THE END OF CHEAP OIL

["M A Jones" <jones118@xxxxxxxxxxxxxxx>]

(Murray Duffin, July 2000)

Abstract

In this paper I will try to summarize & organize the salient
information from a great many source papers, to make the key points readily
accessible.

First I will present conclusions, followed by definitions, data, commentary
on the data and arguments.  Finally the key source papers are referenced,
with Internet addresses, for those who wish to dig deeper own their own.
The following is derived  from two years and many hours of research.

1.0 Conclusions

The end of the era of cheap oil is at hand.  It began  in 1999 with
the resurgence of oil prices from a very uncharacteristic low, in essence a
bottom. We are not running out of oil, in fact far from it.  However, we
are at the point where demand has caught up with supply, and given the huge
investment required, it will be 2- 3 years before slack supply is available
again, if ever. We are only a few years away from the time when 50% of all
of the originally recoverable conventional oil in the earth's crust will
have been exhausted.  After that point (termed the Hubbert Peak), supply
will begin to decline, regardless of investment and the gap between supply
and demand will open.

OPEC is now, again, the world dominant supplier, and in a few years will
control more than 50% of the world's oil supply.  Given OPEC control and
natural self interest, near term demand equal to or greater than supply,
medium term demand growing while supply diminishes and no readily available
alternatives, the price of oil is set to rise inexorably, possibly
punctuated by a few brief respites.

The next substantial price rise is likely to be as soon as Q4
2000.  What will that do to the stock market and our economic boom?
We must adjust to (temporary?) shortages with high and increasing
prices immediately and to permanent shortages within a decade.

No one is to blame.  A finite source will eventually get harder to
produce from and will yield at a lower rate.  Less extravagant consumption
could have delayed, but not prevented this outcome. The economists who
reassure us that there is no foreseeable problem, and the
politicians who listen to them have got it wrong.

There is one other conclusion that I would like to note that is
not directly related to nor derived from this research.  There is a great
deal we can do to reduce oil consumption,  with only neutral or positive
impact on the economy.  The know-how and technology already exist.
Unfortunately, without knowledge on the part of the people,
and political will on the part of our leaders, we are unlikely to act
until prices and shortages really bite.  Dependence on oil could easily be
cut by a factor of 4 per unit of GDP in less than 20 years, without economic
or environmental sacrifice.


2.0  Definitions (Terminology) and Explanations

Several of the definitions are accompanied by necessary
elaborations, so that the reader can understand the sources of disagreement
and confusion relative to the subject of petroleum supply.

2.1 First - some relationships

 a) - Cumulative production (total from the first oil recovery
to the present)

 b) - Reserves - oil that has been discovered, but not yet
recovered

 c) - Estimated Ultimately Recoverable (or Ultimate Recovery)
EUR - how much will have been produced when no further recovery is
possible.

 d) - Discovered-to-date  - a) + b)

 e) - Yet-to-find    c) - d)

 f) - Yet-to-produce    c)-a) or d)+e)

2.2 Resources - Traditionally taken to be "total oil in the
ground" regardless of recoverability.  Ivanhoe12 refers to it  as "oil
available with someone else's money". Resources reflect the geologist's
estimate based on interpretation of exploration (usually seismic) data,
prior to any drilling.  The geologist was motivated to "find" a lot
of oil, in order to secure financing.  In early days (circa 70 years
ago) resources could be as much as 10xEUR. Since the mid `70's with
development of robust computer models, extensive data bases, and digital 3D
mapping, resource estimates are much more accurate, about
equal to EUR.

Ivanhoe notes that government agencies, academics and
economists tend to estimate resources (oil companies report reserves).  They
then assume that "oil-in-the-ground" will someday be recoverable with
improving technology, when in fact much of it was never there in the first
place. Be very wary of any analysis or conclusions based
on "resource" estimates.

2.3)  Reserves - initial reserves are the estimate of oil available
after drilling.  They usually reflect the engineer's conservative opinion of
recoverable in a known time, with a known technique and cost.  Ivanhoe
refers to reserves as "oil available with our money".

