ISIS Report 18/01/05
Oil Running Out
Industrialised countries are heavily dependent on fossil fuels,
especially oil and gas. Gas and oil together provide 70% of the energy used in
both the US and UK. But the worlds reserves are rapidly diminishing, and
they dont have to actually run out before precipitating a crisis.
Dr. Mae-Wan Ho explains
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The peak oil crisis
In 1956, a geologist with Shell Oil, M. King Hubbert, used a bell-shaped
curve to correctly predict that oil from the lower 48 states in the US would
peak around 1969, to be followed by irreversible decline. The term peak
oil has since been used to identify the point at which roughly half of
all the oil in the region has been extracted, and production would decline,
driving up the price of oil and eventually failing to meet demand.
Dr. Colin J. Campbell, who spent decades working as an international
exploration geologist for major oil companies, assembled what has become widely
recognized as the worlds leading hydrocarbon database. He is now a
trustee of the Oil Depletion Analysis Center (ODAC), a London-based charitable
organization. In his book, The Coming Oil Crisis published in 1999 and
later writings, Campbell used the same Hubbert curve to predict
that worldwide oil production would peak between 2005-10 (Fig. 1).
Figure 1. The green graph indicates the amount of oil (in
Giga-barrels per annum) discovered in the world each year. Except for two
isolated spikes in earlier years, the maximum was reached in 1965. The red
curve shows the actual amount of oil extracted each year, given the constraints
of the oil crisis in the early 1970s. This contrasts with the yellow curve, a
theoretical prediction of oil extraction if no constraints were imposed. The
lag between peak discovery and peak extraction is 40 years. The total amount of
world oil that either has been or can be extracted is 1800 Gb, of which 822 Gb
of oil have already been produced in 1999.
(From Campbell 2000)
Campbell pointed out that peak production generally lags 40 years behind
peak discovery. In the US, peak discovery was in1930 and peak production, 1972.
North Sea (UK, Norway and Denmark) oil production peaked prematurely in 2001
(from peak discovery in 1974), because advances in extraction technology
reduced the time lag to 27 years. The peak discovery of the world as a whole
was 1965, so the theoretical peak production year ought to have been 2005, but
because of the oil shocks of the 1970s, production was artificially restricted
by the OPEC quota system, so actual production has been below capacity. He
predicted therefore, that world production is on a plateau from around 1970 to
2010 and will thereafter turn downwards.
Campbell said that oil reserves have been grossly overstated by the
Organization of Petroleum Exporting Countries (OPEC, see box 1), since it was
set up, probably by countries which want to increase their extraction quota
accordingly. Oil discovery peaked in the 1960s, and since 2000, one barrel is
discovered for every four we consume. The rest of the world - apart from the
Middle East - peaked in 1997, and is therefore in terminal decline.
Non-conventional oil delays peak only a few years, but will ameliorate the
subsequent decline. Gas, which is less depleted than oil, would likely peak
OPEC Organisation of Petroleum Exporting Countries
is a collective founded in 1960 to collaborate in managing the export of their
crude oil to the rest of the world. Because of their ability to adjust
production level, they possess a great deal of influence on the price of oil.
Current members are Algeria, Ecuador, Gabon, Indonesia, Iran, Iraq, Kuwait,
Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela.
OPEC member countries produce about 41 percent of the worlds crude
oil and 15 percent of its natural gas. However, OPECs oil exports
represent about 55% of oil traded internationally. After crude oil price rose
to more than $50 per barrel in October 2004. OPEC production ceiling was
increased by 1 mb/d (million barrels a day) to 27mb/d effective from 1 November
Has world oil production peaked?
The signs are that Campbell may not be far off the mark. People like Ali
Bakhtiari, head of strategic planning at Irans National Oil Company
(NOIC), and Matthew Simmons, an energy investment banker and adviser to the
controversial Bush-Cheney energy plan, are united with Campbell in thinking
that global oil production is about to peak, which in turn will signal the
permanent end of cheap oil. When crude oil price rose above $50 per barrel in
October 2004, people are suddenly jolted into thinking that oil production may
be peaking. Worse yet, Campbells charge that the oil reserves have been
overstated also turns out to be correct.
Rapidly vanishing paper reserves
At the beginning of 2004, oil giant Royal Dutch Shell shook the world in
a series of revelations indicating that about a fourth of its oil and gas
reserves does not exist. The faked oil and gas reserves amount to some 4.5
billion barrels. At $35 per barrel as the basis for calculating Shells
"accounting errors", this yields a sum of $150 billion, compared with the total
market value of Shell shares 7 May 2004, which is 140b euros (more than $150
billion at the time)..
Shell is not alone. El Paso of Houston Texas revised its reserves down
by 43% on 31 December 2003. The company Forest Corps announced a new field of
49 million barrels, which was revised down to just 8 million a year later by
Redout Shoal in Alaska; and according to Lothar Komp, writing in the
Executive Intelligence Review, "there are many others."
He quoted energy investment banker Matthew Simmons, "We still do not
have any reliable data on (Iraqs) two great fields. The most famous one
is Kirkuk and we have no new data on that at all. It is a very old field and
the idea that suddenly Iraq can produce five or six million barrels per day is
just a joke. Its goofy."
