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Vol. 11, No. 19 Week of May 07, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Has oil production peaked?

Herrera: Statistics point to peak production; prices likely to go higher

Alan Bailey

Petroleum News

It’s well known that U.S. oil production has been declining for many years. And, in Alaska, oil production is well past its peak. But has worldwide oil production peaked? And what impact might worldwide oil production capacity have on already soaring oil prices?

On May 1 Petroleum News discussed these topics with Alaska oil industry consultant Roger Herrera.

“I really have to believe that the world is very close to, if not past, peak oil,” Herrera said.

Coming from a background as an oil geologist in the days when there might be a one in 20 chance of striking oil with a wildcat well, Herrera was trained to be an optimist about finding oil. So, anticipating declining production really goes against the grain with him.

“Yet here I am,” Herrera said. “I find myself a very strong proponent of the problems associated with world peak oil, which in most people’s minds is a negative position to take.”

Herrera sees the statistics of oil field discovery and production as providing the pointers towards peak production.

“If you look at the sizes of the oil fields that are added every year, they are smaller and smaller and we’re not replacing the oil that we’re using,” he said.

And Herrera sees the dwindling likelihood of finding more giant oil fields as a key parameter in the production equation.

“The giants which are the real feeders to world supply are simply a thing of the past,” Herrera said. “So just on the basis of statistics you have to be very, very concerned.”

Uncertainty

However, Herrera commented on the major uncertainties regarding future oil discoveries.

“One has to be very cautious in estimating guesses,” he said.

Herrera recalls many occasions when geologists have made wildly inaccurate predictions about potential oil discoveries. He particularly remembers a conversation around 1962 with Norman Falconer, the then-chief geologist for BP. Falconer had spent a lifetime career in oil exploration and was a respected fellow of the Royal Society.

“‘What do you think of this North Sea business?’ Falconer said. ‘You know, Herrera, all these younger geologists are telling me how much oil there is in the North Sea — I’m going to drink all the oil they find in the North Sea.’

“Clearly he was dramatically wrong,” Herrera said. Herrera also pointed out some major uncertainties regarding the status of the giant oil fields in the Middle East, where there is a lack of hard data about oil reserves and where information published has more to do with politics than economics.

Another issue is that it is not generally possible to recognize a production peak straight away.

“I believe from just looking at history and peaking oil in individual countries that you inevitably don’t recognize the peak until after it’s happened,” Herrera said.

So, if world oil has peaked it may take a couple of years for data to indicate the production summit. Herrera also thinks that the production of unconventional oil, such as heavy oil, is complicating the picture — rising oil prices have enabled an increase in unconventional oil production.

“Unconventional oil is already playing a relatively major role,” Herrera said.

However, Herrera doesn’t see unconventional oil dramatically changing the situation; it just makes forecasting oil production more difficult.

Supply and demand

Herrera sees the current high oil prices as essentially a result of demand moving out of step with supply in oil markets.

“I would argue that despite all the political rhetoric … that what we’re going through at the moment is purely supply and demand,” Herrera said. “… There is more demand than there is supply and I can’t really see anything geologically on the horizon which is changing that supply in any dramatically positive fashion.”

And Herrera sees the current furor over oil and gasoline prices as having more to do with politics and psychology than factual economics.

“In a way this is a huge psychological problem, rather than a real problem,” he said. “… The world is not falling apart.”

He pointed out that current prices haven’t even reached historic highs — in 1979 oil prices reached $80 per barrel in today’s dollars, he said. And there is no evidence that current $75 per barrel prices are adversely impacting the U.S. economy. The statistics of U.S. work output for a given amount of energy indicate huge improvements in efficiencies, thus reducing the drag on the economy resulting from expensive energy, Herrera said. And expenditure on energy represents a relatively small percentage of individual household budgets, so that the impact of escalating prices is not as great as people tend to think.

Herrera also doesn’t believe that increasing gasoline prices will have a major impact on people’s driving habits. He has recently returned from the United Kingdom, where gasoline prices are much higher than in the United States.

“UK gasoline today is $6.75 a gallon and you can find it for $7 a gallon if you want to,” Herrera said. “If you’re on a motorway it’s $10 a gallon. And is that curbing demand then? Not at all.”

Upward price pressure

But what does the possibility of world oil production passing its peak mean for oil prices?

As the world population and the world economy continue to expand, increasing demands for energy will continue to put upward pressure on oil prices, especially if oil production has peaked, Herrera thinks.

“You have to be very, very concerned about the continued and almost irreversible rise in the cost of energy for at least a few decades,” he said.

Nor does Herrera think that governments have any short-term options for alleviating the situation. For example, he does not think that pouring money into renewable energy will provide a solution — renewable energy sources just cannot provide enough energy.

“There has been more money spent on renewables than on nuclear or coal in the past 10 years in this country,” Herrera said. “And where are we now? Renewables are less than 1 percent of the total energy (supply).”

Not a crisis

But Herrera does not see the current situation as a crisis. Even supposing that we are at peak oil production, half of the hydrocarbons that the world started with are still in the ground. So, there will be a gradual decline in production, rather than a sudden collapse over a production cliff.

And that gradual decline will enable a gradual adjustment to changing circumstances. Faced with oil shortages and escalating energy prices, for example, people are likely to conserve more oil.

“The reality is that people will cope,” Herrera said.

But, although energy conservation is starting to happen in the United States, large-scale conservation would become a big issue because of the way in which it would impact people’s lifestyles. However, there is huge potential for energy savings.

“That could carry America for decades,” Herrera said.

Herrera is very cautious about making predictions about future oil prices. Risk factors associated with terrorism and political instability in some parts of the world have been pushing oil prices up. And the rapid growth of developing countries such as China has had a major impact on oil demand and, hence, oil prices. But it is very difficult to predict the worldwide politics and economics that drive these issues.

“It really makes it a very confusing picture,” Herrera said.

Although political change and unanticipated events in the world could certainly cause the price of oil to drop over short periods of time, Herrera sees long-term demand and supply trends continuing to put upward pressure on oil prices.

“Unless we go into a huge world recession, those price reductions will be relatively temporary and inevitably it (the price trend) is going to be upwards,” Herrera said.



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