With improved analytic techniques reserves are usually
revised upwards. Nearly all discoveries prior to the mid 70's have been back
adjusted, so reserves appear to grow, when in fact it is a result of
refining originally conservative estimates. Reserves can also "grow" because
of reporting regulations (SEC requires reporting of proven reserves), or for
political reasons - e.g. OPEC allocation of quotas based on reserves.

To add to the confusion there are 3 commonly used estimates:

   Proven - i.e. 90% probability that EUR will be equal or higher

   Proven + probable - i.e. 50% probability - the most likely case

   Proven + probable + possible - i.e. 10% probability; very unlikely to be
realized.

Further, sometimes natural gas liquids (NGL) or non- conventional (also
termed unconventional) oil are reported as reserves.

The result is that summing reserves from  all of the world's countries or
oil provinces, without critical analysis, will almost certainly lead to a
too high total.  The detailed data needed to do the critical analysis
resides in closely held data bases (e.g. Petroconsult in Geneva) and is not
available to most economists, or even to the USGS Delphi participants.
Economists and the USGS therefore systematically overstate reserves.

It has been assumed that improved recovery techniques also cause reserve
growth.  Evidence indicates that such new technology increases
recovery rate but has little or no impact on EUR.  It does accelerate
depletion. Current reserves of course are c) - a) - e), EUR minus
cumulative production, minus yet-to-find.

2.4)  Discoveries - New fields found through surveys and
exploration.  Discoveries add to reserves.  In a given "province" (e.g. -
North Sea), the large fields are the easiest to
recognize from survey data, and are therefore the first to be
discovered.  Subsequent discoveries tend to be sequentially smaller.

2.5) Conventional Oil - Normally refineable crude oil, recoverable
with current or confidently planned technology and tools.

2.6)  Non-conventional (Unconventional) Oil - Venezuela (Orinoco)
bitumen, Athabasca tar sands, shale oil and very very deep water offshore
oil. Not recoverable &/or refineable by conventional means

2.7)  Economically recoverable - recoverable with a positive payback
on exploration + development + recovery costs, at a given price.
Economically recoverable may increase as price increases.

2.8)  Energetically recoverable - recoverable with a net energy
yield, when burned as fuel, in excess of the energy used to build the
equipment, supply the material, drill the well and pump and transport the
oil.  A couple of small North Sea fields have been exhausted only 2 years
after being drilled.  It is possible (probable?) that they were economically
but not energetically recoverable, unless they were drilled with a used
(energetically paid for) oil platform.

2.9)  Gb - One billion barrels or 109 barrels equals 1000Mb or one
thousand million barrels.  Resources and reserves are normally expressed in
Gb or Mb.

2.10) NGL - Natural Gas Liquids or gas condensate.  Sometimes
included in reserves or EUR.

2.11) R/P - Reserves to Production Ratio - the number of years to
total exhaustion of reserves at the most recent year's production rate.


3) Data

3.1 EUR  c) Variously estimated from as low as 500 Gb in the  1940's based
on poor data, to 3500 Gb in the 1960's  based on anticipated impact of
technology that hasn't panned out.  Estimates over the past 20 years have
converged on 2000 Gb20.

   Woodward - review of 40 estimates - mean 2000 Gb, median near 2200Gb

   Rand Corporation - between 1600 and 2000 Gb OPEC 2138 Gb

   Petroconsult - 1800 Gb (plus 200 Gb NGL)

   The author will use 2000Gb.

3.2  Cumulative Production  a) Generally accepted as about 820 Gb at end
1999.

3.3  Yet-to-find  e) Ranges from a low of about 150Gb for Campbell
(Petroconsult) to 600Gb for the USGS (United States Geological Survey).
Both the recently low and declining discovery rate, and Laherrere's
parabolic 9 fractal analysis would support the lower number.  The USGS
number derives from a Delphi exercise rather than analysis of hard data.
The knowledge, motivation of and influence on the Delphi participants are
not known. The author, being an optimist, has used 200Gb.

3.4  Reserves c) - e) - a)

While the reserves by country or province are subject to considerable
disagreement, the total tends to be accepted as near 1000Gb.  Late 1995
published data will illustrator the range of disagreement - all in Gb17.

