Articles

OIL : ALL ABOUT OIL RESERVES AND THE PEAK-OIL

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Written by Dario Ruggiero (June 2012)
 
Premise
 
Oil, the natural source that has satisfied human energy needs during all the second industrial revolution, now has become the energy source humans don’t seem able to live without. (according to BP Energy Outlook 2030, in 1990 Oil made up about 39% of total Energy sources, with an estimated decrease to 27.2% in 2030); but, scientific results are not in favor of keeping on this dependence on Oil, as its extraction becomes more and more difficult (and expansive) and, during the process of energy generation, it has a great environmental impact.
 
We are going to analyze three essential aspects about Oil:
 
1) its availability (how much are the world Oil reserves and how long they are going to last at the current production rate);
2) the extraction convenience and the trend in the Oil production (giving a clear explanation of what is the Peak-Oil);
3) the effects the dynamics in the Oil market have on the economy (trend in the Oil price and its correlation with the Economy).
 
 
 
 
Oil availability in the world: quantity and length time of reserves
 
Oil is not a renewable source. What does this really mean? It means that it is a finite energy source and that, either in the short or in the long term (depending on how fast we will consume it), it is doomed to end. Given the current available Oil reserves in the world (1,382 billion of barrels; data as at 2010), at the current production rate, the remaining length time of such reserves is about 46 years. Saudi Arabia is the country with the highest reserves (264.5 billion barrels; lasting about 72 years more); following Venezuela (211.2 billion of barrels; 100 years the remaining length time); then there are Iran, Iraq and Kuwait.

Table – The first 15 countries in the world in terms of Oil proved reserves
(Billion barrels and remaining length time, data as at 2010)
Country K-million barrels Reserve to production ratio (R/P)*
Arabia Saudita 264.5 72.4
Venezuela 211.2 > 100
Iran 137.0 88.4
Iraq 115.0 > 100
Kuwait 101.5 > 100
Emirati Arabi Uniti 97.8 94.1
Russia (Federazione) 77.4 20.6
Libya 46.4 76.7
Kazakhstan 39.8 62.1
Nigeria 37.2 42.4
Canada 32.1 26.3
United States 30.9 11.3
Qatar 25.9 45.2
China 14.8 9.9
Brazil 14.2 18.3
World
1,383.2 46.2
* R/P: estimates the length time of those reserves (in terms of remaining years)
Source: elaboration on BP Statistical Review of World Energy June 2011

The change in the Oil reserves depends on both the quantity of annually extracted Oil and the reserves discovered. Between 1980 and 2010, these reserves doubled, but, in the same period, the daily production rate of Oil increased by 30%. The length time has progressively increased, but in the latest years it has become more steady. This means that in the past years the discovery rate of new Oil reserves was higher than the production rate of Oil, while now the two rates are becoming similar; in the case other reserves were not discovered, at the current production rate, as we have already said, the world Oil reserves would last 46 years.

Actually, how long Oil will remain the main source of Energy depends on several factors such as the development of renewable sources and the discovery of new energy sources; in any case, at a certain point the extraction of Oil will become too expansive and uneconomic; according to an article published in the “Science” in 1984, the ratio between the energy obtained by the extracted Oil and the energy used to extract it has progressively decreased: from 100 in 1940 to 23 in 1970 and 8 in 1984; likely, this ratio has decreased more in the latest years, as Oil over time is extracted from oilfield characterized by more difficulties for the extraction. (Pallante M., 2011b, pag.28).

In the past years, the Oil supply could face great increases in the Oil demand without problems (so the Oil price did not fluctuate very much); recently, the Oil supply has lost this elasticity on the demand; now the Oil price is strongly unstable: it increases when the Oil demand increases and then decreases when the Oil demand, because of the high price, fall again. (James Murray e David King, 25 January 2012)

