Peak Oil is still our future’s reality

Posted on October 24, 2014

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Dino Peak Oil

(This is the final replay in the discussion on “The falling oil price may presage a future recession.”)

In a reply to my previous contribution, “The falling oil price may presage a future recession”, Civil Economist Magnus Grill (19 October in Swedish) says that I assert, “that Peak Oil does not mean that oil will run out rather than that demand for oil will disappear. Thus it is no longer a question of Peak Oil from a production standpoint rather than now it is from a demand standpoint. This means that Aleklett has completely altered his early reasoning.” I must disappoint Magnus Grill. Peak Oil is still related to production of oil from oilfields.

When we discuss Peak Oil we do this based on the fact that oil production in an area or group of areas reaches a maximum and then declines. There are several factors that determine the production profile when production begins within an area but ultimately it is geological parameters that are decisive for determining when production will fall. We have discussed this in several scientific papers.
If we examine the oil production from the North Sea we see that it reached a maximum in 2001 of 6.3 million barrels per day. Since then the oil price has risen five-fold and that should, according to economic theories, have stimulated production. The reality is that production since then has fallen to below half of the 2001 peak. The reality is that it is field distribution, flow equations and other natural parameters that limit production. Peak Oil for the North Sea occurred in 2001.

According to Magnus Grill, it is reduced demand that ultimately will cause a peak in oil production. Oil will become so expensive that fewer will have the means to pay for it. The dynamic that Grill refers to is simply the other side of the same coin. The question that is interesting to address in this situation is why the price of oil [of more recent years] increased so dramatically compared with previous long term trends and how the price will trend in the future. Of course, the price of oil is very significant for determining production, especially for production of the last half of global oil reserves. Early on in our research we often discussed the oil that is technically possible to produce without discussing price in detail. In such a discussion Peak Oil becomes a matter of the maximal production that is technically possible.

If price affects production such that all the technically producible oil is not exploited then this means that the oil peak referred to by Magnus Grill (i.e. determined by demand) will be lower than the technical limit. More recently we have included economic parameters in our models and we have even been able to show how operators can close down production in a region due to their optimization of the economic value of the remaining oil in a particular field. We see that the price of oil affects the level of total oil production but that the shape of the production profile is the same as for projections based on technical feasibility. In all cases, production ceases when a significant proportion, more than half, of the total technically producible resource remains in the ground.

Another example is Canada’s oil sands that, in 2006, were held up as the future saviour of the world from global Peak Oil. In 2007 we published an article in which we studied production from the oil sands under a so-called “crash management scenario”. Our results showed a maximal technically possible production rate of 5.5 million barrels per day in around 2035. Production estimates incorporating realities such as costs and profitability gave much lower prognoses according to IEA, International Energy Agency.

When we coined the phrase “Peak Oil” in 2001 it was primarily conventional oil production that was considered. Published articles asserted that this aspect of oil production would reach a peak during the period 2004 to 2010. The International Energy Agency (IEA) now gives the peak of conventional oil production as having occurred in 2008 and, since then, we have seen a decline in conventional oil production. In a scientific article in 2009 we showed that the rate of decline in production of conventional oil from the oilfields in production a specific year was 6% per year. In November last year the IEA confirmed that this is the true decline rate.
When the Financial Times discusses that we will reach “Peak Oil demand” they have, in reality, admitted that they do not believe that the technically feasible production maximum, “Peak Oil” will be reached because it would require too high an oil price. The decline that we now see in conventional oil production is compensated, for the moment, by shale oil production in the USA and that means that total global oil production can continue at the current level for a few years. All the new marginal production is very price-sensitive so we cannot expect large quantities of cheap oil in the future.
Ten years ago when we began intensive research on future oil production the IEA considered that continued global economic growth (demand) would require a production level of 123 million barrels per day by 2030. Today reality looks completely different. Why do economists and other not criticize the IEA for being so mistaken?

KJELL ALEKLETT

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