Region/Source   OAJ WO Petro USGS

N. America                 77  77   64   100
S. American                78  85   51    74
Europe                     16   31  30    37
FSU (Former Soviet Union)  59  191  76   121
Africa                     73   79  53    72
Middle East (ME)          660  590 439   583
Far East                   42   51  38    62
Other                       2    4   3     4

Total                    1007 1108  754  1053

OGJ - Oil & Gas Journal, Petro - Petroconsult,
WO - World Oil Journal,  USGS - US Geologic Survey

NOTES: . In 1987/88/89 ME reserves jumped by near 280 Gb without new
discoveries and with little new drilling.  Some of the increase may have
been new analysis, but timing would suggest political motivation to
influence OPEC quota allocations.

  ME-stated reserves have remained constant for several years,
despite annual production and lack of discovery.

  FSU - has been strongly overstated in the past (10%
probability numbers?).

 Given the geography it could be expected to be substantially
greater than North America. Petroconsult discounts ME and FSU strongly (too
much?) for the above reasons.

The author goes with c) - e) -a) = 980 Gb.

3.5 Reserves Growth 17
 Published reserves 1973   577 Gb
 Published reserves 1996  1062 Gb
 Production `73 - `96      513 Gb
 Discoveries `73 - `96     520 Gb
 Reserves "growth"`73 -`96 424 Gb

During 23 years reserves grew by nearly 40% of the sum of starting reserves
plus discoveries.  However, it is likely that at least 130 Gb was political
(See 3.4)  Real growth due to drilling and improved mapping and analysis may
have been 30% or about 13Gb/yr average.  (It may have been much lower, also.

Notes:  As new technology has now been applied to most old
discoveries (Odell 17 notes a major effort on enhancing known fields during
this period), and as new discoveries were more accurate to start with,
little further reserve growth should be expected.   Perhaps 3 to 4 Gb/yr
will be realized during the next decade.

3.6 Discovery

 1945 - 1960  Averaged 35 Gb/yr - mainly due to ME

 1970 - 1990  Averaged 23 Gb/yr - influenced by oil crises

 1990 - 1999  Averaged  6 Gb/yr

NOTES: Discovery peaked in 1962/63 and the rate of decline since
has been accelerating. Campbell has noted that discoveries per dollar spent
on exploration was much lower in the `90's than in the `70's.
The time from discovery peak to production peak was 35 years in the lower
48,and 15 years in the FSU. World production is expected to peak 40-45 years
after the discovery peak. The American Association of Petroleum Geologists
has forecast a discovery rate of 8Gb/year from 2000 to 200919.  They must
anticipate a huge increase in exploration which might happen given rising
oil prices.


3.7 Consumption in Gb/yr 17,23

 1990  23.8   1995  24.9

 1991  23.7   1996  25.4

 1992  23.9   1997  26.1

 1993  23.7   1998  26.2

 1994  24.3   1999  26.7

 2000  28.1 (projected)

NOTES . Discovery is now running less than 25% of consumption. Stock draw
down from Oct. `99 through Feb. 2000 was about 250 Mb6, or 4 months of the 3
recent OPEC increases.  (16 months of the first increase)

3.8 What is a large discovery?

The largest field ever discovered was 90Gb - in  Saudi Arabia.  That is 3
years world supply in 2002 terms, assuming it is all recoverable.  It isonly
1.5 years to the Hubbert Peak and declining recovery, if it was the
sole source.

- Today a big field would be 0.5 Gb

- The Caspian Sea referred to as a major find has an EUR of 30 Gb, enough to
postpone the Hubbert Peak about 6 months.

- 60 to 70% of known oil is in 300+ "Giant" fields

- 94% of known oil is in 1311 "Major" & "Giant" fields

- Of 17000+ (excluding 15000 termed insignificant) known fields worldwide,
the 2000 smallest contain a total of 50M bbl of oil - 6/10 of a day supply.

NOTES:

Of 17000 plus known significant fields, 7500+ are in North America. With
32000 fields worldwide (including insignificant) 20 it is unlikely that any
major  finds have been overlooked. It is likely that no few of the smallest
2000, especially in deep water, have a negative net energy return.

