by Colin J. Campbell and Jean H. Laherrère

Peak Oil is now a term in common use throughout the Western world as oil prices increase. These price hikes are likely to continue into the foreseeable future, as increasing demand and decreasing supply move further and further apart. It is in everybody’s interest that we reduce our oil dependency by changing our lifestyles, becoming more energy efficient and developing environmentally friendly alternatives to oil.
In 1973 and 1979 a pair of sudden price increases rudely awakened the industrial world to its dependence on cheap crude oil. Prices first tripled in response to an Arab embargo and then nearly doubled again when Iran dethroned its Shah, sending the major economies sputtering into recession. Many analysts warned that these crises proved that the world would soon run out of oil. Yet they were wrong.

Their dire predictions were emotional and political reactions; even at the time, oil experts knew that they had no scientific basis. Just a few years earlier oil explorers had discovered enormous new oil provinces on the north slope of Alaska and below the North Sea off the coast of Europe. By 1973 the world had consumed, according to many experts’ best estimates, only about one eighth of its endowment of readily accessible crude oil (so-called conventional oil). The five Middle Eastern members of the Organization of Petroleum Exporting Countries (OPEC) were able to hike prices not because oil was growing scarce but because they had managed to corner 36 percent of the market. Later, when demand sagged, and the flow of fresh Alaskan and North Sea oil weakened OPEC’s economic stranglehold, prices collapsed.

From an economic perspective, when the world runs completely out of oil is not directly relevant: what matters is when production begins to taper off. Beyond that point, prices will rise unless demand declines commensurately.

Using several different techniques to estimate the current reserves of conventional oil and the amount still left to be discovered, we conclude that the decline will begin before 2010.

We have spent most of our careers exploring for oil, studying reserve figures and estimating the amount of oil left to discover, first while employed at major oil companies and later as independent consultants. Over the years, we have come to appreciate that the relevant statistics are far more complicated than they first appear.

Consider, for example, three vital numbers needed to project future oil production. The first is the tally of how much oil has been extracted to date, a figure known as cumulative production. The second is an estimate of reserves, the amount that companies can pump out of known oil fields before having to abandon them. Finally, one must have an educated guess at the quantity of conventional oil that remains to be discovered and exploited. Together they add up to ultimate recovery, the total number of barrels that will have been extracted when production ceases many decades from now.

The obvious way to gather these numbers is to look them up in any of several publications. That approach works well enough for cumulative production statistics because companies meter the oil as it flows from their wells. The record of production is not perfect (for example, the two billion barrels of Kuwaiti oil wastefully burned by Iraq in 1991 is usually not included in official statistics), but errors are relatively easy to spot and rectify. Most experts agree that the industry had removed just over 800 Gbo from the earth at the end of 1997.

Getting good estimates of reserves is much harder, however. Almost all the publicly available statistics are taken from surveys conducted by the Oil and Gas Journal and World Oil. Each year these two trade journals query oil firms and governments around the world. They then publish whatever production and reserve numbers they receive but are not able to verify them.

The results, which are often accepted uncritically, contain systematic errors. For one, many of the reported figures are unrealistic. Estimating reserves is an inexact science to begin with, so petroleum engineers assign a probability to their assessments. For example, if, as geologists estimate, there is a 90 percent chance that the Oseberg field in Norway contains 700 million barrels of recoverable oil but only a 10 percent chance that it will yield 2,500 million more barrels, then the lower figure should be cited as the so-called P90 estimate (P90 for "probability 90 percent") and the higher as the P10 reserves.

In practice, companies and countries are often deliberately vague about the likelihood of the reserves they report, preferring instead to publicize whichever figure, within a P10 to P90 range, best suits them. Exaggerated estimates can, for instance, raise the price of an oil company’s stock.

The members of OPEC have faced an even greater temptation to inflate their reports because the higher their reserves, the more oil they are allowed to export. National companies, which have exclusive oil rights in the main OPEC countries, need not (and do not) release detailed statistics on each field that could be used to verify the country’s total reserves. There is thus good reason to suspect that when, during the late 1980s, six of the 11 OPEC nations increased their reserve figures by colossal amounts, ranging from 42 to 197 percent, they did so only to boost their export quotas.

Previous OPEC estimates, inherited from private companies before governments took them over, had probably been conservative, P90 numbers. So some upward revision was warranted. But no major new discoveries or technological breakthroughs justified the addition of a staggering 287 Gbo. That increase is more than all the oil ever discovered in the U.S.—plus 40 percent. Non-OPEC countries, of course, are not above fudging their numbers either: 59 nations stated in 1997 that their reserves were unchanged from 1996. Because reserves naturally drop as old fields are drained and jump when new fields are discovered, perfectly stable numbers year after year are implausible.

Another source of systematic error in the commonly accepted statistics is that the definition of reserves varies widely from region to region. In the U.S., the Securities and Exchange Commission allows companies to call reserves "proved" only if the oil lies near a producing well and there is "reasonable certainty" that it can be recovered profitably at current oil prices, using existing technology. So a proved reserve estimate in the U.S. is roughly equal to a P90 estimate.

