The Wall Street Journal reports on an optimistic new study of world oil supplies, courtesy of the respected Cambridge Energy Research Associates (CERA). According to the WSJ article, CERA argues "that their assessment supports a generally rosy view of the [oil] industry's future, given that new projects in the works will make up for the decline."
Set for release today, the study, based on data from 811 fields around the world, takes aim at a growing school of thought that the world's oil production may soon hit its peak just as demand is surging in Asia and the Middle East.
In other words, oil forever (party on, dudes!), and really not a lot to worry about in general. There are just a few problems with this study.
1. As the WSJ (correctly) explains, decline rates at existing oil fields around the world are almost certain greater than CERA's 4.5% estimate. For instance, "some of the biggest fields in the North Sea, Alaska and the Gulf of Mexico are declining at rates approaching 18% a year." That's right, 18% per year. That means about 5-6 years of oil production from those fields, assuming decline rates continue (NOTE: It's been pointed out that I shouldn't do a linear calculation here, and that's true. So, oil would last a few more years, but not many, as it declines 18% off an ever shrinking base).
2. In general, CERA has always been extremely optimistic about world oil supplies. When I was at the Energy Information Administration (EIA), I remember sitting through fascinating lectures by CERA representatives laying out the case that there would be gobs of new oil production coming online, and also how production at existing fields wasn't declining as fast as many other analysts suspected. Other analysts like Andrew Gould, chief executive at oil services company Schlumberger, who "has estimated that the industry's average decline rate is closer to 8% a year and growing." Or "veteran Houston-based energy banker Matthew Simmons," who argues that "few in the industry believe that the global oil decline rates is below 5% per year." In other words, CERA is an extreme outlier, on the "bullish" side of oil production.
3. As the WSJ points out, "the world's existing fields by 2017 will be producing about 33 million fewer barrels a day than they are now." And that's using CERA's optimistic, 4.5% decline rate off of current world oil production of about 87 million barrels per day. Raise the decline rate to, let's say, 9% per year, and we're talking about a reduction of nearly 8 million barrels per day every year from existing fields, or around 70 million barrels per day by 2017.
4. Meanwhile, consumption's growing fast, including in major oil producing countries. As the WSJ notes, "hitting a production level of 112 million barrels per day within a decade would require adding 59 million barrels a day in new capacity -- or more than six times today's daily output from Saudi Arabia." Again, that's assuming CERA's optimistic 4.5% decline rate at existing fields. At a 9% decline rate, we would need to add an incredible 95 million barrels a day of oil production capacity by 2017 -- that's about 10 million barrels a day per year of NEW oil production capacity.
5. According to EIA, ""the cost of adding...capacity - that is, all the infrastructure, producing and transportation facilities - necessary to produce one additional barrel of oil per day in Saudi Arabia is, at most, $5,000 compared to between $10,000 and $20,000 in most areas of the world." OK, let's say $10,000 per barrel per day extra capacity. Under that assumption the cost to add 59 million barrels per day of production capacity (CERA's 4.5% decline rate assumption) would be $5.9 trillion. To add 95 million barrels per day (assuming a 9% decline rate) would be $9.5 trillion. To put that in perspective, OPEC oil export revenues were about $500 billion in 2007. Most of that money, however, doesn't go back into the oil industry. Instead, most of it goes to running the oil producing countries themselves, subsidizing their populations so they don't rebel, buying weapons, funding fundamentalist Islamic madrasas, etc. So where's this $5.9 trillion or $9.5 trillion going to come from? Is that the sound of chirping crickets I hear?
