If we turn to the 33% of the world’s population represented by the two giant emerging economic superpowers of China and India, with industrial output growth rates of 10%-20% per year, reducing their growth rates of oil demand to only 5% or 6% per year will be very difficult, and require massive mobilization of human and technical resources. The net result is this : there is no chance at all of the so-called Oil Age ending tomorrow or next week. Our central problem, challenge and opportunity is to organise and facilitate rational oil utilisation (ROU) on a worldwide, equitable and efficient base, within a fast changing energy mix.
As we will see in this presentation, Peak Oil is a complex question involving many variables, from the definition of oil and oil-like hydrocarbon liquids, to the interplay of factors controlling world oil supply and demand. We can say that oil currently supplies about 40% of all commercial energy, that is about 4.25 Billion tons of oil on a total of 10.75 Bn tons oil equivalent consumed in 2006. Eliminating the two-fifths supplied by oil will surely not be easy – in fact it will be a Herculean task.
The task is heavily complicated by the fact that substituting oil with natural gas, coal or uranium for nuclear power only exchanges one faster-declining fossil energy resource for three other, relatively slower-declining fossil energy resources. All of them, including uranium, result in climate changing gas emissions directly related to the quantity of energy produced. Substituting oil with non-oil energy depends on many factors, including the physical, technical and economic feasibility, social acceptability, and time needed to switchover. In the case of nuclear power, we can that its extreme financial costs and security risks make this so-called ‘alternative’ a paper solution to the structural energy crisis set by Peak Oil. As North Korea is the most recent to demonstrate, there is no intrinsic barrier or separation between « civil » and « military » nuclear technology.
Defining Peak Oil is complex, and several definitions are presented here, including the ASPO definition which only focuses the total extraction or production of narroly-defined, mostly ‘conventional’ petroleum liquids in the whole-year period of the peak year. The definition excludes the more normally used and much wider concept of oil, the « all liquids » definition. Using this definition, and taking account of the 2 annual peaks of oil demand – seasonal demand now being the most powerful price setting variable – we are in fact a lot closer to Peak Oil than many persons care to admit.
A better, more operational definition of ‘peak’ is proposed. This effective financial and economic definition is an oil price context of extremely volatile, unpredictable and uncontrollable price swings, able always to bounce further and higher when the supply/demand balance becomes negative. Continuation of this will lead to year-round physical undersupply of oil markets, if there is no rapid cut in demand. This Peak Oil context is in my estimation possible by as early as August 2007. Year-round extraction in 2007, on an « all liquids » base will attain about 31.9 Gb (Billion barrels), and decline from 2008.
Peak oil and Kyoto Treaty obligations for ratifying countries will surely reinforce the ‘rush to gas’, and certain growth of renewables, as well as some moves to oil and energy saving in these countries, and generally accelerate the trend of changing regional and national energy mixes. These mixes will change faster and more than they have changed in any previous recent period. Evolving mixes, certainly including energy economic restructuring and reduced energy intensity in OECD countries, that is ‘Negawatts instead of Megawatts’, fast growth of renewables, greater energy network integration, much more transparent energy pricing, these and other trends can be called Energy Transition. This will above all be a time of energy challenge, financial and economic risk, and investor opportunity.
The changing energy mix will generate, and arise from new and emerging consumer and user needs, expectations, values and ways of using energy. It will demand new energy economic infrastructures, and surely provoke sometimes contradictory political and national economic policy stances, that is intensify the opposition between « top-down » and « ground-up » models and processes of change. Separating the two is the key to mapping likely sequences of change, and identifying investor opportunities, and strategies for Energy Transition.
The second « ground-up » group of motors for change includes local, NGO, community, municipal, urban and urban regional associations and collective entities, and their responses to the basic market signals of fast changing energy mixes and Energy Transition : higher energy prices and declining energy security.
