Peak Oil – now for the downslope

Guest post by David Archibald

When I posted on peak oil’s effect on agricultural costs and food security, some comments questioned the idea of peak oil. What follows is a summary of the subject. We will start with what is considered to be the most successful economic forecast ever made – the prediction in March 1956 by King Hubbert of the Shell Oil Company that US oil production would peak in 1970. This was in a paper entitled “Nuclear Energy and the Fossil Fuels” presented at the Spring meeting of the American Petroleum Institute in San Antonio, Texas. The paper’s title reflects Hubbert’s view that nuclear power would have to replace fossil fuels on the latter’s exhaustion. The view hasn’t changed, but the replacement need has become urgent.

Figure 1: Logistic Decline Plot for the United States

Source: Al-Husseini 2006

Figure 1 shows the basis for Hubbert’s prediction. This is a logistic decline plot of annual production divided by cumulative production to that year against cumulative production. His original analysis anticipated that Lower 48 crude production would peak at 2.8 -3.0 billion barrels between 1966 and 1971 and then enter an irreversible decline. Production in the lower 48 actually peaked at 3.4 billion barrels in 1970. Under Hubbert’s original forecast of ultimate potential of 200 billion barrels in his 1965 assessment, 1991 crude oil output was projected to be 1.9 billion barrels. Actual 1991 production was, in fact, 2.0 billion barrels – a modest variation from Hubbert’s prediction made 35 years earlier (Smith and Lidsky 1993).

Figure 2: Logistic growth curve for US crude oil production

This figure is from Nashawi et. al. 2010. The blue line is the modeled projection to 2070. The purple line is cumulative production to 2008. The US has burnt through 84% of its original oil endowment.

Figure 3: World oil discovery by year

Source: Al-Husseini 2006

Figure 3 shows that oil discovery peaked fifty years ago in the early 1960s. Based on the well-established trend, not much hope can be held for positive departure from the forecast discovery profile.

Having shown how powerful Hubbert-style analysis is forecasting production, let’s go on to look at what the global oil production profile looks like.

Figure 4: Logistic Decline Plot for Global Oil Production

As Figure 4 shows, the world had consumed half of its original oil endowment by 2005. 2005 was the year that global oil production peaked. According to Hubbert theory, we will have a few years of near-peak production before the steep decline down the right hand side of the bell-shaped curve begins.

Figure 5: A 2004 estimate of the Global Oil Production Decline

Source of figure: Al-Husseini 2006

I have included Figure 5 because it covers a 120 year span and it has been accurate for production over the last seven years since it was published.

Figure 6: World Oil Production 1965 – 2030

This is another way of looking at the coming decline which will be 1.5 million barrels/day/year. The decline will go on for about three decades at that rate before flattening out.

Figure 7: Logistic growth curve for Non-Opec oil production

Source: Nashawi et. al. 2010

Discussion of oil prices and the tightening oil market tends to concentrate on just how much spare capacity Saudi Arabia has. As Figure 7 shows, whatever swing capacity Saudi Arabia has will soon be overtaken by events. The big story is Non-Opec production, which will almost halve by the end of this decade.

Figure 8: Oil price 1990 – 2016

Modelling the oil price in a tightening market is difficult because of the dampening effect on consumption of the increasing price. Plotted logarithmically, the oil price chart itself may reflect that effect and thus might be used as a predictive tool. What it shows is that the oil price is constrained by a parallel uptrend channel rising at 15.6% per annum. The current UK retail price for gasoline is indicated on the chart to show that civilisation, of a sort, can continue at very high oil prices.

Table 1: Oil price forecast by year and the concomitant effect on agricultural operating costs.

Table 1 shows how the oil price rise derived from the established trend in Figure 8 translates through to price per US gallon and agricultural operating costs relative to the 2009 level. There will be a severe departure from what Michelle Bachman has promised to achieve.

Figure 9: Energy-related inputs relative to total operating expenses, 2007-08 average

From: Sands and Westcott 2011

Based on the USDA figures and recalculating for the $200 per barrel oil price expected in 2014, wheat and corn operating costs will be 60% higher in 2014.

In 2009, the Chief Economist of the International Energy Agency, Fatih Birol, said that “we have to leave oil before oil leaves us.” Only one country is doing that, and of course it is the same country that is proceeding to commercialise the molten salt, thorium-burning nuclear reactor – China.

Figure 10: Chinese oil production, imports and coal-to-liquids production

This figure shows Chinese domestic oil production, imports and a projection of coal-to-liquids production assuming that demand follows its established trajectory.

China currently has three Fischer-Tropsch coal-to-liquids (CTL) plants and one liquefaction plant commissioned with a further three Fischer-Tropsch plants under construction. Total planned production from those seven plants is in excess of 600,000 BOPD. A journal earlier this year reported that “Chinese CTL investors will pay active efforts in preliminary works for mega size CTL projects starting from 2011 and may realise commissioning of such projects before the year 2015”. By comparison, in the United States, Section 526 of the Energy Security and Independence Act of 2007 blocks the Department of Defense from using CTL fuels because the life cycle greenhouse gas (GHG) emissions from those fuels would be much larger than the GHG emissions from conventional petroleum.

The economic effect of continuously rising oil prices will be to continuously cause economic contraction.

Table 2: Compilation of studies on the Oil Price – US GDP Effect

Source: Sauter and Awerbuch 2003

At the 1.5% average estimate of growth decrease per 10% oil price increase, the 15.6% per annum oil price rise expected over the next few years will shrink the US economy at 2.2% per annum. The fastest way to reduce this effect would be to install CTL capacity in the US. To replace all of the US’ oil imports with home-grown CTL would take more coal than is currently burnt in US power stations. It follows that what is also needed is a good, safe nuclear technology to replace coal in power generation, bearing out Hubbert’s observation of fifty-five years ago.

References

Al-Husseini, M., The Debate over Hubbert’s Peak: a review”, GeoArabia, Vol. 11, No. 2, 2006

Nashawi, I.S,, Malallah, A. and Al Bisharah, M., Forecasting World Crude Oil Production Using Multicyclic Hubbert Model, Energy Fuels, American Chemical Society 2010

Smith, A.L. and Lidsky, B.J., 1993, King Hubbert’s analysis revisited: Update of the

Lower 48 oil and gas resource base, The Leading Edge, November 1993

Sands, R. and Westcott, P., Impacts of Higher Energy Prices on Agriculture and Rural Economies, United States Department of Agriculture, Economic Research Report Number 123, 2011

Sauter, R. and Awerbuch, S., Oil Price Volatility and Economic Activity: A Survey and Literature Review, IEA Research Paper, August 2003.

October 2011