The End Of Cheap Oil

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The End of Cheap OilGlobal production of conventional oil will begin to declinesooner than most people think, probably within 10 yearsby Colin J. Campbell and Jean H. LaherrèreIn 1973 and 1979 a pair of suddenprice increases rudely awakened theindustrial world to its dependence oncheap crude oil. Prices first tripled in response to an Arab embargo and thennearly doubled again when Iran dethroned its Shah, sending the majoreconomies sputtering into recession.Many analysts warned that these crisesproved that the world would soon runout of oil. Yet they were wrong.Their dire predictions were emotional and political reactions; even at thetime, oil experts knew that they had noscientific basis. Just a few years earlieroil explorers had discovered enormousnew oil provinces on the north slope ofAlaska and below the North Sea off thecoast of Europe. By 1973 the world hadconsumed, according to many experts’best estimates, only about one eighth ofits endowment of readily accessible crudeoil (so-called conventional oil). The fiveMiddle Eastern members of the Organization of Petroleum Exporting Countries (OPEC) were able to hike pricesnot because oil was growing scarce butbecause they had managed to corner 36percent of the market. Later, when demand sagged, and the flow of freshAlaskan and North Sea oil weakenedOPEC’s economic stranglehold, pricescollapsed.The next oil crunch will not be sotemporary. Our analysis of the discovery and production of oil fields aroundthe world suggests that within the nextdecade, the supply of conventional oilwill be unable to keep up with demand.This conclusion contradicts the pictureone gets from oil industry reports, whichboasted of 1,020 billion barrels of oil(Gbo) in “proved” reserves at the startof 1998. Dividing that figure by thecurrent production rate of about 23.6Gbo a year might suggest that crude oilcould remain plentiful and cheap for 43more years—probably longer, becauseofficial charts show reserves growing.Unfortunately, this appraisal makesthree critical errors. First, it relies on distorted estimates of reserves. A secondmistake is to pretend that productionwill remain constant. Third and mostimportant, conventional wisdom erroneously assumes that the last bucket ofoil can be pumped from the ground justas quickly as the barrels of oil gushingfrom wells today. In fact, the rate atwhich any well—or any country—canproduce oil always rises to a maximumand then, when about half the oil is gone,begins falling gradually back to zero.From an economic perspective, whenthe world runs completely out of oil isthus not directly relevant: what mattersis when production begins to taper off.Beyond that point, prices will rise unless demand declines commensurately.HISTORY OF OIL PRODUCTION, from the first commercial American well inTitusville, Pa. (left), to derricks bristling above the Los Angeles basin (below), began with steady growth in the U.S. (red line). But domestic production began todecline after 1970, and restrictions in the flow of Middle Eastern oil in 1973 and1979 led to inflation and shortages (near and center right). More recently, thePersian Gulf War, with its burning oil fields (far right), reminded the industrialworld of its dependence on Middle Eastern oil production (gray entific American March 1998Copyright 1998 Scientific American, Inc.The End of Cheap Oil

