Running out of and into oil: Analyzing global oil depletion to 2050

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1 Running out of and into oil: Analyzing global oil depletion to 2050 David L. Greene The Q Group Spring 2005 Seminar Key Largo, Florida April 4, 2005

2 Lost our bearings? Oil prices have broken $50 a barrel. Soaring Chinese demand is rocking energy markets. Climate-destabilising carbon emissions grow apace. New energy investments will cost over $500 billion per year. As the World Energy Outlook 2004 goes to press, the energy world has lost its bearings. The price is assumed to remain flat ($22/bbl) until 2010, and then to begin to climb steadily to $29 in p. 39 OPEC countries, mainly in the Middle East, will meet most of the increase in global demand. By 2030, OPEC will supply over half of the world s oil needs an even larger share than in the 1970s. p. 32 International Energy Agency, 2004.

3 Transportation runs on oil.

4 The emergence of OPEC and consequent oil price shocks in the 1970s and 80s temporarily reversed the global trend of increasing petroleum use for increasing global mobility.

5 WHERE WILL THE OIL COME FROM? The graph below was not presented by Colin Campbell or Jean Laherrere, but Rex Tillerson, President of Exxon Mobil Corporation (3/11/04). One solution: OPEC will provide.

6 Why should OPEC do this? Because of the inelasticity of world oil demand and supply The payoffs to OPEC are relatively insensitive to faster output growth; aggressive output expansion yields slightly lower payoffs than just maintaining current market share. D. Gately, The Energy Journal, 2004.

7 The U.S. Energy Information Administration says that OPEC will increase production 50% by 2025, spending its patrimony for no profit. For OPEC members, cumulative production of almost 280 billion barrels in the high A world oil price case is projected to bring in $9.9 trillion, as compared with cumulative production of 343 billion barrels and revenues of $9.7 trillion in the reference case. AEO 2005, p. 46. Undiscounted cumulative revenues from OPEC member country production in the high B world oil price case exceed those in the reference and high A world oil price cases, despite lower production; (255 billion barrels) AEO 2005, p. 47.

8 Are we running out of oil? Pessimists aka Geologists Geology rules Discoveries lag production Peaking, not running out matters Expect peak by 2010 Optimists aka Economists Economics & technology rule Rate of technological progress will exceed rate of depletion Market system will provide incentives to expand, redefine resources Stone age did not end for lack of stones

9 Take optimists view but quantify. How much oil remains to be discovered? How fast might technology increase recovery rates? How much will reserves grow? How fast will technology reduce the cost of unconventional sources? How much unconventional oil is there and where is it?

10 The optimists approach is optimistic. No Hubbert s curves No geologic constraints on production rates Costs do rise with depletion, however RESOURCE/Production ratio limits expansion of production Analogous to a limit based on life of capital No explicit calculation of capital investment No environmental/social/political constraints on production ANWAR, offshore, etc. fair game

11 What is oil? Conventional Oil Liquid hydrocarbons of light and medium gravity and viscosity, in porous and permeable reservoirs. Plus enhanced recovery and NGLs Unconventional Oil Deposits of density > water (heavy oil), viscosities > 10,000 cp (oil sands) and tight formations (shale oil). Liquid fuels can be made from coal or natural gas (not considered here).

12 Do we know how much oil there is?

13 In 2000 the USGS published a major assessment of world oil resources, including uncertainty and technological progress. (Billions of Barrels) Speculative Resources = Undiscovered 50 th to 5 th percentile Estimated Additional = Undiscovered 50 th percentile Reserve Growth Proved Reserves

14 There is even greater uncertainty about unconventional oil resources, but regions seem to divide into oil sand/heavy oil or shale oil. (1 Gtoe = 7.33 billion bbls, 20.1 mmbd) MEA = Middle East + North Africa

15 Pessimists dispute the USGS estimates with the following arguments: OPEC members overstate proved reserves Reserve growth methodology biased Range of uncertainty exaggerated Unconventional resources also much smaller than implied by my estimates Campbell, 2003.

16 A resource accounting model was constructed to simulate oil resource depletion, expansion and transition under various scenarios. It does not include Hubbert curves. If anything, its rules are optimistic.

