Issues Magazine

Waiting for the Global Oil Downturn

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iStockphoto

By Bruce Robinson

“Peak oil” – when the rate of oil production worldwide starts its inevitable decline – is widely forecast to occur sometime around 2014. Some are ignoring the possibility of oil shortage, while others are looking at problems and opportunities.

We will probably not know when oil production reached its all-time maximum – “peak oil” – until some years after the event. Definitions and estimates of oil production differ, so there is considerable uncertainty about the data behind the forecasts. Some people are much more optimistic, but they are perhaps now in the minority.

Acknowledgment of the real risks of future global oil shortages at state and federal government levels and in business is seriously inadequate, highlighting a common but unfortunate tendency to overlook or discount crucial risk factors.

“Predictable Surprises” is the title of a 2003 essay in the Harvard Business Review and a subsequent book by Max Bazerman and Michael Watkins. “Why do leaders consistently ignore looming signs of crises even when they know the consequences could be devastating? Most events that catch us by surprise are both predictable and preventable, but we consistently miss (or ignore) the warning signs,” they say.

Another perspective, from the work of economist Daniel Kahneman (Bias, Blindness and How We Truly Think), is the “optimism bias”, where often only the most positive and favourable outcomes are considered both generally and in project planning. This is an unconscious bias. However, the associated “strategic misrepresentation” is a related and deliberate deception towards an unrealistically optimistic outcome.

These seem very plausible explanations for the attitudes of many decision-makers to peak oil. Rather than look at past and forecast discovery rates and production rates, they believe in unlikely but comforting business-as-usual scenarios, or expect “blue sky” alternatives and technological leaps to eventuate in time to negate peak oil.

The collective blindness to probable future oil shortages is a major problem. It prevents or inhibits the implementation of the multitude of sensible policies that together would soften the impact of future oil shortages when they occur. In particular, measures to reduce our automobile dependence significantly receive very low priority.

Some local governments have defied these trends and have looked at oil vulnerability much more honestly and openly than their state and federal counterparts. In Perth, the City of Stirling has recently released its Oil Risk Strategy and, in Melbourne, Maribyrnong City Council prepared a Peak Oil Contingency Plan in 2009.

A number of very authoritative and important reports have warned about peak oil or oil scarcity. Nature, The International Monetary Fund, Macquarie Bank, Lloyds of London, the US and German Defence Departments, Australia’s Bureau of Infrastructure, Transport and Regional Economics and Sir Richard Branson, amongst others, have all warned about oil shortages in the near term.

The International Energy Agency (IEA) was established by the oil-consuming nations to counterbalance the OPEC cartel, and in the past it has been very optimistic about future oil production rates. It has been criticised by a whistleblower for caving in to US pressure to understate the problem, and by the Global Energy Systems group in Sweden for using over-optimistic production rates in its forecasts. However, the IEA has been increasingly strident in its warnings about declining production rates in the world’s currently productive oilfields, and it has been continually revising downwards its estimates of forward oil production.

Of course, there are other views, for example from CERA and ExxonMobil, that there is no peak in sight. However, the growing body of evidence from a wide range of sources is certainly reason to consider very seriously the possibility that peak oil will occur within the next few years. This is because the rate of discovery of oil reached its worldwide peak in 1964 and has been falling relatively steadily since then (Fig. 1). The world uses two or three times as much oil every year as it finds now.


Figure 1. World oil discovery rates.

The US oil price rose from $14/barrel (bbl; 142 litres) in July 1998 to reach $145/bbl in July 2008 before falling briefly to $30/bbl as a result of the global financial crisis before rising again steeply to almost pre-GFC levels. How long before it rises sharply again and reaches $200–$300/bbl?

We don’t know, but peak oil will probably arrive soon, when world oil production starts its geologically determined decline while demand continues to rise. Economic modelling by CSIRO’s Future Fuel Forum has a worst-case scenario of $8/litre for transport fuel in Australia by 2018 if peak oil occurs soon and if alternatives like large-scale coal-to-liquids and gas-to-liquids are not on-stream then.

The majority of the world’s giant oilfields are already in decline now. As a local example, Bass Strait started its decline in 1985 and is now producing only a tiny fraction of its peak yield. Australia’s overall oil production peaked in 2000 and is going downhill fast. Similar declines have happened in many of the world’s supergiant fields, such as in the North Sea, and in Alaska’s Prudhoe Bay and Mexico’s Cantarell Complex.

In its comprehensive World Energy Outlook in November 2008, the IEA released the results of a unique analysis of 800 oilfields, including all 54 supergiants (those fields with initial reserves larger than 5 Gbbl) in production today. It estimates that the average production-weighted decline rate worldwide for fields that have passed their production peak is currently 6.7% per annum, and this is expected to increase to 8.6% per annum in 2030. This means that fresh sources of oil producing a total of 45 Mbbl/day (over half the world’s current production) will have be found simply to maintain present levels of supply to 2030.

IEA Chief Economist, Dr Fatih Birol, is often interviewed by the world’s media, and he reiterates a similar warning: “The world is heading for a catastrophic energy crunch that could cripple a global economic recovery because most of the major oil fields in the world have passed their peak production”.

