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Predicting A World Oil Production Peak/ Possible Price Trajectories

Predicting A World Oil Production Peak/ Possible Price Trajectories. Presented at the California Energy Commission Workshop on World Oil Supplies April 28, 2003 Sacramento, CA Alfred J. Cavallo, Consultant 289 Western Way Princeton, NJ 08540. OUTLINE. Background Increasing Demand,

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Predicting A World Oil Production Peak/ Possible Price Trajectories

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  1. Predicting A World Oil Production Peak/Possible Price Trajectories Presented at the California Energy Commission Workshop on World Oil Supplies April 28, 2003 Sacramento, CA Alfred J. Cavallo, Consultant 289 Western Way Princeton, NJ 08540

  2. OUTLINE Background Increasing Demand, Finite Supplies The Debate: When will oil production peak? (What Debate?) New Approach: New Model/ Model Validation Results Possible Price Trajectories Conclusions

  3. BACKGROUND Increasing demand driven by: · Population increase · Industrialization of China, India Projected world annual demand increase: 2%/year Exponential growth: 2%/year over 20 years: x 1.5 increase. 75 Mbbl/d (2002) => 110 Mbbl/d (2022) History: 1.5% increase over last decade

  4. THE DEBATE Conventional petroleum reserves are finite. Production has peaked in the US, UK, Egypt or is flat in many non-OPEC oil plays When will world oil production peak? What are the reserves? Where are the reserves? What are the alternatives? Except there is no debate. Why?????

  5. WHAT OIL PEAK? Public interest groups: Greenhouse effect will limit consumption, not resource constraints. (The stone age didn't stop because people ran out of stones.) EIA (Annual Energy Outlook 2003): Business As Usual Through 2025 (Peak in 2037?) EC (2001): No problem through 2025 CIA (2002): Peak in 2025 (Not widely reported)

  6. REASONS FOR NON-ISSUE Cry wolf too often. · PA geologist in 1874 stated that the US would run out of oil by 1878. · Club of Rome (1972) · USGS (1981) · Campbell (Scientific American, 3/98); oil price drop to $10/bbl in 12/98. Reasons for difficulty with predictions: Market price decoupled from production cost: => wild price fluctuations. [Market price not now a reflection of fundamental resource limits.]

  7. Continued Reserve estimates problematic (until recently: back of envelope calculations). No error bars on reserve estimates. Proprietary reserve estimates Poor Models No analysis of assumptions or limitations Hubbert's Peak: No geophysical or physical reason for production to follow a logistic growth curve.

  8. QUESTION Can a forecast be made that is useful to consumers and producers, one that will alert them to problems so that alternatives might be put in place? [Useful vs useless predictions] Requirements: · Believable Reserve Estimates · Transparent (econometric) Model Understand Market Rules

  9. UNDERSTAND THE RESERVES Supplies are now abundant due to profound advances in geosciences and in petroleum engineering and technology: 1. Plate tectonics 2. Oil formation (source rock), migration, trapping 2a. All major sedimentary basins explored, more remote, or deeper deposits developed. 3. Three dimensional seismic surveys 4. Lateral drilling 5. FPSO Corollary: Much better reserve estimates can be made (not widely appreciated).

  10. UNDERSTAND THE MARKETS How profitable is this business? What are production costs? · Now · Future "Non-OPEC finding and development costs dropped from $22/bbl in 1981 to $6/bbl in 2001 (2001$)." E. Baird, President and CEO, Schlumberger Ltd. Fossil Fuels, The Key to Sustainable Development, World Energy, 2003, Vol 6, No. 1, p 34-41.

  11. PROFITS What is the market price?? OPEC "price band" of $28-$22/bbl CONCLUSION: Market Price decoupled from production cost (OPEC, non-OPEC) Market equilibrium does not exist. Delectable Margins!!!! (OPEC and non-OPEC Producers)

  12. CONSEQUENCES · Market Price gives no indication of how rapidly reserves are being depleted. · Market rules favor maximum rates of current production (OPEC and non-OPEC). · More expensive non-OPEC reserves are being depleted much faster than low cost OPEC reserves. · Prices may decrease as production approaches a peak.

  13. THE MODEL Model Assumptions: · Market Stability: OPEC rules (swing producers) · Decision Criterion: Production Plateau or Peak when USGS Proven plus Undiscovered Reserves to Production Ratio (Rp+u/P) drops to between 10 years and 20 years. (Economics: Nobody will increase production after this point since the future of the enterprise is threatened.) · Aggregate/disaggregate reserves/producers · Assume all undiscovered oil is discovered and marketed as rapidly as needed · Assume 2% demand growth (1%, 3%).

  14. HORSEFEATHERS! Predictions always wrong before …. (so they always will be wrong..) The USGS is a bunch of armchair geologists... Trust the good ol’e boys to find all the oil you need... Model Validation Now have many more years of experience, many more non-OPEC oil plays are well-developed and have plateaued or peaked production. Using available production statistics (Petroleum Economist, World Oil), examine production trends relative to USGS Rp+u.

  15. BEST CASE SIMPLIFYING ASSUMPTIONS 1. “Aggregate Producers, Full Cooperation” Unrealistic, especially as one approaches a peak (OPEC and non-OPEC). 2. “All undiscovered oil found and produced as rapidly as needed.” Unrealistic, especially for FSU, as more remote fields are developed.

  16. POSSIBLE PRICE TRAJECTORIES Old (OPEC domination) · Long production plateau after 2010, gradual price rise New (US dictated) · Price decrease ($15-20/bbl), rapid increase in consumption · Market collapse and desperate search for alternatives (GTL, heavy oil, tar sands).

  17. ADVANTAGES OF NEW SYSTEM TO THE US: · Buy support (cheap gas) for war(s) from US voters · Remove resources from those likely to challenge US domination. · Full control of oil allows US to dictate the rules for the world economy

  18. ALTERNATIVE POLICY SURCHARGES AND REBATES SURCHARGE: Phase in a $3/gallon (minimum) surcharge on gasoline REBATE: Surcharges immediately recycled to consumers to help them cope with new world.

  19. CONCLUSIONS · Science (Reserve Estimates) plus Understanding of Market Rules allow credible predictions to be made · Production peak in near future (2010-2020) · Sooner under US, later under OPEC · Cheap gas until the peak is clearly visible · US-dictated production rates will lead to a much more chaotic transition to a sustainable economy. * Alternatives are technically feasible and affordable

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