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Has World Crude Oil Production Peaked?
by Joseph Dancy, LSGI Advisors, Inc.

Adjunct Professor, SMU School of Law
September 10, 2003

In 1956 American geophysicist M. King Hubbert completed his analysis of future crude oil production in the United States. Hubbert�s work was groundbreaking because it combined geophysics with statistical analysis, projecting the trend of domestic oil production levels for years to come. Hulbert predicted that production would follow a bell curve: production would go up, but it would inevitably peak and then start to decline following a bell curve pattern.

The math told Hubbert that the peak of U.S. production would occur in the early 1970s, clashing with the conventional wisdom of the time. Amazingly Hubbard was right: U.S. oil production hit its high in 1970, then started to decline just in time for the OPEC-induced oil crisis.

Ken Deffeyes, a Shell Oil company engineer who worked with Hubbert, was impressed by Hubbert�s methodology and predictions. At the time Deffeyes was one of the few people who took Hubbert's prediction seriously. "I realized that a contracting oil industry was not a good career prospect," he says, "so I decided to get out and go into academia."

Deffeyes, now a retired Princeton University Professor of Geology, recently revisited Hubbert�s study of U.S. production trends to attempt to identify when the world's crude oil production will peak. The results of his inquiry was published in 2001 in a book entitled �Hubbert's Peak.�

Consequences of Peak World Crude Oil Production

The peak of world oil production has profound economic implications. In 2002 crude oil accounted for 39% of the energy consumption in the United States. U.S. oil demand has climbed on average 1- 2% per year since the late 1980s according to a report prepared for the Bush Administration, and worldwide demand is also increasing. Natural gas accounted for 24% of U.S. energy demand, with coal accounting for 23%.

Increasing worldwide production of crude oil year after year over the last century has fostered impressive economic growth, especially in developed countries. Even today, looking at worldwide statistics, five of six global inhabitants use virtually no energy. The one of six who live in a developed economy use a considerable amount of energy.

Rates of oil production tend to accelerate, experts say, until about half of the oil reserves are drained from the oil fields. From that point forward, oil is produced more slowly and more expensively. The point at which production stops accelerating and starts to slow down is known as the production peak.

If world crude oil production should peak, or begin to decline, the law of supply and demand would mean that prices for the product will increase substantially. This increase in price will be global, and will create �chaos in the oil industry, in governments, and in national economies� writes Deffeyes. Short term solutions will be few and costly. U.S. dependence on crude oil imports is �incredibly large� and growing, adding to the problem.

Deffeyes� Conclusion � When Will World Oil Production Peak?

Examining the data and analysis several different ways, Deffeyes reaches a conclusion with far-reaching consequences for the entire industrialized world. The conclusion is this: somewhere between today and six years from now worldwide crude oil production will peak. After that, higher prices or chronic shortages will become a way of life. The 100-year reign of crude oil will be over, along with the economic growth that it nurtured.

Using "reasonably accurate [world oil] production inventories" Deffeyes provides an educated guess on the total amount of world crude oil that will be produced. This method was used successfully by Hubbert in his prediction of the U.S. production peak. The inventory method, as applied by Deffeyes, determines that world crude oil production should peak in 2009.

Deffeyes also uses an alternative method used by Hubbert, "fitting parallel curves to the cumulative production and to discoveries (cumulative production plus reserves)" to determine the date of peak production. This method predicts that peak production will be in 2003.

Several other analysts began applying Hubbert's method to world oil production starting in 1995, and �most of them estimate that the peak year for world oil will be between 2004 and 2008," writes Deffeyes � very close to his estimates.

Other Recent Analysis � Simmons & Company

Investment banker Matthew Simmons of Simmons & Company, a close advisor to the Bush Administration, concurs with Deffeyes� analysis. They note that many scientists agree that peak production occurs when around �the best 50%� of reserves are gone, and note it is very difficult to project an exact date or recoverable percentage before a production decline occurs.

Simmons notes that the rate of decline of crude oil production has increased as smaller fields are developed and technology increases production rates. Many major oil fields are producing more water, a sign of resource depletion. Economics can increase the amount of reserves recoverable, but the rate of production is more difficult to affect.

Simmons claims that his �analysis leads me to worry that peaking is at hand, not years away.� He admits he may be wrong, but if he is right �the consequences are too serious to ignore.�

Recent Developments

"Hubbert�s Peak� was published in 2001, and Deffeyes stands by his conclusions today � except for one fact: several weeks ago he said he was wrong about world production reaching its peak midway through this decade. He now claims that it probably has already happened - in 2000.

"Production in 2001 and 2002 was down from 2000, and 2003 is not off to a great start. After 2004, the rest of the world's production capability will have dropped enough so that opening all the valves in Saudi Arabia will not catch up to the year 2000."

Solutions

Although world oil production should peak at some time between 2000 and 2009, Deffeyes observes that none of our political leaders seem to be paying attention. Even oil companies are not buying up existing oil fields that they would if they believed the prediction.

Using the latest technology has not helped increase overall production as the discovery of new oil fields has declined sharply since the 1960's. Some geologists argue that the new technology has only shown that there isn't much oil left to be found. And most oil occurs between 5,000 and 15,000 feet underground � deeper than this and the heat generally causes the hydrocarbons to become natural gas � so drilling deeper is not a solution.

Over the next decade, if crude oil becomes more expensive, natural gas will probably be the most attractive hydrocarbon to substitute for oil, at least for electricity generation and heating. It is relatively clean and by all estimates plentiful � on a worldwide basis anyway.

But production of conventional sources of natural gas appears to have peaked in the U.S. in the 1990s � but huge natural gas reserves and productive capacity exist worldwide. Liquefied natural gas can be imported into the U.S. to meet projected energy needs, but the infrastructure costs for such facilities will be measured in the billions of dollars.

"In a sense, the fossil fuels are a one-time gift that lifted us up from subsistence agriculture and eventually should lead us to a future based on renewable resources," Deffeyes concludes.

© 2003 Joseph Dancy

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Joseph Dancy, Adjunct Professor, Oil & Gas Law, SMU School of Law, Advisor, LSGI Market Letter | Joseph Dancy's Book Reviews | E-mail

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