The key remaining question of the peak oil crisis is just when world production is going to start on an unstoppable decline. A few years ago those analysts who were deeply enmeshed in the problem were saying that 2011 or 2012 looked like the fateful year.
But then the unexpected happened — a great recession came along and the demand for oil plunged. Although global oil production set a nominal high during the great price run-up back in the summer of 2008, production soon fell away as the deepening recession cut demand by some 4 million barrels a day.
As prices collapsed in the winter of 2008-2009, OPEC got its act together and cut production dramatically, leaving the world, or at least a few OPEC countries with what is known as spare productive capacity — oil wells that are ready to produce, but have been shut down because there is no market for their product. Keep in mind when you have to shut down some of your oil wells, you usually stop those with the heaviest most sulfur-laden oil first as this oil does not bring as good a price as better grades.
World oil production, including about 10 million barrels a day (b/d) of various forms of combustible liquids such as biofuels that are usually counted as “oil,” currently stands at about 86 million b/d. This number got as high as 87 or 88 million (depending on whose numbers you like) back in the summer of 2008, fell to 83 or 84 million b/d in the winter of 2009, and then has been climbing back slowly as China, India, and the oil exporting countries step up their demand.
Behind these numbers however are two forces, the inexorable depletion of existing fields which is currently running about 4 million b/d each year and new oil fields coming into production which for 2009 and 2010 is expected to add about 6 million b/d of new productive capacity each year. As long as the completion of new oil production projects exceeds 4 million b/d — all is well.
Indeed for the last few years the capacity to produce more oil has been growing ahead of the demand so spare capacity to produce more oil is now in the vicinity of 5 or 6 million b/d. This means that if there were sufficient demand, global oil production could be cranked up to 91 or even 92 million b/d – for awhile. As even the Chinese don’t seem to need an additional 5 billion b/d, at least not right away (their current consumption is about 8-9 million b/d), those 5 or 6 million b/d seem destined to remain spare for a while.
Now if the world’s oil producers could add another 5 or 6 million b/d of oil production each year indefinitely, there would not be a problem and you would not be reading this article. Unfortunately, however, they can’t. People who follow these matters, and it is rather straight forward to do, say that for the next few years we will only be adding about 3-4 million b/d of new capacity to produce oil and by 2015 this will be down to about 2 million b/d. This, of course, is well below the annual drop of 4 million barrels per day from the existing fields due to depletion.
As long as the additions to our capacity to produce oil do not get too far below the pace of depletion, there would seem to be no reason for wild spikes in oil prices – in the near term. If the world continues to bump along in its current state for the next 3 or 4 years, it would seem that the availability and price of oil will not upset the apple cart with shortages or unaffordable gasoline prices. After 2013, however, all bets are off as there does not seem to be enough new production starting up to balance depletion.
The next few years are like to be seminal ones in modern history.
These days, new oil production capacity, on the scale of millions of barrels a day, does not appear overnight from the drill of a lucky wild catter. Large new oil production projects take five, six, or seven years before the first oil can be shipped and cost billions of dollars. If a major project is not already well along, we are unlikely to see any oil from it until the latter half of the decade. For the next five years we are stuck with those projects that are already underway.
This train of thought seems to say that somewhere around 2014, world oil production, which has been on a rough plateau since 2005, will start to decline, perhaps rapidly.
There are a number of forces already in motion which could interrupt this rather tidy schedule of four more good years and then “le deluge.” Believe it or not the only good news in sight could come from Iraq which seems to be the last remaining place on earth where lots of cheap and easy-to-produce oil is still available. The Iraqis recently let contracts to increase their oil production by 7 or 8 million b/d in order to become the world’s biggest and richest oil producer. However, anyone familiar with the history of Iraq over the last century has reason to be skeptical that the Iraqis, even with the help of nearly all the world’s major oil companies, can save the world by stopping the decline in oil production for very long.
On the downside, there are numerous forces in play that could send oil prices to economy-killing highs or plunge the world into the greatest depression ever within the next three years. These range from hostilities in the Middle East to the bursting of China’s economic bubble, the bankruptcy of a major country, or the collapse of a currency. Some of these developments could send oil to undreamed of prices, while others could so reduce the demand for oil that its price and availability would no longer be of much interest. The next few years are like to be seminal ones in modern history.
Tom Whipple is a retired government analyst and has been following the peak oil issue for several years.