When the Oil Age Ends

The large oil fields are getting old with no comparable replacements in sight. Even the oil industry is openly worrying about future production levels. Meanwhile, the price continues to increase, now up to $135.

Just about all oil industry managers, government representatives, analysts, and advisors are now dismissing the Peak Oil Theory. This theory is based on the work of the Shell geologist Marion King Hubbert, who predicted that oil production is now almost at its maximum. Opponents of the Peak Oil Theory argue that it would be mistaken to dismiss the introduction of advanced drilling technology into established and older oil fields as being too insignificant to have any value in influencing market forces.

But on Wednesday, the price for one barrel (159 liters) of oil increased to more than $135. This is an increase of more than 1000 percent over the past decade. Fear of the end of the Hydrocarbon Era has now reached the general public. Today many industry representatives concede that supply shortages are driving the price of oil as much as the strongly increasing demand. Analysts from Goldman Sachs still even consider it possible that the 159 liter barrel of crude oil will cost $200 before the end of the decade.

Are not the supporters of the Peak Oil Theory also right? The most recent developments suggest that they are correct. In April, Russian output fell for the first time in 10 years. Just five years after it was reporting annual increases of 12 percent, Russia announced a half percent drop in output. Lukoil Chairman Leonid Fedun even said that Russia’s oil production has probably passed its peak.

Just a few days later, Saudi Arabia confirmed that plans for an increase in production have been put on hold. The Saudi Arabian Energy Minister Ali Naimi said that current forecasts would not justify an increase in output capacity beyond the planned amount anyway. This contradicts most other predictions and raises questions about whether Saudi Arabia, the world’s largest oil producer, really wants to increase production and whether its reserves are really running out, after 75 years of pumping.

Saudi Arabia is stuck in a dilemma. The kingdom’s recent announcement of a slight increase in production barely had an effect on the price because every increase in production only uses up the reserves faster. What makes this situation even more complicated is that Saudi Arabia’s oil industry shuns publicity. The capital city, Riyadh, is isolated to such an extent that analysts from the financial services provider Sanford Bernstein have tried to get glimpses of it from satellite photographs. They supervised the country’s drilling activities in the Ghawar oil field for nine months this way. These analysts came to the conclusion that Saudi Arabia is having some unexpected struggles in recovering additional oil from the northern part of the world’s largest oil field.

The well-known oil industry analyst and investment banker Matthew Simmons believes Riyadh’s announcement about not ramping up production to be additional proof that the kingdom is struggling with declining reserves. In his book, ”Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy,” Simmons goes a long way toward sowing serious doubts about the future reliability of Saudi Arabia’s oil supply. After examining 200 technical reports, Simmons came to the conclusion that the kingdom’s oil fields are becoming more difficult to tap and are being depleted more rapidly than the sheikhs have been ready to admit up to now.

Simmons says that the world is depending on a few gigantic, old, and dwindling oil fields. Since the 1970’s, next to nothing has been discovered which can begin to compare with these established oil fields. One-fifth of the oil consumed today originates from one field which is over 40 years old. No field discovered in the past 30 years produces more than one million barrels per day. Furthermore, the sizes of these “newer” fields have dramatically decreased.

As these oil fields age, production decreases, and sometimes dramatically so. An example of this is Mexico’s Cantarell Field, one of the world’s four largest oil fields. After its discovery in 1976 by a fisherman, over two million barrels per day were pumped during peak production. Today, daily production is only half that and continues to drop at a rate of around 24% per year. Similar trends, if not as dramatic, are to be found in almost all oil fields around the world, probably including the world’s three other largest oil fields: Saudi Arabia’s Ghawar, Kuwait’s Burgan, and China’s Daqing. Every year up to two-thirds of the newer production is being used to offset the loss of production in the aging oil fields.

Shell geologist M. King Hubbert correctly predicted in 1956 that production in the United States would reach its maximum between 1965 and 1970. Later predictions have proven to be less reliable. The Hubbert curve indicates that the production level of a limited natural resource follows a bell-shaped pattern. Once peak production passes, there will be threats of economic upheavals and a quick return to the time before the Industrial Revolution.

Worries about the future petroleum supply, in the meantime, have also reached the senior leadership in the oil industry. Both ConocoPhillips Chairman James Mulva and Total CEO Christophe de Margarie have recently said that, in their estimation, global production will never surpass more than 100 million barrels per day. However, according to the International Energy Agency (IEA), the world will need that much oil in just seven years, and another 16 million barrels per day by the year 2030.

Mulva and de Margarie certainly would not want to be viewed as supporters of the Peak Oil Theory. However, more and more industry managers and ministers like them support the assessment that the world is running out of easily accessible oil and that political obstacles are keeping companies away from going after the estimated global reserves of 2400 to 4400 billion barrels.

