Oil, Jihad and Destiny: Will declining oil production plunge our planet into a Depression?

Purpose of this study- The objective of this research effort was to characterize the size and direction of the worldwide market for crude oil, including the depletion of reserves and the impact that alternative depletion scenarios would have on oil production and consumption. These scenarios were then analyzed in order to determine their impact on world and national economies, with a special focus on the United States.

Methodology – Market or industry research is a process that involves a number of interrelated steps. Research reports are based on facts and opinions which have been compiled, organized, analyzed and interpreted by someone who understands the research process. Market and Industry Research is not about absolutes. It’s about people. Events. Products. Issues. Questions. And their interrelationship. It has FOCUS. It will deal with a specific question or issue.

In this study, it quickly became evident there were three key issues. How much oil can we expect to produce over the next 20 years? Will Islamic cultural conflict disrupt oil production? What is the economic impact of declining oil production?

In order to introduce the widest possible audience to the very serious nature of this report, I have elected to publish Chapters One and Two on this BLOG. The complete report may be found in book form at Amazon.com or BookSurge. It is also available as PDF file that can be downloaded from BookSurge

Ronald R. Cooke

The Cultural Economist

www.tceconomist.blogspot.com

Truth is reality.

The Secret

Truth is unpopular.

Liberals ignore truth if it challenges their beliefs or mocks their preconceptions. They are more comfortable with an adjusted reality that supports their ideology. Conservatives reject truth if it will force change. They are more secure with intellectual pursuit that confirms established principle.

Neither philosophy will like this report. It undermines doctrinaire wisdom and predicts catastrophic change. Our future reality includes the decimation of our economic condition and the subsequent decline of human culture. All that we have achieved, and all that we aspire to, are in mortal jeopardy.

Oil depletion is a secret. The press typically ignores a problem until it causes a crisis. By then it will be too late. Politicians are reactive animals. They shun the topic of oil depletion because it is political suicide to discuss unpleasant issues. If they acknowledge a pending oil crisis, then we voters will ask embarrassing questions: Why did you let this happen? What do you intend to do about it?

And that will lead to more obfuscation. Neither the press nor our politicians have a clue.

Then there is the issue of corruption. A thorough inquiry into the subject of oil depletion would raise uncomfortable questions. Have our politicians been feeding at the oil money watering trough?

So nobody wants to point the finger. Not Democrats. Not Republicans. Liberals or conservatives. Don’t rock the boat. Government reports mislead us with unfounded optimism or ideologically correct misinformation. The officious pressure of conformist procedure ensures government bureaucrats will cover for government politicians and academics will reject meaningful discussion.

Oil, it would appear, is not a politically correct subject.

But eventually the voters will find out about oil depletion and the whole Middle East mess. And then the politicians will have to fabricate some plausible excuse for their failure to act. Blame it on the President. He wants to spend billions on space exploration. We can nail him for his failure to propose a comprehensive energy program. What’s more important, we will ask – a make work program for NASA – or heat for your home? Pretty pictures of some planet – or gasoline for your car?

Doesn’t our government know how to set priorities?

NO.

But we are suspicious. We who will suffer. Ominous signs are everywhere. Rising gas prices. Talk of shortages. Indefensible terrorist activity. A growing suspicion of Iran, Syria and Saudi Arabia. The threat of conflict in most of the Middle Eastern nations where oil is produced. An oil crisis will dump the world’s economy down the toilet. Poverty. Unemployment. High inflation. Kids going hungry. Men desperate for a job. Women struggling with demeaning depravation.

Doesn’t anybody care? Why isn’t energy a high priority subject on the agenda of every industrialized nation? Why are European and American politicians avoiding the reality of oil depletion?

Because if our politicians can keep oil depletion a secret, they don’t have to deal with the inevitable economic and cultural consequences, the embarrassing questions of failed leadership and the contempt of an unhappy electorate.

Warning

Fair warning. Oil depletion. It’s coming. Sooner or later.

Maybe sooner than later. If Islamic fanatics have their way, the oil spigot will be turned off. So it doesn’t matter how much oil sits under the ground in some pool of reserves. What really matters is how much oil can we actually produce? And that takes us back to Saudi Arabia. And Iraq. The world’s economy, it seems, teeters on the political stability of these two countries.

Saudi Arabia is supposed to have the largest oil reserves in the world. But it is becoming increasingly clear that this country’s reserve numbers are bogus. And by the way, isn’t Saudi Arabia struggling with a growing political instability that could devastate its oil production?

