The Future of Oil

Reference links:

EIA on World Oil Supply	Presentation given to American Association of Petroleum Geologists in New Orleans in April 2000, on "Long Term World Oil Supply". It is based on USGS estimates of world oil reserves.
C. J. Cambell on World Oil Supply	Noted oil geologist Colin Campbell doesn't think much of the USGS estimates. Here he presents his own take on world oil reserves and when oil production is likely to peak. Campbell, along with co-author Jean Laherrere, had previously published an article in the March 1998 Scientific American, forecasting an imminent peak in world oil production.
Michael Lynch on Campbell's Forecasts	Noted oil economist Michael Lynch doesn't think much of Campbell's methods and forecasts. This article, "Crying Wolf", was written in response to the 1998 Scientific American article. The gist is that the methodology used by Campbell fails because it takes recoverable resources as fixed, rather than total resources. Over time, the fraction of total resources that are recoverable increases, as extraction methods improve.
World Energy Prospects to 2020	Paper prepared by IEA (International Energy Agency, not to be confused with EIA, DOE's Energy Information Agency) for presentation to the G8 Energy Ministers' Meeting in April 1998. Not as recent as I'd like, but if there's a "bible" on the subject of energy prospects, this would probably have to be it. It puts the oil peak between 2010 - 2020.

After reviewing the above articles (and a pile of others I haven't logged) my chief conclusion is that nobody really knows just how much conventional oil remains, or when production will peak. There's a lot of guessing going on, and answers depend strongly on assumptions. Well, predicting the future isn't supposed to be easy..

That said, there are a few conclusions that I think can be drawn with fair confidence. First, though, a couple of quick notes about what constitutes conventional oil, and what it means for world oil production to peak. From the EIA report:

The conventional oil resource base is defined as “all oil produced from reservoirs through a wellbore using any primary, secondary, improved, enhanced or tertiary method. It does not include liquids from mined deposits (tar sands, oil shales) or created liquids (gas-to-liquids, coal oil).

So conventional oil is any oil pumped from an oil well, on or offshore, even if it took steam injection or other enhanced recovery methods to get it out. And it excludes "synfuels" produced from coal or gas, or oil recovered from mining of tar sands and oil shales.

When oil analysts talk about the world oil production peak, they aren't talking about a day we actually "run out" of oil. That will likely never happen; we'll just get to the point where what's left is too expensive to access. Nor are they thinking of a day when we collectively realize "Houston, we have a problem", and begin voluntarily driving smaller cars and switching to other sources for our transportation needs. The world oil production peak could come about that way, from declining demand. Many environmentalists dearly hope it will, and the sooner the better. But given the economic growth in India, China, and other parts of the world, that's most unlikely. In any case, when oil analysts discuss Hubbert's Peak, they're talking about a supply-limited oil production peak. It assumes that a growing world economy will continue to drive production upward, until it runs smack into the declining ability of the world's oil fields to economically produce at the rate demanded.

Note that phrase "to economically produce". "Economically" is crucial. An oil field is not a big underground lake from which oil can be pumped at any rate one requires. The oil has to percolate through porous rock to the well bore, and there's a limit to how fast it can do so. As oil is withdrawn from a field, what remains has further to percolate and less pressure to drive it, so production slows. Of course a well can deliberately be pumped at less than its maximum production rate, or even shut down to "rest". If demand temporarily falls, that may be necessary. But oil producers try to avoid that situation as much as possible. It means they've spend a lot of money to drill wels whose full capacity isn't yet needed. Only the Persian Gulf oil countries, which still have rich oil fields close to the surface where wells are (relatively) cheap to drill, maintain significant reserve capacity. Elsewhere, increasing oil production generally means drilling more wells.

For any given oil field, there's a point at which the field has been "fully developed". That occurs when the number and spacing of wells drilled is sufficient to eventually recover all the oil that's available for recovery in that field. Additional wells can still be drilled to boost the production rate, but oil pumped from them will shorten the productive lives of neighboring wells. The capital spent on the additional wells has, in the long run, no net return. Hence it makes economic sense for producers to increase oil production only by drilling in fields that are not yet fully developed. When there are no more of those--or not enough to offset the declining production of fully developed fields--then production has hit its supply-limited peak. After that, it becomes a seller's oil market, and prices will rise until demand is reined in to match declining supply.

So much for background. Now let's return to our dueling oil analysts, and conclusions from my own research dabbling.

