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Plotting the coming oil shock

A study based on the Hubbert model of peak oil suggests a coming global oil shock may begin as early as 2014 – which ties in with the timeline suggested in a variety of other reports and statements.

Peak oil, the concept that geological constraints dictate a time must come when oil production reaches its natural limit, makes it clear a diminishing supply will soon be on a collision course with soaring demand. Despite getting a showing online, and in the occasional business report, it’s yet to break into the mainstream media.

I recently considered three major energy reports published so far in 2010 which take a number of different views on the issue:
The Oil Crunch: a Wake-up Call for the UK Economy (published by UK Industry Taskforce on Peak Oil & Energy Security in February) that suggests oil is currently at or near peak and so output “cannot rise significantly above 92 million barrels per day;”
The Joint Operating Environment 2010 (United States Joint Forces Command, published a little later in February), stating the world has vast reserves but has not invested enough to keep increasing supplies;
Sustainable Energy Security: Strategic Risks and Opportunities for Business (published by insurers Lloyds with Chatham House, June), which manages to take both sides, stating: “Even before we reach peak oil, we could witness an oil supply crunch because of increased Asian demand.”

Three independent reports, one consistent prediction – the world will be entering into a period of oil supply turmoil sometime between the beginning of 2011 or 2013. These findings are based on subtlety different assumptions about oil production: it’s at peak, it’s underinvested, or that both are true. (There's more about this in my original post, of course.)

But I overlooked an academic report published February 2010 and only given cursory attention in the media. Which is a pity, as it’s an attempt to quantify things from a purely peak oil perspective and bring the pioneering work of geologist M King Hubbert up to date. Forecasting World Crude Oil Production Using Multicyclic Hubbert Model, written by two Kuwait University engineers and a representative of Kuwait Oil Company, used the Hubbert model of peak oil, along with some fancy mathematical formula - and, no doubt, a few assumptions about reserves - to model future output. Their prediction for non-Opec oil is presented left.

(I have to hold my hand up and admit that at the time, I could only find a two-paragraph abstract – or pay $30 for the full text. I very recently stumbled over the above link to what I guess, from the term presspac in the url, was put together for media use. I’m presenting it here under the terms of fair dealing.)

Forecasting World Crude Oil Production appears to focus solely on conventional crude reservoirs, and not refer to sources of unconventional oil as far as I can tell. This would be a weakness to someone with a cornucopean view, who might tell you that Canada has reserves second only to Saudi Arabia - but the issue here is flow. Oil sands and shale oils are extracted through a lengthy, complicated and expensive process, as opposed to being simply pumped out of the ground, and, as such, cannot be brought to the market quickly enough to have any great impact on peak oil.

The report itself begins by reviewing the 2008 oil price “fluctuations,” the burgeoning demand from industrializing countries and the realization that “rapid growth in fuel demand has forced the policy makers worldwide to include uninterrupted crude oil supply as a vital priority in their economic and strategic planning.” It then states:

The objective of this study is to develop a forecasting model to predict world crude oil supply with better accuracy than the existing models. Even though our approach originates from Hubbert model, it overcomes the limitations and restrictions associated with the original Hubbert model. As opposed to Hubbert single-cycle model, our model has more than one cycle depending on the historical oil production trend and known oil reserves. The presented method is a viable tool to predict the peak oil production rate and time. The model is simple, accurate, and totally data driven, which allows a continuous updating once new data are available.

This should not be taken as a criticism of “one of the most renowned statistical models for the prediction of oil and gas production,” because it goes on to state that Hubbert's process works now just as well as it did back then:

However, time had shown that Hubbert forecasts were remarkably accurate; [US] oil production did indeed peak in 1970. Since that time, the Hubbert model gained worldwide popularity because of its simplicity and availability of required data and was extensively tested and used to forecast oil production worldwide. Having compared the forecast results of various methods to those of Hubbert, Cleveland and Kaufmann praised the Hubbert model, stating that, despite its lack of theoretical basis, its symmetric parabola predicts production more accurately than regression curves, economic models, or Delphi techniques.