Iraq? Coalition troops try to keep the peace. Islamic fundamentalists are determined to kick the infidels out. Democracy will not work in a land torn by cultural chaos. Dictatorship and tyranny are the future. Under these circumstances, how can we possibly believe that Iraqi oil will delay the inevitable decline of world oil production?

Yes. Oil consumers have a problem. Big time.

But hold on. We’re getting ahead of ourselves. Before we talk about an Islamist induced oil crisis, we need a better understanding of the basic problem. Oil depletion. Reserves. How much of that black gold there is left for us humans to consume.

Actually we don’t know. How much oil there is in the ground. Or how much oil we Homo Sapiens can produce. And those who control the information don’t want to tell us the truth. They sell perception. They know reality. They feed us the big picture to make us feel safe.

There’s no problem – right? They sustain our current level of knowledge. Or is it ignorance?

I know what you are thinking. Those damn oil companies. Who can believe them?

But guess what? The big five oil companies are forced by SEC disclosure rules to be relatively straight. No. They are not without fault. But the worst liars in this circus of misinformation represent national governments. It doesn’t matter if a particular nation is a producer or a consumer of oil. For reasons of selfish best interest, they both fib. Obfuscate. Hide the truth.

Consumer national governments are loath to even discuss the truth because – anyway you look at it – oil depletion is bad news. And national governments do not like to tell their constituents bad news. That’s the way political systems work. Democracy or dictatorship. Bad news must be avoided at all costs. It creates anxiety. Conflict. Questions. Opposition. Bad news always generates a pervasive distrust that somehow the existing national government is doing something wrong. And eventually the offending government officials will be blamed for causing the problem. People, after all, expect their national government to protect them from harm or deprivation.

Even if that is impossible.

Producer nations want to pretend that they can go on producing oil – forever. Oil reserve information is a state secret. That permits these national governments to fabricate whatever oil reserve numbers they are pleased to present to a gullible public. Big reserve numbers allow them to borrow big bunches of money from the bankers. It gives them prestige and status. But can we trust any of the reserve information published by – or about – the nations that belong to OPEC (Organization of Petroleum Exporting Countries)? Probably not. For example, the reserve gains these nations claimed in the late 1980s are an obvious fabrication. There has never been an independent verification that the oil they claim to have actually exists. And get this – even though they pump millions of barrels per day, their reserve claims never seem to decrease.

Is there a credibility problem?

Even Canada has succumbed to the temptress of misrepresentation. Canada now claims to have the second largest oil reserves in the world, all based on the inclusion of its oil sands in its reserve estimates. Oil sands? Doesn’t this ignore the incredible problems of producing oil from sticky rock?

What can we expect from the IEA? That’s the International Energy Agency in Paris. The IEA is an autonomous agency linked with the Organization for Economic Co-operation and Development (OECD). The IEA produces the World Energy Outlook. But wait. Where do they get their data? Unfortunately, it would appear that the IEA uses the bogus data of producer nations in its forecasts. And is their outlook influenced by the political bias of OECD members?

What of the United Nations? Would the publication of a comprehensive report on oil depletion tell us the truth? Or would the study bog down in the sludge of self-serving political posturing?

Our political institutions have failed us. It would appear that being politically correct is more important than exposing the truth.

If we can not get a straight answer from the governments of oil producing or consuming nations, or even quasi-government international organizations, then can we get a reasonable assessment of oil depletion data from the oil companies? The answer is yes. And no. It depends on who you are talking to and what data is being discussed.

First the good news. Oil companies listed on any stock exchange in the United States are required, by SEC and various accounting rules, to make a reasonable assessment of their reserve positions each year. Oil reserves, after all, are an important item on the balance sheet of any oil company. Accuracy counts. As a practice, however, oil companies understate their reserves. They do not want to be in the position of inflating the value of their assets. That would be fraud. So they try to fudge a bit on the low side in order to protect themselves. Most investors are pleased with this arrangement.

Now the bad news. Oil companies do not actually own most of the oil they produce. It is produced under a revenue sharing arrangement with a government agency of the nation under whose land (or water) the oil reservoir is located. The oil company has a license or extraction contract. So when an oil company tells us it has so many barrels of oil in its reserves, that figure may include assets that are derived from existing contracts. If the contract goes away, so does the oil that can be claimed as an asset. In addition, at any given time the oil companies are under contract for only a fraction of the reserves that may be claimed by the nation that actually owns the oil.

