Economy and climate on the path down from the peak of oil and gas

Fifteen billion years ago the universe was created through an enormous energy conversion we call the “Big Bang”. At that time all the hydrogen that fuels our sun today was produced. Energy from the sun is essential for life on Earth. Five billion years ago a star exploded in our Milky Way galaxy. In the “ashes” from that explosion could be found carbon and oxygen that, together with hydrogen, form the building blocks of life. The remains of that supernova also contained all the other elements that make up our solar system. Changes in energy systems such as these have been, and will always be, decisive for our future, a fact too few people understand. That is why I was very happy to hear President Obama acknowledge its significance in one of his first speeches as president, “No single issue is as fundamental to our future as energy”.

On any ordinary day your body temperature is 37C while the world’s average temperature is 15C. This means that we must supply our bodies with fuel (i.e. energy) so that we do not cool down and therefore die. Our biological engines require the same amount of energy no matter whether we are rich or poor. If we consume too much fuel then we hold this extra energy as a layer of fat.

The primary requirement for all of us is that we feed our bodies 2,500 kilocalories per day. This means that the world’s 6.7 billion inhabitants need to eat a large amount of food. In units of watt-hours it is approximately 7000 terawatt-hours per year. For historical reasons, when we discuss volumes of oil we describe this in “barrels” (1 barrel is 159 litres), and the unit million barrels per day is used (Mb/d). If we compare humanity’s food energy requirement with the energy in oil then we need 12 Mb/d. It may be provocative to compare steamed salmon, roast beef, chicken, rice, maize, wheat etc. with oil but we must get used to the thought since our food production is completely dependent on oil.

Fifty years ago our knowledge of the world’s oil reserves was quite limited but with today’s technology our knowledge has grown and our prognoses of forthcoming production have become ever more certain.

A decisive fact for our future is that is that over half of all the oil that was generated millions of years ago can be found in only a few hundred, giant oilfields. At the start when these fields were discovered, it seemed as though they would never end. During a 10-year period around 1960, 48 billion barrels of oil per year were found while annual global consumption was only 8 billion barrels. Now the yearly consumption has risen to over 30 billion barrels but the finds per year have decreased.

The International Energy Agency (IEA) estimates that, during the coming 20 years, approximately 115 billion barrels will be located, an estimate that we agree with. During the same 20-year period they also forecast that the world will consume more than 600 billion barrels of oil.

Our oil needs for the next 20 years can be found in known reserves. The problem is that the oil exists in small pores within layers of stone and must be forced towards the borehole from which it is pumped up. Investments in new technology can influence the flow, but this flow is restricted by physical parameters such as pressure, viscosity and surface tension. However, a study we have made of the largest oilfields shows that just before half the oil is extracted from a field its flow begins to decline dramatically by, on average, 8 per cent per year. What is unfortunate for our future oil production is that a large part currently comes from giant old oilfields. Today, the crude oil production is 72 Mb/d but in 20 years these fields will produce between 20 to 30 Mb/d.

There are unexploited oilfields that have been found and there will be future finds. These oilfields can be opened for new production in coming years but they are smaller than the ones currently in decline and the investment costs required to exploit them are increasing. If we assume a realistic rate of new production then, in the years until 2030 we can expect approximately 20 Mb/d. However, in the same time period existing production will decline by 45 Mb/d so that the total will still be lower than today. In an article we call “The Peak of the Oil Age” we have calculated that the highest level of oil production that the world will ever reach was in July last year.

If we study in detail the most important factors that determine future oil production then the parameter “depletion of remaining reserves” is decisive. We have shown that only a certain fraction of the existing reserves can be extracted per year. For a region such as the North Sea, where reserves and production are freely disclosed (i.e. not kept secret) we see that they can only produce 6 per cent of the existing reserves in any year. Therefore, the fact that the reserves are decreasing means that the rate of oil production also declines. A few years ago Norway was the world’s third largest exporter of oil but it is highly probable that it will no longer export oil within 25 years. Russian oil exports, the second largest in the world, are also expected to decrease.

The future of world oil exports rests upon those from the Middle East where most of the world’s largest oilfields exist. The world’s largest oilfield, Ghawar, is found in Saudi Arabia. Today, approximately 7 per cent of the world’s crude oil comes from this field. Its production continues to be fairly steady, meaning that it still possesses over half of the extractable oil that it had from the start. Various conflicting pieces of information are circulating about the field’s size but there is considerable evidence that the higher estimates are more realistic than the lower ones. The fact that the Saudis are now trying to introduce additional modern production technology means that the plateau of steady production will be extended but it can also mean that when production begins to decline it may show the same dramatic decline seen for the North Sea.

When considering future oil production in the Middle East there is also a social factor that must be taken into account. The profits from oil sales need to be sufficient to support a growing population. Although their oil production costs are quite low, the Saudis state that they require a selling price of US$75 per barrel. The question is how high the price of oil can be before it causes problems for world trade. From our experiences of last year we know that $147 per barrel is too high a price.

The world finds itself in a deep economic recession and is looking for signs of an upswing. During the four years from 2003 to 2007 we had strong growth. There is hope for a new growth spurt of the same size. If we study the change in our energy consumption during that same period we see a clear increase. Historically, global growth has always meant increased energy use. During the last period of growth, oil consumption rose by 10 per cent from 77 to 85 Mb/d. When the IEA discusses our future oil needs they see the coupling between economic growth and increased oil consumption as decisive. At the moment oil production is around 84 Mb/d. If the next economic upswing requires an additional increase in oil production of 10 per cent then we would need between 92 and 93 Mb/d. Our calculations show that such an increase is not possible. What will happen now that the fuel for the next economic upswing cannot be found?