Regulators in most other countries do not enforce particular oil-reserve definitions. For many years, the former Soviet countries have routinely released wildly optimistic figures—essentially P10 reserves. Yet analysts have often misinterpreted these as estimates of "proved" reserves. World Oil reckoned reserves in the former Soviet Union amounted to 190 Gbo in 1996, whereas the Oil and Gas Journal put the number at 57 Gbo. This large discrepancy shows just how elastic these numbers can be.

Using only P90 estimates is not the answer, because adding what is 90 percent likely for each field, as is done in the U.S., does not in fact yield what is 90 percent likely for a country or the entire planet. On the contrary, summing many P90 reserve estimates always understates the amount of proved oil in a region. The only correct way to total up reserve numbers is to add the mean, or average, estimates of oil in each field. In practice, the median estimate, often called "proved and probable," or P50 reserves, is more widely used and is good enough. The P50 value is the number of barrels of oil that are as likely as not to come out of a well during its lifetime, assuming prices remain within a limited range. Errors in P50 estimates tend to cancel one another out.

We were able to work around many of the problems plaguing estimates of conventional reserves by using a large body of statistics maintained by Petroconsultants in Geneva. This information, assembled over 40 years from myriad sources, covers some 18,000 oil fields worldwide. It, too, contains some dubious reports, but we did our best to correct these sporadic errors.

According to our calculations, the world had at the end of 1996 approximately 850 Gbo of conventional oil in P50 reserves—substantially less than the 1,019 Gbo reported in the Oil and Gas Journal and the 1,160 Gbo estimated by World Oil. The difference is actually greater than it appears because our value represents the amount most likely to come out of known oil fields, whereas the larger number is supposedly a cautious estimate of proved reserves.

For the purposes of calculating when oil production will crest, even more critical than the size of the world’s reserves is the size of ultimate recovery—all the cheap oil there is to be had. In order to estimate that, we need to know whether, and how fast, reserves are moving up or down. It is here that the official statistics become dangerously misleading.

According to most accounts, world oil reserves have marched steadily upward over the past 20 years. Extending that apparent trend into the future, one could easily conclude, as the U.S. Energy Information Administration has, that oil production will continue to rise unhindered for decades to come, increasing almost two thirds by 2020.

Such growth is an illusion. About 80 percent of the oil produced today flows from fields that were found before 1973, and the great majority of them are declining. In the 1990s oil companies have discovered an average of seven Gbo a year; last year they drained more than three times as much. Yet official figures indicated that proved reserves did not fall by 16 Gbo, as one would expect rather they expanded by 11 Gbo. One reason is that several dozen governments opted not to report declines in their reserves, perhaps to enhance their political cachet and their ability to obtain loans. A more important cause of the expansion lies in revisions: oil companies replaced earlier estimates of the reserves left in many fields with higher numbers. For most purposes, such amendments are harmless, but they seriously distort forecasts extrapolated from published reports.

To judge accurately how much oil explorers will uncover in the future, one has to backdate every revision to the year in which the field was first discovered—not to the year in which a company or country corrected an earlier estimate. Doing so reveals that global discovery peaked in the early 1960s and has been falling steadily ever since. By extending the trend to zero, we can make a good guess at how much oil the industry will ultimately find.

We have used other methods to estimate the ultimate recovery of conventional oil for each country and we calculate that the oil industry will be able to recover only about another 1,000 billion barrels of conventional oil. This number, though great, is little more than the 800 billion barrels that have already been extracted.

It is important to realize that spending more money on oil exploration will not change this situation. After the price of crude hit all-time highs in the early 1980s, explorers developed new technology for finding and recovering oil, and they scoured the world for new fields. They found few: the discovery rate continued its decline uninterrupted. There is only so much crude oil in the world, and the industry has found about 90 percent of it.

Predicting when oil production will stop rising is relatively straightforward once one has a good estimate of how much oil there is left to produce. We simply apply a refinement of a technique first published in 1956 by M. King Hubbert. Hubbert observed that in any large region, unrestrained extraction of a finite resource rises along a bellshaped curve that peaks when about half the resource is gone. To demonstrate his theory, Hubbert fitted a bell curve to production statistics and projected that crude oil production in the lower 48 U.S. states would rise for 13 more years, then crest in 1969, give or take a year. He was right: production peaked in 1970 and has continued to follow Hubbert curves with only minor deviations. The flow of oil from several other regions, such as the former Soviet Union and the collection of all oil producers outside the Middle East, also follows Hubbert curves quite faithfully.

The global picture is more complicated, because the Middle East members of OPEC deliberately reined back their oil exports in the 1970s, while other nations continued producing at full capacity. Our analysis reveals that a number of the largest producers, including Norway and the U.K., reached their peaks around the turn of the. Since 2002 the world is relying on Middle East nations, particularly five near the Persian Gulf (Iran, Iraq, Kuwait, Saudi Arabia and the United Arab Emirates), to fill in the gap between dwindling supply and growing demand. But once approximately 900 Gbo have been consumed, production must soon begin to fall. It seems most likely that world production of conventional oil is now peaking or about to peak.

