Cheer Up: The World Has Plenty Of Oil
It’s widely believed nowadays that global oil production is running up against its limits. “The days of easy oil are over”, we are told and we should brace ourselves for an age of relative oil scarcity. The reality, however, is very different. As more and more people within the oil industry have come to realize in recent years, the world has plenty of oil that can be produced at competitive prices for a long, long time to come. This means the world does not face inevitable “energy poverty” and there is no reason to be afraid of unavoidable “energy wars”.
Four years ago, I wrote in my book The Myth of the Oil Crisis that: “To believe in imminent peak oil requires an unlikely concatenation of overstated reserves, the funnel of major projects drying up, the end of significant reserves growth, very disappointing exploration results, in both well-established and frontier basins, and a failure, despite ideal circumstances, of unconventional oil to deliver what has already been shown to be achievable.”
I believe that what we have learned since then only confirms this assessment. Despite Total chief Christophe de Margerie’s stating in 2010 that global production would be unlikely to exceed 100 million barrels per day (bpd), and that 90 million would be “optimistic”, in November 2011 supply actually reached 90 million bpd for the first time ever. This is on a broad definition – including unconventional oil, natural gas liquids and biofuels – but to the consumer, the source of the fuel that goes into the tank is irrelevant.
True, spot prices have remained stubbornly high, driven last year by economic recovery and the disruption in Libya, this year by fears over Iran. But long-dated futures prices below $100 per barrel imply the market expects a longer-term easing.
In this article I will not undertake an exhaustive re-examination of the peak oil theory and its counter-arguments, but I will attempt to assess the lessons from the roller-coaster of the oil market of the last four years. I will discuss four areas in which key evidence has emerged explaining recent oil history and supporting a broadly optimistic view on our oil future: OPEC policy; new exploration plays and advances in unconventional oil; the reaction of the economy to oil shocks; and geopolitics, particularly in the world’s oil hub, the Middle East.
Figure 1: Market share of OPEC and producers1
(click to enlarge)
The key to understanding the high oil prices this century lies in OPEC’s role. Since 1994 and the recovery of Kuwait from the First Gulf War, OPEC’s market share (Figure 1) has remained virtually unchanged – in fact falling from 36% to 34% in 2011 if we consider crude oil only, or rising slightly from 39% to 41% if we include other liquids (primarily condensate and natural gas liquids, not subject to production quotas).
During this time, changes in Saudi Arabia’s oil production correlate well with those of its Gulf OPEC allies Kuwait, the UAE and Qatar, but much less with those of other OPEC members and not at all with Russia’s production pattern. (Nor does it correlate with neighbour Oman’s production, showing that it is specifically Gulf OPEC – and not wider OPEC or the Gulf Arab countries – that matters.
This is because various external factors (war, sanctions, political instability and mismanagement) affected Saudi Arabia’s major OPEC competitors – Iran, Iraq, Venezuela, Libya and Nigeria – during this period. As a result, and combined with shrinking spare capacity due to fast Asian demand growth, Saudi Arabia was able to enforce OPEC discipline – in stark contrast to the period 1986-1998. Under reasonable assumptions, OPEC maximises its (future) revenue by doing no more than maintaining its current market share2.
Numerous commentators have cast doubt on the size of OPEC’s reserves, claiming them to be overstated, though without firm evidence. A study from consultancy IHS Energy from 20073 suggests a modest degree of overstatement, perhaps around 7% (~60 billion barrels). This is, however, more than compensated by IHS’s view of underestimates outside OPEC, and Iraq’s subsequent reserves upgrade (which is entirely plausible in view of renewed field studies, development and the arrival of modern technology after 30 years of war and sanctions).
In any case, it is clear that OPEC’s output is nowhere near being constrained by reserves, even if these are overstated: its reserves-to-production ratio is more than 85 years, compared to 21 in Russia – where production is still growing, by a respectable 1.6% in the year to March.
The key OPEC news since 2008 was Iraq’s award of massive field development contracts to international oil companies, which would bring production capacity to a nominal 13.5 million bpd around 2017. This target will not be reached, for a variety of logistical, economic, political and security-related reasons. But even an increase to 6.5 Mbpd would meet more than half the world’s incremental demand over that period.
After a long period of post-invasion decline and stagnation, the new investment is beginning to deliver: Iraq’s exports in March were the highest since 1989. It will probably exceed its 1979 record production this year or next, in the process overtaking Iran as OPEC’s second-largest player.
In response to the Libyan and Iran crises, Kuwait and Saudi Arabia have also increased production to record highs, not matched in Saudi’s case since 1980; in Kuwait’s since 1973. Saudi Arabia’s production capacity is tight but that is due to its post-recession decision to delay new field developments, now being reversed. This casts doubt on the famous prediction made by the renowned investment banker Matthew Simmons in 2005 that “we could be on the verge of seeing a collapse of thirty or forty percent of [Saudi] production in the imminent future, and imminent means sometime in the next three to five years – but it could even be tomorrow.”
The implication that OPEC (led by Saudi Arabia) sought to maintain a fairly constant market share from 1994-2011 suggests four scenarios for the future:
- Non-OPEC production remains weak, leading to a continuation of OPEC’s matching policy, and high prices to ration demand. Note though, that with an actual peak and decline in non-OPEC supplies, it becomes optimal for OPEC to increase market share
- Robust non-OPEC output growth resumes, forcing OPEC to match it to maintain market share, or as in the early 1980s, to cut output to defend an ultimately unfeasible price target
- OPEC changes its policy and begins increasing market share because it is worried about demand destruction or non-oil technologies
- Other OPEC members seek to expand capacity, most likely Iraq but possibly also Libya and a post-Chavez Venezuela, forcing Saudi Arabia and its Gulf allies to respond with increases of their own
These scenarios present a far more nuanced view of global oil production trajectories than the simplistic “peak oil” view of a resource-limited production curve. [...]
The Intellectual Climate
Yet these dramatic developments and advances in our understanding appear to have been ignored by many observers, who remain trapped in a paradigm where physical availability of resources is the only significant factor.
Former UK Chief Scientific Adviser, David King, with oceanographer James Murray, published an essay in Nature 10 in January arguing that there has been a peak in ‘easy access’ oil (whatever that means) since 2005. Remarkably, this study mentions neither OPEC policy (including its 2008 production cuts in response to the economic crisis); Iraq, with its enormous volumes of ‘easily-extracted’ oil; nor shale oil.
Intellectually, the peak oil movement appears to have moved on to preparation for collapse (or at least an end to growth). Peak oil has become conflated with other real or potential crises: the recession, climate change and overpopulation.
This is very reminiscent of the 1970s, and indeed features of OPEC strategy, rising costs, new resource types and technologies are also familiar. There are clearly different ways the oil market may evolve over the next five to ten years. A continuation of high prices in the face of production disappointments and strong Asian growth is plausible. So is a kind of re-run of the 1980s, with new supplies, growing efficiency and intra-OPEC competition driving down prices. What is not on the horizon is a resource-limited peak in production, nor an associated economic collapse.