So this leads us to only one possible conclusion: there may be less oil on this planet than claimed (which would be devastating); or there may be more oil than anyone realizes (which would be very nice).

We simply do not know.

Or do we?

That’s what this report is all about.

Chapter 2 INDUSTRY ANALYSIS

We want to ignore oil depletion. And we will. Until it eats us.

Oil Depletion Forecasts

Interest in the subject of oil depletion has been growing. Here is a representative synopsis of current opinion.

Douglas-Westwood

Douglas-Westwood, Ltd. is a respected oil industry consulting firm based in Canterbury, England. According to Douglas-Westwood’s 3^rd edition of “The World Oil Supply Report 2004-2050”, authored by Dr Michael R. Smith, three fundamentals are strongly evident: increasing oil demand, reducing reserves and a decline in discovery rates[1].

“Global oil demand grew by a dramatic 2.6% in 2003 with the greatest increase from China. This was led by a surge in oil-fired power generation capacity and a 75% jump in sales of passenger vehicles. Although the 2003 demand growth of over 10% in China is unsustainable, it is still expected to remain the highest in the world.” …

“The world is drawing down its oil reserves at an unprecedented rate. Although 99 countries have or can produce significant oil, 52, including the USA, are already well past peak (greater than 5 years) whilst another 16 including the UK, Norway, Australia and China are at peak or will reach it soon. All the remainder will see peaks in the next 25 years.”…

“Only Russia, Kazakhstan and Azerbaijan can truly lay claim to significant conventional oil reserves and projects here have been very slow to get off the ground. And although deep waters are a great opportunity, they are currently responsible for only around 4% of production and are expected to only reach 10% of total capacity.”…

“Thus the fundamental conclusions remain that the world’s known and estimated yet-to-find reserves and resources cannot satisfy even the present level of production beyond 2020. And just 1% growth in global economic activity increases demand such that a production peak occurs as early as 2016. Although the response will be complex, this will ultimately result in a sustained increase in oil prices.”…

“A short period of over-supply is forecast, generated by growth from the former Soviet Union and from deepwater (production) … However, by 2008 all OPEC countries will need to begin to increase production as much as they can to meet even modest demand growth. Iraq is probably the most under-explored country in the world in relation to its productive potential. Once stability is achieved a field development programme must begin with very large infrastructure projects and huge investments. However, whether companies will be willing to take on the political and geological risk, remains to be seen,” .

The report stresses the need for rapid action by consuming nations. “All governments must review energy supply security now to produce policies and budgets consistent with impending shortfalls in oil supply in the coming years. Japan and China are competing for Russian oil whilst a number of countries in Western Europe are already facing up to the prospect of energy supply shortfalls and beginning major programmes to encourage renewables. However, Europe, Asia and North America will need a lot more than renewable energy to overcome the long term supply squeeze.”

USGS

U.S. Department of the Interior, U.S. Geological Survey

From: USGS World Petroleum Assessment 2000.

“The USGS periodically estimates the amount of oil and gas remaining to be found, and since 1981, the last three of these studies has shown a slight increase in the combined volume of identified reserves and undiscovered resources.

In USGS World Petroleum Assessment 2000, the world was divided into approximately one thousand petroleum provinces, based primarily on geologic factors, and then grouped into eight regions roughly comparable to the eight economic regions defined by the U.S. State Department. Significant petroleum resources are known to exist in 406 of the 1000 geologic provinces.

The U.S. Geological Survey’s latest assessment of undiscovered oil and gas resources of the world reports an increase in global energy resources, with a 20 percent increase in undiscovered oil and a slight decrease in undiscovered natural gas. This assessment estimates the volume of oil and gas, exclusive of the U.S., that may be added to the world’s reserves in the next 30 years.”

“There is still an abundance of oil and gas in the world,” said Thomas Ahlbrandt, USGS World Petroleum Assessment project chief. “Since oil became a major energy source about 100 years ago, about 539 billion barrels of oil have been produced outside of the U.S. We now estimate the total amount of future technically recoverable oil, outside the U.S., to be about 2120 billion barrels.”