Digging for the True Numberse have spent most of our careersexploring for oil, studying reservefigures and estimating the amount of oilleft to discover, first while employed atmajor oil companies and later as independent consultants. Over the years,we have come to appreciate that the relevant statistics are far more complicated than they first appear.Consider, for example, three vitalnumbers needed to project future oilproduction. The first is the tally of howmuch oil has been extracted to date, afigure known as cumulative production.The second is an estimate of reserves,the amount that companies can pumpout of known oil fields before having toabandon them. Finally, one must havean educated guess at the quantity ofconventional oil that remains to be discovered and exploited. Together theyadd up to ultimate recovery, the totalnumber of barrels that will have beenextracted when production ceases manydecades from now.The obvious way to gather these numbers is to look them up in any of severalpublications. That approach works wellenough for cumulative production sta-Wtistics because companies meter the oilIn practice, companies and countriesas it flows from their wells. The record are often deliberately vague about theof production is not perfect (for exam- likelihood of the reserves they report,ple, the two billion barrels of Kuwaiti preferring instead to publicize whichevoil wastefully burned by Iraq in 1991 is er figure, within a P10 to P90 range,usually not included in official statistics), best suits them. Exaggerated estimatesbut errors are relatively easy to spot can, for instance, raise the price of anand rectify. Most experts agree that the oil company’s stock.industry had removed just over 800The members of OPEC have faced anGbo from the earth at the end of 1997. even greater temptation to inflate theirGetting good estimates of reserves is reports because the higher their reserves,much harder, however. Almost all the the more oil they are allowed to export.publicly available statistics are taken National companies, which have exclufrom surveys conducted by the Oil and sive oil rights in the main OPEC counGas Journal and World Oil. Each year tries, need not (and do not) release dethese two trade journals query oil firms tailed statistics on each field that couldand governments around the world. be used to verify the country’s total reThey then publish whatever production serves. There is thus good reason to susand reserve numbers they receive but pect that when, during the late 1980s,are not able to verify them.six of the 11 OPEC nations increasedThe results, which are often accepted their reserve figures by colossal amounts,uncritically, contain systematic errors. ranging from 42 to 197 percent, theyFor one, many of the reported figures did so only to boost their export quotas.are unrealistic. Estimating reserves is anPrevious OPEC estimates, inheritedinexact science to begin with, so petro- from private companies before governleum engineers assign a probability to ments took them over, had probablytheir assessments. For example, if, as been conservative, P90 numbers. Sogeologists estimate, there is a 90 percent some upward revision was warranted.chance that the Oseberg field in Norway But no major new discoveries or techcontains 700 million barrels of recovernological breakthroughs justiable oil but only a 10 percentfied the addition of a stagchance that it will yield 2,500 milgering 287 Gbo. That inlion more barrels, then the lowercrease is more than allfigure should be cited as the sothe oil ever discoveredcalled P90 estimate (P90 forin the U.S.—plus 40percent. Non-OPEC“probability 90 percent”) andcountries, of course,the higher as the P10 reserves.197319791973OIL PRODUCTIONIN THE PERSIAN GULFThe End of Cheap OilUPI/CORBIS-BETTMANNOIL PRODUCTIONIN THE U.S.AND CANADA1979Copyright 1998 Scientific American, Inc.BRUNO BARBEY Magnum PhotosUPI/CORBIS-BETTMANN19911991Scientific American March 199879JENNIFER C. CHRISTIANSEN; SOURCE: JEAN H. LAHERRÈREUsing several different techniques to estimate the current reserves of conventional oil and the amount still left to bediscovered, we conclude that the decline will begin before 2010.

are not above fudging their numbers either: 59 nations stated in 1997 that theirreserves were unchanged from 1996.Because reserves naturally drop as oldfields are drained and jump when newfields are discovered, perfectly stablenumbers year after year are implausible.Unproved Reservesnother source of systematic error inthe commonly accepted statistics isthat the definition of reserves varieswidely from region to region. In theU.S., the Securities and Exchange Commission allows companies to call reserves “proved” only if the oil lies neara producing well and there is “reasonable certainty” that it can be recoveredprofitably at current oil prices, usingexisting technology. So a proved reserveestimate in the U.S. is roughly equal toa P90 estimate.Regulators in most other countries donot enforce particular oil-reserve definitions. For many years, the former Sovietcountries have routinely released wildlyoptimistic figures—essentially P10 reserves. Yet analysts have often misinterpreted these as estimates of “proved”reserves. World Oil reckoned reservesin the former Soviet Union amountedto 190 Gbo in 1996, whereas the Oiland Gas Journal put the number at 57Gbo. This large discrepancy shows justhow elastic these numbers can be.Using only P90 estimates is not theAanswer, because adding what is 90 percent likely for each field, as is done inthe U.S., does not in fact yield what is90 percent likely for a country or the entire planet. On the contrary, summingmany P90 reserve estimates always understates the amount of proved oil in aregion. The only correct way to totalup reserve numbers is to add the mean,or average, estimates of oil in each field.In practice, the median estimate, oftencalled “proved and probable,” or P50reserves, is more widely used and is goodenough. The P50 value is the number ofbarrels of oil that are as likely as not tocome out of a well during its lifetime,assuming prices remain within a limitedrange. Errors in P50 estimates tend tocancel one another out.We were able to work around manyof the problems plaguing estimates ofconventional reserves by using a largebody of statistics maintained by Petroconsultants in Geneva. This information, assembled over 40 years from myriad sources, covers some 18,000 oil fieldsworldwide. It, too, contains some dubious reports, but we did our best to correct these sporadic errors.According to our calculations, theworld had at the end of 1996 approximately 850 Gbo of conventional oil inP50 reserves—substantially less thanthe 1,019 Gbo reported in the Oil andGas Journal and the 1,160 Gbo estimated by World Oil. The difference isactually greater than it appears becauseEARTH’S CONVENTIONAL CRUDE OIL is almost half gone.Reserves (defined here as the amount as likely as not to come8000YEARSour value represents the amount mostlikely to come out of known oil fields,whereas the larger number is supposedlya cautious estimate of proved reserves.For the purposes of calculating whenoil production will crest, even more critical than the size of the world’s reservesis the size of ultimate recovery—all thecheap oil there is to be had. In order toestimate that, we need to know whether, and how fast, reserves are moving upor down. It is here that the official statistics become dangerously misleading.Diminishing Returnsccording to most accounts, worldoil reserves have marched steadilyupward over the past 20 years. Extending that apparent trend into the future,one could easily conclude, as the U.S.Energy Information Administration has,that oil production will continue to riseunhindered for decades to come, increasing almost two thirds by 2020.Such growth is an illusion. About 80percent of the oil produced today flowsfrom fields that were found before 1973,and the great majority of them are declining. In the 1990s oil companies havediscovered an average of seven Gbo ayear; last year they drained more thanthree times as much. Yet official figuresindicated that proved reserves did notfall by 16 Gbo, as one would expect—rather they expanded by 11 Gbo. Onereason is that several dozen governmentsAout of known fields) and future discoveries together will providelittle more than what has already been burned.RESERVES:850 BILLION BARRELSScientific American March 1998Copyright 1998 Scientific American, Inc.JENNIFER C. CHRISTIANSEN; LAURIE GRACEINDIVIDUALWELLSLAURIE GRACEUNDISCOVERED:150 BILLION BARRELSTOTAL FORENTIRE REGIONANNUAL OIL PRODUCTION(INCREASING YIELD)COURTESY OF THE SOCIETY OF EXPLORATION GEOPHYSICISTSFLOW OF OIL starts to fallfrom any large region whenabout half the crude is gone.Adding the output of fields ofvarious sizes and ages (greencurves at right) usually yieldsa bell-shaped production curvefor the region as a whole. M.King Hubbert (left), a geologist with Shell Oil, exploitedthis fact in 1956 to predict correctly that oil from the lower48 American states would peakaround 1969.The End of Cheap Oil40