At an international briefing in February 2004, Simmons also said, "The
US and Canadian natural gas market peaked in 2003. Russias recent oil
turn-around was totally out of the blue."
Simmons strongly questioned the amount of reserves that actually exists
in the Gulf after reviewing more than 200 technical papers written by
scientists in the Society of Petroleum Engineers. The worlds major
reserves are in a handful of oil fields within a region "slightly more than
half the size of Virginia", and "all five of these great fields have a litany
of challenges today." The evidence is that "the easy oil era in Saudi Arabia is
either nearly over or over." For example, "the ability to drill vertical wells
in Saudi Arabia has now become obsolete, and that even extended reach
horizontal wells are now being described as second generation wells
... replacing those are maximum reservoir contact wells which sometimes the
papers call bottle brush wells."
Technology just like this, said Simmons, led to a stunning production
collapse in Omans Yibal field. By 1990, vertical wells had become
obsolete. So for the first time ever horizontal drilling was introduced to the
Middle East. Production hit a brand new record of 250 000 barrels a day, but
began to decline rapidly in 1997. By 2001, Yibals production dropped
below 90 000 barrels a day, and is now somewhere between 40 000 and 50 000
barrels a day. "It caught everyone by surprise," Simmons remarked.
While Saudi Arabias national oil company Saudi Aramco claims to
have 257.5 billion barrels, its recently retired executive vice president Sadad
Al Husseini said there is in fact "130 billion barrels of proven reserves".
Since the collapse of the Soviet Union, the Russian reserve estimate has
fallen by around 30%. And as long ago as 1993, a Russian oil minister described
his country's reserves as "strongly exaggerated due to inclusion of reserves
and resources that are neither reliable nor technologically or economically
So, even though the five big Middle Eastern countries do hold around
half the worlds remaining oil, there is a great deal of uncertainty as to
how much there really is, and how long it is going to last.
Another bombshell was dropped in November 2004 by BP exploration
consultant Francis Harper, who estimated the amount of total usable oil
reserves in the world at 2.4 trillion barrels, considerably less than the 3
trillion assumed by bullish commentators such as the US governments
geological survey. He said production would peak between 2010 and 2020; and
demand will outstrip supply much earlier than other forecasts by ExxonMobil
Corp. (XOM) or Royal Dutch/Shell Group (RD SC.
Demand for oil still rising
A major contribution to the rise in demand for oil is from rapidly
growing economies like China. China forecasts the countrys crude oil
output will peak at 200 million tonnes in 2015; it reached 17m tonnes last
year, from 120 000 tonnes at the start of the communist era in 1949. But crude
oil consumption is forecast to hit 350 to 380 million tonnes as early as 2010
from a little more than 250 m tonnes last year. China is the second-largest oil
consumer after the US, and has been a net importer of oil for the past 10
More pessimistic news came from a study released in November 2004 from
ODAC. It found all major new oil-recovery projects scheduled to come on stream
over the next six years unlikely to boost supplies enough to meet worlds
ODAC analysed 68 mega projects with start-up dates from 2004 through
2010, and concluded they would add 12.5 million barrels a day to world oil
supplies by the turn of the decade.
"This new production would almost certainly not be sufficient to offset
diminishing supplies from existing sources and still meet growing global
demand," ODAC Board member Chris Skrebowski said.
More than half of the estimated new supply would simply replace
production declines elsewhere due to natural depletion. A modest one percent
annual rise in demand over the six-year period would leave little or no surplus
capacity to cushion against unforeseen disruptions in supply. If demand were to
increase by two percent annually, available supplies could fall short of the
total needed in 2010 by more than two million barrels a day roughly
equivalent to losing all of Kuwaits current daily production.
"With most producers operating flat out to meet runaway demand increases
this year, the worlds immediately available spare production capacity has
virtually disappeared," Mr Skrebowski said. "This means that significant
additional supplies in the near-to-medium term must come from new projects
already in the development pipeline."
According to data from the latest BP Statistical Review of World Energy,
18 major oil-producing countries are now past their peak production, and their
combined annual output dropped by over a million barrels a day in 2003. This
group of countries now accounts for almost 29 percent of total world
The ODAC study did not attempt to forecast when other countries would
peak and tip into decline, but experts agree that several more are likely to do
so within the next few years. Mexico and China (see above), the worlds
fifth- and sixth-largest producers respectively, appear to be among the likely
Mexicos national oil company, Pemex, has already announced that
production from Cantarell, the worlds largest offshore oil field, is
expected to peak in 2006 and then decline by 14 percent a year. China, too, has
confirmed that its two largest producing regions are now in decline. It
achieved only modest overall production growth last year of 1.5 percent.
Of the 68 confirmed projects that ODAC analysed, 56 are due to come on
stream in the next three years. Seven are scheduled to start pumping oil in
2008, three in 2009 and just two in 2010. Since it takes, on average, six years
from first discovery for a major project to start producing oil, any other new
projects approved now would be unlikely to add further supplies until after
"It is disturbing to see such a dramatic fall-off of new project
commitments after 2007, and not more than a handful of tentative projects into
the next decade," Skrebowski said.
"This could very well be a signal that world oil production is rapidly
approaching its peak, as a growing number of analysts now forecast, especially
in view of the diminishing prospects for major new oil discoveries," he