” … The USGS team believes the largest reserves of undiscovered oil lie in existing fields in the Middle East, the northeast Greenland Shelf, the western Siberian and Caspian areas, and the Niger and Congo delta areas of Africa. Significant new reserves were found in northeast Greenland and offshore Suriname, both of which have no history of production. ‘What we did is look into the future and predict how much will be discovered in the next 30 years based on the geology of how it gets trapped,’ explains Suzanne D. Weedman, program coordinator of the USGS World Petroleum Assessment 2000. ‘We also believe that the [oil] reserve numbers are going to increase.’ the USGS report is documented with 32,000 pages of data.”

The USGS conventional oil reserve numbers would appear to break down as follows:

If we correct the USGS Known Reserves data for production since 1995, Total World Resources of conventional oil and NGL as of 12/31/2003 would appear to be 2.047 Bbl (billion barrels).

EIA

Energy Information Administration [2]

From: International Energy Outlook 2003 (IEO2003)

(Italics were inserted by the author for emphasis).

“Worldwide consumption of commercial energy is projected to grow by 58 % over the next two and one-half decades … (with) much of the growth to occur in the developing world …

In the IEO2003 reference case projection, world oil consumption increases from 77 mm bpd in 2001 to 119 mm bpd in 2025, an annualized growth rate of 1.8 %.

The increases in worldwide oil use projected in the reference case would require an increase of 42 mm bpd over current productive capacity. OPEC producers are expected to be the major source of increased production, but non-OPEC supply is expected to remain competitive, with major growth in offshore resources, especially in the Caspian Basin, Latin America, and deepwater West Africa. …”

From: Annual Energy Outlook 2003

“As has been typical over the past few years, energy prices were extremely volatile during 2002. Spot natural gas prices, about $2 per thousand cubic feet in January, rose to between $3 and $4 per thousand cubic feet by the fall. Average wellhead prices, which are moderated by the inclusion of natural gas bought under contract, also increased over the year. Crude oil prices also rose in 2002, mainly because of reduced production by the Organization of Petroleum Exporting Counties (OPEC) and, to a lesser degree, fears about the potential impact of military action in Iraq. Crude oil prices began 2002 at roughly $16 per barrel and were between $25 and $30 per barrel by the fall. …

Net imports accounted for 55 percent of total U.S. oil demand in 2001, up from 37 percent in 1980 and 42 percent in 1990. That trend is expected to continue. A growing portion of imports is projected to be refined petroleum products, such as gasoline, diesel fuel, and jet fuel, assuming the future availability of those products in world markets. …

In nominal dollars, the average world oil price is expected to reach approximately $48 per barrel in 2025. (Since oil has already exceeded this price, we can assume 2025 has arrived early – Ron).

World oil demand is projected to increase from 76.0 million barrels per day in 2001 to 112.0 million barrels per day in 2020 including projected demand in the former Soviet Union and in developing nations, including China, India, Africa, and South and Central America. World oil demand, including both conventional and unconventional oil supplies, grows to 123.2 million barrels per day by 2025. Growth in oil production in both OPEC and non-OPEC nations leads to relatively slow growth in prices through 2025. OPEC conventional oil production is expected to reach 60.1 million barrels per day in 2025, more than double the 28.3 million barrels per day produced in 2001. The forecast assumes that sufficient capital will be available to expand production capacity.

Non-OPEC conventional oil production is expected to increase from 45.5 to 58.8 million barrels per day between 2001 and 2025. A 1.0 million barrel per day decline in production in the industrialized nations (United States, Canada, Mexico, Western Europe, Japan, Australia, and New Zealand) is more than offset by increased production from Russia, the Caspian Basin, Non-OPEC Africa, and South and Central America (in particular, Brazil). Russian oil production is expected to continue to recover from the lows of the 1990s and to reach 10.4 million barrels per day by 2025, 44 percent above 2001 levels. Production from the Caspian Basin is expected to exceed 5.0 million barrels per day by 2025, compared with 1.6 million barrels per day in 2001. By 2025, projected production from South and Central America reaches 6.3 million barrels per day, up from 3.7 million barrels per day in 2001. Non-OPEC African production is projected to grow from 2.7 million barrels per day in 2001 to 6.9 million barrels per day by 2025. …

USA Total energy consumption is projected to an average annual increase of 1.5 percent. Light-duty vehicle miles traveled are projected to grow by 2.4 percent per year through 2020 and by 2.3 percent per year through 2025. Consistent with recent trends, less improvement is projected for the average fuel efficiency of new light-duty vehicles than in AEO2002. New light-duty vehicle efficiency is projected to reach 25.6 miles per gallon by 2020 in AEO2003 … and 26.1 miles per gallon by 2025.

