What Peak Oil?

As recently as in January of this year, the science journal Nature published an article by researchers arguing that the world has already passed the tipping point of petroleum production. As Arstechnica described the findings:

Since 2005, the global production of oil has remained relatively flat, peaking in 2008 and declining since, even as demand for petroleum has continued to increase. The result has been wild fluctuations in the price of oil as small changes in demand set off large shocks in the system. 

In today's issue of Nature, two authors (the University of Washington's James Murray and Oxford's David King) argue that this sort of volatility will be all we can expect from here on out—and we're likely to face it with other fossil fuels, as well.

In other words, peak oil production had passed and it was downhill from now on. Not so fast says a recent analysis from Harvard University's Belfer Center for Science and International Affairs. The report by Leonardo Maugeri, a research fellow with the Center's Geopolitics of Energy Project, concludes:

Contrary to what most people believe, oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption. This could lead to a glut of overproduction and a steep dip in oil prices.

Based on original, bottom-up, field-by-field analysis of most oil exploration and development projects in the world, this paper suggests that an unrestricted, additional production (the level of production targeted by each single project, according to its schedule, unadjusted for risk) of more than 49 million barrels per day of oil (crude oil and natural gas liquids, or NGLs) is targeted for 2020, the equivalent of more than half the current world production capacity of 93 mbd.

After adjusting this substantial figure considering the risk factors affecting the actual accomplishment of the projects on a country-by-country basis, the additional production that could come by 2020 is about 29 mbd. Factoring in depletion rates of currently producing oilfields and their "reserve growth" (the estimated increases in crude oil, natural gas, and natural gas liquids that could be added to existing reserves through extension, revision, improved recovery efficiency, and the discovery of new pools or reservoirs), the net additional production capacity by 2020 could be 17.6 mbd, yielding a world oil production capacity of 110.6 mbd by that date…. This would represent the most significant increase in any decade since the 1980s.

In addition, Maugeri finds:

Oil Prices May Collapse. Contrary to prevailing wisdom that increasing global demand for oil will increase prices, the report finds oil production capacity is growing at such an unprecedented level that supply might outpace consumption. When the glut of oil hits the market, it could trigger a collapse in oil prices.

While the age of "cheap oil" may be ending, it is still uncertain what the future level of oil prices might be. Technology may turn today's expensive oil into tomorrow's cheap oil. The oil market will remain highly volatile until 2015 and prone to extreme movements in opposite directions, representing a challenge for investors. After 2015, however, most of the oil exploration and development projects analyzed in the report will advance significantly and contribute to a shoring up of the world's production capacity. This could provoke overproduction and lead to a significant, steady dip of oil prices, unless oil demand were to grow at a sustained yearly rate of at least 1.6 percent trough 2020.

For more background tracing peak oil soothsaying see also, my columns, Peak Oil Panic (2006), and Political Peak Oil (2007), and blogpost, Peak Oil Revisited, (2009).