The standard approach to make forecasts of nearly something is to look at latest traits and assume that this development will continue, at the very least for the following a number of years. With world oil manufacturing, the development in oil production appears to be like fairly benign, with the pattern slightly upward (Figure 1).
Figure 1. Quarterly crude and condensate oil production, based mostly on EIA data.
If we glance on the state of affairs extra carefully, nevertheless, we see that we’re dealing with an unstable state of affairs. The top ten crude oil producing nations have a variety of issues (Determine 2). Center Japanese producers are notably vulnerable to instability, thanks to the advances of ISIS and the massive variety of refugees shifting from one country to another.
Figure 2. Prime ten crude oil and condensate producers throughout first quarter of 2014, based on EIA data.
Relatively low oil costs are a part of the problem as properly. The cost of producing oil is rising far more rapidly than its promoting value, as discussed in my publish Starting of the top? Oil Companies Minimize Again on Spending. The truth is, the promoting price of oil hasn’t actually risen since 2011 (Determine 3), as a result of residents can’t afford larger oil costs with their stagnating wages.
Determine 3. Average weekly oil prices, based mostly on EIA knowledge.
The truth that the promoting price of oil remains flat tends to lead to political instability in oil exporters because they can’t gather the taxes required to offer programs needed to pacify their folks (meals and fuel subsidies, water supplied by desalination, jobs programs, and so on.) with out very excessive oil prices. Low oil costs also make the plight of oil exporters with declining oil production worse, together with Russia, Mexico, and Venezuela.
Many people when looking at future oil supply concern themselves with the quantity of reserves (or assets) remaining, or perhaps Power Return on Power Invested (EROEI). None of those is actually the appropriate limit, nevertheless. The limiting issue is how long our current networked economic system can hold together. There are lots of oil reserves left, and the EROEI of Center Japanese oil is generally quite high (that’s, favorable). But instability could still bring the system down. So could popping of the US oil provide bubble by larger interest rates or more stringent lending guidelines.
The highest Two Crude Oil Producers: Russia and Saudi Arabia
Once we have a look at quarterly crude oil production (including condensate, using EIA information), we see that Russia’s crude oil production tends to be a lot smoother than Saudi Arabia’s (Figure four). We also see that for the reason that third quarter of 2006, Russia’s crude oil manufacturing tends to be larger than Saudi Arabia’s.
Figure four. Comparability of quarterly oil production (crude + condensate) for Russia and Saudi Arabia, based mostly on EIA information.
Both Russia and Saudi Arabia are headed towards issues now. Russia’s Finance Minister has recently introduced that its oil production has hit and peak, and is predicted to fall, causing financial difficulties. In truth, if we look at month-to-month EIA knowledge, we see that November 2013 is the best month of production, and that every month of production since that date has dropped from this stage. To date, the drop in oil manufacturing has been relatively small, however when an oil exporter is depending on tax income from oil to fund government programs, even a small drop in manufacturing (with out the next oil value) is a financial downside.
We see in Determine 4 above that Saudi Arabia’s quarterly oil production is kind of erratic, in comparison with oil production of Russia. A part of the rationale Saudi Arabia’s oil manufacturing is so erratic is that it extends the life of its fields by periodically stress-free (decreasing) production from them. It additionally reacts to oil value changes-if the oil price is too low, as in the latter a part of 2008 and in 2009, Saudi oil manufacturing drops. The tendency to jerk oil manufacturing round gives the illusion that Saudi Arabia has spare production capacity. It’s doubtful at this level that it has a lot true spare capability. It makes an excellent story, although, which information media are keen to repeat endlessly.
Saudi Arabia has not been in a position to boost oil exports for years (Figure 5). It gained a reputation for its oil exports back in the late 1970s and early 1980s, and has been able to relaxation on its laurels. Its high “proven reserves(which have never been audited, and are doubted by many) add to the illusion that it might probably produce any amount it wants.
Determine 5. Comparison of Russian and Saudi Arabian oil exports, based on BP Statistical Overview of World Vitality 2014 information (oil manufacturing minus oil consumption). Pre-1985 Russian amounts estimated based on Former Soviet Union quantities.
