Oil Panic: The Global Oil Depletion Debate

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1 Stanford School of Earth Sciences Lecture at the Meeting of the California Independent Petroleum Association Oil Panic: The Global Oil Depletion Debate Saturday, June 4, 2011 Steven Gorelick Stanford University

2 Finite global oil resource Production was up 1/3 in the past 20 years Global Oil Production (billion barrels per year)

3 Hubbert s Prediction M. King Hubbert ( ) US National Academy of Sciences (1955)

4 Logistic or Hubbert Curve Production billion barrels per year time to peak slope height Area under curve = 4 x peak height x slope Mass-balance Based Method 1) Determine oil endowment or ultimate production = area under curve 2) Fit pre-peak slope to oil production data

5 Logistic or Hubbert Curve Production billion barrels per year time to peak slope height Area under curve = 4 x peak height x slope Mass-balance Based Method 1) Determine oil endowment or ultimate resource = area under curve 2) Fit pre-peak slope to oil production data

6 Logistic or Hubbert Curve Production billion barrels per year time to peak slope height Area under curve = 4 x peak height x slope Mass-balance Based Method 1) Determine oil endowment or ultimate production = area under curve 2) Fit pre-peak slope to oil production data

7 How much oil is there? 2009 Global Oil Endowment Not including NGLs

8 Global oil Hubbert curves Peak

9 Global Problem 1: Developing nations will demand oil as we have.

10 Global Problem 2: Discoveries are not being keeping pace with production (EnergyFiles; EIA)

11 Global Problem 3: Reported reserve estimates are inflated. 34 to 42% of global production (EIA)

12 Global Problem 4a: Discoveries declined 35 years before production declined in the US. (EIA)

13 Global Problem 4a: Discoveries declined 35 years before production declined in the US. (USGS; EIA)

14 Global Problem 4a: Discoveries declined 35 years before production declined in the US. (USGS; EIA)

15 Global Problem 4b: Discoveries peaked in 1961 (EnergyFiles; EIA)

16 Global Problem 4b: Discoveries peaked in 1961 (EnergyFiles; EIA)

17 Global Problem 4b: Discoveries peaked in 1961 (EnergyFiles; EIA)

18 No wonder people are worried!

19 Counter-arguments to oil depletion Malthusian catastrophe 1798 Essay on the Principle of Population "... the peak of production will soon be passed -- possibly within three years. David White, Chief Geologist, USGS, 1919

20 ...it is unsafe to rest in the assurance that plenty of petroleum will be found in the future merely because it has been in the past. Snider and Brooks, AAPG Bulletin, 1936 Global oil production (billion barrels per year) We could use up all the proven reserves in the entire world by the end of the next decade. Jimmy Carter, 1977 The looming oil crisis could arrive uncomfortably soon. Kerr, Science, 2007

21 Fallacy 1 Hubbert s predictions were correct, and his method works in general Why is Hubbert s approach appealing? and problematic Familiar bell curve not a statistical distribution Success in predicting US oil production no success predicting world oil & gas production Presumed to represent a mass balance we cannot estimate resource availability Production decline indicates oil depletion production can decline for other reasons

22 Were Hubbert s fits predictive? (not for natural gas in US) US gas production (trillion cu ft.) As of 2010, US gas production was over 4 times Hubbert s 1956 prediction. (after Deming, 2000)

23 Not for global oil production

24 Initial Exponential Rise 1978

25 What occurred next?

26 A shift to linearity 1983

27 Exponential

28 Linear

29 Worldwide oil production has not followed Hubbert s prediction? Production data Why should production follow a symmetric curve? Does a declining curve mean resource depletion?

30 Does the decline in US zinc production mean we are running out? Zinc is the 23 rd most abundant element in the earth s crust US has 20% of the world s reserves US reserve base is 90 million metric tons

31 World and US zinc production World production US production

32 Fallacy 2 The limit to world energy resources is quantifiable The world has never run out of any significant, globally traded, non-renewable mineral resource. Reserves: The identified accumulations that can be extracted profitably with existing technology under present economic conditions. Resources: Reserves plus all the accumulations of a fossil energy source that may become available. Subjectivity Includes uneconomic, undiscovered, inferred accumulations. (McKelvey; Brobst and Pratt; McCabe)

33 reserve reserve We have more resources than suspected Technology increases discoveries Technology reduces production costs (resource reserve) (McCabe)

34 What happens to reserves when the price of oil increases? (Oil & Gas Journal; EIA)

35 US oil resource estimates have increased Endowment = Amount Used + Amount Remaining US Crude Oil US oil (billion barrels) Endowment remaining oil Produced for ~ 35 years Cumulative production Year Any oil found will be produced over the following ~35 years (after McCabe, 1998)

36 Estimates of world crude oil endowment have increased with time World oil (trillion barrels) Endowment years Cumulative production Recipe for a bad prediction: base it on a snapshot assessment of the oil endowment (Deming; McCabe; USGS )

37 Fallacy 3 There is economic evidence of an oil shortage If there is a structural oil shortage, why is the price trend down? (EIA; Global Financial Data)