In Campbell and Laherrere's 1998 Scientific American article, they said that "Barring a world recession, it seems most likely that world production will peak during the first decade of the 21st century". They thought that it might come as early as 2004. Since that was written, there has been a world recession, and a short-term decline in oil demand. That should push out the peak a few years, to something closer to the IEA's 2010 - 2020 time frame.
We may already be feeling "foreshocks" of an oil production peak. Campbell and Laherrere's forecast had non-OPEC production peaking around 2000, with OPEC picking up the slack to support continued world growth for roughly another ten years. It's hard to be certain, but it does appear that world oil production outside of OPEC may have peaked. Certainly we've seen sharp price increases in response to what is, in terms of total world oil output, a small loss of production from Venezuela. Various agency's forecasts of price stability through 2015 have already been blown out of the water.
Forecasts by the DOE's Energy Information Administration of a substantially later peak--2037, in their median and "most likely" scenario--are not as reassuring as they might be. They rest partly on optimistic USGS estimates of world oil resources, and partly on a depletion model that puts the production peak later in the life of a field than the standard Hubbert model. In the EIA model, the late production peak is followed by a much steeper decline.
Campbell's criticisms of the methodology used in developing the USGS estimates do seem at least partially valid. The USGS produced three estimates--low, median, and high--but only the low estimate is at all consistent with the recorded discovery rates in recent years. World oil discoveries peaked an 1964, and have been declining more or less steadily ever since. The USGS median and high resource estimates, however, both require rapidly increasing discovery rates.
The EIA's depletion model also seems unrealistic, at least in the sudden transition it produces between rising and sharply falling production. Anticipating this objection, the EIA includes a variant of their median case in which a "rounded peak" is introduced. It corresponds to what might be expected when producers, recognizing that a peak is approaching, postpone new drilling, in order to have more oil to sell after prices rise. That variation moves the peak seven years forward, to 2030.

I discuss factors that might influence the date of the world oil production peak in another note on this site (q.v.). The production model for an oil field is not actually as simple as what I summarized above, due to the development of various techniques for stimulating production from older wells. There is quite a bit of uncertainty as to what fraction of the "original oil in place" is economically recoverable, as a result of these techniques. Campbell believes that they mainly just accelerate the production of the fraction of oil that is recoverable, without substantially increasing that fraction. The EIA report, while not addressing that issue directly, does suggest that the difference between Campbell's and the USGS's estimates of world oil reserves are due to differing assumptions about the fraction of resources that are recoverable.

Despite the differences and controversy over the year of an oil production peak, there is no question that the "reign of conventional oil" will soon be drawing to a close. No finite resource can last very long against an exponential growth in consumption. If oil production can keep up with the current 2% rate of growth in demand, it will take only 25 years to consume as much oil again as we've consumed in all the years since the first oil well was drilled. And by 2037, when the EIA projects that oil production will peak, annual consumption will have more than doubled. At that rate, even the huge 900 billion barrels by which the optimistic USGS high estimates exceeds its median estimate only delays the production peak by ten years.

That's not to say that there isn't an immediate and practical difference to being within a few years of the world oil production peak, versus having another 25 years of cheap oil ahead of us. In the short term, the controversy surrounding the USGS oil resource estimates and the date of the oil production peak matters a great deal. It matters to the immediate future of the economy, and figures into investment decisions and the formulation of an appropriate national energy policy. At the time I write this, in early January 2003, the price of oil has been holding at just over $30 a barrel. In the news, the high price is attributed to uncertainty about the threatened US invasion of Iraq, and continued production loss from Venezuela due to political unrest. If world oil resources are really as large as the USGS estimates, then this should be a temporary situation. Oil prices should return to the $22 - $25 that is the official OPEC target (raised from the $18 per barrel that prevailed until recently). But if Campbell and his colleagues are right, and oil is really within just a few years of peaking, then the $2.00 a gallon we're expected to be paying for gasoline this spring will be only a taste of things shortly to come.

What will come after the reign of conventional oil is a wide open question, and is not addressed in the above articles. Most environmentalists hope to see the current oil economy replaced by the "hydrogen economy"--with the hydrogen, of course, produced from renewable energy resources. Conservative betting, however, would have to be that conventional oil will be first supplemented, and eventually replaced by non-conventional oil. The latter includes oil extracted from tar sands and oil shales, as well as oil synthesized from coal. World reserves of oil from oil shales and tar sands are estimated to be several times larger than total world reserves of conventional oil--although it's hard to say what the ultimate recovery fraction might be. World reserves of coal are several times higher again. Fuel synthesized from coal in the US alone could theoretically supply the world's oil needs for about two hundred years, if population stablilizes.

My own betting is that what we'll actually see for oil production won't look much like the classical model, with its single sharp peak followed by steady decline. I think we'll see at least two distinct peaks, and probably more. Enhanced oil recovery--EOR--via C02 injection will become widespread, and I think that it will increase the oil recovery factor enough to make the USGS median estimates close to correct. But I doubt that it will ramp up fast enough to avoid a near-term production peak, and a period of sharply higher oil prices. Once CO2-based EOR is widely in place, we'll see a rise in production and a drop in oil prices. After that, it's an open question whether we'll see a another production-limited peak sometime around 2040, or whether increasing energy effiiency and a switch to renewable sources will result in a demand-limited peak some time earlier.

I'd like to think it will be the latter. Check back in ten years, and we'll see.