This represents an increase of about 0.7 Mb/d each year, about the same as over the past few years.

The decrease could come from LNG replacing diesel fuel for long haul trucks. This is a more aggressive forecast than others have made. Citigroup, for example, forecasts 0.3 Mb/d displacement of diesel by LNG in 2020.

While the Economist magazine made much ado about improved gasoline mileage, the improvements will largely be offset be population growth2.

Persian Gulf Countries, 2020 vs 2013:

 

Increase in supply +3 Mb/d
   
Increase in demand +2 Mb/d

Total excess supply

+1 M/b/d

 

The increase in supply will primarily come from Iraq with a slight increase from Saudi Arabia. Saudi Arabia is producing around 11 Mb/d and is hard pressed to increase by much more than a 1 Mb/d. Saudi Arabia also has a serious domestic problem in providing services to its growing population, which will increase demand.

Iraq’s ability to increase oil production is problematic, but is given the benefit of the doubt in this back of the envelope analysis.

Iran, Kuwait, UAE will see only slight increases in supply, offset by increased demand.

 

North Africa, 2020 vs 2013:

 

Increase in supply -1 Mb/d
   
Increase in demand +2 Mb/d

Total excess supply

-3 M/b/d

 

Libya will be hard pressed to maintain current output. Events in Egypt are likely to lead to less supply while demand increases.

Cairo Souq. Photo by D. Dears

Cairo Souk. Photo by D. Dears

 

Europe, 2020 vs 2013

 

Increase in supply +1 Mb/d
   
Increase in demand +1 Mb/d

Total excess supply

0 M/b/d

Europe, including Russia, will see some slight increase in oil production, primarily from Norway, with Russia hard pressed to maintain current output due to large infrastructure problems.

Europe’s rejection of fracking will prevent any improvements in both oil and natural gas supply, with the possible exception of the UK which may accept fracking.

Europe’s CO2 disease is impeding growth and corresponding increase in demand. Europe’s economic malaise may have given rise to the new peak oil fad where supply outstrips demand.

 

Rest of World

While the sum of these estimates would indicate a surplus of supply, it’s necessary to look at the rest of the world in Part 2 to arrive at a conclusion.

 

Notes:

  1. ExxonMobil forecasts 113 Mb/d in 2040.
  2. Population growth of 0.9 percent per year with concomitant increase in number of vehicles. Mpg improvements from today of approximately 25 mpg to 48.7 mpg in 2025, an 8% annual improvement.

 

 

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8 Comments leave one →
  1. donb permalink
    August 20, 2013 3:10 pm

    Donn,
    Oil use depends on availability and cost relative to other energy types, where the latter depends on extraction costs. Although you analyze future oil supply and demand, I think your analysis leaves out two important factors. These are increasing oil extraction costs. which increase alternative energy use, and current and future depletion of major oil reservoirs. The Hubert curves, which consider oil demand as well as the balance between new oil reservoirs and depletion of current ones, are relevant here. For example, I think the current U.S. oil production from fracking is around 5 million barrels/day, and may increase. But, at its peak the North Sea region produced about 10 million barrels/day, and oil in this region is rapidly depleting. Trading an old major oil reservoir for a new one may not maintain availability of oil, especially if world demand increases. There is also the question of how much economically extractable oil exists in the ground, relative to what the public will pay? At some future time, total world oil supplies will become a significant factor.

    • August 20, 2013 3:28 pm

      Thanks for your comment.
      Yes, someday, oil will either cost too much or supplies will decline, but I don’t think this will happen in this century, possible even the next.
      Hubbert’s curve has been consistently wrong, even though some smart people believe in Peak Oil. I don’t, at least I don’t in so far as this century is concerned.
      Hubbert’s curve Peak Oil has referred to supply.
      The new Peak Oil Demand fad, refers to too much supply.
      My article tries to show that demand and supply will likely remain more or less in balance for the next 30 years.

  2. donb permalink
    August 20, 2013 5:05 pm

    I seriously doubt that major oil supply will last another century. At current increasing demand, I would guess a fraction of that.
    I also disagree that Hubert curves are irrelevant. There are two types of Hubert curves to examine. Those of specific reservoirs, e.g. the North Sea, the Alaska slope, clearly show the Hubert-predicted curves for growth and major decline. U.S. oil production generally followed the Hubert curve from ~1950 to ~2009, and closely followed it over ~1980-2009. Fracking has increased it above the curve for now
    A total Hubert curve for the world (the important oil inventory) has followed the Hubert curve since ~1985. In addition to the North Sea depletion, you name above some other issues with world reservoirs, e.g., nobody knows the total Saudi inventory, but it is not limitless and much oil has already been pumped.
    For those interested in Hubert curves, I suggest a paper by Juvkam-Wold and Dessler in the April, 2009, issue of “World Oil”.

    • August 20, 2013 5:33 pm

      Thanks again.
      Hubbert’s curve and Peak Oil smack of Malthusian thinking and limited resources.
      Time and again it’s been shown that resources aren’t limited, and that as prices increase new reserves are found. Or, sometimes, alternatives are discovered.
      Fracking has shown this with respect to oil and natural gas. A few years ago the United States was running out of natural gas, now we have an abundance due to fracking.
      Each oil field is finite; however the ability to extract more and more from the field isn’t fixed. New techniques are initiated to increase the amount of recoverable oil. This factor alone undermines Hubbert’s Peak Oil hypothesis.

  3. donb permalink
    August 20, 2013 10:30 pm

    I am not speaking of the peak oil hypothesis, but a much broader interpretation of Hubert’s curves. In any given oil reservoir the total oil is limited in two ways — the absolute total amount and the amount that can be economically extracted under current circumstances. True for some reservoirs new techniques can extract more oil — e.g., fracking, deep ocean drilling, etc. This must then be compared against those oil reservoirs where production is rapidly decreasing (e.g., North Sea). Oil production in a field may be decreasing either because oil is running out or because its extraction is becoming more expensive and not economically justified. Fracking is an example where new techniques rejuvenated old and greatly decreased oil production (e.g. west TX). But not all oil deposits can be exploited by fracking, only certain shale formations. Eventually the cost of retrieving oil from a given deposit will not be economical, largely because other energy sources become competitive.
    The Hubert analysis for a given reservoir, where cumulative production is plotted against the percent of annual production divided by cumulative production is not dependent on any assumption of peak oil, but rather is a form of analysis of actual data. Don’t base your judgment of this type of analysis (which has been expanded by several others) just because of your belief about peak oil. Look at the data and Hubert’s way of analyzing it.

    • August 21, 2013 8:35 am

      Hubbert’s curve has been used to justify Peak Oil supply.
      More sophisticated tools are used to evaluate any specific reservoir.
      EOR has been around for around sixty years. It started with water injection, then CO2 injection, then fracking and horizontal drilling.
      I don’t believe Hubbert’s curve has any scientific use. It was adopted as a policy tool to get people to believe the world was running out of oil.
      The world seems to have a lot more oil than some people would like to believe.

  4. January 21, 2014 1:02 pm

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    blog and I’m impressed! Very helpful information specially the last
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