USA Total petroleum demand is projected to grow at an average annual rate of 1.7 percent through 2025 (reaching 29.17 million barrels per day), led by growth in the transportation sector, which is expected to account for about 74 percent of petroleum demand in 2025. … ”

IEA

International Energy Agency[3]

From: Oil Supply Prospects

(Italics were inserted by the author for emphasis).

“Oil reserve estimates are inevitably uncertain and studies normally report oil reserve estimates as ranges, rather than as point estimates. For example the United States Geological Survey in 1993 reported a range of 2.1 to 2.8 trillion (10¹²) barrels for worldwide recoverable reserves of conventional oil. Experts differ on these figures; some take a static view, emphasizing geological and statistical issues that lead to a low reserve estimate, and some take a dynamic view, arguing that rapidly advancing technology will help discover more reserves and make a wider range of already known deposits economically recoverable. Experience in mature oil regions indicates that production builds to a peak when approximately half of the ultimately recoverable reserves has been produced, and then falls away. The application of new technologies, such as horizontal drilling and 3D seismic analysis, determines the ultimate size of recoverable reserves. It can extend the peak and delay or slow the decline in production. But eventually production falls, given a fixed oil resource. This has been the experience, for example, in the United States.

This approach has been applied on a regional basis. It indicates that a peaking of conventional oil production could occur between years 2010 and 2020, depending on assumptions for the level of reserves. Oil production outside OPEC Middle East would peak before OPEC Middle East production implying a greater reliance on OPEC Middle East supply between the two peaks. A plateau in oil production for OPEC Middle East of 47.9 Mbl/day has been assumed, rather than a sharp peak, following an IEA study.

… projections for oil production profiles for the world … (assume) ultimate recoverable reserves of conventional oil of 2.3 trillion barrels. … Table 1 gives details of supplies for conventional and non-conventional oil. The transition from conventional to non-conventional oil as the marginal supply in 2015 is assumed to raise the oil price from $17-25 … over the period 2010 to 2015. The use of non-conventional oil expands rapidly after 2015 as it meets the increase in demand for liquid fuels and compensates for the decline in conventional oil production.

…. To produce large and increasing volumes of oil from non-conventional sources will require many major multi-billion dollar projects. Some unevenness in supply availability is possible because of the long lead times required for these big projects and the difficulties in matching supply to demand … . It is necessary to distinguish fluctuations in the world oil price from its longer term average level. Some short-term price movements could well arise from supply-demand mismatches, … But opinion on the effect of this changeover on … oil price is mixed.”

“A higher view of oil reserves would assume an ultimate stock of recoverable conventional oil of 3 trillion barrels, compared with the lower assumption of 2.3 trillion barrels…. This view postpones the production peak of conventional oil and the associated rise in world oil price to 2020.”

Table 1
IEA Oil Supply 1996-2020*

*Assuming a Lower Estimate of Conventional Oil Reserves of 2.3 trillion barrels

To its credit, the IEA does present us with a relatively unambiguous analysis of its data. The stark truth comes out if we are willing to analyze the implications of the IEA’s report.

The IEA apparently believes that conventional crude oil shortages are inevitable. In order to provide the world with enough energy, non-conventional fuel production will have to increase rapidly after 2014. According to the above Table, by 2020, we humans will have to be producing 17.3 Mbl of un-conventional petroleum liquids per day ( 6.3 Bbl per year ). The IEA has illustrated this shift in the source of oil production by showing that non-OPEC oil production has already peaked, and OPEC oil production will peak about 2014 – 2018.

It’s all downhill from there.

Independent Analysts

Colin Campbell.

October 23. 2002. Professor Colin Campbell, a senior oil geologist and oil executive with forty years of experience in oil exploration and production was interviewed by “From The Wilderness” Editor Mike Ruppert. The complete text can be found at WEB site fromthewilderness.com/free/ww3/102302_campbell.html.

“The key event in the Petroleum Era is not when the oil runs out, but when oil production peaks, especially as demand and population are rising. World per capita oil production peaked in 1979 and has been in decline since. The peak in volume of total world oil production is upon us right now, even as the demand or better said — the need — for oil is increasing rapidly.