6. Meanwhile, the Saudis continue to obfuscate (polite word for "lie") about their own oil production capacity, arguing that they've got plenty and $100 per barrel is all the result of speculation, refinery problems, and...stuff. The fact is, the Saudis were saying three years ago that prices were "clearly too high" at $54 per barrel. Back then, the Saudis were producing about 9.5 million barrels per day of crude oil. Today, with prices having nearly doubled since 2005, the Saudis are actually producing LESS oil -- 8.7 million barrels per day -- than they were then. That's right, $100 per barrel isn't enough incentive for the Saudis to produce more oil, despite the fact that Saudi marginal production costs reportedly (I say "reportedly" because everything's so opaque in The Kingdom) are around $1-$2 per barrel. Which raises the question, of course, why WON'T the Saudis produce more oil when it's at $100 per barrel, and when they said $54 per barrel was "clearly too high" a price? Let's turn to our old friend Occam's Razor for a moment: the simplest, most parsimonious explanation is that the Saudis CAN'T PRODUCE MORE OIL. Again, Saudi crude oil production has actually DECLINED as oil prices have doubled since 2005. What does that tell you?
7. One last point about CERA is that they don't appear to take environmental considerations or other factors (e.g., Middle East instability, terrorism) into account when making their oil production projections. So, when CERA says we'll just tap into Canadian and Venezuelan oil sands, they don't appear to be considering the fact that this is an utter absurdity from an environmental perspective, unless you don't mind the ocean rising several meters and planetary mass extinctions.
In sum, CERA has always been the most optimistic -- outlandishly so, to the point that I can't figure out why they have any credibility anymore -- on oil production and prices. They've been proven wrong, time and time again. Yet people -- including, sadly, EIA -- keep listening to them. Why? Perhaps because their chairman, Daniel Yergin -- author of the Pulitzer Prize winning book, "The Prize: The Epic Quest for Oil, Money, and Power?" -- is popular, respected, and friendly with "everybody who's anybody?" If so, that's no way to do serious oil analysis.
Is it not amazing how Bush fawns on his family's best friends, the Saudis, trying to bribe them with high tech weaponry, kissing their feet and whining for more oil, and the Saudis tell him to get lost? Is it not disgusting that Bush continues to keep us in Iraq, trying to ensure that global oil companies siphon off most of Iraq's oil, and even his puppet Maliki government has balked and not followed orders? Is it not incredible that, even with all the damage done by Bush's policies, not just to the environment and to America's moral leadership and Constitution, but to the very economic fabric of the American middle class, that the Republican Party even now refuses to recognize the fiscal disaster roaring down on America, and is balking at any serious attempt by Congress to address the disasters?
No wonder people want Change, not merely here in the United States, but across the world. I regard the unrest among Muslims and even among Chinese peasants as part of the world-wide mood for "Change" from whatever their existing circumstances may be. For that matter, the Islamic jihadist movement (like the fundamentalist Christian movements) can be considered to be another Establishment response to the compelling winds of change.
Frustrating the desire for "Change" temporarily will only increase the violence with which change will come.
Year 1 10,000,000 bbl/d
2 8,200,000 bbl/d
3 6,724,000 bbl/d
4 5,513,680 bbl/d
5 4,521,218 bbl/d
6 3,707,398 bbl/d
7 3,040,067 bbl/d
8 2,492,855 bbl/d
9 2,044,141 bbl/d
10 1,676,196 bbl/d
11 1,374,480 bbl/d
12 1,127,074 bbl/d
13 924,201 bbl/d
14 757,844 bbl/d
15 621,432 bbl/d
From 10 million barrels per day in year #1, oil production is cut in half by year 4 and more than two-thirds by year 7. That's dramatic.
Given the short-range idea of future planning so endemic among Bush and Republicans, would these resources push a final reckoning day past, say, 2050---- their life-span, enabling them to shrug the problem off on to their grandchildren, like the national debt and so on, maybe even past their hoped-for Armageddon, which will solve everything, of course. Any advice?
On sour and heavy crudes, like Russia's Urals crude, it just takes refineries more effort to refine. And in the process, they produce giant piles of sulphur. They are truly astounding in size. Visit Pasadena, TX for a tour! ;)