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When Can We Expect The Next Oil Shock?

When Can We Expect The Next Oil Shock?

The views expressed are those of Dennis Coyne and do not necessarily reflect the views of Ron Patterson.


The post that follows relies heavily on the previous work of both Paul Pukite (aka Webhubbletelescope) and Jean Laherrere and I thank them both for sharing their knowledge, any mistakes are my responsibility.

In a previous post I presented a simplified Oil Shock model that closely followed a 2013 estimate of World C+C Ultimately Recoverable Resources (URR) by Jean Laherrere of 2700 Gb, where 2200 Gb was from crude plus condensate less extra heavy oil (C+C-XH) and 500 Gb was from extra heavy (XH) oil resources in the Canadian and Venezuelan oil sands.

In the analysis here I use the Hubbert Linearization (HL) method to estimate World C+C-XH URR to be about 2500 Gb. The creaming curve method preferred by Jean Laherrere suggests the lower URR of 2200 Gb, if we assume only 200 Gb of future reserve growth and oil discovery.

Previously, I have shown that US oil reserve growth (of proved plus probable reserves) was 63% from 1980 to 2005. If we assume all of the 200 Gb of reserves added to the URR=2200 Gb model are from oil discoveries and that in a URR=2500 Gb, oil discoveries are also 200 Gb, then 300 Gb of reserve growth would be needed over all future years (we will use 90 years to 2100) or about 35% reserve growth on the 850 Gb of 2P (proved plus probable) reserves in 2010. I conclude that a URR of 2500 Gb for C+C-XH is quite conservative.

A problem with the Hubbert Linearization method is that there is a tendency to underestimate URR.

HL Analyses from 1998, 2005, and 2015 shown in the chart below give URRs of 1600 Gb, 2000 Gb, and 2500 Gb respectively, so this leads one to suspect the HL estimate is the minimum of future URR.

The United States Geological Survey gives an optimistic World C+C-XH URR estimate of 3100 Gb, I believe this is too high and think the average of the HL and USGS estimate may be reasonable at 2800 Gb for World C+C-XH URR. Related: Greece And Iran Provide One-Two Punch To Oil Prices

A second reason that a World C+C-XH URR may be higher than the HL estimate is to consider the United States at its peak in 1970. The HL estimate for 1950 to 1970 pointed to a C+C URR of 208 Gb. In 2007, the HL estimate for 1950 to 2007 pointed to a URR of 226 Gb. After 2007, the large increase in US light tight oil (LTO) output no longer follows the linear trend and the US C+C URR is likely to be higher than 226 Gb. US HL Chart below:

Simply using the 226/208 ratio indicates that the URR estimate at peak output is likely to underestimate URR by at least 9%, so if we increase the World URR HL estimate by 9% (2500*1.09) we get 2700 Gb for the World C+C-XH URR estimate.

Another perspective is to consider that at the 1970 peak for US C+C output, the cumulative C+C output (Q=96 Gb) was about 42% of the current (1950-2007) HL URR estimate (96/226). If we assume 2014 is the peak for World C+C-XH output and that the current cumulative C+C-XH of 1240 Gb is 42% of the eventual URR, then the World C+C-XH URR would be (1240/0.42) 2950 Gb.

As before, I would choose to average these two estimates of World C+C-XH URR to 2825 Gb and then round to two significant digits, the final estimate is 2800 Gb.

What about extra heavy (XH) oil from the oil sands of Canada and Venezuela? Jean Laherrere‘s estimate for the XH URR is 500 Gb and the USGS estimate is 1000 Gb. Initially, I was tempted to estimate the XH URR at 750 Gb, but conversations with Fernando Leanme (who is familiar with production problems in the Orinoco belt) led me to reduce the XH URR estimate to 600 Gb.

The XH output scenario is shown below, it is assumed that this scenario is unchanged by changes in the C+C-XH scenario. This scenario is more conservative than previous XH scenarios I have used, which were more similar to those of Jean Laherrere. Peak output is about 10.3 Mb/d in 2056 vs earlier scenarios which peaked at 14 Mb/d in 2070.

For comparison Jean Laherrere’s XH scenario is in the chart below, peak of 15 Mb/d in 2070.

Jean Laherrere has provided the best data I have seen for World proved plus probable (2P) reserves for C+C-XH. His Feb 2013 estimate for the end of 2010 for C+C-XH 2P reserves was 850 Gb. The Oil Shock model estimates proved producing reserves for the World. By using United States data from the EIA and assuming that 2P reserves are 1.5 times higher than proved reserves, we find that over the 1996 to 2008 period in the US, 52% of 2P reserves are producing reserves. For the World, I have assumed the ratio of producing reserves to 2P reserves is 50 to 51%, so in my Oil shock models I aim for this ratio in 2010 where 2P reserves are well estimated at 850 Gb.

I present 3 different scenarios below where the XH output scenario is the same (600 Gb), but the C+C-XH URR varies from 2500 Gb to 3100 Gb, with an intermediate scenario of 2800 Gb. In an earlier post, I presented a simplified oil shock model where the maximum entropy probability distribution was defined by a constant “k”, where 1/k is the mean time between oil discovery and first production for the average oil field. For the models presented below, 1/k is different for each of the models in order for the ratio of producing reserves to 2P reserves in 2010 to remain similar as we change the URR of the C+C-XH models over a range of 600 Gb.

URR of Model 1/k
2500 Gb 29 years
2800 Gb 34 years
3100 Gb 38 years

For all three models the percentage of producing reserves to 2P reserves at the end of 2010 is between 50 and 51%. The extraction rate was chosen so that the model matched EIA C+C output from 1960 to 2014, for years earlier than 1960 a single extraction rate was chosen so that the 1959 output level was consistent with 1960 output. We do not know what extraction rates will be after 2014, we can only guess.