17 World energy scenarios were derived from existing projections. The Reference Scenario represents business as usual.

18 Most future growth of energy use is expected in the developing world (2.7%/yr v. 1%/yr).

19 The average growth of world oil use from 2000 to 2050 is 1.9%/yr.

20 An ecologically driven scenario foresees only an 0.8% annual growth in energy use.

21 In this scenario, there is a demand-driven peak in oil use.

22 Six depletion/transition scenarios were constructed. Two IIASA/WEC scenarios Three EIA Int. Energy Outlook to 2020 Two DOE/NRCan NA transport projections Three sources of conventional oil resource estimates Three unconventional oil estimates

23 A risk analysis was carried out, defining key parameters as random variables.

24 Reference/USGS: non-middle East oil production peaks by 2030 with 90% probability.

25 Reference/Rogner: Non-MEA peak likely anytime

26 If Campbell s estimates are correct, the non-mea peak will occur before 2010.

27 The most important determinant of the date of peaking is how much oil there is.

28 From 2.7 Gtoe in 2001, non-mea oil production is estimated to increase substantially.

29 Lower R/P ratios, more oil resources, slower growth of MEA production all raise the level of peak ROW output.

30 The total world oil production peak could be significantly later, perhaps after 2050.

31 The world peaking date depends strongly on the rate of expansion of Middle East production.

32 Under median assumptions, unconventional oil production must expand rapidly after 2020.

33 Using the upper range of values of the 5 factors that most strongly influence the world peaking date yields a broad, flat ROW curve.

34 Slowing the growth of MEA production raises prices and further delays the ROW peak.

35 The price estimates of my model are not predictions. They reflect optimistic assumptions about supply technologies. Their purpose is to regulate the market mechanisms by which unconventional resources are introduced.

36 The optimism of the model is reflected in increasing US production to 2020.

37 The Middle East could maintain a dominant position through 2050.

38 Rapid expansion of heavy oil and oil sands is needed to allow world oil use to continue to grow.

39 The ability to produce vast quantities of shale oil (or liquids from coal) is even more uncertain.

40 Conclusions Caveats Rate of production likely to decrease after 2020 in any case Transition to unconventional oil may be rapid: 7-9%/yr growth First supplies from Venezuela, Canada, Russia Present trends imply ROW oil peak Vast quantities of shale oil (or coal, NG) may be needed before 2050 Model doesn t include geologic constraints on production rates; relies on target resource-toproduction ratios Does not include environmental or political constraints Does not include gas- or coal-to-liquids Unconventional oil resource estimates weak Scenario, not market equilibrium based modeling of oil demand

41 Thank you fo r your interest.

42 For a copy of the report: Visit Or contact David L. Greene at: dlgreene@ornl.gov

43 EIA used a few simple assumptions to produce a range of peak year estimates with implausible transitions and ignoring OPEC.

44 The model predicts that production may peak before proved reserves (caveat).

45 Never mind that man behind the curtain. (Wizard of Oz)

46 OPEC is an imperfect, partially monopolistic cartel. (von Stackelberg, 1952) It is imperfect, because it is a cartel of sovereign states with differing interests. It faces a (mostly) competitive fringe. Some members of the fringe collude with the cartel at times. Five factors determine the cartel s market power. Price elasticity of ROW supply Price elasticity of World Demand Market Share Rate of growth of World Demand Rate of growth/decline in ROW supply

47 In theory, a partial monopolist s power (in a static market) depends on three things. P = C 1 1+ S P β ( P) ( ) μ( ) + 1 β = price elasticity of world oil demand ( β < 0 ) S = Share of world oil market ( 0 < S < 1 ) µ= Rest-Of-World supply response ( -1 < µ < 0 ) Short- v. long-run elasticities differ by an order of magnitude! Growing demand or declining supply amplify market power.

48 These economic parameters define the space in which the cartel can operate, not what it will do. Source: BP, EIA; OPEC Core is Venezuela, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, UAE, Algeria & Libya.

49 Growing world oil demand and peaking ROW oil supply affect the calculus in two ways. Cartel effectiveness enhanced It is easier to not expand capacity than to cut production. Cartel market power magnified Growing demand increases the inverse elasticity term Peaking ROW production diminishes the ROW supply response term C P =, 0 < ρ < 1, 0 < δ < 1 (1 + ρ) 1+ S( (1 δ ) μ( P) + 1) β ( P)

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