Supply-driven oil production will mean continued high prices

As Brent crude oil prices crashed to below $50/barrel in late 2008 after coming within a whisker of $150/barrel just a few months previously, many western governments no doubt heaved a huge sigh of relief. It was at least one piece of good news for economies battered by the banking crisis.

Campaigners who, only last summer, warned of rocketing oil prices triggered by so-called ‘peak oil’ ­ the point at which global production cannot be increased and starts to decline ­ started to look as though they had indulged in a touch of scaremongering.

As 2008 drew to a close, the market began to correct itself and the US cut oil imports by 500,000 to 750,000 barrels a day, according to the Oil Market Consultancy Service. One major reason for lower prices was expectation of lower consumption during a western economies recession.

Some OPEC producers, such as Saudi Arabia, now appear to be cutting production, as they pledged to in December. And when prices start to rise again, further investment in oil production will become more likely.

It looks, then, as if the extreme prices of last summer were a result of a peak in credit, not oil production, and that market pricing mechanisms have temporarily restored market equilibrium. Some oil is now being conserved underground for future use, allowing more time for the development of alternative transport technologies.

Declining production
That, at least, is a conventional view. “The theory that we will hit a brick wall of declining oil production is grossly exaggerated,” says Jeremy Nicholson, director of the Energy Intensive Users Group, a consortium of large manufacturers. He is sceptical of the predictions of ‘peak oil’ theorists and believes that, in future, more investment in unconventional oil sources such as oil sands, along with investment in other energy sources, will cushion the problems created by the decline.

The suggestion that “we don’t know how much oil might be out there", is anoth er of the main arguments used by analysts not convinced by peak oil theories in order to shift the argument away from the issue of proven reserves: the amount of resources that current technology proves exists and is producible. They point to new developments, such as two new North Sea oil fields ­ West Don and Don South West ­ that are just about to start up, as evidence that further global potential for oil extraction is underestimated.

Unconventional oil sources as well as the presence of oil under the Arctic Ocean off Latin America, eastern Siberia and western Africa are used to back up the same argument.

Peak oil experts, on the other hand, state that the potential of relatively easily accessible resources is declining, that most oil fields are past their peak and that 97% of the globe has been explored for oil. To dismiss their arguments would be illogical; hydrocarbons are not renewable, therefore their exploitation will peak if the world economy continues to desire oil. That fact is demonstrated by the Oil Market Consultancy Service’s Dr Mahmoud Salameh, who has aggregated figures from various sources.

Global peak
Of all the oil producing countries only Iraq is a long way off peak production, Salameh says, while Saudi Arabia and the United Arab Emirates are less than five years away. The global peak, he argues, “may have already been reached in 2004 if we factor in what I describe as ‘OPEC’s inflated proven oil reserves’. [It] indicates that OPEC’s proven oil reserves are overstated by around 300 billion barrels,” he says. Discovery rates have declined over the past 15 years. During that period, 23% of global oil production has been replaced by new discoveries.

The most liberal estimates suggest that two trillion barrels of oil remain to be exploited, while the most cautious suggest only one trillion barrels remain. “If two trillion barrels of oil or more remain, then the peak lies far away in the 2030s and we have enough time to bring in alternatives to oil. If only one trillion remain, the peak is already upon us, or will arrive some time soon,” says Salameh.

Energy supply consultancy Peak Oil Consulting suggests world oil production will peak between 2011-13.

Director Chris Skrebowski says the issue is the need to bring on-stream new flows to replace the depletion of existing capacity. The “easy oil” that makes up most of existing capacity is declining fast and the new capacity coming on stream ­ often from “not-so-easy” oil - will not be replacing it fast enough from 2011 onwards, he says. Meanwhile, the International Energy Agency says conventional crude oil output could plateau in 2020.

Falling demand
Last September, demand fell after prices rose to uncomfortable levels. Where demand does not adjust, production has ­ at least until now ­ but there are doubts over how long that can continue. Jonathan Wood, energy analyst at risk consultancy Control Risks, observes a greater reluctance to produce more oil when needed. “A problematic trend since 2005 is that the anticipated response by producers to turn up the [OPEC] oil production [when demand rises] has not necessarily materialised,” he says.

Some worry the market response mechanism will not come into play at times when it is needed in future.

“There is less of a connect with the economic cycle than most people say,” says David Bowden of the Association for the Study of Peak Oil. Global production will not meet demand even if the recession were to continue over the next few years, while oil markets will be supply-driven and not react so readily to demand changes. It will take more and more oil to extract a barrel of oil, he says.

The resulting scenario is a prolonged recession or relentless price increases if not enough investment has been made in transport alternatives and energy efficiency by the time production is peaking. As Energy Intensive Users Group’s Nicholson says, “One should be under no illusion that we’ll go back to the oil prices of a few years ago.”

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