The oil industry is not preparing itself for a future date when the oil is finally gone once and for all, but rather is using new technologies to utilize old oil fields more efficiently and to tap less readily accessible oil. It is also supporting a somewhat less wasteful approach when dealing with this natural resource.

Oil industry managers acknowledge that the fields of industrialized nations, for example, in Alaska and the North Sea, are now at their peak levels of production. However, according to their assessment, unconventional fields such as the tar sands in the Venezuelan Orinoco Oil Belt and the oil shale deposits in the Canadian province of Alberta contain more petroleum than Saudi Arabia. The Arctic also probably harbors immense quantities of oil. China’s new love with the automobile, according to industry insiders, can eventually be met with alternative fuels obtained from natural gas, coal, corn, sugar cane, algae, or turkey entrails.

The largest oil field lies beneath Detroit, says Joseph Stanislaw, a consultant with Deloitte Consulting. He is alluding, with this comment, to the millions of barrels of oil which can be saved each day if Americans would switch over to more environmentally friendly automobiles.

Peter Jackson, from Cambridge Energy Research Associates (CERA), says this implies that global production will “follow an undulating plateau for one or more decades before declining slowly.” The consulting firm does not anticipate a drop in global production capabilities before the year 2030 and, for this reason, provides one of the most positive predictions.

CERA acknowledges, however, that easing up is not a wise course of action. Saudi Arabia’s remaining reserves are not as abundant as they have been for several years. They only amount to two or three million barrels per day because of the great demand for oil by China and other countries. The Saudi reserves cannot compensate for large losses in production, which is an important factor in driving oil prices higher.

Long term alternatives to potential sources of oil outside Saudi Arabia have their own separate problems. The recovery of oil from the oil shale deposits in Alberta would be a very large and dirty undertaking, requiring immense amounts of energy and water. And thanks to Venezuela’s populist President Hugo Chávez, hardly any foreign oil company is willing to take a chance on investing billions of dollars or Euros into the development of the fields in the Orinoco Oil Belt. Furthermore, the technology for tapping oil deposits in the Arctic has yet to be invented. As far as the alternative energy sources are concerned, solar power, wind, and biofuels from, for example, turkey entrails will play only a secondary role in the energy mix, according to the predictions of their most optimistic proponents.

Even if all decisions to increase the percentage of renewable energy sources were implemented starting tomorrow and all oil conservation measures were observed, OPEC would still have to increase daily production by 11.5 million barrels by 2030, according to the IEA. The bulk of this oil must come from Saudi Arabia.

This projected 11.5 million barrel increase is over 50% more than the increase in daily oil production which OPEC achieved between 1980 and 2006. A looming shortage of the oil industry’s skilled employees, who now average almost 50 years of age, and bottlenecks with the supply of steel and other important material can be expected to complicate this situation even further.

What will happen when politics, an aging workforce, and material shortages come together and Saudi Arabia cannot or will not step in as the savior? Will the advocates of the “Peak Oil” Theory be proven right, even if for the wrong reasons?

That depends on the ability of the market to make corrections. The worst case scenario, for the optimists, involves high oil prices dampening the demand, thereby giving companies the opportunity to devise new methods for the production and conservation of energy.

There is already a decline in the rate of growth of oil consumption in the United States and other industrial nations. This could make it possible for the emerging countries to call for further production increases, according to Sanford Bernstein analyst, Neil McMahon. With an annual global economic growth rate of 3.5%, McMahon says that the overall demand for oil would practically remain unchanged in such a situation.

The Energy Information Administration (EIA), an agency within the U.S. Department of Energy which publishes energy data statistics, forecasts, and analyses for sound policy making and public understanding, predicts that the United States will slightly cut back its importation of crude oil and petroleum products over the next 22 years. As a consequence, the dependence of the world’s largest oil consumer on imports would decrease from 60 percent to 50 percent by 2015 and then increase again to 54 percent by 2030. As reasons for the decline, the EIA cites reduced fuel consumption by automobiles, a lower demand for oil, an increase in oil production in the Gulf of Mexico, and more utilization of biofuels.

The pessimists’ scenarios include severe and widespread economic downturns, in which the developing countries will be brought to their knees by the pressure of having to subsidize their citizens’ increasing fuel and food costs. Geologist and author Jeremy Leggett paints probably the darkest picture in his book “Half Gone: Oil, Gas, Hot Air and the Global Energy Crisis.” He says “home prices will collapse, the stock markets will take a hit, and companies will go bankrupt. First, hundreds of thousands and then millions of workers will lose their jobs. In previously affluent communities, lines of panhandlers will form in front of soup kitchens and city streets once known for their cafés will be full of beggars.”