38 Are we running out? Consider price and production production increases price trends down

39 Gasoline price and oil production trends If we are running out, why are prices not trending up? (EIA)

40 Cost down: Improved oil recovery and discovery Oil recovery technology Before 1980: 70-80% oil remained After 1980: 50-60% oil remained 1996 future: 25-35% remains Improved geophysical imagery Oil is cheaper to extract than when drilling to 60 feet in 1860 (R. Sears, Shell, Stanford Lecture 1/22/04)

41 One reason that discoveries have lagged Exploration lull Cheap oil in the late 80s and 90s

42 Fallacy 4 The world will depend on oil even more than it does today Two concepts: 1) End use 2) Oil-use intensity (efficiency)

43 The concept of end use End use: the service that a commodity provides Do we need any mineral commodity? Copper Harrison Brown 1970 s reserves would be depleted by 2001 Demand technology substitution Technology leapfrogging

44 Typical production history is often explainable based on technology, price, and substitution Example: Global Mercury Time

45 Typical production history is often explainable based on technology, price, and substitution Lower prices stimulate demand Cheaper substitutes result in decreased demand Substitutes Batteries Thermometers Dental fillings Time

46 Oil use National income relation in 2005

47 Oil use National income relation in 1980

48 Decreasing oil-use intensity goal

49 Global oil-use intensity Improved world oil-use efficiency (billion barrels per year per trillion $ of GWP) 1950 to 2009 : world oil use / GWP declined by 38% 1975 to 2009 : US oil use / GDP declined by 54% 1980 to 2009 : China s oil use / GDP declined by 63% Efficiency is permanent

50 Fallacy 5 Reserves are dwindling and discovery is all but over Dwindling? Reserves are at an all-time high. In 1980: 28 years to consume oil versus today: 43 years

51 Did OPEC Really Exaggerate Its Oil Reserves? But from 1981 to 1996 global non-opec giant oil field reserves grew 3x as much as OPEC reserves. So did OPEC exaggerate? (Klett and Schmoker; and EIA)

52 Is Saudi Arabia Running Out? Global Production Global Reserves Producing Wells US has 1/12 th Saudi Arabian reserves But US : 3 rd largest global oil producer and maintains ½ of Saudi Arabia s production US has 320 times as many producing oil wells Imagine Saudi Arabia with all those wells. Is Saudi Arabia running out or holding out?

53 Solutions So what is the likely future?

54 Oil is Getting Heavier But There s Lots 6/2/11 ~$100/bbl (Oil and Gas Journal)

55 1979 Global Oil Production (consumption) Rate Trend Change Exponential period through 1978 Linear period since 1983 Not a price response: Oil prices trended down Why? CAFE (1975) goal to double fuel economy by 1985 Significance? Trend change reflects global behavior

56 Oil production has tracked population for over 25 years 4.1 barrels per person per year

57 Decreased gasoline demand U.S. Passenger Vehicle Efficiencies Miles per gallon Miles per Gallon Existing Car Fleet On-Road MPG New Car Rated MPG New car fuel efficiency doubled in 13 years under CAFE goal Barrels per person per year Global per capita oil use tracks fuel efficiency (Lovins et al.; EIA, Census Bureau)

58 Impact of future fuel efficiency A 14-mpg increase yielded a 1 barrel per person decrease in consumption. If : 28 to 42 mpg, use might drop by 25% (by 1 barrel per person)

59 How will world oil production ever reach its Hubbert peak value? Hubbert curve (3 trillion barrels endowment ) A per capita oil use decline would offset the increase in population more people using less per person.

60 How will world oil production ever reach its Hubbert peak value? Hubbert curve (3 trillion barrels endowment ) Projection based on 3 barrels per person phased in Already 2007 law : New Corporate Average Fuel Economy (CAFE) Standards by mpg But not enough.

61 What should we really be worried about? Environment 70% of oil transportation Cars ~1 pound of CO 2 / mile Oil use ~40% of CO 2

62 Will cars run on gasoline in 40 years? Substitution: Hybrid electric transition to electric cars. Electricity from natural gas, coal, nuclear, renewables. Price volatility can strand new (green) technologies.

63 Cartel Economics

64 Cartel Economics OPEC 12 70% of global reserves (55% in Middle East) 42% of global oil production OPEC formed in 1960 with the express purpose of controlling production to keep oil prices high. Oil fell below $35 per barrel at the end of 2008 OPEC cut production with $75 per barrel goal What is the recent price of oil? >>$75 per barrel

65 One Interim Strategy Problem : A cartel keeps prices high Objective: Create a competing cartel that reduces oil price volatility Approach: Importing nations can stockpile oil Economic Oil Reserves (3.8 billion barrels = 5.5 times SPR and could offset 2 years of OPEC imports)

66 Closing remarks A peak in global oil production will likely reflect a decrease in demand rather than lack of supply. Should global oil supply meet demand for the foreseeable future: at what cost to our safety, economy, and environment? Control by a cartel in unstable regions Price volatility that disrupts innovation Environmental degradation

67 The art of soothsaying, although probably not the world s oldest profession, can certainly offer strong claims for being the second oldest. -- M.K. Hubbert, 1959 Thank You!

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