IEA estimates of future production have been reviewed by Professor Kjell Aleklett of the Global Energy Systems group at the University of Uppsala in Sweden. Using the same basic data of decline rates of existing fields and reserves in the “yet-to-be-developed” and “yet-to-find” categories, the Uppsala group forecast considerably lower production rates out to 2030. They discovered that the IEA had assumed unrealistically high production rates from the reserves in the new fields that were twice as high as has ever been achieved in any oil region – even high-tech areas like the North Sea and the Gulf of Mexico. This, and some other more minor differences, led Professor Aleklett to estimate a global production rate, based on the same IEA data, of 75 Mbbl/day in 2030, much lower than the IEA’s estimate of 106 Mbbl/day.

The forecast from Dr Colin Campbell, founder of the Association for the Study of Peak Oil (ASPO), is less optimistic again. It is likely that more and more of the world’s oil will be used in oil-producing countries, where petrol is often subsidised and population and usage is increasing quite rapidly. This means there will be less for export, and the amount available on the world market will decrease faster than overall global production.

For instance, Indonesia was a member of OPEC until recently. Its slowly declining production and rising domestic use mean that Indonesia is now an oil importer rather than an oil exporter. Similar trends are happening in a number of oil-exporting countries.

As documented in World Energy Outlook 2008, declining production in existing fields will be offset in part from production by fields already discovered and being brought on-stream, and from fields yet to be discovered. The near-term production from fields already discovered can be estimated from published information on large existing and proposed projects.

This “megaprojects” approach was pioneered by Chris Skrebowski, editor of Petroleum Review, and published by the Institute of Energy in London. A field discovered this year may not be producing at capacity for perhaps almost a decade, so the near-term production can be estimated from existing production rates after allowing for an average rate of decline of 6.7% per annum as well as the expected contributions from fields now being brought into production. Estimating these new projects or expansion of existing fields is the basis of the megaprojects method.

In his presentation to the ASPO-9 conference in Brussels in April 2011, Skrebowski forecast a production crunch in 2012 or 2013. His summary was that supply is tightening and future supply looks inadequate: uncertainty is discouraging investment, costs are rising, and demand remains strong and is possibly underestimated.

As well as planning for peak oil, Australia should be preparing for sudden oil shocks bigger than the 1973 and 1979 oil crises. A revolution in Saudi Arabia or a war over Iran, for instance, would cause a dramatic global oil crisis. Contingency planning is recommended for, say, a 30% nationwide shortfall of transport fuels for three months or more.

World oil price forecasts by the Australian Bureau of Agricultural and Resource Economics (ABARE) have been consistently low, showing a clear “optimism bias”. Many other economists have a similarly poor track record on oil price forecasting. For example, the Australian Financial Review reported an interview with eminent economist Professor Vernon Smith in November 2005, when the oil price was $60/bbl:

ASPO’s oil peak predictions are “baloney”, an economic fallacy. According to Smith, a world about to reach an oil peak would be charging a lot more for oil, which he expects to sell for $15 a barrel in the near future.

Instead of dropping from $60 to $15/bbl, the oil price rose to almost ten times Smith’s forecast within three years.

In evidence to the 2006 Senate Inquiry into Australia’s future oil supply, the director of ABARE, Dr Brian Fisher, said: “If the price of eggs is high enough, even the roosters will start to lay,” implying that high oil prices would result in increased oil production. However, this has proven incorrect. Global oil production has plateaued since 2005 rather than rising when the price rose substantially.

Recent important work by University of Washington Professor of Oceanography James Murray and David King, director of Oxford University’s Smith School of Enterprise and the Environment (Nature 2012, 481, 433–435), shows an abrupt change in oil economics in about 2005, when increasing price no longer sparked increasing production (Fig. 2).


Figure 2. Oil production versus price. (Data used with permission.)

Governments, communities and investors should be aware of the probability of future oil scarcity. Too many organisations, including superannuation funds, are investing in tunnels, toll roads, airports and the like, which will prove very unwise when oil shortages occur. Peak oil will certainly mean peak car traffic and peak airline travel. Ordinary people and small businesses are making long-term plans on the assumption that fuel availability and travel patterns will remain the same as they are now. This is also unwise.

Options for peak oil mitigation and adaptation are countless. Many are “no regrets” alternatives – things we should be doing now. Many should have been started 20 years before peak oil arrives.

We all need to start planning and acting now, as a matter of urgency, both for sudden fuel shortages and for the permanent shortages that peak oil will cause. Currently governments, economists and much of the community are turning a blind eye to the probability that business in the oil industry will soon not be “as usual” and that serious shortages and ongoing scarcity are very likely within a few years.

The Australian Association for the Study of Peak Oil (www.ASPO-Australia.org.au) is a nationwide volunteer-based network of professionals working to warn Australia of its oil vulnerability. ASPO-Australia is keen to assist organisations and government with oil vulnerability assessments and risk management plans to prepare for probable near-term oil shortages.