In 2013, oil exports from Russia have been equal to 88% of Saudi Arabian oil exports. The world is very close to being as dependent on Russian oil exports as it is on Saudi Arabian oil exports. Most individuals don’t understand this relationship.
The current instability of the Center East has not hit Saudi Arabia but, but there is increased preventing throughout. Saudi Arabia is just not immune to the problems of the other international locations. In accordance with BBC, there is already a hidden uprising taking place in eastern Saudi Arabia.
US Oil Production is a Bubble of Very Light Oil
The US is the world’s third largest producer of crude and condensate. Recent US crude oil manufacturing shows a “spikein tight oil productions-that’s, manufacturing utilizing hydraulic fracturing, generally in shale formations (Determine 6).
Determine 6. US crude oil manufacturing cut up between tight oil (from shale formations), Alaska, and all different, primarily based on EIA knowledge. Shale is from AEO 2014 Early Release Overview.
If we take a look at latest information on a quarterly basis, the development in manufacturing also seems to be very favorable.
Determine 7. US Crude and condensate manufacturing by quarter, based mostly on EIA data.
The brand new crude is much lighter than conventional crude. In response to the Wall Street Journal, the anticipated cut up of US crude is as follows:
Determine eight. Wall Avenue Journal image illustrating the anticipated mixture of US crude oil.
There are various points with the new “oilproduction:
– The brand new oil production is so “lightthat a portion of it is not what we use to energy our vehicles and trucks. The very gentle “condensateportion (just like pure fuel liquids) is very an issue.
– Oil refineries will not be necessarily set as much as handle crude with a lot risky materials mixed in. Such crude tends to explode, if not dealt with properly.
– These very gentle fuels usually are not very versatile, the best way heavier fuels are. With the usage of “crackingfacilities, it is possible to make heavy oil into medium oil (for gasoline and diesel). But using very gentle oil merchandise to make heavier ones is a very costly operation, requiring “gas-to-liquidplants.
– Because of the rising manufacturing of very light merchandise, the price of condensate has fallen in the last three years. If extra tight oil production takes place, available costs for condensate are more likely to drop even further. Because of this, it might make sense to export the “condensateportion of tight oil to different components of the world the place prices are likely to be higher. In any other case, will probably be exhausting to keep the mixed gross sales worth of tight oil (crude oil + condensate) excessive enough to encourage more tight oil production.
The opposite subject with “tight oilproduction (that is, manufacturing from shale formations) is that its manufacturing seems to be a “bubble.The large increase in oil manufacturing (Figure 6) came since 2009 when oil prices have been excessive and interest rates had been very low. Money flow from these operations tends to be adverse. If interest rates should rise, or if oil prices should fall, the system is more likely to hit a restrict. Another potential drawback is oil corporations hitting borrowing limits, so that they cannot add more wells.
Without US oil production, world crude oil production would have been on a plateau since 2005.
Figure 9. World crude and condensate, excluding US production, primarily based on EIA data.
Canadian Oil Manufacturing
The opposite current success story with respect to oil production is Canada, the world’s fifth largest producer of crude and condensate. Due to the oil sands, Canadian oil production has greater than doubled since the start of 1994 (Determine 10).
Determine 10. Canadian quarterly crude oil (and condensate) manufacturing primarily based on EIA data.
In fact, there are environmental issues with respect to each oil from the oil sands and US tight oil. When we get to the “bottom of the barrel,we find yourself with the much less environmentally fascinating kinds of oil. This is part of our current problem, and one purpose why we’re reaching limits.
Oil Production in China, Iraq, and Iran
In the primary quarter of 2014, China was the fourth largest producer of crude oil. Iraq was sixth, and Iran was seventh (based on Determine 2 above). Let’s first look on the oil manufacturing of China and Iran.
Determine 11. China and Iran crude and condensate production by quarter based on EIA data.
