Analysts claim early peak in world oil production

Aug. 19, 2002

By OGJ editors

HOUSTON, Aug. 12 -- The world is drawing down its oil reserves at an unprecedented rate, with supplies likely to be constrained by global production capacity by 2010, "even assuming no growth in demand," said analysts at Douglas-Westwood Ltd., an energy industry consulting firm based in Canterbury, England.

"Oil will permanently cease to be abundant," said Douglas-Westwood analysts in the World Oil Supply Report issued earlier this month. "Supply and demand will be forced to balance—but at a price."

The resulting economic shocks will rival those of the 1970s, as oil prices "could double and treble within 2 or 3 years as the world changes from oil abundance to oil scarcity. The world is facing a future of major oil price increases, which will occur sooner than many people believe," that report concluded.

Production to peak soon
"The world's known and estimated 'yet to find' reserves cannot satisfy even the present level of production of some 74 million b/d beyond 2022. Any growth in global economic activity only serves to increase demand and bring forward the peak year," the report said.

A 1% annual growth in world demand for oil could cause global crude production to peak at 83 million b/d in 2016, said Douglas-Westwood analysts. A 2% growth in demand could trigger a production peak of 87 million b/d by 2011, while 3% growth would move that production peak to as early as 2006, they said.

Zero demand growth would delay the world's oil production peak only until 2022, said the Douglas-Westwood report.

However, the International Energy Agency recently forecast that world oil demand would reach 119 million b/d by 2020.

"Clearly a major supply and demand imbalance is in prospect," the report said. "In short, it seems likely that during the first 25 years of this century, we will witness the beginnings of the end of the age of oil. The discussion is not if it will happen, but when."

Cheap oil supplies on which developed countries have depended to fuel economic growth for "at least the last century" still make up 40% of global energy consumption.

"Outside of periods of disruption caused by war and general political instability, oil supplies have been abundant, and they will continue to be so until global peak production capacity has been reached. When this peak will occur and how large it will be are factors critically important to regional and global economic growth," the report said.

Michael Smith, lead author of the Douglas-Westwood study, said 95 countries either produce oil now, have produced it in the past, or will produce it in the future. However, he said, 46 of those countries, including the US and Russia, are more than 5 years past their production peaks.

Another 10 countries, including the UK and Malaysia, are just beginning to see their production decline, while a further 12—including Norway and China—will peak soon. All of the remaining 27 producers will see their production peak within the next 20 years, said Smith.

The report considers all existing and potential oil producing countries and forecasts their likely future oil reserves depletion, along with the year and level of peak production. It encompasses all known and "yet to find" oil reserves, including onshore and offshore, deepwater and shallow-water, conventional resources, and oil shale.

OPEC regains control
"As this time approaches, we expect (the Organization of Petroleum Exporting Countries') share of production will increase to 40%, and major capital investments within OPEC countries will be required to increase gross production by 2 million b/d every year after that to offset declines elsewhere," he said.

That means Saudi Arabia, Iran, and Iraq "will all have to allow greater access by foreign companies to sustain production growth," said Smith. "However, as OPEC's share of production reaches 40%, the potential for it to begin controlling oil prices increases dramatically."

Facing the problem
The Douglas-Westwood report presents a number of different scenarios, the results of which share two common factors—the probability of a peak in world oil production in the not-too-distant future, followed by major price increases.

It also notes that a number of countries are already facing up to the prospect of energy supply shortfalls. Some countries, such as the UK, are beginning major programs to encourage renewable energy sources, while some major companies such as BP PLC and the Royal Dutch-Shell Group are investing heavily in such projects.

However, the report suggests that increased investment will be needed in all energy sources, from natural gas to nuclear power. It recommends that:
-- All countries, including both energy exporters and importers, review energy supply security now. Government budgets and policies need to be consistent with impending global shortfalls in oil supply in "the critical years."
-- Governments impose regulations to improve energy efficiency and conservation and endeavor to purchase a proportion of power from renewable sources. Focused renewables policies should be developed, "especially for offshore wind."
-- Oil companies and their major suppliers develop strategies for long-term survival. "Decisions need to be made on what energy sources to focus and where. Profits (from current operations) need to be at least partly employed in bringing on other forms of energy, especially renewables and fuels such as hydrogen," the report said.

It noted that the transport industry, especially vehicles that use refined oil products, is growing rapidly. "However, as 'the critical years' approach, this growth will become unsustainable, and new mass-produced alternative and fuel-efficient transport systems will be required," it said.