opted not to report declines in their reserves, perhaps to enhance their politicalcachet and their ability to obtain loans.A more important cause of the expansion lies in revisions: oil companies replaced earlier estimates of the reservesleft in many fields with higher numbers.For most purposes, such amendmentsare harmless, but they seriously distortforecasts extrapolated from publishedreports.To judge accurately how much oil explorers will uncover in the future, onehas to backdate every revision to theyear in which the field was first discovered—not to the year in which a company or country corrected an earlier estimate. Doing so reveals that global discovery peaked in the early 1960s andhas been falling steadily ever since. Byextending the trend to zero, we canmake a good guess at how much oil theindustry will ultimately find.We have used other methods to estimate the ultimate recovery of conventional oil for each country [see box onnext two pages], and we calculate thatthe oil industry will be able to recoveronly about another 1,000 billion barrels of conventional oil. This number,though great, is little more than the 800billion barrels that have already beenextracted.It is important to realize that spending more money on oil exploration willnot change this situation. After the priceof crude hit all-time highs in the early1980s, explorers developed new technology for finding and recovering oil,and they scoured the world for newfields. They found few: the discovery30LAURIE GRACE; SOURCE: JEAN H. LAHERRÈREANNUAL OIL PRODUCTION (BILLIONS OF BARRELSGLOBAL PRODUCTION OF OIL, bothconventional and unconventional (red),recovered after falling in 1973 and 1979.But a more permanent decline is less than10 years away, according to the authors’model, based in part on multiple Hubbertcurves (lighter lines). U.S. and Canadianoil (brown) topped out in 1972; production in the former Soviet Union (yellow)has fallen 45 percent since 1987. A crest inthe oil produced outside the Persian Gulfregion (purple) now appears imminent.WORLDWORLD OUTSIDE PERSIAN GULFPERSIAN GULFU.S. AND CANADAFORMER SOVIET UNIONU.K. AND NORWAY2520151050193019401950196019701980rate continued its decline uninterrupted. There is only so much crude oil inthe world, and the industry has foundabout 90 percent of it.Predicting the Inevitableredicting when oil production willstop rising is relatively straightforward once one has a good estimate ofhow much oil there is left to produce.We simply apply a refinement of a technique first published in 1956 by M.King Hubbert. Hubbert observed thatin any large region, unrestrained extraction of a finite resource rises along a bellshaped curve that peaks when abouthalf the resource is gone. To demonstrate his theory, Hubbert fitted a bellcurve to production statistics and projected that crude oil production in thelower 48 U.S. states would rise for 13more years, then crest in 1969, give ortake a year. He was right: productionpeaked in 1970 and has continued tofollow Hubbert curves with only minordeviations. The flow of oil from severalother regions, such as the former SovietUnion and the collection of all oil producers outside the Middle East, also follows Hubbert curves quite faithfully.The global picture is more complicated, because the Middle East members ofOPEC deliberately reined back their oilexports in the 1970s, while other na-P199020002010202020302040 2050tions continued producing at full capacity. Our analysis reveals that a numberof the largest producers, including Norway and the U.K., will reach their peaksaround the turn of the millennium unless they sharply curtail production. By2002 or so the world will rely on Middle East nations, particularly five nearthe Persian Gulf (Iran, Iraq, Kuwait,Saudi Arabia and the United Arab Emirates), to fill in the gap between dwindling supply and growing demand. Butonce approximately 900 Gbo have beenconsumed, production must soon beginto fall. Barring a global recession, itseems most likely that world production of conventional oil will peak during the first decade of the 21st century.Perhaps surprisingly, that predictiondoes not shift much even if our estimates are a few hundred billion barrelshigh or low. Craig Bond Hatfield of theUniversity of Toledo, for example, hasconducted his own analysis based on a1991 estimate by the U.S. GeologicalSurvey of 1,550 Gbo remaining—55percent higher than our figure. Yet hesimilarly concludes that the world willhit maximum oil production within thenext 15 years. John D. Edwards of theUniversity of Colorado published lastAugust one of the most optimistic recent estimates of oil remaining: 2,036Gbo. (Edwards concedes that the industry has only a 5 percent chance of at-PRODUCED:800 BILLION BARRELSThe End of Cheap OilCopyright 1998 Scientific American, Inc.Scientific American March 199881