Several things are a given. First the total remaining conventional oil on the planet is estimated to be around 1 trillion barrels. Second, at present rates (not those of five or 10 years from now), the world is using close to 80 million barrels per day. At the current rate, there would be only enough oil to sustain the planet for another 35 years under the best of scenarios. But the oil that remains is going to be increasingly expensive to produce and it will tend to be of a lesser quality, necessitating higher refining costs, than what has already been used. All of those costs will have to be passed on in the form of price hikes or — in some cases — spikes. Oil price spikes invariably lead to recession. The world’s economy is based upon the sale of products that are either made from oil or which need hydrocarbon energy (including natural gas) to operate, either via internal combustion or via electricity.

Different regions of the world peak in oil production at different times. The U.S. peaked in the early-1970s. Europe, Russia and the North Sea have also peaked.

The majors are merging and downsizing and outsourcing and not investing in new refineries because they know full well that production is set to decline and that the exploration opportunities are getting less and less. …

Only a fraction of the oil in the reservoir is recoverable because it does not sit in one big cavern down there but in the very small pore spaces between the grains of sand. These grains are coated in water and when it coalesces, it blocks the pore spaces preventing the further movement of oil. … It is said that recovery has increased from 30 percent to 40 percent thanks to technology and is set to rise …in the future. But most of this improvement has nothing to do with technology. It is an artifact of reporting. The industry has always made conservative initial estimates …so reserves naturally grow over time.”

Duncan and Youngquist.

Richard C. Duncan and Walter Youngquist, “Encircling the Peak of World Oil Production,” Natural Resources Research, (1999):3:219-232, p. 220.

“Oil has formed in the upper approximately 16,000 ft of the Earth’s crust since at least as far back as the Cambrian Period, some 550 million years ago …. It is a rich inheritance of highly concentrated solar-derived energy captured by myriad organisms, chiefly algae, and then distilled by geological processes into an energy form that is unequalled by any other energy source in its versatility and convenience in handling. Now, within one human lifetime, one-half of this unique 550 Million Year inheritance will have been spent. The remainder will go very fast.” The article predicts that by 2007 the world will peak in oil production at 30 billion barrels per year and by 2020 we will have dropped to 24.6 billion barrels per year.

James Puplava.

From an excellent document prepared by James J. Puplava,

Part 1: Hubbert’s Peak & The Economics of Oil; available on Financial Sense, March 16, 2002; financialsense.com.

“Hubbert estimated world oil reserves at 1.8 trillion barrels. Since that time and including new discoveries, the estimate has been raised to 2.0 to 2.1 trillion barrels of oil. We now have data on world oil production going back to 1850. Colin J. Campbell of Petroconsultants has made a country-by-country estimate of the world’s oil reserves. His estimates match those of Hubbert at 1.8 trillion barrels. With updated data, there has been no significant bulge or dip in the world’s production curve as originally estimated by Hubbert. Using production decline curves from known oil reserves, petroleum analysts using Hubbert’s methods have now been able to estimate the peak in world oil production. According to these estimates, world oil production will begin to peak between the years of 2004 and 2008. A few of the top geologists, including Colin J. Campbell, think that peak is in 2003. The point to understand is that we are depleting our oil reserves at an annual rate of 6% a year; while demand growth is growing at an annual rate of 2%. In order to simply keep even, the world’s oil industry would have to find the equivalent of 8% a year of new oil reserves from new discoveries. This is not happening. The world consumes 76 million barrels of oil a day. This oil is not being replaced.

There is nothing going on in the Caspian Sea, West Africa, or the South China Sea that would come close to replacing what we are now consuming.

Political leaders and the public are totally oblivious to this fact. They are not paying attention. Last year’s energy crisis has now been forgotten. The news media explained the crisis in terms of industry price gouging, regulations, taxes, and distribution problems. No one is paying attention to world production declines in the U.S. or elsewhere. This means there is nothing that can be done now in order to avoid a future crisis. It takes years from the time of discovery of new oil to the time it is produced, shipped, and refined and consumed as energy. The oil that is discovered today won’t reach the markets for another 8-10 years. An unprecedented crisis is just over the horizon because of inattention and neglect.”

Confusion And Reality

It should be obvious that both the USGS and the Department of Energy are under pressure to make sure their respective projections of oil consumption are matched by oil production and reserve availability. Publishing data that shows oil production will be less than oil demand would not be politically correct.

