On October 14, 2010, Aaron Task interviewed Chris Martenson at Yahoo’s Tech Ticker (video below). Chris, who was fresh off attending ASPO-USA’s annual peak oil conference, told Aaron that “conventional oil” peaked “around 2005.” Aaron had no way to assess this statement, so he ran with it. It was then that I decided to write this post in a futile attempt to get everybody on the same page about future oil production.

IMHO, anybody with a vested in the world’s future oil supply—that would be almost everybody on Earth—should read this post. Realistically, my expectations are somewhat lower Smiley_glasses

First things first. Conventional oil refers to crude oil plus lease condensate according to the Energy Information Agency (EIA). That’s as good a defintion as any, and I will use EIA data today. All liquids refers to conventional oil taken together with natural gas liquids, refinery gains and biofuels, but today I will stick with conventional oil. In July, 2010 the world produced 73.691 million barrels per day (b/d) of conventional oil. The all-liquids total for that month was 86.474 million b/d. You can see that conventional oil by far makes up the largest share of the total liquids supply. When I refer to just “oil” in the text below, I mean conventional oil as defined by the EIA.

Chris’ claim that conventional oil peaked around 2005 is false. If anything, conventional oil production peaked in July, 2008 (graph below).

EIA data for conventional oil production, from Table 1.1d (xcel spreadsheet). The average world production through July stands at 73.426 million barrels per day in 2010.

The queston thus becomes: did world conventional oil production peak in mid-2008 or are we looking at a local maxima (high point) in production that may be surpassed in the future? To answer this question, we must first understand what this production graph is telling us.

During the “demand shock” that caused oil to spike to well over $100 dollars per barrel in 2008, world oil production actually declined year-over-year in 2006 and 2007 even as the price was rising. To a lot of us, this looked like an actual 2005 peak in the world’s oil production. Conventional wisdom says that as prices rise in an environment of unrelenting demand, supply should increase as a result of new investment in production capacity. Prices had been rising since 2003. Where was the new supply that would rebalance prices? It wasn’t there!

By mid-2008, the “Great” recession was well underway—it began in the 4th quarter of 2007—and our economic woes were further accelerated by the surging oil price. The nominal price rose into the $140s in June and July, which is not a price for oil people can afford. As a result of the recession and the oil price, demand crashed. Thus, conventional oil production after July, 2008 reflects much diminished demand, not an inability to increase supply—OPEC slashed production dramatically.The world economy hit bottom in early 2009, and oil demand started to recover in mid-2009. You can see in the graph that oil demand is rising in 2010.

If one looks conventional oil production on a yearly basis, 2005 is still the peak year in the EIA data. However, we can now see that concluding that oil’s all-time production peak occurred “around” 2005 as Martenson said conflates supply with demand. I have found that this is a common mistake.

Let’s get to the 64,000 dollar question: has conventional oil production peaked? The correct answer is most likely not. There are two unknowns preventing us from coming to any definitive conclusions about timing:

  • We don’t know how the global economy is going to fare in the future. It certainly does look shaky. (I won’t cover this today.)
  • We don’t know exactly how much spare production capacity the world has to meet future demand if the world economy grows steadily in the next few years.

It is this second unknown that makes all the difference from a supply point of view. Oil production outside of OPEC (non-OPEC) has “peaked” in the sense that it has flat-lined. In fact, the EIA forecasts that total non-OPEC supply will fall by 240,000 b/d next year due to the inability of other non-OPEC producers to offset declines in Mexico and the North Sea. Generally speaking, we can depend on the assumption that non-OPEC production will never rise much—if at all—above its current level and is more likely to stay flat or decline as time goes on.

That is why the world looks to OPEC to solve its future oil supply needs. And here we run into a host of problems. The EIA estimates that OPEC’s spare (unused) capacity is about 5 million b/d right now in 2010 (and this doesn’t change in 2011). Any increase in demand requires that new supply be taken from this capacity. The main problem is that Saudi Arabia has almost all the spare capacity!