I used the increasing trend of extraction rate over the 2009 to 2014 period and fit a line to the extraction rates for these 5 years, I assumed the trend would continue unless output was above 80 Mb/d, or the extraction rate was above the previous maximum rate in 1979, or output had peaked. If any of these three things occurred the extraction rate would gradually level off and then would begin to decline, these are guesses and are merely suggestive of what could occur.

I expect that future high oil prices will cause economic growth to slow and oil demand will decrease and thereby reduce the extraction rate. There will also be some substitution away from oil use for transport as oil prices rise which will also reduce oil demand. It is not possible to forecast these changes with any degree of accuracy. Related: Military Renewable Investment Could See Huge Growth In Coming Years

The Scenario with URR=3400 Gb (including 600 Gb of XH oil) is below, peak is 79 Mb/d in 2018. Annual decline rates are 1% or less until 2032 and remain below 1.5% until 2040 and stay between 1.5% and 1.83% until 2100. Cumulative C+C output is 2900 Gb in 2100.

The Scenario with a World C+C URR of 3100 Gb (600 Gb of XH oil included) is presented below, the peak is in 2014 at 78 Mb/d and annual decline rates remain below 1.75% from 2015 to 2100 and are less than 1.5% until 2028. Cumulative C+C output is 2600 Gb in 2100.

The final scenario has a World C+C URR of 3700 Gb (with 600 Gb of XH oil), peak is 80 Mb/d in 2023. Annual decline rates remain below 1% until 2042, under 1.5% until 2047 and remain under 1.62% until 2100. Cumulative C+C output is 3000 Gb in 2100.

The three scenarios can be compared in the chart below.

If there were no future oil shocks due to economic crises or major wars and World C+C URR is in fact between 3100 Gb and 3700 Gb, then future C+C output could follow an output path between the green and red curves in the chart above. It is unlikely that there will be no severe oil shocks in the future, though predicting the timing of such shocks would be difficult. Related: OPEC Still Holds All The Cards In Oil Price Game

The three excel files with the three scenarios presented above can be found at the links below. By adjusting the extraction rates to higher or lower values than I have chosen you can create any scenario you choose. Optimists can have extraction rates go to 20% if they choose and pessimists can make the extraction rates go to zero (which would mean no output) if they wish. One would have to explain why either of these would occur. We don’t want to assume a collapse in order to have a collapse in oil output, and we shouldn’t assume that resources are infinite to prove that there will be no peak in oil output. Each spreadsheet is about 3.5 megabytes (the order is 3400 Gb, 3100 Gb, and 3700 Gb).

A pessimistic scenario is presented below with an “oil shock” beginning in 2035 and similar in magnitude to the 1980-5 oil shock (extraction rate falls by a similar percentage), we could envision a war in the middle east where oil supplies from Iran, Iraq, Kuwait, and Saudia Arabia are reduced to zero and the resulting recession reduces oil demand even further, the URR is assumed to be 3400 Gb for this scenario. Peak is 79 Mb/d in 2018, annual decline rate is less than 1.1% until 2035.

An optimistic scenario is presented below where extraction rates increase at the 2009-2014 trend until they are 10% higher than the highest rate previously reached in 1979, then extraction rates remain at this level until 2100. The C+C URR is 3400 Gb. Peak is 81 Mb/d in 2023 and annual decline rate remains below 1.1% until 2035.

A final “realistic”scenario has a less severe oil shock in 2035 with extraction rates decreasing only half as much as the “pessimistic” scenario and with extraction rates continuing to decline, but less steeply after 2045. This might result from a severe financial crisis in 2034 with a depression following. Peak is 79 Mb/d in 2018 and annual decline rates stay below 1.1% until 2036. Chart below.

The chart below compares the optimistic and pessimistic scenarios with my “realistic” scenario for a World C+C URR of 3400 Gb. Cumulative output of the optimistic scenario is about 2900 Gb in 2100 and the pessimistic and realistic scenario has lower cumulative output at about 2800 Gb in 2100.

Excel files for realistic, pessimistic, and optimistic scenarios respectively are below.

By Dennis Coyne Via Peakoilbarrel.com

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  • Jim on July 09 2015 said:
    Brilliant analysis. The only problem is that you have implied the future cause of declining oil production is due to scarcity or technical difficulty of extraction or even high prices by characterizing it as a "shock." By using a primarily economic term, you have judged the future so to speak. Another possibility is that demand for oil will peak and decline due to substitution of natural gas or coal, new technologies or more efficiencies in pricing (not to mention world wars, famines, extinctions and so forth).
  • Gunnar Kaestle on September 14 2015 said:
    Thanks for the good overview. "A problem with the Hubbert Linearization method is that there is a tendency to underestimate URR." David Rutledge therefore used another apporximation, by fitting the production data to the logistic growth function. He did that for coal mining, as there the data is not that sigmoidly smooth as for crude oil.
    http://www.its.caltech.edu/~rutledge/DavidRutledgeCoalGeology.pdf

    Concerning the question of when or what is peak oil, I'd say that price elasticity of production is also an important characteristic. Have a look at the figure "Phase Shift" in the Murray and King article. http://www.washington.edu/research/.SITEPARTS/.documents/.or/Nature_Comment_01_26_2012.pdf

    It would be helpful if somebody could have a closer look at the data and update the price vs production scatterplots, especially to get an impression how price elasticity developed in the last few years when light tight oil emergend and what happened with the price elasticity during the last 1,5 years with declining oil prices.

    Gunnar

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