The individual and collective perception of these signals, emerging quite fast in the large, mature urban markets of OECD countries, and soon emerging in urban areas of nonOECD countries, generates clearly identifiable opportunities, in a wide range of energy and energy-related economic domains. My proposed investor holding, the IET Fund, addresses these emerging opportunities across a range of vehicles, with the basic objective of mobilising and moving investor resources to the task of Energy Transition.
DEFINING PEAK OIL
Several definitions are possible, and a large number are in circulation, contributing to confusion of political, media and public opinion on the subject. We can list the following definitions:
- ASPO-Association for Study of Peak Oil definition – the maximum total extraction and production of oil in a 12-month period, this period being the peak year
- Peak production rate definition – the maximum total extraction and production rate, held for a certain period, say 390 days, in the so-defined peak year
- Peak demand rate definition – the maximum possible daily average demand satisfied by world supply before physically undersupply intervenes
- Peak oil price definition – maximum possible price attained in a given year or period, following which oil demand and production durably decline
All these definitions require a subsidiary definition of what “oil” means. ASPO’s definition is ‘petroleum liquids’, including condensates, extreme depth offshore oil, heavy oils and certain syncrudes, but some national ASPO groups use much more restricted definitions. Conversely the US EIA, for example, uses a wide definition of ‘oil-like hydrocarbons’, including maize bioethanol.
Another problem for defining oil production and production capacities is the question of net versus gross production and capacities. On a worldwide basis, loss of production on land and especially offshore, and loss in transport, storage and utilisation totals at least 1.5 Million barrels/day (Mbd), about two-thirds the current national consumption of France or Italy.
Depletion: ASPO’s widely recognised specialty is technical study of depletion rates and factors. The massive data bases of ASPO groups, worldwide, enables us to confidently forecast likely net addition to world oil production capacities after depletion. This is now low and erratic from year to year. For 2006, net capacity growth is unlikely to exceed 1.05 Mbd, far less than world production, transport and storage losses!
World demand and Peak Oil: Extracting and producing oil or ‘oil-like hydrocarbons’ has no sense at all unless it is used, about 91% as fuel and 9% as a raw material and lubricant. World oil demand is an astonishingly neglected subject as I can attest by the number of my study proposals on this subject rejected as ‘not interesting’. What we can say is that world oil demand is now almost totally disconnected from world oil supply, and that the approx. 35% of world oil that is either priced by major markets like NYMEX and Singapore, or priced close to day quoted prices on these markets, has its price governed almost exclusively by world demand and its seasonal variations.
The world oil pricing system, treating oil on the same basis as seasonal fruits and vegetables is highly speculative, opaque and inappropriate for the ‘lifeblood of industrial civilization’. Worse than this, the near total de-connection between demand and supply is shown by this simple figure: as noted, net additions to world oil production capacity will be unlikely to exceed 1.05 Mbd (+ 1.2%) in 2006. Conversely, world oil demand net of substitution and oil-saving technology will likely grow by 2.2 – 2.4 Mbd in 2006 (+ 2.5%).
Terror of the 100-dollar Barrel: For a variety of reasons related to the spectre of ‘triple digit oil prices’, world oil demand data is highly opaque and contradictory. Almost all major institutions with an interest in energy, such as World Bank, OECD IEA, US EIA, the 5 major oil corporation, Eurostat and others claim or imply that world oil demand is now at ‘historically low rates’, of about 1.5% pa. Even ASPO groups retain a world demand inflator of only 1.7% pa. The underlying rationale – totally contradicted by real macroeconomic mechanisms in play, that we can call ‘Petro-Keynesian Belle Epoque growth’ – is that high oil prices lead to price elastic fall of demand.
