Article and Photos
by Arthur E. Berman,
editor@hgs.org
From the Editor
June, 2005
Ideas Are Like Stars:
The Current Oil Boom, 2001-2005
Many years ago, Robert Weimer asked my stratigraphy class to explain what we observed shortly after arriving at an outcrop along the Colorado Front Range. Several people offered interpretations of possible depositional environments and sedimentary facies relationships as we stood by our vehicles.
Weimer responded, “I asked for observations, not interpretations. How can you interpret the geology when you haven’t gotten close enough to the outcrop to describe it?”
That incident didn’t make an immediate impression on me but it produced an echo in my mind. I have recalled it and Weimer’s comment so many times that now it has become part of my approach and response to many situations in life.
In May, I wrote about the period of high oil prices from 1973 to 1986 (Berman, 2005, in press). I discovered that many of my recollections and impressions of that period were, at best, incomplete and parochial. My intention for this, my last “From the Editor” letter, was to carry the story to the present, draw some conclusions and perhaps make some predictions about the current high price cycle we are experiencing in the oil industry.
As I researched the topic, I discovered an analogy to Bob Weimer’s complaint on the outcrop years ago: people are making and publishing high level interpretations without first getting close enough to the data to observe and describe what is there. Analysts, pundits and other industry experts focus on three ruling theories to explain high oil prices and the current environment in the oil business: peak oil production, failure to discover new reserves, and unanticipated demand from China and India.
I am not implying that these factors are incorrect or without basis. I am suggesting that a simple story is being told to explain factors that are, in the case of the present high oil price cycle, much more basic and fundamental. Please join me as we move away from the vehicles, walk up to the outcrop and describe what we see. Maybe after that we can move on to interpretations.
Peak Oil Production: The World is Running Out of Oil
The first theme or ruling theory I encountered while reading for this and last month’s “From the Editor” letter is the notion that peak world oil production is imminent or has already occurred. According to its advocates, peak oil production leads irrevocably either to the demise of civilization as we know it or, at the very least, to radical adjustments in lifestyle for industrialized countries that are dependent on oil.
Many call peak oil production “Hubbert’s Peak” referring to predictions made in 1956 by M. King Hubbert. Hubbert correctly predicted that United States oil production would peak in 1970. His other predictions about peak U.S. gas production and world oil production were incorrect.
The discovery of the Prudhoe Bay Field in 1967 complicated Hubbert’s prediction about U.S. peak production and nearly discredited his predictive method. Prudhoe Bay began production in 1977 and, by 1985, daily U.S. production had climbed to 96% of its 1970 peak (Figure 1).
Hubbert’s method involved questionable assumptions: production rise and fall would be symmetrical and log-normal, and reserves would remain static. Hubbert assumed that peak production would occur when exactly half of proved reserves were depleted. The problem, of course, is that proved reserves must remain static in order to predict the midpoint of depletion. Prudhoe Bay was simply not in the model (Figure 2). Neither were Kuparuk River or Point Thompson in the Alaskan Arctic. Likewise, other important discoveries in the Wyoming-Utah Overthrust Belt and the Deepwater Gulf of Mexico were understandably not anticipated when Hubbert performed his calculations.
Extrapolation always leads to errors because it fails to recognize the ingenuity of people and technology to find new reserves and to produce more supply than estimated from existing fields. It is difficult to imagine that today’s proponents of peak oil methods can rule out significant new reserves yet to be discovered in regions far more likely to contain large fields than the United States.
Remaining conventional, proven world petroleum reserves are estimated to be 2130.5 billion barrels equivalent (Figure 3). Depletion is estimated to be 807-822 billion barrels (Bentley and Smith, 2003) Using the Hubbert method, peak global production has not yet been reached. Proponents of imminent peak production argue that Middle Eastern reserve estimates are exaggerated, and perhaps they are, but we must use the data that we have. Present world consumption is about 30 billion barrels per year (Energy Information Administration). This suggests that peak world production will be reached in less than 8 years (other reliable sources, notably the United States Geological Survey, do not anticipate peak global production until 2030).
So what? If someone has recommendations about what should be done about the impending peak in global oil production, I would like to hear them. History is full of predictions that, more often than not, don’t occur. What ever happened to the famous prediction of the Y2K disaster in which all the world’s computers would stop working when the calendar changed from 1999 to 2000? Billions of dollars were spent preparing for this event and yet nothing happened.
Petroleum is abundant and will be an economically important commodity for a long time. What is certain is that the cost of petroleum will increase as it becomes scarcer. Peak oil thinking does not account for systemic changes in oil consumption as prices increase or for new reserve additions through exploration or field growth. It does not consider advances in technology either in exploration or production, or in consumption efficiency.
