Economist's Corner

The Future of Global Oil Production: Plateau or Peak?

Economist’s Corner this issue hosts Peter Jackson of Cambridge Energy Research Assocs. Jackson presents a macroeconomic perspective on the peak oil theory.

Kristine Petrosyan and Francesco Verre, Editors, Economist's Corner


 

The “peak oil” debate continues to rage with no progress. Cambridge Energy Research Associates’ view, based on 2 decades of research, is that there will not be unlimited resources, but rather that supply levels will reach a plateau at a time in the future and will not even begin to “run dry” for an extended period thereafter. Above-ground, not geological, factors will play the major role in dictating the end of the age of oil. To summarize several primary conclusions:

  • There is no evidence of a peak in global production before 2030.
  • An undulating plateau rather than a peak is anticipated, and the inflexion point in global production will be driven by above-ground factors, rather than limited by below-ground resources.
  • The debate should move toward a better understanding of the key drivers of production, including the scale of global resources and the likely production outlook.

Following strong capacity growth to at least 2030, global production will eventually follow an undulating plateau for decades before declining. The profile will not be a bell curve, but it will be asymmetrical—with the slope of decline more gradual and not mirroring the rapid rate of increase. During the plateau period, demand growth will likely no longer be met by growth in available, commercially exploitable natural oil supplies. Unconventional resources such as heavy-oil sands, gas-related liquids, and gas-to-liquids and coal-to-liquids projects will fill the gap.

Understanding the difference between a plateau and a peak followed by a decline, as well as the timing of events, is critical to the global energy future. Corporations, governments, and other groups need to have a coherent description of how and when the undulating plateau will occur so that rational policy and investment choices can be made. There is time to consider the best way to develop viable energy alternatives that would provide the bulk of our transport energy needs and ensure that there is a useable production stream of conventional crude for some time to come.

An apparent peak in world oil production could materialize if aboveground issues such as war, political change, or intractability in decision making by governments should limit upstream investment and activity. But such an outcome would not be related to geological constraints.

The analytical techniques developed by M. King Hubbert are commonly used to support the concept of an imminent peak. Despite his valuable contributions in the 1950s, his model fails to recognize that reserves estimates evolve with time. It does not incorporate economic or technological factors that influence productive capacity and ignores the impact of both price and demand. Hubbert did predict the year of peak U.S. production, but failed to project a robust production profile after 1970.

The peak oil theory is frequently supported with data indicating that new exploration activity is not sufficient to replace annual production. However, this argument is incomplete because it ignores the role of development projects in expanding reserves and fails to understand economic factors that emphasize development vs. exploration work.

By focusing on discoveries and ignoring reserves upgrades, it disregards the fact that the combination of field revisions and exploration has generated resource growth of as much as 320 billion bbl, or one-third more than total production, during the period from 1995 to 2003.

Those who believe a peak is imminent tend to consider only proven remaining reserves of conventional oil, which they currently estimate at about 1.2 trillion bbl. But the remaining global oil resource base is at least 3.7 trillion bbl, three times as large as estimates by peak oil theory proponents. The global resource base, including historical production of 1.1 trillion bbl and yet-to-be-produced resources, is 4.8 trillion bbl and is very likely to grow, especially as unconventional resources grow in importance.

Hubbert’s post-peak decline curve assumptions are rebutted by observation that the geometry of typical oilfield production profiles is often asymmetrical and does not generally show a precipitous mirror-image decline in production after an apparent peak, even without the application of new technology or enhanced-oil-recovery techniques. Although Hubbert made an important contribution, his methodology does not replicate the production of tens of thousands of oil fields currently producing globally, nor the impact of new exploration and ongoing field upgrades. The fact that the method appears to work selectively in some areas and not others suggests it is of limited use.

It is not surprising that peak oil lobby projections of the date a peak would be reached continue to come and go. The most recent target, Thanksgiving 2005, came and went. Other projected dates for peak oil are 2007–2009, 2010, and 2012. These also will come and go. The peak argument is not presented in the context of a credible evaluation of available data; its proponents have not made available a detailed analysis that would allow an objective discussion.

A production peak of sorts will develop in the next 50 years. We believe that considering the multitude of factors that will control future productive capacity, it is not possible to calculate reliably the date of the peak, nor is this the key issue. There is a need to identify the signposts that will herald the onset of the inevitable slowdown of production growth and ensure that policymakers outside the energy community have a clear understanding of possible outcomes and risks. This involves understanding the main indicators we can extract from geology, economics, and technology and understanding supply, demand, and oil markets in general.

 


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