3.9 When can we expect the Hubbert peak?

 1999 Reserves                    980 Gb

 Possible reserve growth to 2020   70 Gb

 Yet to find                      200 Gb

 Cumulative production            820 Gb

 Initial resources               2070 Gb

 50% depletion                   1040 Gb

 Already depleted                 820 Gb

 Remaining to Hubbert Peak        220 Gb


 Average annual consumption 2000- 2010 - 31 Gb/yr
 Hubbert Peak in 220/31 = 7 years - ie 2007


NOTES: - The author is a self-proclaimed optimist. For a much more
scientific analysis see Duncan and Youngquist 22 , who place the peak in
2006.

3.10 How rapid will the decline be after the peak?

The lower 48 production dropped by 50% in 37 years, about 1.8% per
year. North Sea fields that are already in decline are down 36% in 6
years for Norway and 65% in 15 years for the UK, or about 6% per year 14.
Campbell and Laherrere project about 2.5 to 4% per year.

NOTES: If a demand growth of 1.5%/yr bumps into a supply decline of
3.5%/yr we will have a major problem. Energy efficiencies of greater than
2%/yr are probably achievable. Energy substitutions of 2% per year may be
possible. Allocation of the available supply will need to be addressed -
will market mechanisims serve?, which ones?. What if the decline is 6% per
year?

3.11) How about unconventional oil?

Unconventional "resource " estimates, vary from about 1300 -
4000 Gb (100 years' supply.? - No, only about 1/6 of it is considered to be
energetically recoverable.) However, the resources are meaningless for
purposes of this paper. What  counts is the rate of recovery projected over
the next 20 years. In spite of nearly 30 years and several billion dollars
no successful technology has been developed to recover shale oil, and
efforts have largely been abandoned.  Orinoco bitumen is already producing
(Orimulsion), and tar sands may be attractive at about $50.00 per barrel.
It is estimated that, with sufficient investment (billions of
dollars) bitumen and tar sand production could be brought to 2Mb/day in 2010
(about 2% of needs) and 7 Mb/day in 2020.   This addition would reduce the
rate of decline after the Hubbert Peak slightly.

Notes:  One can imagine an energy efficient world in which North
America would need less than 10 Mb/day by 2050 and it could all come from
tar sands, at a high enough price.

3.12  What about year 2000? 16

                        Q1     Q2     Q3     Q4
 Demand   (Mb/day)    75.7   75.1   76.6   78.7
 Supply non-OPEC      45.9   45.6   45.7   46.4
 Supply   OPEC        29.4   30.6   31.3   31.6
 Supply TOTAL         75.3   76.2   77.0   78.0

NOTES: Excess supply in Q2 and Q3 does not make up prior destock.
The swing supplier is Iraq. They have no reason to help and have already
announced production problems. Total supply is above 98% of capacity in Q4,
- no room for problems.

3.13 What's wrong with R/P?

BP/Amoco statistics show that we have about 38.5 years of reserves at the
1998 production rate. This ratio is essentially a meaningless number as it
assumes implicitly that oil can be produced at a constant rate, until the
last drop is recovered, and then recovery will drop instantly to zero. The
real world doesn't work that way.

4.0  The Arguments

4.1 The Economists and Academics

The two perhaps most optimistic contributors are P. R. Odell and Michael
Lynch.

4.1.1 Odell 17

- Assumes that reserves growth in the future will be at
least as high as in 1973-96, (very unlikely-see 3.5) but doesn't say how
quickly. (It would have to bequicker than in the reference  23 years to do
much good.)

- Takes the USGS number for yet-to-be-discovered, the most
optimistic number,and ignores discovery rate.

- Assumes 35 Gb/yr production by 2020, but gives no detail on
how we get there from here.

- Doesn't discuss who controls the oil wells.

- Simply invents numbers for total non-conventional oil
reserves with noreference to credible sources & no consideration of costs or
rate of recovery.

- Assumes fairly explicitly that technology will take care of
the details, with no mention of what technology, or how quickly, or
reference to past progress. With this set of assumptions he concludes that
there is no problem in the foreseeable future.

4.1.2 Lynch 21

-In a 1998 paper Lynch tackles Campbell (the most profilic and
often cited geologist) head on. He notes that they both forecast the future
in 1989 and Lynch got it right. He points out that Campbell in 1989 and in
subsequent forecasts was consistently pessimistic, and has had to regularly
raise  his reserve estimates and push out his day of reckoning.