e combined several techniques to conclude that about1,000 billion barrels of conventional oil remain to beproduced. First, we extrapolated published production figuresfor older oil fields that have begun to decline. The Thistle field50403020100050 100 150 200 250 300 350 400 450 500OIL PRODUCED TO DATE (MILLIONS OF BARRELS)taining that very high goal.) Even so,his calculations suggest that conventional oil will top out in 2020.Smoothing the Peakactors other than major economicchanges could speed or delay thepoint at which oil production begins todecline. Three in particular have oftenled economists and academic geologiststo dismiss concerns about future oilproduction with naive optimism.First, some argue, huge deposits of oilmay lie undetected in far-off corners ofthe globe. In fact, that is very unlikely.Exploration has pushed the frontiersback so far that only extremely deep water and polar regions remain to be fullytested, and even their prospects are nowreasonably well understood. Theoretical advances in geochemistry and geophysics have made it possible to mapproductive and prospective fields withimpressive accuracy. As a result, largetracts can be condemned as barren.Much of the deepwater realm, for example, has been shown to be absolutelynonprospective for geologic reasons.What about the much touted Caspian Sea deposits? Our models projectthat oil production from that regionwill grow until around 2010. We agreewith analysts at the USGS World Oil Assessment program and elsewhere whorank the total resources there as roughlyequivalent to those of the North Sea—that is, perhaps 50 Gbo but certainly notseveral hundreds of billions as sometimes reported in the media.A second common rejoinder is thatF82Scientific American March 1998.from the diminishing returns on exploration in larger regions.b300FORMERSOVIET LLIMIT10,00015,00020,000CUMULATIVE NUMBER OF EXPLORATORY WELLSnew technologies have steadily increasedLast, economists like to point out thatthe fraction of oil that can be recovered the world contains enormous caches offrom fields in a basin—the so-called re- unconventional oil that can substitutecovery factor. In the 1960s oil compa- for crude oil as soon as the price risesnies assumed as a rule of thumb that high enough to make them profitable.only 30 percent of the oil in a field was There is no question that the resourcestypically recoverable; now they bank are ample: the Orinoco oil belt in Veneon an average of 40 or 50 percent. That zuela has been assessed to contain aprogress

78 Scientific American March 1998 The End of Cheap Oil The End of Cheap Oil . serves “proved” only if the oil lies near a producing well and there is “reason- . many P90 reserve estimates always un - derstates the amount of proved oil in a region. The only correct way to total

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