World conventional oil supply expected to peak in 21st century

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Reflecting increasing consumer demand for petroleum products, world crude oil demand has been growing at an annualized compound rate slightly in excess of 2% in recent years. Demand growth is highest in the developing world, particularly in China and India (each with a population exceeding 1 billion) and to a lesser extent in Africa (800 million) and South America (350 million). Where high demand growth exists, it is primarily due to rapidly rising consumer demand for transportation via cars and trucks powered with internal combustion engines. For economic and/or political reasons, this high demand growth component did not exist in most of the developing world even a decade ago.

A multitude of analysts consisting of retired petroleum industry professionals hailing from either the geologic or business side of the house, a smattering of physicists, assorted consultants, and less than a handful of economists have predicted at various times over the past two decades, and with increasing frequency, that world crude oil production would peak at times ranging from 8 to 20 years after their forecast. Dire effects on world oil prices, the welfare of mankind in general, and the US economy and lifestyle in particular are typically alleged to follow the predicted peaks. The times for many of these predicted peaks have already come and gone, or will soon do so.

In April 2000, the US Geological Survey released results of the most thorough and methodologically modern assessment of world crude oil and natural gas resources attempted. This five-year study was undertaken "to provide impartial, scientifically based, societally relevant petroleum resource information essential to the economic and strategic security of the United States." It was conducted by 40 geoscientists (many with industry backgrounds) and reviewed stage-by-stage by geoscientists employed by many petroleum industry firms, including several of the multinational majors.

The study prompted the Energy Information Administration to take the next logical step by providing the first federal analysis of long-term world oil supply since that published by Dr. M. King Hubbert of the USGS in 1974, notwithstanding Dr. Michael Smith's assertion that "the major oil companies never talk about decline and neither does the US Energy Information Administration" (Offshore, August 2002).

EIA's study, presented at the 2000 American Association of Petroleum Geologists meeting and published in July 2000, remains online in PowerPoint format at: http://www.eia.doe.gov/pub/oil_gas/petroleum/presentations/2000/long_term_supply/index.htm. Since then, nothing has happened, nor has any new information become available that would significantly alter its results. High feedback and sustained requests for "live" presentation indicate widespread cognizance of the analysis among energy policy makers in the federal government, analysts who focus on energy matters, and senior managers of public and private entities that are major consumers of petroleum products.

Data and methodology

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EIA's long-term world oil supply analysis was done very much in the spirit of King Hubbert's. However, it had the benefit of a longer exploration and production history and a geologically derived, rather than merely assumed, estimate of the world's conventional technically recoverable crude oil resource base. The methodology developed for the analysis also differed from that used by others, including Hubbert, in significant ways:

• Although our approach is as "high-level generalized" as those used by the other estimators, it explicitly deals in a quantitative manner with both demand and supply, whereas others' approaches incorporate the demand side of the world crude oil market equation only implicitly
• Our approach does not assume that the declining production trend after the peak will be a mirror image of the incline prior to the peak. While symmetry appeared to be a reasonable choice at the time Hubbert made his estimates for the US (which, unlike the world, was not a closed supply-demand system) and later elected (perhaps unfortunately) to apply the same approach at world scale, there is no strong physical or economic rationale that supports a symmetrical outcome for the entire world, particularly in view of the more drawn out time scale of worldwide development
• Pursuant to the prior point, EIA's approach does not assume that a single functional form can accurately model the full production curve. Hubbert's choice of the logistic function to model the full production curve made sense at the time he selected it given the sparse data that were available to him at that time. That is no longer the case. We elected to marry two functional forms, the first of which extends production from history along a constant percentage growth path until the production peak is reached, the second of which declines production post-peak at a constant reserves to production (R/P) ratio (not to be mistaken for a constant decline rate). The estimated time of peak production is therefore determined by the choice of these functional forms, the rate of pre-peak production growth, the post-peak R/P ratio, and the estimated size of the technically recoverable resource base. EIA selected an R/P ratio of 10 as being representative of the post-peak production experience. The US, a large, prolific, and very mature producing region, has an R/P ratio of about 10 and was used as the model for the world in a mature state
• In concert with the USGS, our approach assumes that ultimate recovery appreciation (field growth, reserves growth) occurs outside the borders of the US, albeit not necessarily in every field. For an excellent historical example, one need only look at what has happened to projected dates of abandonment in the North Sea over the past three decades. Others who have predicted that the end is imminent either ignore this factor or claim that it does not apply outside the US