It states Hubbert progressed from empirical observation to providing a “mathematical foundation for his model.” According to the authors, the only issue with it is that “recent studies have shown that most worldwide oil producing countries display more than one Hubbert production cycle.” (I would hazard a guess this relates to the variety of non-geological factors involved in actual production quantities.)

Using such a multi-cyclic model, the report suggests:

Saudi Arabia's production rate is anticipated to increase from 9.4 MMSTB/D [million stock tank barrels per day] in 2005 to 12.2 MMSTB/D in 2015, and it is estimated to peak in 2027, at a production rate of 14 MMSTB/D.

OPEC crude oil reserves are being depleted at an annual rate of 1.25%.

OPEC crude oil production will peak at 53 MMSTB/D in 2026. The production is expected to decrease to 29 MMSTB/D by 2050.

Non-OPEC countries have already reached their peak production rate of 39.6 MMSTB/D in 2006.

Non-OPEC crude oil reserves are being depleted at a rate of 5.6% per year.

World production will peak in 2014 at a production rate of 79 MMSTB/D, and then it will start declining to reach about 30 MMSTB/D in 2050.

Forecasting World Crude Oil Production's model for the predicted peaking of Opec oil in 2026 is presented here (left). It states Opec will remain the world's main supplier of oil throughout the century.

As an aside, International Energy Agency chief economist economist Fatih Birol reportedly told the annual forum of the Organization for Economic Co-operation and Development earlier this year that non-Opec oil “is reaching a peak and the bulk of oil predication growth will have to come from a few countries in the Middle East.” He continued that if the world continues to under-invest in oil production, and if global demand continues to rise, there will be a price spike: ". . .in 2013, 2014 we may well see higher prices than we have seen in the recent past."

Of course, any forecast of this sort is fraught with danger – and many, many peak oil writers have gone before with dates of global peak oil that have come and gone, and all the time output has continued rising. But despite the perils of prediction, Forecasting World Crude Oil Production is still an interesting and worthwhile document, particularly as it does not claim to be infallible:

Forecasting is not accomplished by consulting a crystal ball or amystic of some sort, but by appraising the past, inspecting present conditions, and projecting these into the future based on the best available information. It is well-known that the ultimate oil recovery of any field in the world is only determined when the production management decides to abandon the field for good. This does not occur until the projected oil revenues fall below expected costs and human ingenuity is unable to reverse this relationship.

The Forecasting World Crude Oil Production prediction model" for global peak oil in 2014 is presented here (left). As stated above, the model suggests world conventional crude production will peak in 2014 at 79 million barrels per day, and promptly enter decline. It is predicted to drop to 30 million barrels per day by 2050, which is a colossal decline by anyone’s standards, suggesting output will be reduced by a half in a little over 30 years. The report claims that, as of 2005, the world had reserves of 1161 billion barrels, of which 78 per cent is held by Opec members. Oil is being depleted at an annual rate of 2.1 per cent.

In addition, Forecasting World Crude Oil Production gives a worthwhile background to oil production, considering the rise of Opec, and oil becoming a geopolitical resource. It also provides a whole slew of output, production and suggested dates for peak oil for each country that produces oil.

I'm not qualified to pass judgement on this particular report, other than to say that it appears to contain a lot of rigorous mathematical work but probably rests on the strength of the reserves data its built on. But what interests me is the culmulative picture that's emerging. Many different groups and agencies are talking about a coming oil supply crisis – whether they use the term peak oil or not. These disparate groups, spread across the globe, have considered various possibilities and probabilities – but are still talking about very similar possible outcomes. According to the various reports, we likely face an oil crisis as early as 2011, or as late as 2014. We have only four years to prepare for a new energy world. And, if Forecasting World Crude Oil Production is correct about the decline in crude output, it is going to be very different from the world we know now.

What do you think? Leave a comment below.

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