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Has oil peaked?: Yes

The Texas oil industry knows all about peak oil, because we've already gone through it.

In 1972, Texas was King of the Oil World. We had increased our oil production by 40 percent during the previous 10 years at relatively low prices. Texas producers were poised for surging production as oil prices exploded and increased tenfold by 1980. Texas underwent its biggest drilling boom in history. The number of producing wells jumped 14 percent by 1982. The industry consensus was that oil production would increase dramatically.

To general astonishment, Texas oil production fell instead, despite dramatically higher prices, frantic drilling and improving technology. By 1982, production had dropped to almost exactly what it had been in 1962, reversing the earlier 40 percent gain.

Not everyone was surprised, however. In 1956, M. King Hubbert, a native-born Texan oil geologist working for Shell Oil, got up before a meeting of the American Petroleum Institute in San Antonio and made a startling statement. He predicted that Texas and Lower 48 oil production would peak, and start irreversible declines, between 1965 and 1971. Dr. Hubbert also predicted that world oil production would peak and then decline within 50 years, by 2006.

Dr. Hubbert used complex mathematics to predict recoverable oil reserves, but his resulting model was quite simple: fields, regions and ultimately the world tend to peak, and enter irreversible declines when they have produced about half of their ultimate recoverable reserves. The underlying cause is that the largest reserves are found first because they are large and easy to find. The average size of discoveries shrinks over time, so one looks harder and harder for smaller and smaller fields, as has happened in Texas.

The Lower 48 peaked in 1970. Texas peaked in 1972. Alaskan oil production slowed the U.S. oil decline, but U.S. oil production never equaled its 1970 peak. Today, Prudhoe Bay, the largest American oil field, is now at about one-fifth of its peak production and declining rapidly.

Did we stop finding oil in Texas in 1973? No.. However, it is impossible to replace old, very large oil fields, like the East Texas Field, with a collection of the much smaller fields such as we have been finding in Texas since 1972. Today, Lower 48 oil production is at about half of its 1970 output, and Texas oil production is at about one-fourth of its 1972 rate.

Dr. Kenneth Deffeyes, a former associate of Dr. Hubbert's, recently published a simplified method of predicting the total amount of oil that can be produced from a region. This method is commonly called "Hubbert Linearization," or HL. HL uses two known factors -- annual production and cumulative production to date -- to estimate the total recoverable reserves.

How reliable is the HL formula as a predictor? It shows us that the Lower 48 peaked when it was 52 percent depleted. Texas peak did not show up until our oil reserves were 57 percent depleted - but I suspect that can be explained by the Texas Railroad Commission's regulation of Texas oil production, which kept production equal to demand -- that is, below the maximum efficient rate of production.

Another example are the North Sea oil fields, where production has been falling steadily since peaking in 1999 at 52 percent of total recoverable reserves. North Sea oil production is now about one-fourth below its peak. The HL formula would have foreseen this, but the 10 major oil companies working the North Sea oil fields did not. Using the best engineers and technology available, they predicted just before what we now know was the peak in 1999 that North Sea production would peak around 2010. They were badly mistaken, but many of these same companies are now saying that world peak oil production is decades away.

The HL model says Saudi Arabia is 58% depleted and the world is 48% depleted. This is close to where Texas and the Lower 48 peaked and started irreversible declines in production. Based on the HL method and historical models, I believe that Saudi Arabia and the world are now on the verge of irreversible declines in conventional oil production.

Two legendary Texas billionaires, Boone Pickens and Richard Rainwater, who share a remarkable ability to profitably predict future trends--have looked at exactly the same regional and world data plots that I have looked at, and they have reached exactly the same conclusion that I have: that the world has used about half of its conventional crude oil reserves. Both Mr. Pickens and Mr. Rainwater have tried to warn us about the challenges that we will face as a result of declining conventional oil production.

What about unconventional sources of oil? The unconventional reserves are very large but can only be produced slowly because of high capital and energy costs per barrel of production. In recent years, new tar sands production has balanced declines in conventional Canadian oil production, with no net increase for exports.

There will be massive efforts with unconventional oil, such as Canadian tar sands and the tar and very heavy oil deposits in Venezuela. However, I predict that unconventional sources of oil will only slow--and not reverse--the decline in total world oil production because of the time and energy needed to expand production of these "oils."

Without question, we have to reduce greatly our energy consumption to account for this new reality. What can we do? I have seen two very sensible proposals.

The first is that we fund Social Security and Medicare with a tax on energy consumption, especially at the gas pump, offset by reducing or eliminating the highly regressive payroll taxes. Doing this would unleash enormous free market forces against profligate energy use.

The second proposal is that we electrify our freight railroads and encourage freight to go by rail instead of truck with any of a variety of economic incentives while building electric urban rail systems, such as DART, at a rate much faster much faster than today's pace.

Incidentally, both strategies will also find favor with those concerned about global warming.

Jeffrey J. Brown, an independent petroleum geologist in the Dallas area, can be reached at [email protected]. Bart Anderson, with the Energy Bulletin, and consulting engineer Alan Drake both contributed to this article. Read more of their work at www.energybulletin.net.

Editorial Notes: This opinion piece was prominently displayed on the front page of the editorial section of the Dallas Morning News. The other side of the argument was given by Ronald Bailey: Has Oil Peaked? Not Yet. -BA

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