-Bases his own arguments on the fact that reserves have
always grown (up to 1998) (See 3.5) without questioning that they do this
independent of consumption and discoveries.

-Totally ignores the rapid decline in discovery rate, and
seems to asume that reserves will grow forever.

-States untapped resources as greater than 2000 Gb without
citing sources.  He can only get to such a number by including the bulk of
unconventional oil and misusing "resources" (See 2.2) while ignoring issues
of costs and rate of recovery.


The not quite stated conclusion is that Campbell was wrong in the past and
must therefore be wrong in the future, while Lynch was right in the past and
must therefore be right in the future.

Lynch also concludes that there is no forseeable problem with the ongoing
availability of cheap oil.

His 1998 paper was published before prices tripled, so he may
be a little more cautious now.

4.2 The Geologists

The key references are Campbell, Laherrere, and Ivanhoe.
They have all held senior positions with major oil companies, they all have
access to  considerable very specific data and they all understand the
technology of exploration, development and recovery.  They seem to be
unanimous on three points:

  - the world has been thoroughly surveyed and largely explored. There are
no major new surprises waiting to be discovered.

  - big fields get discovered first.  Anything not yet discovered is also
not big.

  - the Hubbert Peak will be reached before 2010.

4.2.1 Campbell 1-5

-Is the most published, the most often cited, the most definite and probably
the most pessimistic; (or maybe realistic).

-Admits to being guilty as charged by Lynch, stating simply that as he gets
more or better data he revises his conclusions.  The time frame may shift a
little, but the problem won't go away and won't be long postponed.

-Has probably  been intentionally pessimistic, trying to get an uncaring
world to pay attention before it is too late, and has thus put himself in
the position of "crying wolf".

-Bases his argument mainly on discovery.  If we are using oil 4-5 times
faster than we discover it, and if discovery per dollar of exploration is
declining rapidly, then we face a very finite limit on our supply.

-Along with Laherrere was the first to publish a Hubbert Peak
analysis for the world, and  emphasizes that running out of oil is not the
issue; it is the declining production after the peak, when 50% of the oil is
still in the ground, that is the problem. It is the end of cheap oil that he
warns us of.

-Also questions the declared reserves, noting: FSU reserves were exaggerated
under Communism for political reasons. FSU fields are in disarray, in
declining production, and won't help in the next years even if their
reserves are higher. ME reserves grew about 280 Bbbl from 1987-89 without
significant new drilling or exploration, probably because OPEC quotas were
pro-rated on reserves. ME reserves have not declined in the past 10 years
regardless of production and no new discoveries. Campbell declares reserves
at the low end of all estimates and thus positions the Hubbert Peak earlier.


4.2.2 Laherrere 7-11

-Is the most analytic and possibly the most interesting
contributor. Of particular interest is his  analysis of the parabolic
fractal distribution of petroleum in the earth's crust.  This analysis is
probably the most telling argument against major new
discoveries.

-Also provides an excellent analysis of why the optimistic USGS numbers are
probably wrong.


4.2.3  Ivanhoe 12

-Provides some very useful clarification of terms and difficulties, and
otherwise largely agrees with Campbell.

4.3  Others

4.3.1  Riva 18

-Has major problems with arithmetic that leads him to some unsupportably
optimistic conclusions.  Regretably he briefed Congress in 1998, and it  is
most unlikely that any representatives caught the errors.

-Projects a demand of 94M bbl/day by 2010 or 34.8 B  bbl/yeaar.  Such a
growth rate would pull in the Hubbert Peak by about one year. It seems most
unlikely that such a high demand could be satisfied - so something has to
give.

4.3.2 Fleay  6

-Has published a recent (Feb. 2000) and very detailed paper, illuminating
the present supply/demand and price situation.  This paper is a "must read".


4.3.3 Simmons 15,16

-Provides a comparison of 2000 vs 1973 and an analysis of 2000 with a
projection of the fourth quarter that is very alarming. Also a "must read".

5.0  What is to be done?

5.1  Immediately

- Start to accept with equanimity that higher gasoline and heating oil
prices are not going to go away, but indeed will continue to rise, and
adjust life styles accordingly.

