The Looming Crisis
In Worldwide Oil Supplies
By E. Hunter Herron, Ph.D.
President, Petroleum Equities Inc.
New assessments of global oil reserves show the world
faces a relentless oil-supply crisis within the next ten years.
n the absence of political disruptions, global oil supplies are presently adequate to satisfy demand, and prices of petroleum products, while volatile, are generally manageable. But according to new scholarly assessments of oil reserves, the world faces a relentless oil-supply crisis beginning in the early years of this new century.
At the same time, despite exceptional advances in petroleum geology and the technologies employed in the search for petroleum deposits, discovery rates of new oil reserves are falling for every four barrels used today, only one new barrel is found.
Thus, the lines of cumulative production and remaining reserves will inevitably cross the question is not if but when.
A group of distinguished international petroleum consultants have built new mathematical
models of oil discovery, production, and consumption which predict the point of global peak
production and ensuing decline. (2), (3) The models show oil production will peak when half the world's recoverable oil has been produced.
Estimating when peak production will occur therefore requires estimating when half the world's oil supply will be exhausted. This can be done by determining three factors:1. How much of the oil that has already been discovered remains to be produced
2. How much additional oil remains to be discovered
3. How much oil is presently being consumed.
Factor 1 - Remaining Oil from Previous Discoveries: Oil & Gas Journal, the most widely consulted publication on the subject of oil supply and demand, reports that 807 billion barrels were produced by 1998, with almost half of that amount since the supply shocks of the 1970s. Currently, the median estimate of remaining reserves in known fields is 830 billion barrels. (4)
Thus, a total of approximately 1.64 trillion barrels of oil have been discovered, and approximately 0.83 trillion barrels of this total remain to be produced.
Factor 2 - Additional Oil Discoveries: The earth has now been so extensively explored for petroleum that virtually all its prolific producing trends have been identified. Figure 1, which displays the amount of oil discovered per decade, shows discoveries peaked during the 1960s, verifying the advanced state of worldwide exploration.
Extrapolating the historical pattern in Figure 1 suggests the ultimate discovery worldwide of about 1.8 trillion barrels, which is in line with the trend of some 25 published estimates over as many years. If so, about 165 billion barrels of oil remain to be found. Adding this amount to the 830 billion barrels of oil still in existing fields gives 995 billion barrels remaining to be produced.
Factor 3 - Oil Consumption Rate: Annual oil consumption worldwide is at present about 25 billion barrels a year. So if oil consumption remains constant with 995 billion barrels still remaining to be produced, the world's oil supplies will last another 40 years.
However, oil consumption is not constant, it is steadily rising. And oil production models show that production cannot remain constant until all oil reserves are exhausted production rates begin to fall when half the reserves have been produced.
Since most data suggest that the world's recoverable reserve of conventional oil, both discovered and yet-to-be discovered, totals 1.8 trillion barrels, a best estimate of half the world's ultimate reserve is 900 billion barrels. As more than 800 billion barrels have already been produced, it appears that less than 100 billion barrels remain before the midpoint of reserve depletion will be reached.
With the world's annual consumption rate at 25 billion barrels, this reserve midpoint is less than five years away. Suddenly, the glass the world has long considered to be almost full is found to be half empty.
World oil supply is dominated by five so-called swing producers in the Middle East: Abu Dhabi, Iran, Iraq, Kuwait, and Saudi Arabia. Together, these countries own half the worlds yet-to-be-produced volume of conventional oil.
Consistent with the supply-disruption events of the 1970s, oil production models assume the swing producers will impose radical price increases when they supply more than 30 percent of the world's demand, leading to a worldwide plateau of demand until the swing producers' share reaches 50 percent.
By then, the swing producers themselves will all be close to their midpoint of depletion, and world production of conventional oil will have to decline. In this scenario, the models suggest the world faces a two-stage oil crisis, depicted in Figure 2.
Crisis Stage One - Increased Oil Prices: The first crisis is predicted by the production models to occur in the near future, when the production share of the swing producers reaches 30 percent. The swing producers then impose much higher prices, which should curb further increases in demand.
The more-than-doubling of oil prices that occurred during 1999 suggests the prediction of this first crisis is turning out to be correct.
Crisis Stage Two - Permanent Production Decline: The models further predict a second crisis will occur around 2015, when physical shortages begin to appear. The cumulative production of all the swing producers themselves will then be beyond the midpoint of their total reserves, and worldwide production of conventional crude oil will lapse into permanent decline.
Potential solutions to this looming oil supply crisis are discussed in a follow-up report. And for additional information on the oil supply crisis, search the web or the following specific web sites.
1. Campbell, C.J.: "Running Out of Gas: This Time the Wolf is Coming," The National Interest, Spring 1998.
2. Campbell, C.J.: "Depletion Patterns Show Change Due for Production of Conventional Oil," Oil & Gas Journal, December 29, 1997.
3. Laherrere, J.H.: "World Oil Supply -- What goes up must come down, but when will it peak?," Oil & Gas Journal, February 1, 1999.
4. "Worldwide Look at Reserves and Production," Oil & Gas Journal, December 28, 1998.