As of 2010, Iran was the fourth largest producer of crude oil on the planet. Iran has had so many sanctions in opposition to it that it is hard to figure out a base interval, previous to sanctions. If we examine Iran’s first quarter 2014 oil manufacturing to its most current high manufacturing within the second quarter of 2010, oil production is now down about 870,000 barrels a day. If sanctions are removed and warfare does not become a lot of an issue, oil manufacturing may theoretically rise by about this amount.
China has comparatively more stable oil manufacturing than Iran. One concern now is that China’s oil production is no longer rising very much. Oil production for the fourth quarter of 2013 is roughly tied with oil production for the fourth quarter of 2012. The latest quarter of oil production is down a bit. It isn’t clear whether China will be able to keep up its current degree of manufacturing, which is the explanation I mention the possibility of a decline in oil production in Figure 2.
The lack of growth in China’s oil provides may be behind its recent belligerence in coping with Viet Nam and Japan. It is not solely exporters that turn out to be disturbed when oil supplies are to not their liking. Oil importers additionally turn into disturbed, because oil provides are very important to the economy of all nations.
Now let’s add Iraq to the oil manufacturing chart for Iran and China.
Figure 12. Quarterly crude oil and condensate manufacturing for Iran, China, and Iraq, primarily based on EIA knowledge.
Thanks to improvements in oil production in Iraq, and sanctions against Iran, oil manufacturing for Iraq barely exceeds that of Iran in the first quarter of 2014. However, given Iraq’s previous instability in oil production, and its current issues with ISIS and with Kurdistan, it is hard to expect that Iraq will be a dependable oil producer sooner or later. In principle Iraq’s oil production can rise a number of million barrels a day over the subsequent 10 or 20 years, however we will hardly count on it.
The Oil Price Drawback that Provides to Instability
Determine 13 reveals my view of the mismatch between (1) the price oil producers need to extract their oil and (2) the price consumers can afford. The cost of extraction (broadly defined including taxes required by governments) retains rising whereas “ability to payhas remained flat since 2007. The shortcoming of consumers to pay high prices for oil (because wages will not be rising very much) explains why oil prices have remained comparatively flat in Determine 3 (near the top of this put up), even whereas there is fighting in the Middle East.
Figure thirteen. Comparison of oil value per barrel needed by producers (Brent) with skill to pay. Amounts based mostly on judgment of author.
When the promoting price is decrease than the complete price of production (together with the price of investing in new wells and paying dividends to shareholders), the tendency is to reduce manufacturing, one way or one other. This reduction will be voluntarily, within the form of a publicly traded firm shopping for again inventory or selling off acreage.
Alternatively, the cutback can be involuntary, not directly attributable to political instability. This occurs as a result of oil manufacturing is often heavily taxed in oil exporting nations. If the oil worth remains too low, taxes collected are usually too low, making it not possible to fund packages corresponding to food and fuel subsidies, desalination plants, and jobs applications. With out satisfactory applications, there are typically uprisings and civil disorder.
If an individual seems to be carefully at Figure 13, it is clear that in 2014, we are out in “Wile E. Coyote Territory.The broadly defined price of oil extraction (including required taxes by exporters) now exceeds the power of consumers to pay for oil. In consequence, oil prices barely spike in any respect, even when there are main Middle Eastern disruptions (Determine 3, above).
The rationale why Wile E. Coyote situation can happen at all is because it takes a while for the mismatch between prices and costs to work its means by means of the system. Independent oil firms can determine to sell off acreage and buy back shares of inventory nevertheless it takes some time for these actions to truly take place. Moreover, the mismatch between needed oil prices and charged oil prices tends to get worse over time for oil exporters. This lays the groundwork for rising dissent within these countries.
With oil prices remaining relatively flat, importers become complacent as a result of they don’t understand what is happening. It looks like we haven’t any drawback when, in truth, there actually is a fairly large problem, lurking behind the scenes.
To make issues worse, it’s becoming extra and more difficult to continue Quantitative Easing, a program that tends to carry down longer-term curiosity charges. The expectation is that the program can be discontinued by October 2014. The reason why the price of oil has stayed as high because it has within the final a number of years is due to the results of quantitative easing and extremely low interest charges. If it weren’t for these, oil prices would fall, as a result of customers would need to pay way more for goods purchased on credit, leaving less for the acquisition of oil merchandise. See my latest put up, The Connection Between Oil Costs, Debt Levels, and Curiosity Rates.
