Oil and Gas in the Capitals

 Vol. 233 No. 5

“Peak oil” is a concept that, in barely a decade, has gone from total obscurity to being a hot-button issue, rivaling global warming and sustainability. It is almost universally misunderstood and often misinterpreted. On one hand, many peak oil advocates are ideological extremists—Armageddonist back-to-nature types who seem to feel that living without oil is preferable (“life in the 15th century was really great”). On the other hand, the Pollyannas say, “not to worry,” since the world has an endless supply of affordable oil available for centuries.

It is thus refreshing to find a comprehensive, peak oil analysis that relies on rigorous scientific methods and empirical data. The just-published book, Peeking at Peak Oil, by Dr. Kjell Aleklett of Uppsala University in Sweden. Dr. Aleklett, a physicist, is a leading expert, and this book should be required reading for anyone seriously interested in the future world energy market and economy, especially politicians and policymakers.

Definitions. Peak oil does not imply that we are “running out of oil.” Rather, notes Dr. Aleklett, the term refers to the maximum oil production rate in any area, recognizing that it is a finite natural resource, subject to depletion. Further, it refers to conventional petroleum, which the USGS defines as “discrete fields with well-defined hydrocarbon-water contacts, where the hydrocarbons are buoyant on a column of water.” It is production of this conventional oil that has peaked and is on a plateau.

However, as many point out, the world is literally awash in hydrocarbons. So, what is the concern about future oil supply adequacy? Here, Dr. Aleklett’s work yields its greatest contribution. There is, indeed, no global hydrocarbon shortage, but the critical issue is whether liquid fuels derived from unconventional resources can be produced at rates, quantities and prices that can compensate for the inevitable decline of conventional oil output. Aleklett’s analysis is meticulous, his results are convincing, and the implications are sobering.

World conventional oil production is on an 82-million-bpd plateau. However, the real sleeper is the production decline rate in existing fields, about 4% to 6% annually. Thus, the total flow of oil from existing fields is decreasing about 4 million bpd every year, and new oil production—conventional and unconventional—must total at least this amount just to maintain current consumption.

It is a race between declining conventional oil and increasing unconventional oil. Can unconventional liquid fuels fill this gap soon? Aleklett’s work is enlightening. He uses the standard IEA definitions of “unconventional”: Bitumen and extra heavy oil from Canada’s oil sands, extra heavy oil from Venezuela’s Orinoco belt, oil produced from shale, coal-to-liquids, gas-to-liquids, ”refinery additives,” etc. 

Potential for increase. After a painstaking, detailed analysis, he concludes that the maximum, incremental production increase from all unconventional sources, combined, is about 8 million bpd during the next 25 years. Since the total flow from fields already producing is decreasing 4 million bopd every year, unconventional output gains during the next 25 years can only compensate for a two-year decline in conventional production. More importantly, even if he has underestimated the possible, unconventional oil increases by 100%, this would still only compensate for four years of decline. 

There is further concern. Aleklett and other analysts estimate that worldwide conventional oil production could begin declining within five years. Unconventional oil is expensive to develop and has long lead times. For example, Canada produces about 1.7 million bopd from oil sands, but it has taken the Canadians 40 years to achieve this output level. Thus, even if money was no object, and environmental and institutional constraints were minimal, there simply may not be enough time to develop sufficient, unconventional oil flows.

While oil demand is flat or declining in most OECD nations, total world oil demand is still increasing every year, driven by China, India and the rest of the world. One does not need a Ph.D. in economics to recognize that continually increasing oil demand, combined with flat or even decreasing supply, is a recipe for higher prices, price volatility and never-ending crises. This is the problem facing the world in the near future. And, yes, the world may be awash in hydrocarbon resources, but none can quickly replace the reliable conventional oil.

If Dr. Aleklett’s book only brought this stark reality into focus, it would be a valuable contribution. However, the book also contains a wealth of information on oil geology basics, oil production technologies, the distinction of oil field sizes, deepwater drilling, oil exports and consumption. This book has enough to interest both novices and oil industry veterans.

I do take issue with some material. His blanket acceptance of IPCC (Intergovernmental Panel on Climate Change) pronouncements on global warming is troubling. His proposed “Uppsala Protocol” for rationing available oil supplies is almost certainly unworkable.

However, this book’s biggest problem is implicit. Dr. Aleklett is a natural scientist, as are virtually all peak oil luminaries, and he has numerous references to “flat earth economists” throughout the book. Accordingly, he may not fully appreciate the determinate role of supply, demand and prices in driving markets, policies, technologies and resources.

Thus, world energy markets and economies may be in for a rough period ahead, as conventional and unconventional oil supplies fail to keep pace with world demand. To deny this is to ignore reality.