Critics of the USGS World Petroleum Assessment 2000 point out that this survey relies heavily on statistical analysis. The USGS has assumed that if certain types of geological formations in one part of the world have yielded deposits of oil in the past, then it follows that oil deposits will be equally abundant in these formations where they appear in other parts of the world. The USGS has thus identified the formations where oil is likely to be found. These geological structures are well known. Unfortunately, the USGS has determined its reserve estimates by making probability calculations, rather than by drilling holes in the ground. Whether there is, or is not, any oil in these structures is therefore speculative. The USGS also comes under fire for its oil recovery assumptions, which appear to be 30 to 33 percent higher than current oil production experience.

The IEA and the U. S. EIA/DOE appear to rely on statistics published by various trade publications, most notably the “Oil and Gas Journal” and “World Oil”. These statistics are, in turn, heavily influenced by the politically motivated reserve claims of the oil producing nations. The reserves routinely quoted by the member nations of OPEC, for example, are highly suspect because even to casual observation it is obvious they have been manipulated.

There is a high level of confusion over the classification of oil reserves. For example, what is the difference between “identified reserves” and “proven reserves”? If proven reserves of 859 Bbl of oil are defined to include all Identified reserves, then total available reserves of conventional oil increase to 1.1 Tbl (Trillion barrels of oil). Total available reserves, including oil that may be found in deposits under the ocean, oil from tar sands and shales, oil that is located under layers of polar ice and oil derived from petroleum liquids, may exceed 3 trillion barrels. That would appear to give us some breathing room in our oil depletion scenario.

But wait a moment. If we accept these most optimistic estimates of oil reserves, is it likely that we will be able to find all of them?

No. Logic infers that a percentage of possible oil reserves will never be found because they exist in formations that are inaccessible – under the ocean, under layers of ice, or in lands plagued by bad weather and hostile cultures.

Can we assume that all found “pools” will be large enough to be of practical value?

No. The cost of extraction will exceed the value of found oil in some percentage of reserves. All reserves are not equally useful. Most of the oil found over the last four years, for example, has come from smaller deposits that will deplete rapidly.

Can we assume that we will be able to extract every drop of oil from all available reserves?

No. Although available technology has dramatically increased the volume of oil that can be recovered, all wells have a finite life span. When abandoned, there will still be oil in the ground.

Can we assume, as some have claimed, that oil from tar sands and shales will replace the declining volume of conventional oil production?

No. Heavy oil must be “thinned” by the addition of condensates (Pentane, for example) in order to manufacture a feedstock that can be refined into petroleum products. Existing supplies of these dilutents are limited. In addition, heavy oil production uses increasingly scarce natural gas to heat the oil so that it will flow from its source rock. Natural gas shortages will curtail production.

How realistic is the EIA assumption that OPEC suppliers will be able to increase conventional oil production from 28.3 million barrels per day in 2001, to 60.1 million barrels per day in 2025?

Given the realities of Middle East politics and projected oil production capacity, this assumption is highly speculative.

How realistic is the IEA assumption that non-conventional liquids production can increase fast enough to make up the difference between increasing demand and declining conventional oil production?

If we humans immediately adopt the recommendations found in this report, it is possible that we can grow our non-conventional liquids production fast enough to compensate for declining conventional oil production. Unfortunately, it is highly unlikely that existing alternative energy programs will be available for mass commercialization before we encounter a depletion crisis.

From the 2003 Update of the ASPO (Association for the Study of Peak Oil) Oil & Gas Depletion Model (Colin Campbell & Anders Sivertsson).

“We are using oil faster than we are finding it and have done so since about 1981. … Although there remain the eternal uncertainties about the reliability of the data, it appears that the world’s oil account has been running a deficit since 1981, as it continues to eat into its inheritance from past discovery.”

And consider Colin Campbell’s base case for ASPO: “Total world conventional petroleum production from day one to year 2075 (including already produced and yet to be discovered) is estimated at about 1,900 billion barrels, and unconventional oil production (includes natural gas liquids, bitumen, deepwater, arctic, etc.) increases this total to about 2,700 billion barrels. Oil production from all sources is expected to rise to about 83 million barrels per day in year 2010 and then begin a terminal decline.”

Going forward, oil companies are going to be under increasing pressure from government agencies to be sure they have accurately stated their estimated reserves. For example:

Thursday, March 18, 2004, AP Biz Wire, seattlepi.nwsource.com

“The Royal Dutch/Shell Group of Cos. … announced additional cuts to its estimated reserves of oil and natural gas and suggested that more reductions might follow. … Shell has now reclassified 4.15 billion in reserves that it had carried on its books.” Reserves under contract are carried as an asset on the company’s books.

