Bhushan Bahree and Jeffrey Ball wrote an Wall Street Journal article Producers Move to Debunk Gloomy 'Peak Oil' Forecasts (subscription required). As the title suggests, oil producers want us to believe that there is plenty of oil remaining.
At an OPEC seminar yesterday, Mr. Jum'ah of Aramco said the world had produced only about one trillion barrels, or about 18%, of the earth's producible potential of 5.7 trillion barrels of oil. "That fact alone should discredit the argument that peak oil is imminent, and put our minds at ease concerning future petroleum supplies," he said. The remaining 4.7 trillion barrels should be enough to last more than 140 years at current output rates, he said.
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In an interview, Mr. Jum'ah said the Saudis "don't mind the development of alternatives to oil," because increasing energy demand means the world needs supplemental energy sources. But he objected to government subsidies and other supports that lead people to believe that alternatives like ethanol are a "panacea" that is "around the corner," he said.
Still, 3.5 trillion of the roughly 4.7 trillion barrels of oil Mr. Jum'ah is counting on will depend on the development of new technologies. "I believe we will eventually tally about one trillion barrels each from yet-to-be-discovered fields and higher recovery rates" from existing fields, he said in the speech. He also factored in 1.5 trillion barrels from nonconventional sources, such as Canadian tar sands.
Mr. Jum'ah's speech came two days after Exxon's Australia chief, Mark Nolan, told an industry conference in Adelaide, Australia, that "the end of oil is nowhere in sight." Mr. Nolan cited a U.S. Geological Survey estimate of more than three trillion barrels of conventional recoverable oil resources, of which one trillion barrels has been produced. Conservative estimates of heavy-oil and shale-oil resources push the total to four trillion barrels, while a 10% increase in recoverability will deliver an extra 800 billion barrels, Mr. Nolan said.
Let us work with some of the numbers presented in the article. I am going to assume that 4.7 trillion barrels of oil remain to be produced. Although not quoted above, the article also states that demand is expected to reach 84.8 million barrels per day this year. For my purposes, I am going to assume that oil consumption will grow at two percent per year. That might be high. But with growth in many emerging markets, two percent might even be low. If we extrapolate from 84.8 million barrels per day in 2007, then by end of 2036, only 29 years away, the world will be producing 151 million barrels per day and will have produced 1.26 trillion barrels. Can the world sustainably produce 150 million barrels per day? Can the environment tolerate 150 million barrels per day? For the sake of argument, I will assume that the world can continue to increase production at two percent per year and that the environment can withstand the increased production. By 2077, about 70 years from now, the production will have topped out at 339 million barrels per day and the world will have produced the remaining 4.77 trillion barrels of oil. Put differently, if these assumptions were to play out, those of you who have small children today have children that will witness the end of oil.
The 70 years is far shorter than the 140 years quoted in the article. At present, there is no viable alternative to use in place of oil. In the next 70 years, we will have to find a replacement for oil.
I find it interesting that the article refers to Canadian oil sands (the oil sands industry very much dislikes the tar sands moniker). Canadian oil sands are expensive to develop. All in costs, including cost of capital, for an integrated producer—that is, a bitumen producer coupled with an upgrader— is about U.S.$35–$40 per barrel. When prices are high, oil sands appear to be a license to print money. But if prices were to return to historical norms of about $20–$25 per barrel for a five to ten years when production begins, the company might never break even. Unlike conventional production, turning off an oil sands plant is an extremely expensive proposition. First, the vast majority of the workforce is located in Fort McMurray, Alberta. If a workforce were to be fired, it would leave town and likely never return. And second, all that expensive capital equipment would sit unused. That would be extremely expensive. As long as the incremental came close to covering variable operating costs, the plant would continue to run.
Alberta is experiencing an unprecendented level of oil sands activity. The oil companies must have faith and confidence that prices will remain sufficiently high for them to earn a reasonable return. Otherwise, they would not choose to aggressively pursue oil sands as they are doing today.
If these high prices are to be maintained and we have only produced 18% of the earth's producible production, would not the high prices spur all sorts of activity and drive prices much lower? If prices were forecasted to go much lower, then why all the excitement in the Alberta oil sands industry? Perhaps oil companies have confidence because they know that producing the remaining 82% of the producable oil is going to be expensive and difficult.
Incidentally for those who might want an excellent, in-depth understanding of the marketing and pricing of Canadian oil sands crudes, I recommend Purvin & Gertz Global Markets for Canadian Crude study. Contact Steven Kelly at using the company's website contact us feature. Please note that the cost of this study is prohibitively expensive for an individual and is meant for corporations and governments.
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