Demand forecasting: I will present a few ground-up and transparent calculations concerning the world automotive industry, to show that world oil demand growth is very surely alive and well. We can note that with about 75 Million cars and car equivalent land transport vehicles produced in 2006, and world human population growth in 2006 also being about 75 Million, that we are now at the state of ‘For every baby a new car is born’. About 98% of these new vehicles operate with petroleum hydrocarbon liquids and GPL, not hydrogen, flexfuel, bioethanol or biodiesel, despite the talk of After Oil. Close to 35% of world oil demand, and around 50% of demand growth can be traced directly and indirectly to land transport vehicles. Each car equivalent unit needs about 5 barrels oil equivalent (boe) of energy to produce, of which about 2 barrels will be liquid hydrocarbons. Other forms of transport – world airplane construction and movements, world shipbuilding and ship movements – need to be analysed by oil demand impact, to which we add the habitat, construction and public works industry, the agriculture and fisheries industries. Concerning electric power production, we can note the ‘perverse factor’ of climate change, increasing summer peak airconditioning electricity demand in many countries, as well as irrigation agriculture power demand. Worldwide, oil-fired electric power production is certainly not declining. In brief, we quickly arrive at my estimate of 2.2 – 2.4 Mbd growth of world oil demand for 2006, net of substitution and oil-saving.
Iceberg lettuce and oil price peaks: World oil demand variation due to seasonal factor is very surely increasing, but the annual changes are difficult to estimate. I present schematic series of seasonal demand estimates and forecasts for 2005-06-07 using an extended “all liquids” basis for defining ‘oil’. What we can see is that the Northern Hemisphere ‘summer motoring, airplane movement, airconditioning and irrigation demand peak’ could attain 89 Mbd.
There is no certitude world supply can meet this. In the same way that Iceberg lettuce, tomato or forest mushroom prices explode and implode, depending on supply and demand, world oil prices can surely follow suit. This will continue until and unless oil is removed from the current ‘free market’ pricing system, and treated as a vital but declining resource.
Unlimited demand potential: While supply is surely limited, shown by the very weak growth in world output capacity despite 6 years of ever-rising annual average prices, world oil demand potential is effectively unlimited. As I show in the Presentation, all the OECD countries have extreme oil intensities or average consumption per capita, led by the USA at about 25.5 barrels/capita/year. If by miracle, planet Earth was allocated a half-dozen extra Ghawar, Cantarell or Burgan fields, enabling China and India to attain the present US oil intensity, their combined oil demand would run at 150 Mbd and their annual consumption would be 54.75 Billion barrels. Even at ‘moderate’ European country oil intensities – around 12 bcy – China and India would generate a demand of about 70 Mbd, or about 58.5 Mbd more than their present oil demand.
Returning briefly to the car industry, we can note the role of this industry in producing explosive oil consumption growth. Taking ‘before car’ and ‘after car’ in economic success story countries such as South Korea, we note that their oil demand can increase 10-fold (900%) in as little as 35 years.
Rational Oil Utilisation (ROU): Nothing in theory, but only in theory prevents China, India, Brazil, Turkey, Pakistan or other industrialising countries reproducing the Asian Tiger, oil-driven economic success story. We must however accept, very soon, that this is no longer possible, and for many reasons in addition to Peak Oil, such as runaway climate change and geopolitical rivalry in the Middle East, aggravated by struggle for access to and control over the world’s remaining oil resources.
We first note there is no chance whatsoever that the Oil Age will end tomorrow or next week. What is urgently required are openly debated, internationally agreed measures for ROU, and planned Energy Transition away from fossil fuels.
ARE WE CLOSE TO PEAK OIL ?
The fact that ‘After Oil’ has entered the vocabulary of political leaders, at least in Europe, and world media constantly refers to ‘declining oil supplies’, together with rapidly increasing citizen and consumer demands for protection of the environment and a shift to ‘clean renewables’, all these facts and factors suggest that we are close to PO.