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• We believe that the USGS estimates are conservative for a variety of reasons, chief among which are that the USGS assessment did not encompass all geologically conceivable small sources of conventionally resevoired crude oil and was limited to the assessment of reserves that would be added within a 30-year time frame because, in part, "technological changes beyond 30 years are difficult, if not impossible, to conceptualize and quantify." The latter limitation has clear implications for such matters as expectations regarding field discoverability and producibility, not to mention recovery factor improvement
• A larger resource base implies a later date of peak production than does a smaller one. The significant volumetric difference between the conventional crude oil resource base views held by the USGS and EIA and those of most other contemporary long term oil supply estimators is depicted in the figure, which compares the former to the 1995-vintage view set forth by Colin Campbell and Jean Laherrère in "The End of Cheap Oil?" (Scientific American, March 1998). This was applied to a hypothetical in-place resource volume
• We elected to explicitly recognize the existence of uncertainty (as did the USGS resource estimation process) by developing an approach that postulates 12 scenarios that span a range of plausible variation in the inputs. Each scenario has its own unique peak production rate and time of occurrence. Others' approaches do not explicitly recognize uncertainty and typically produce a solitary point estimate.

Results

The particular scenario shown in the second graph depicts the 2% demand growth experience of recent years extended up to the production peak (similar to the 2.2% rate applied through 2020 in EIA's 2002 International Energy Outlook) and then the decline path from the peak at a constant R/P ratio of 10.

The three divergent curves shown reflect alternative resource base volumes. From left to right, they are the sum of the USGS's United States and rest-of-world resource estimates at the 95% certain (19-in-20 chances of that much or more), the statistical mean (expected value), and 5% certain (1-in-20 chance of that much or more) volumetric levels. Thus, if the USGS mean resource estimate proves to be correct, if 2% production growth continues until peak production is reached, and if production then declines at an R/P ratio of 10, world conventional crude oil production would be expected to peak in 2037 at a volume of 53.2 Bbbl/yr.

Provided numerically in the table and graphically in the last figure are the results of all 12 scenarios, in which the pre-peak production growth rate is varied against the same three USGS fractile estimates of the resource base while post-peak decline remains fixed at R/P=10.

Depending on what actually happens to demand, as well as on how fortunate the world eventually proves to be vis-à-vis the volume of its conventional crude oil resource endowment, peak world conventional crude oil production could plausibly occur anywhere between 2021 at a volume of 48.5 Bbbl/yr and 2112 at a volume of 24.6 Bbbl/yr, though neither of these extremes has a substantial probability of occurrence.

Sensitivity

These results are remarkably insensitive to the assumption of alternative resource base estimates. For example, adding 900 Bbbl – more oil than had been produced at the time the estimates were made – to the mean USGS resource estimate in the 2% growth case only delays the estimated production peak by 10 years. Similarly, subtracting 850 Bbbl in the same scenario accelerates the estimated production peak by only 11 years.

It is worth noting that a 1% decrease in the pre-peak growth rate has roughly the same effect that adding 900 Bbbl to the estimated resource base does.

The bottom line

Will the world ever physically run out of crude oil? No, but only because it will eventually become very expensive in absence of lower-cost alternatives. When will worldwide production of conventionally reservoired crude oil peak? That will in part depend on the rate of demand growth, which is subject to reduction via both technological advancements in petroleum product usage and the substitution of new energy source technologies.

It will also depend in part on the rate at which technological advancement, operating in concert with world oil market economics, accelerates large-scale development of unconventional sources of crude such as tar sands and very heavy oils. Production from some of the Canadian tar sands and Venezuelan heavy oil deposits is already economic and growing.

In any event, the world production peak for conventionally reservoired crude is unlikely to be "right around the corner" as so many other estimators have been predicting. Our analysis shows that it will be closer to the middle of the 21st century than to its beginning. Given the long lead times required for significant mass-market penetration of new energy technologies, this result in no way justifies complacency about both supply-side and demand-side research and development.