-Stop looking for someone to blame.

-Stop looking for easy outs.  As Peter Senge has noted "the
easy way out leadsback in".

-Communicate the facts to our fellow citizens and our
political leaders.

5.2  Near term

-Declining oil availability poses a real threat to the economy, unless we
start preparing now.  We can do 2 things:

-make the economy much more energy efficient;

-develop alternative (renewable) energy sources.

If we started now, in earnest, enough could be achieved before 2007 to avert
a crisis. Details of what can be done would require another paper.


REFERENCES

1) Campbell - Evolution of Oil asessments 3/23/2000
  http://www.hubbertpeak.com/campbell/assessments.htm

2) Campbell - Myth of Spare Capacity 3/20/2000
  http://www.hubbertpeak.com/campbell/mythcap.htm

3) Campbell - Letter to the Editor-Foreign Affairs 1/8/2000
  http://www.hubbertpeak.com/campbell/foreignaffairs200001.htm

4) Campbell - The Imminent Peakof World Oil Production (Presentation
to the UK House of Commons 7/7/99
  http://www.hubbertpeak.com/campbell/commons.htm

5) Campbell & Laherrere - The End of Cheap Oil - Scientific American
v278/3 1996
  http://www.dieoff.org/page140.htm

6) Fleay, Brian J - Oil Supply:  The Crunch Has Arrived 3/13/2000
  http://www.hubbertpeak.com/fleay/crunch.htm

7) Laherrere - Is USGS 2000 Assessment Reliable?  5/2/2000
  http://www.hubbertpeak.com/laherrere/usgs2000/

8) Laherrere - Technological Progress or Bad Reporting and Bad
Arithmetic?  -  Geopolitics of Energy 22/4  4/16/99
  http://www.dieoff.org/page176.htm
9) Laherrere - Parabolic Fractal Distributions in Nature French
Academy of Science 4/4/96
   http://www.hubbertpeak.com/laherrere/fractal.htm

10) Laherrere -Multi-Hubbert Modeling - 7/97
   http://www.hubbertpeak.com/laherrere/multihub.htm
11) Laherrere - Future Sources of Crude Oil Supply and Quality
Considerations 6/12/97
   http://www.hubbertpeak.com/laherrere/supply.htm

12) Ivanhoe - Get Ready for Another Oil Shock - The Futurist Jan/Feb. `97
   http://www.dieoff.org/page90.htm

13) Youngquist - Spending Our Great Inheritance - Then What?  Geotimes 7/98
   http://www.hubbertpeak.com/youngquist/geotimes.htm

14) Blanchard - The Impact of Declining Major North Sea Oil Fields
upon North Sea Production Jan 2000
   http://www.hubbertpeak.com/blanchard

15) Simmons - The Oil World 1973 Compared to 2000 - Oil and Gas
Journal 4/2000
  http://www.simmonsco-intl.com/web/downloads/whitepaper.pdf

16) Simmons- The Energy Markets in 2000 - Running on Empty?  Speech 5/24/00
  http://www.simmonco-intl.com/web/downloads/whitepaper.pdf

17) Odell - A Guide to Oil Reserves and Resources
  http://www.greenpeace.org/~climate/arctic99//reports/odell317.html

18) Riva - World Oil Production After Year 2000 - Business as Usual
or Crisis 8/18/95; Congressional Briefing
  http://www.crie.org/n/e/eng-3.html

19) Shirley - Discoveries Are Getting Smaller - Explorer Jan 2000
   http://www.aapg.org/explorer/archives/01_00/global_look.html

20) McKenzie, WRI - Estimated Ultimately Recoverable (EUR) Oil 3/96
   http://www.wri.org/wri/climate/finitoil/eur-oil.html
   http://dieoff.com/eur.htm

21)Lynch - Crying Wolf: Warnings About Oil Supply  3/98
   http://www.stanford.edu/sep/jon/world-oil.dir/lynch/worldoil.html

22)Duncan and Youngquist - The World Petroleum Life Cycle 10/22/98
   http://www.dieoff.com/page133.pdf

23)BPAmoco Energy Statistics
   http://www.bpamoco.com/worldenergy/oil/index.htm



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