Market Trends

The Peak

Disaster prophets like to point out that once oil production peaks, it will then decline at a rate that is equal to, or greater than, the rate of increase experienced when there was a surplus of reserves. This is the very sharp “peak” of oil production so often seen in various articles on oil depletion. If geology and the mechanics of extraction were the only variables, this would probably be the case. A sharp peak would occur and we would subsequently feel as though the availability of oil were falling off a cliff because of a rapidly growing delta between real demand and available production. However, since neither production nor consumption have historically followed a smooth curve – up or down – and since there is an economic interaction between demand, consumption and production, we should expect the peak of consumption to be characterized by a series of alternating cycles. Periods of shortage will be separated by periods of surplus. Shortages will curtail economic activity. As oil production recovers from a shortage, it will become available to a market where demand has been decreased by the recessionary influence of the previous shortage. Surplus oil decreases prices. Economic theory suggests that the combination of lower prices and surplus oil should stimulate demand – assuming, of course, there are no peripheral events to limit an economic recovery. The recovery will continue until increasing oil demand again exceeds production. At this point, consumption should equal production, plus or minus variables such as available storage, weather conditions, transportation snafus, rank speculation, cultural conflict, labor strikes, political conflict, and so on. If thereafter production should decrease, for any reason, consumption will also be forced down. Decreased oil consumption, along with the associated increases in petroleum prices, will cause a corresponding decrease in economic activity. The cycle will thus be repeated.

We must conclude, therefore, that oil induced recessions, punctuated by periods of increased economic activity, become a distinct possibility as oil production peaks. These cycles could become very severe in magnitude, and the cultural challenges discussed elsewhere in this report will certainly serve to exacerbate their volatility. These cycles have already begun.

Real Versus Natural Demand

Boring as economics may be to some readers, it is very important for us to understand that at the “peak” of oil production, and beyond, there will be a growing divide between demand, consumption and production. Indeed, demand will split into to components: Natural Demand and Real Demand.

Natural demand quantifies the theoretical demand for oil that would exist if there were no impediments to consumption. China, for example, currently has a projected average annual natural demand of 3.6 percent per year. That is how fast China’s natural demand for oil would grow each year (on average) if there were no restrictions on consumption or economic growth for the period 2003 through 2022. Natural demand is not merely a theoretical number. It reflects the economic and cultural expectations of a consuming nation. If oil production fails to keep up with natural demand, then there will be social discontent because consumers have to reduce their expectations. Oil shortages will restrict consumption as we approach the peak of oil production. Consumer confidence will subsequently decline, and this decline may trigger a recessionary trend in the national economy.

Real demand, by contrast, measures how the demand for oil ebbs and flows according to changes in price and the economic health of consumer nations. Growing economies and lower prices stimulate additional demand. Recessionary economies and higher prices reduce demand. As we approach the peak of oil production, cycles of shortage and surplus will increase the volatility of real demand. During shortages, consumers will be compelled to reduce their demand to match the actual availability of oil – as happened in 1973. Real demand will be forced down until consumption equals production. But what happens when there is a subsequent surplus? The growth of real demand will be constrained by the health (or lack thereof) of the economy. In up cycles, we can expect real demand to trail available oil production until the economy recovers. Thus we can expect economic down cycles caused by oil shortages and higher prices to happen very fast. The psychological impact will be traumatic. Up cycles based on a surplus of available oil and lower prices will take more time to develop. Consumer confidence will take time to recover.

And so. Why is this discussion important? Because the cycles of consumption and production discussed above will increase the delta between natural demand and real demand. With each passing year, this delta will increase. The larger the delta, the greater the social discontent. Combine the volatile economic hardship of oil shortages with the growing delta between natural and real demand, and it becomes obvious that after oil production peaks, there will be a corresponding increase in social discontent.[4]

The Price of Oil

[ For the remainder of this chapter please see the original article:
tceconomist.blogspot.com/2005/05/oil-jihad-and-destiny.html ]

Copyright 2004 and 2005
by
Ronald R. Cooke
The Cultural Economist

Oil Jihad and Destiny provides an assessment of world oil production, characterizes the economic devastation of oil depletion and suggests solutions to the emerging energy crisis. It is available for purchase at BookSurge and Amazon.com.