When the wells run dry: The debate over production levels seems set to continue

Peak oil, put simply, refers to the point in time when global oil extraction reaches its maximum capacity. After this point, the rate of production enters into terminal, irreversible decline. As a theory, it has generated more controversy than is perhaps appropriate for what remains a logical statement of fact. That is, oil, like any finite resource, cannot continue to be extracted in increasing quantities forever. Indeed, this is as true for Egypt as it is for any other country: its oil reserves have continued to rise in recent years thanks to ongoing exploration, but this trend cannot continue indefinitely. On a global level, the issue of when precisely the peak moment will occur (or, indeed, whether it has already taken place) remains a matter of heated debate, often prompting extreme positions.

PEAK PRODUCTION: The theory of peak oil would be less controversial were its implications not so challenging to the global economy, which has been built around the exploitation of oil and its associated products. According to the Hubbert peak theory model – which was developed by geoscientist M King Hubbert in 1956 and originally designed to for the US market – oil production appears as a bell-shaped curve, suggesting an initially swift decline in production, which is then followed by a longer-term tailing off.

It is the initial rapid decline in production which has always caused division among geologists and oil industry figures, calling into question as it does the sector’s capacity to ensure a steady supply of oil to consumers. Hubbert’s initial prediction, that US oil production would peak between the late 1960s and early 1970s, before entering into fairly rapid decline, was initially greeted with scepticism. However, when US production duly peaked in 1970, Hubbert achieved widespread renown. Indeed, the US National Academy of Sciences altered its previously over-optimistic calculations to match his.

However, despite being proved correct in the case of the US, Hubbert’s peak model still struggled to gain acceptance on a global scale. His initial prediction of a global peak, made in 1974, was for the year 1995, while the Club of Rome predicted in the 1970s that peak capacity would be reached in 2003. As it happened, production continued to rise throughout the 1990s and 2000s, hitting 85m barrels per day in 2006.

SCHOOLS OF THOUGHT: Current opinion regarding the likely date of a global peak in supply is split: on the one hand, a group led mainly by economists considers the true level of remaining oil reserves to be a function more of the market price of oil than the physical quantities available. Included in this group is Fadhil Chalabi, the former acting secretary-general of OPEC and currently the executive director of the Centre for Global Energy Studies, a London-based energy think-tank. In an interview with regional affairs magazine The argued instead that it is in fact global demand for oil which is in long-term decline.

The argument in favour of long-term decline in demand is supported by the International Energy Agency (IEA) – the OECD-sponsored body which many of the world’s governments rely on to draw up their energy policies. In January 2010 the IEA announced that oil use in rich industrialised nations would never return to 2006 and 2007 levels due to increased fuel efficiency and the use of alternatives. OECD countries account for 53% of global oil consumption.

Opposing this view, a number of geologists have been joined by a growing number of industry figures in speculating that peak oil has either already occurred or will occur imminently. Their case is strengthened to an extent by the fact that the standard of disclosure for existing bookable reserves within OPEC is highly variable, while non-OPEC production, which tends to have higher standards of disclosure, is by comparison expected to peak in 2010.

INDUSTRY ACCEPTANCE: The idea that oil (or at least easily accessible light, sweet crude) is destined to peak in the near future has been gaining growing acceptance within the oil industry. Royal Dutch/Shell, a major independent oil company, has said that after 2015 “easily accessible supplies of oil and gas will probably no longer keep up with demand” – a peak of sorts.

Meanwhile, speaking at the World Economic Forum in Davos in 2010, French oil company Total’s chairman, Thierry Desmarest, argued that world oil production could peak “in about 10 years”, and that “it will be very difficult to raise oil production worldwide above 95m barrels, which is 10% more than today”. In the UK, a delegation led by entrepreneur Richard Branson argued in February 2010 that the world was facing an “oil crunch” within five years even more serious than the recent credit crunch. Perhaps most significantly, between 2007 and 2008 the IEA reassessed the rate of decline in existing oilfields from 3.7% a year to 6.7%. The new figure brings the agency’s estimated date for peak oil forward from 2030 to “around 2020”, according to its chief economist, Fatih Birol.

THE ROAD AHEAD: Which side of the debate is closer to the truth? As an argument against an imminent peak in oil supply, the economic approach has a degree of logic. Oil is an economic good, and the physical volume available is often of secondary importance to the cost of its extraction. As the market price of oil rises, previously unprofitable supplies become economically tenable. Record oil prices in recent years have also prompted fresh investment in new recovery methods and unconventional oil. Enhanced oil recovery, for example, has reversed the long-term decline in production in Oman, while oil production from Canada’s tar sands has surged in recent years. Should the price of oil continue to rise, new recovery methods may also become viable, rendering conventional estimates of proven, probable and possible reserves largely meaningless. Moreover, conservation combined with alternative energy sources will lead to a diversification in feedstock and less absolute dependence on oil.

Introducing the economic factor to what was previously seen as a purely geological problem can, however, lead to some unpalatable conclusions. A 2005 US Department of Energy report on peak oil, written by Robert Hirsch, argued that alternatives to oil are insufficiently developed to meet the demand currently catered to by the hydrocarbon. He argued that to avoid global economic collapse would require, “a mitigation crash programme 20 years before peaking”. According to the IEA, that would have been 10 years ago.

EXPORT LAND MODEL: In the absence of sufficiently developed alternatives to ensure a smooth transition, the economic factor in oil supply can actually lead to a multiplier effect on the peaking of oil – a sting in the tale. The Export Land Model, developed by geologist Jeffrey Brown, demonstrates how declining oil production in a given economy (“Export Land”) can actually lead to a decline in oil exports that is proportionately far greater than the fall in production.

The Export Land Model uses simple economics to show the knock-on effect of declining production. As supplies decrease, the market price rises, leading to increased economic growth in the exporting nation and hence higher domestic demand for oil. In the theoretical model, a 25% drop in oil production over a five-year period results in a drop in oil exports of 70%.

Several real-world examples of the Export Land Model have already occurred, including Indonesia, Argentina, Egypt and Mexico. The model suggests that the peaking of oil will be less momentous than the realignment of the global economy that may accompany it. In the absence of sufficiently developed alternatives, the comparative advantage of oil-producing nations will surge ahead of oil-importing nations, leading to widespread relocation of capital and productive capacity.

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The Report: Egypt 2012

Energy chapter from The Report: Egypt 2012

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