From John Williams’ Why The Saudis Hold The Cards Right Now. “The US government EIA now estimates OPEC spare capacity at 4.96 million barrels per day. Only Saudi Arabia with 3.75 million b/d excess capacity has any significant power. Kuwait and UAE each have an estimated 300,000 b/d of spare capacity and Qatar has 260,000 b/d. With Saudi Arabia controlling 76% of the spare capacity the combined power (16%) of Kuwait, Qatar and UAE is barely enough to influence prices.”

World policy-makers and analysts believe the Saudis do indeed have about 3.75 million b/d in spare production capacity. A small but vocal minority (including Chris Martenson) do not believe the Saudis have anything close to this much spare capacity. If they don’t, oil production might as well have peaked in 2005. If they do, and we throw in Kuwait, the UAE and Qatar, the world is capable of producing as much as 78+ million barrels per day of conventional crude oil. Once the 800,000 b/d the other Persian Gulf countries have is exhausted, everything rides on the question of Saudi production capacity and intentions.

Well, you might say, of course the Saudis have what they claim. Or at least they have some large part of it. And I agree—I think OPEC’s spare capacity is at least 2.5 million barrels per day at the low end, and may be as high as 3.5 million barrels per day at the high end. This range puts Saudi spare capacity at between 1.7 million and 2.7 million barrels per day. Theoretically, the world can produce as much as 77 million barrels per day.

On the other hand, those saying we’ve peaked like to point out that Saudi Arabia has never produced 10,000,000 barrels per day of conventional oil on an annual basis since 1970 (EIA data). And it’s true. The most they’ve ever produced in any given month in the last 10 years was 9.7 million barrels per-day in—you guessed it!—July of 2008. Thus the pessimists argue that Saudi capacity is largely a reflection of Saudi production. However, absence of evidence is not evidence of absence. This is another common fallacy.

On the other hand, the world has put all of its future oil production eggs in one risky basket—the Saudi basket. Turning the argument around, they’ve never produced more than 9.7 million barrels per day in any month in the last 10 years! And they finally reached that level when the oil price was over $140/barrel and the economic damage had already been done. Realistically, when push comes to shove in terms of global demand, how much oil is Saudi Arabia willing to produce?  We really don’t know. This is an extremely dangerous position for the world to be in.

Al_naimi A vaunted part of their large spare capacity now comes from the Khurais development which was put on-stream in mid-2009. This large field is supposedly standing by ready to produce 1.2 million barrels per day as needed. In order to achieve this output, the Saudis must pump seawater from over a 100 miles away and inject it into the field to force the oil out. Khurais has little of the natural reservoir pressure that new (light) oil fields typically do. (Khurais was discovered about 50 years ago and produces light oil.) Has this field ever produced 1.2 million barrels per day? Well, no! I’m sure the Saudis did the required well tests, but as for turning this field up to full volume, and sustaining full production for months on end, that’s never been done.

It seems clear enough that the world can produce at least another 2.5 million barrels of conventional oil per day beyond the 73.462 (monthly average) it has produced through July of 2010. The question becomes whether producing 75-76 million barrels could be sustained for any long period of time. The “natural” decline rate in Saudi Arabia’s oil fields (taken as a whole) is about 8% per year. In order to mitigate this, they must constantly invest in field maintainance. Moreover, most of their mainstay producers, including the mighty Ghawar field (~5 million b/d capacity) are many decades old.

And then there is the trust issue. Clearly, the Saudis have exaggerated the size of their recoverable reserves as I demonstrated in OPEC Will Never Run Out Of Oil. Can we trust their spare capacity numbers?

Where do we stand? Peak oil does not mean the end of the world as we know it in the medium-term—the next 5 years or so depending on how the global economy fares—but in the longer term things don’t look so good. Some say Iraq will increase its output by several millon barrels per day in the next decade, but that’s a very risky proposition.

Our utter dependence on the Kingdom of Saudi Arabia to meet our future supply needs poses a significant threat to the global economy. Moreover, it’s a disgrace that the world has allowed such dangerous risks to pile up without adequate preparation for a future it was not hard to see coming.

Here’s the Martenson video.