Some economists and academic geologists argue that huge deposits of oil may lie undetected in far-off corners of the globe. In fact, that is very unlikely. Exploration has pushed the frontiers back so far that only extremely deep water and polar regions remain to be fully tested, and even their prospects are now reasonably well understood. Theoretical advances in geochemistry and geophysics have made it possible to map productive and prospective fields with impressive accuracy. As a result, large tracts can be condemned as barren. Much of the deepwater realm, for example, has been shown to be absolutely nonprospective for geologic reasons.

What about the much touted Caspian Sea deposits? Our models project that oil production from that region will grow until around 2010. We agree with analysts at the USGS World Oil Assessment program and elsewhere who rank the total resources there as roughly equivalent to those of the North Sea that is, perhaps 50 Gbo but certainly not several hundreds of billions as sometimes reported in the media.

A second common rejoinder is that new technologies have steadily increased the fraction of oil that can be recovered from fields in a basin—the so-called recovery factor. In the 1960s oil companies assumed as a rule of thumb that only 30 percent of the oil in a field was typically recoverable; now they bank on an average of 40 or 50 percent. That progress will continue and will extend global reserves for many years to come, the argument runs.

Of course, advanced technologies will buy a bit more time before production starts to fall. But most of the apparent improvement in recovery factors is an artifact of reporting. As oil fields grow old, their owners often deploy newer technology to slow their decline. The falloff also allows engineers to gauge the size of the field more accurately and to correct previous underestimation—in particular P90 estimates that by definition were 90 percent likely to be exceeded.

Another reason not to pin too much hope on better recovery is that oil companies routinely count on technological progress when they compute their reserve estimates. In truth, advanced technologies can offer little help in draining the largest basins of oil, those onshore in the Middle East where the oil needs no assistance to gush from the ground.

Last, economists like to point out that the world contains enormous caches of unconventional oil that can substitute for crude oil as soon as the price rises high enough to make them profitable. There is no question that the resources are ample: the Orinoco oil belt in Venezuela has been assessed to contain a staggering 1.2 trillion barrels of the sludge known as heavy oil. Tar sands and shale deposits in Canada and the former Soviet Union may contain the equivalent of more than 300 billion barrels of oil. Theoretically, these unconventional oil reserves could quench the world’s thirst for liquid fuels as conventional oil passes its prime. But the industry will be hard-pressed for the time and money needed to ramp up production of unconventional oil quickly enough

Such substitutes for crude oil might also exact a high environmental price. Tar sands typically emerge from strip mines. Extracting oil from these sands and shales creates air pollution. The Orinoco sludge contains heavy metals and sulfur that must be removed. So governments may restrict these industries from growing as fast as they could. In view of these potential obstacles, our skeptical estimate is that only 700 Gbo will be produced from unconventional reserves over the next 60 years.

Meanwhile global demand for oil is currently rising at more than 2 percent a year. Since 1985, energy use is up about 30 percent in Latin America, 40 percent in Africa and 50 percent in Asia. The Energy Information Administration forecasts that worldwide demand for oil will increase 60 percent (to about 40 Gbo a year) by 2020.

The switch from growth to decline in oil production will thus almost certainly create economic and political tension. Unless alternatives to crude oil quickly prove themselves, the market share of the OPEC states in the Middle East will rise rapidly. These nations’ share of the global oil business has already passed 30 percent, the level reached during the oil-price shocks of the 1970s. By 2010 their share will quite probably hit 50 percent.

The world could thus see radical increases in oil prices. That alone might be sufficient to curb demand, flattening production for perhaps 10 years. (Demand fell more than 10 percent after the 1979 shock and took 17 years to recover.) But by 2010 or so, many Middle Eastern nations will themselves be past the midpoint. World production will then have to fall.

The world is not running out of oil—at least not yet. What our society is facing is the end of the abundant and cheap oil on which all industrial nations depend. 

A Nation Rocked to Sleep

by Carly Sheehan

Have you ever heard the sound of a mother screaming for her son?

The torrential rains of a mother's weeping will never be done

They call him a hero, you should be glad that he's one, but

Have you ever heard the sound of a mother screaming for her son?

Have you ever heard the sound of a father holding back his cries?

He must be brave because his boy died for another man's lies

The only grief he allows himself are long, deep sighs

Have you ever heard the sound of a father holding back his cries?

Have you ever heard the sound of taps played at your brother's grave?

They say that he died so that the flag will continue to wave

But I believe he died because they had oil to save

Have you ever heard the sound of taps played at your brother's grave?

Have you ever heard the sound of a nation being rocked to sleep?

The leaders want to keep you numb so the pain won't be so deep

But if we the people let them continue another mother will weep

Have you ever heard the sound of a nation being rocked to sleep?

*Casey Sheehan, a U.S. soldier,  was killed in Iraq. This poem was written by Casey's 18 year old sister, Carly.
*Casey Austin Sheehan - Born May 29th 1979 ~ Died April 4th 2004

Author: COLIN J. CAMPBELL and JEAN H. LAHERRÈRE have each worked in the oil industry for more than 40 years. 

Source: This is an edited version of an article that appeared in Scientific American.
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