This may indeed be serendipitous timing ! Already in July-August 2006, world oil demand on a wide ‘all liquids’ basis was likely running at around 87 Mbd. We also attained a historic nominal-price high of about 78 USD/bbl (barrel) at the time, but this was quickly explained away as due to the ‘geopolitical risk premium’, placed by so-called oil price experts at 10, or 20 or even 30 USD/bbl. Any number will do if that contributes to nicely large speculative trading changes of the daily price. This ‘geopolitical risk premium’ disappeared in August with the last Israeli F-16 raids on Beirut, but the Iran nuclear crisis, or saga continues; the Iraq war is a rising threat to region-wide stability; the Palestine-Israel conflict continues, and the so-called ‘Clash of civilizations’ or ‘Islamic menace’ is a media favourite and fonds de commerce for the rush-to-print Al Qaida book industry.
World oil demand entered its second, and largest seasonal trough from late August, and this simple factor can easily be identified as the real basis of oil price falls since then, and ending very surely by mid-November or before, depending on seasonal weather. The fact that a historic oil price peak was attained with the 2006 Summer demand peak suggests that world demand was then at the limits of physical supply. This theory can be checked and analysed, and I can propose several methods for doing so.
Mid East and Central Asian geopolitical instability: This region holds at least 55% of remaining world oil reserves. All major oil import dependent countries have a vital interest in this region. The traditional methods for assuring vital supplies of oil do not necessarily start with military invasion and occupation, but they certainly include this option. The problem, of course, is there are big new players in this ‘game’, as well as many historical and traditional players, many of them local, but as yet not declared.
My next book with the title ‘The Next Oil War’ treats this dangerous endgame struggle for control of the world’s largest remaining oil reserves, to a backdrop of religious schism and conflict, and its risky ‘divide and rule’ options for external players seeking increased leverage.
Prices and PO: We return the probable most ‘operational’ definition of Peak Oil, the price at which world oil demand finally exhibits price elasticity, demand growth shrinks to zero, and world supply adjusts to emerging energy mixes with a declining oil share. Ideally, the rate of decline of this share would be at least equal to the decay rate, or decline rate of world oil output after PO, placed by ASPO at around 3.5% pa from either 2009 or 2010, using ASPO definitions and ASPO’s unrealistically low demand growth inflator. A price-induced energy mix shift away from oil, enabled also by ROU, could in my opinion be triggered by oil prices attaining about 95 USD/bbl. At present we have no sign whatsoever of any meaningful shift way from oil in the world energy mix.
The urgency of the situation is deliberately downplayed by institutions such as World Bank and OECD IEA, claiming that PO will occur ‘sometime after 2025’. Using published data from the World Bank and IEA, and data from the World Bank consultant M. G. Salameh’s presentation to the ASPO5 Conference (Pisa, July 2006), we obtain an estimated world oil demand of about 115 Mbd in the 2020-2025 period. This is at least 28 Mbd above current day average production capacity. Adding 28 Mbd to world capacity, net of depletion, will require the discovery and sustained production of about 3 “new Saudi Arabias”, 6 or 7 “new Irans” or 20 “new Iraqs” of the post-2003 liberated variety.
Achieving this in 15 years is simply impossible. It is surprising that supposedly ‘serious’ institution continue to publish these fantasy figures.
It is sure and certain, however, that oil prices above 80 USD/bbl will help to transform the easy talk of ‘After Oil’ into organised, real world action for the simple reason there is legitimate doubt that the world will even sustain world oil production above 90 Mbd.
Concerning narrowly-defined “conventional oil”, we can note, PO occurred at least 5 years ago, and possibly as far back as 1996-1998.
SUMMARY OF KEY ESTIMATES AND FORECASTS
2006 net additions to world output capacities: 1.05 Mbd
2006 net annual demand growth: 2.2 – 2.4 Mbd
Peak summer demand August 2007: 88.5 – 89 Mbd
Total annual extraction and production 2007: 31.9 Billion bbl
Oil price range Dec 2006-Feb 2007: 65 – 80 USD/bbl
Oil price range Jul-Aug 2007: 75 – 95 USD/bbl
Operational Peak Year: Jun 2007 – Jun 2008
This paper was presented at the ‘OIL AND GAS INVESTING’ forum in Geneva on November 3, 2006.
Part 2 of this presentation will be published tomorrow on EnergyPulse.