In order to measure the degree of a country’s resilience from external source of Oil, it is interesting to consider the ratio between the Oil consumption and the Oil reserves. It is clear that a country that consume a great quantity of this mineral source, but has a minimum amount of Oil reserves, has a great dependence on the imports from other countries’ reserves. Let’s consider United States, first country in terms of Oil consumption (about 19 million barrels daily in 2010); its Oil reserves are about 31 billion barrels; using only its own reserves, these will end in almost 4 years. So the independence index is very low and United States depends very much on the reserves of other countries. Let’s consider now Saudi Arabia; it is sixth for Oil consumption, (2.8 billion of barrels daily), but, thanks to its reserves, the independence index from other countries’ reserves is the highest between the 15 countries with the highest level of consumption. China and India also have a great dependence on other countries’ Oil (nevertheless their consumptions are far lower – about 8 times – than United States’). It is interesting to note that there are countries that, in per capita terms, consume ten times the world average Oil per capita consumption; in the United States, in particular, each person in 2010 on average consumed 22.5 barrels of Oil a year, more than 5 times the world average. If countries with a big demographic size (China, India etc...) increased the Oil per capita consumption as that of United States, the Oil supply would not be able to face such an increase of demand; the Oil price will rise, with negative effects on the economy.

 
Peak Oil, the convenience of Oil extraction and trend in Oil production

Marion King Hubbert, geophysical in the research laboratories of Shell Oil Company in Houston, defined a low regarding the production cycle of any fuel field: its thesis was that at the beginning the fuel field is exploited only superficially, then its production reaches the maximum when half of its reserves have been extracted; finally its production rate starts a decrease as more expansive technologies are required in order to extract the remaining mineral. Hubbert based its theory on the observation of historical data about coal in Pennsylvania, following a mathematical theory (Hubbert curve). By applying its theory to Oil production in the continental states of America, Hubbert (1956) estimated that USA Oil production would have reached its peak at the beginning of the 70s. Then this theory was proved to be right. (Hubbert M.K., 1956)

Graph – Daily Oil production in United States between 1900 and 2011
(Thousand barrels)

Source: elaboration on BP Statistical Review of World Energy June 2011

Researchers in all the world have tried to establish when world Oil production would have reached its peak; in other words, the time since it would have started a decrease.

In order to do such an estimate, it is important, first of all, to explain the different forms of Oil: 1) the conventional Oil, the less viscous and easily removable; 2) the unconventional Oil, including different kinds of Oil, like the heavy Oil. (from ASPO Italia)

Jean Laherrere, France geologist, estimated that the Peak of conventional Oil would have been in 2005, the unconventional one’s in 2070 and the total’s (average of the two) in 2010; according to many geologist, conventional Oil has already reached or is going to reach its peak; according to James Murray and David King, “Oil’s tipping point has passed “. (James Murray e David King, 25 January 2012)

Data since 1965 show that the growth rate of daily world Oil production is reducing and is disappearing. The daily world Oil production curve has a logarithmic trend with an intense growth in the years before 1970 and a gradual slowdown. Starting from 2004 world Oil production is steady at 80 million barrels per day.

In particular, No-Opec countries registered the biggest slowdown, with a daily Oil production that, starting from the 90s, had values steady at 35 million daily Oil barrels. As for Opec countries, after the 1979-1985 crisis, daily Oil production has recovered, but with a decreasing growth rate and a value steady at 35 million daily barrels from 2005. Among the main countries (in terms of Oil production in 2010), United States has clearly reached the Peak of its production in 1970; Russia has likely reached its maximum; Iran, Saudi Arabia and China also have Oil production curve with a logarithmic trend with a decreasing growth rate.

 
Dynamics in the Oil market and Economy

Since 2004 world Oil production has been steady at 80 million barrels daily; in 2005 the conventional one reached 72 million barrels daily and since then it has not over-passed 75 millions. According to James Murray e David King – two researchers who recently published an article in Nature (highlighting that conventional Oil has already reached its production peak with negative consequences on the Economy) – “Oil market is moving towards a new state, in one in Physics called as transition phase: now, Oil production is not elastic, not able to follow the demand growth, and this push Oil price going up …” Going on: “…Oil price peaks can cause economic crisis; they have contributed to the current one. It is unlikely that in future Economy will be able to face what Oil price is going to deserve. Only by becoming more resilient to fossil fuels we can ensure stronger economic perspectives and face climate change challenges.”

