Saturday, February 12, 2011

Is Oil Output Peaking or Not? Either Way, Cheap Oil Is Gone for Good?


As investors and as drivers, most of us have an interest in the price of oil, and what it's going to do next. But if you're having trouble figuring out whether global oil production is about to peak -- an occurrence that will inevitably be followed by a surge in oil prices -- you're not alone.

Supporters and critics of the theory of peak oil, which predicts when the maximum level of global oil production will be reached and the rate of its decline afterward, are about as far apart in their assumptions and conclusions as the Union and Confederacy were in early 1861.

Wikileaks sparked a new round in the peak-oil debate this week after it released what it says are confidential cables from U.S. embassy officials that cite a senior Saudi government oil executive's 2007 conclusion that the kingdom's oil reserves may have been overstated by 300 billion barrels -- about 40%.

The executive also said Saudi Arabia wouldn't be able to increase oil production to the 12.5 million barrels per day (bpd) necessary to keep the price of crude from rising sharply. Saudi Arabia pumped an average of 9.76 million bpd in 2009, according to Central Intelligence Agency data, the second-highest rate in the world, behind Russia's 10.1 million bpd.

Pumping at Full Capacity

The question of how much spare production capacity Saudi Arabia has is critical, because it's the one nation that can increase supply by a significant amount if the world needs a lot more oil in a hurry. Nearly all other oil producers, with the exception of Iraq and a couple of others, are already pumping as much oil as their infrastructures will allow, and for good reason: With prices in the $80 to $90 per barrel range, oil is highly profitable now. Oil traded Thursday up 53 cents to $87.17 per barrel.

Previously, the general consensus was that the Saudis had about 5 million bpd in excess capacity, but the information released by Wikileaks suggests it may not even be 2.5 million bpd. If that was proven to be true, it would put upward pressure on the price of crude in today's oil-hungry world.

And that the world is growing more oil-hungry is the one agreed-upon fact in the peak-oil debate. Analysts on both sides concur that global oil demand will rise from about 89 million bpd in 2011 to between 100 million and 105 million bpd in 2030, thanks to robust growth in emerging markets, particularly in China and India. However, beyond demand, peak oil's supporters and critics differ widely on how high the global oil supply can go, and the amount of oil that can be profitably extracted from the ground.

Super-Giant Fields Are Draining Quickly

James Schlesinger, a secretary of energy during the Carter administration and a director of the CIA under President Nixon, suggested during a November 2010 speech at the Association for the Study of Peak Oil and Gas that the peak-oil debate is over.

Schlesinger points out that the world is excessively dependent on the giant, conventional oil fields discovered in the 1950s and 1960s, and production at the old super-giant fields like Burgan in Kuwait and Cantarell in Mexico started to decline sooner than forecast. Conventional fields in the key oil-producing regions of Alaska, the North Sea and Western Siberia are also in decline, he said.

While it is not yet "Twilight in the Desert," he said -- referring to the book by the late energy analyst Matthew Simmons, who calculated that Saudi and global oil production would peak this decade -- "we are well into the afternoon." Schlesinger added that "even the Ghawar oil field [the world's largest] is increasingly hard to sustain."

Also, despite a demand-driven price spike since 2004, oil production in 2010 was about the same as it was in 2004, Schlesinger said. Normally, such a large rise in prices would result in a large amount of additional oil produced. That didn't happen.

Finally, given a 4% to 6% production decline from aging conventional oil fields, the world will need the equivalent of five, new Saudi Arabias -- or about 50 million bpd from new oil sources -- to meet demand in 25 years.

For Schlesinger, it's clear: Peak oil is here, and the data he presents are enough to make you want to move closer to a mass-transit system.

Improved Drilling Technology Could Save the Day

Planning such move seems somewhat urgent -- until one reviews the work of energy analyst Raymond J. Learsy, a member of the Woodrow Wilson International Center for Scholars, also an author and former commodities trader.

In a HuffingtonPost column, Learsy says the figures on 2007 oil reserves cited by the Saudi source in the WikiLeaks story imply that only 51% of Saudi reserves are recoverable. "That was then, this is now," Learsy wrote. "In the more than three years since, there has been a time warp in the application of new oil drilling technology."

Thanks to these development, shale natural gas has been accessed, and natural gas reserves in the U.S. have increased fivefold in the past five years alone, Learsy said.

Those new drilling techniques are being applied to oil fields, too. The unconventional field in North Dakota and Montana known as the Bakken Formation will be producing millions of barrels per day in the years ahead, Learsy said. He added that the Saudis have a vested interest in perpetuating "the perception of shortage" and the myth of their inability to meet demand because it supports oil's high price, "thereby rationalizing ever-steepening prices and massive profits to the OPEC cartel and their oil industry allies."

Tapping New Sources

"Such is the oil information we are fed by the oil industry, a somnolent press and passive government agencies, all trying to make us feel better while we pay exorbitant rent for what we have foolishly let become a basic economic necessity," Learsy wrote.

The Bakken Formation holds 3 billion to 4.3 billion barrels of undiscovered, technically recoverable oil, according to a 2008 U.S. Geological Survey study. Still, barring a substantial, upward revision in its reserves, Bakken will increase the daily global oil supply only modestly.

However, another unconventional field in North America is capable of substantially increasing that supply. Canada's Athabasca oil sands region contains about 1.7 trillion barrels of oil, with at least 170 billion barrels considered to be profitably recoverable at 2006 oil prices (about $65 per barrel). Currently supplying about 1.3 million bpd, the Athabasca region could produce up to 4.1 million bpd by 2020, according to the Canadian Association of Petroleum Producers.

The World Energy Council estimates the total global oil sands reserves at about 2.65 trillion barrels.

Era of Cheap Oil Is Over

Depending on which analysis is correct, peak oil is either close at hand or several decades away. Either production from unconventional oil fields won't be able to ramp up fast enough to replace declining production at aging conventional oil fields or new drilling technology will increase output at many conventional fields and add vast new supplies from unconventional fields, pushing the day of reckoning further into the future.

Either way, barring another long global recession, one thing at least is certain: The era of cheap oil is over. It's highly unlikely that the U.S. will ever see $1.50-a-gallon gasoline again. Indeed, if global oil demand continues to climb, the current $3.11 per gallon average U.S. price for regular unleaded may look cheap in a few years.

That's enough to make many Americans consider more efficient vehicles and other ways to save on transportation costs, whether the peak is imminent or not.

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