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Peak oil: A turning point for humankind
by Colin J. Campbell
The fundamental driver of the 20th Centuryís economic
prosperity has been an abundant supply of cheap oil. At first, it came largely
from the United States as it opened up its extensive territories with dynamic
capitalism and technological prowess. But U.S. discovery peaked around 1930,
which inevitably led to a corresponding peak in production some forty years
later.
The focus of supply then shifted to the Middle East, as its
vast resources were tapped by the international companies. They however soon
lost their control in a series of expropriations as the host governments sought
a greater share of the proceeds. In 1973, some Middle East governments used
their control of oil as a weapon in their conflict with Israelís occupation of
Palestine, giving rise to the First Oil Shock that rocked the world.
The international companies, anticipating these pressures,
had successfully diversified their supply before the shock, bringing in new
productive provinces in Alaska, the North Sea, Africa and elsewhere. These
deposits were more difficult and costly to exploit, but production was rapidly
stepped up when control of the traditional sources was lost. In part that was
made possible by great technological advances in everything from seismic surveys
to drilling. Geochemistry and better geological understanding made it possible
to identify the productive trends, once the essential data had been gathered.
The new knowledge showed both where oil was and where it was not, reducing the
scope for good surprises.
The industry found and produced the expensive and difficult
oil from the new provinces at the maximum rate possible, leaving the control of
the abundant, cheap and easy oil in the hands of the Middle East OPEC countries.
The latter were accordingly forced into a swing role, making up the difference
between world demand and what the other countries could produce. It was contrary
to normal economic practice and concealed the gradual impact of depletion,
growing shortage and rising cost, which would otherwise have alerted us to what
was happening.
But these new provinces faced the same depletion pattern that
had already been demonstrated in the United States. The larger fields, which are
found and exploited first, gave a natural discovery peak. Advances in technology
and operating efficiency also reduced the time-lag from discovery to the
corresponding production peaks. Whereas it took the United States forty years,
the North Sea, which is now at peak, did it in just twenty-seven.
As discovery in the accessible areas dwindled to about
one-quarter of consumption, the industry, which fully appreciated this obvious
link between discovery and production, turned its attention to the last
remaining frontier, namely the ocean depths. It is axiomatic that no one would
look for oil in 6000 feet of water if there were anywhere else easier left. The
deepwater domain is also subject to depletion with an even shorter time-lag
between the peaks of discovery and production. Although much of the ocean is
deep, only a few areas have the essential geology, giving a potential of not
more than about 85 Gb (billion barrels) - enough to supply the world for less
than four years. It is no panacea.
Price falls
A combination of circumstances led to a dramatic fall in the
price of oil in 1998. They included unseasonably warm weather; an Asian
recession that reduced the demand for swing Middle East production; the collapse
of the rouble, encouraging exports; overestimation of supply by the
International Energy Agency (IEA), which misled OPEC; and further turns in Iraq.
Furthermore, there were motives to talk down the long-term price of oil as oil
companies and their financial advisers planned acquisitions. Major companies,
plainly seeing that exploration could no longer underpin their future, took the
opportunity of the price crisis to merge, successfully concealing their real
predicament from the stock market. Budgets were slashed and staffs purged in a
climate of uncertainty leading to an improvident draw on stocks.
The OPEC countries themselves did everything possible to
foster the notion that they could flood the world with cheap oil at the flick of
a switch. It was a strategy aimed to inhibit investments in natural gas,
non-conventional oil, renewable energy or energy saving that they feared might
undermine the market for their oil, on which they utterly depend.
But it was a short-lived price collapse. Before long, the
underlying resource and depletion pressures manifested themselves again with
prices rebounding in a staggering 300% increase in twelve months, when another
anomalous fall occurred at the end of 2000. It was partly triggered by profit
taking for year-end financial reporting and partly by the hope of a brief
reprieve as spring demand traditionally falls.
The underlying trend is due to reassert itself, leading to
the resumption of soaring oil prices. The Middle East is working flat out to try
to offset the decline of its old fields. In large measure, new production in
Venezuela can come only from infill drilling in old heavy oil fields, which is
dependent on the amount of effort and investment. It does not sound as if it has
many shut-in wells either. Its oilmen speak of reduced capacity.
The market may hope that some important recent discoveries
tell a different story with a happier ending. The long-known Azadegan prospect
on the Iraq-Iran border was at last tested, delivering some 5 Gb of reserves to
Iran. Kashagan East in the north Caspian found about 7 Gb of high sulfur oil at
great depth, demonstrating that the prospect was not one huge structure as
hoped, but several independent reefs. The disappointment caused two major
companies to withdraw from the venture.
Promising deepwater finds continue to be made off West
Africa, but it is becoming clear from the experience of the Gulf of Mexico that
deep-water operations do test technology and management to the absolute limit.
Small accidents or setbacks can have devastating consequences in this extreme
environment. Petroconsultants recently announced the total oil discovery for
2000 at 11.2 Gb, less than half consumption, and of that much was in the Former
Soviet Union and in deepwater off West Africa.
The reality is that there is no real reprieve. Gradually the
marketóand not just the oil marketówill come to realize that OPEC can no
longer single-handedly manage depletion. It will be a dreadful realization
because it means that there is no ceiling to oil price other than from falling
demand. That in turn spells economic recession and a crumbling stock market, the
first signs of which are already being felt.
The United States is perhaps the most vulnerable to the
coming crisis having farther to fall after the boom years, which themselves were
largely driven by foreign debt and inward investment. The growing shortfall in
oil supply since its own peak of production was made good by soaring oil
imports, now contributing more than half its needs, and a move to natural gas.
The rate of import cannot, however, be maintained as other countries pass their
own production peaks, putting ever more pressure on the Middle East. The North
Sea is now at peak, with the UK being off 7% in 2000 and 16% off October to
October, meaning that production is set to fall by one-half in ten years. For
every barrel imported into the United States, there will be one less left for
anyone else, a situation inevitably leading to international tensions.
The move to natural gas proved to be only a short-lived
palliative. Gas depletes differently from oil. An uncontrolled gas well would
blow it all away in one big puff. Production is, accordingly, capped by
infrastructure and market, leaving a large, unseen balloon of readily available
spare capacity. In a privatized market, trading on a daily basis, production
becomes cheaper and cheaper as the original costs are written off and as this
almost free spare capacity is drawn down. There were no market signals of the
approach of the cliff at the end of the plateau. It accordingly came without
warning, causing prices to surge through the roof, and bringing power blackouts
to California. Canada is trying to make good the shortfall, but its stocks are
falling fast too.
The US has to somehow find a way to cut its demand by at
least five percent a year. It wonít be easy, but as the octogenarian said of
old age "the alternative is even worse." Europe faces the same
predicament as North Sea production plummets. Although it may draw on gas from
Russia, North Africa and the Middle East to see it over the transition, assuming
that new pipelines can be built in time, that creates a new and unwelcome
geopolitical dependency.
All of this is so incredibly obvious, being clearly revealed
by even the simplest analysis of discovery and production trends. The
inexplicable part is our great reluctance to look reality in the face and at
least make some plans for what promises to be one of the greatest economic and
political discontinuities of all time. Time is of the essence. It is later than
you think.
Colin Campbell is a geologist formerly with
Petroconsultants.
For more on peak oil and related topics, see Campbell's foreword
to The Party's Over (written in 2003) and various Culture
Change Letters (written in 2003).
Sent to Culture Change from The M. King Hubbert Center, Petroleum Engineering
Department, Colorado School of Mines, Golden, CO 80401-1887.
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