Figure 14. Massive credit score related drop in oil prices that occurred in late 2008 is now being mitigated by Quantitative Easing and very low interest charges.
Because of the expectation that Quantitative Easing will end by October 2014 and the stress to tighten credit circumstances, my expectation is that the inexpensive price of oil will begin dropping in late 2014, as proven in Figure 13. The growing disparity between what consumers can afford and what producers want tends to make the Wile E. Coyote overshoot condition even worse. It’s prone to result in extra issues with instability in the Middle East, and a collapse of the US oil manufacturing bubble.
I explained earlier that we dwell in a networked economic system, and this truth adjustments the best way financial models work. Many people have developed models of future oil manufacturing assuming that the appropriate model is a “bell curve,primarily based on oil depletion charges and the shortcoming to geologically extract more oil. Sadly, this isn’t the best model.
The state of affairs is much more complex than simple geological decline models assume. There are a number of limits concerned-prices needed by oil producers, costs reasonably priced by oil importers, and costs for different products, such as water and food. Interest rates are additionally essential. There are time lags involved between the time the Wile E. Coyote state of affairs begins, and the actions to repair this mismatch takes place. It is that this time lag that tends to make drop-offs very steep.
The fact that we are coping with political instability signifies that a number of fuels are likely to be affected without delay. Clearly natural gasoline exports from the Middle East shall be affected at the identical time as oil exports. Many different spillover effects are likely to happen as effectively. US companies with out oil will want to cut again on operations. This will lead to job layoffs and lowered electricity use. With decrease electricity demand, prices for electricity in addition to for coal and natural fuel will are likely to drop. Electricity companies will more and more face bankruptcy, and gasoline suppliers will reduce operations.
Thus, we can’t count on decline to comply with a bell curve. The real model of future energy consumption crosses many disciplines directly, making the situation troublesome to mannequin. The Reserves / Current Production mannequin provides a vastly too high indication of future manufacturing, for quite a lot of reasons-rising price of extraction due to diminishing returns, need for top costs and taxes to support the operations of exporters, and failure to think about curiosity charges.
The Energy Return on Vitality Invested model seems at a narrowly defined ratio-usable energy acquired on the “well-head,compared to power expended at the “well-headdisregarding many issues-together with taxes, labor costs, value of borrowing cash, and required dividends to stockholders to maintain the system going. All of these different gadgets also characterize an allocation of out there power. A multiplier can theoretically regulate for all of these wants, however this multiplier tends to change over time, and it tends to differ from power supply to energy supply.
The EROEI ratio is probably adequate for evaluating two “like productssay tight oil produced in North Dakota vs tight oil produced in Texas, or a ten yr change in North Dakota vitality ratios, but it doesn’t work effectively when evaluating dissimilar sorts of vitality. In particular, the mannequin tends to be very deceptive when comparing an vitality source that requires subsidies to an energy supply that puts off huge tax income to support native governments.
When there are multiple limits which might be being encountered, it is the monetary system that brings all of the boundaries collectively. Furthermore, it is governments which might be susceptible to failing, if enough surplus power is not produced. It is rather troublesome to construct models that cross academic areas, so we have a tendency to find fashions that mirror “silopondering of one particular educational specialty. These models can supply some insight, nevertheless it is easy to assume that they have more predictive worth than they do.
Sadly, the limits we’re reaching appear to be financial and political in nature. If these are the true limits, we appear to be not far away from the simultaneous drop in the production of many vitality merchandise. This type of limit offers a much steeper drop off than the continuously quoted symmetric “bell curve of oil manufacturing.The shape of the drop off corresponds to (1) the type of drop off skilled by earlier civilizations when they collapsed, (2) the kind of drop-off I have forecast for world vitality consumption, and (three) Ugo Bardi’s Seneca cliff. The 1972 book Limits to Growth by Donella Meadows et al.