Let’s clear what are the relations between Oil price and economic growth. An increase in the Oil price negatively influence Economy acting in both the demand and supply of goods.

Influence on the demand of goods:
an increase in the Oil price means an increase in the no-discretional spending of consumers (petrol, public transport, home energy consumption). So there is a reduction in the consumer’s disposable income. So consumption (and consequently GDP) will reduce.

Influence in the supply of goods:
manufacturing plants use energy in their production process; Logistic sectors use energy in transporting good; Tourism sectors use energy in transporting customers. Oil production, as we said, has by now reached its peak; so if there was not any increase in manufacturing productivity (process that requires a long period), Economy would not grow more.

In any case, an Economy whose good prices are strongly dependent on the Oil price – as it has become very volatile – is an economy dominated by uncertainty, with entrepreneurs and consumers having big difficulties in planning their investments: this is another reason why Economy stagnates.

Developing countries (especially BRICS), thanks to their low cost of production, expanding investments, exports and confidence, are growing without break. The portion of world Oil consumed by them is increasing at the expenses of Advanced Western countries, that, in order to preserve or increase their GDP, must better manage their energy source mix.

Actually, the matter is more complex: at the beginning the Peak of world Oil production brings uncertainty in the economy rather than recession. An increase in the Oil price (generated by an excess of Oil demand on supply) brings a recession in countries that already consume great quantities of Oil and are forced to reduce their Oil consumption; with the decrease in the Oil demand, Oil price will decrease again bringing a recovery in the Economy. This process will go on; in the case world Oil production remain steady at the current level, there will be a convergence toward a global steady Economy; but, according to Hubbert theory, Oil production, after its peak, will gradually reduce and will not be able to feed the current Economy level any more.

 
Conclusions
 
As in the past years western countries with their 1 billion inhabitants (a bit over 800 millions in both United States and Europe) were the lonely great Oil consumers, Economy (except for the post-79 crisis) didn’t face big problems. The emergency of new countries, with about 3 billion Inhabitants (a bit more than 2,8 billion in the BRIC) craving energy and the lifestyle established in Western countries, things are changing. So, by now, millions and millions of people are competing to get a scarce energy source. Humankind has created an economic system excessively dependent on Oil; this will cause serious problems when there will be a decrease in Oil supply, or simply when Oil supply will be not more able to face the increase in Oil demand. The solution to economic and environmental problems consists in finding a new mix of energy sources, able to feed a rebirth in the Economy, more environmental friendly.

 
BIBLIOGRAFIA
 
BP, BP Energy Outlook 2030, (January 2012), London

Commissione Europea, (2011), Una tabella di marcia verso un'economia competitiva a basse emissioni di carbonio nel 2050 - comunicazione della commissione al parlamento europeo, al consiglio, al comitato economico e sociale europeo e al comitato delle regioni

Cutler J. Cleveland, Robert Costanza, Charles A.S. Hall e Robert Kaufmann, (31 agosto 1984), “Energy and the U.-S. Economy: A Biophisical Perspective, Science, vol. 225, n. 4665, , pp. 890-897

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James Murray and David King, (25 January 2012), “Climate policy: Oil's tipping point has passed”, Nature 481, p. 433–435

Hubbert M.K., (1956), Nuclear energy and the fossil fuels, American Petroleum Institute Drilling & Production Practice, Proceedings Spring Meeting San Antonio Texas

International Energy Agency (IEA), World Energy Outlook 2011

OECD, (marzo 2012), Oecd Environmental Outlook To 2050: The Consequences of Inaction

Maurizio Pallante, (2011), La decrescita felice, GEI Gruppo editoriale italiano s.r.l., Roma

Maurizio Pallante, (2011b), Meno e Meglio, Bruno Mondadori, Milano

Jeremy Rifkin , (2002), Economia all'idrogeno, Mondadori, Milano

Wolfgang Sachs e Marco Morosini (a cura di), (8-3-2011), Futuro sostenibile – Le risposte eco-sociali alle crisi in Europa, Wuppertal Institute, Bruxelles

 

This article by Dario Ruggiero
is licensed under a Creative Commons Attribuzione - Non commerciale - Non opere derivate 3.0 Italia License



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