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Ferdinand E. Banks

Ferdinand E. Banks

Ferdinand E. Banks, Uppsala University (Sweden), performed his undergraduate studies at Illinois Institute of Technology (electrical engineering) and Roosevelt University (Chicago), graduating with honors in…

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Endless Oil: Prices NOT Peaks are the Issue

”Endless Oil” is the title of a piece in Business Week (Jan, 18, 2010). Its author is Stanley Reed, and it was interesting for me because I remember when Business Week would not have published a tissue of nonsense like that article, and perhaps even more important, I was surprised when I saw the names of some of the persons whose opinions were cited. All I can say is that my dream tonight might involve encountering them in a seminar room or conference. Then they would find out the true state of the world oil economy.

Let me begin with the narrative that all of my energy economics students must know perfectly after my second lecture. The Russian oil output is probably close to peaking, and in any event the director of one of the largest Russian firms says that his country will never produce more than 10 million barrels per day (= 10mb/d). This number may be slightly wrong, but it happens to be one-tenth of the amount (= 100 mb/d) that the present CEO of Total (the French oil major) says is the absolute maximum for world production. (Another Total executive recently suggested 95 mb/d).

If this is not sufficient, consider the following.  The discovery of what we think of as conventional oil peaked in l965. In the early l980s the annual consumption of oil became larger than the annual discovery, and at the present time only about 1 barrel of (conventional or near-conventional) oil is discovered for every 3 consumed.

According to a British Petroleum (BP) document, of 54 producing nations only 14 still show increasing production. 30 are past peak output, while output rates are declining in 10.

Non OPEC countries produce 60 percent of world oil. That output has peaked. It is also my opinion that while Russia may not join OPEC – or be allowed to join – they will go along with OPEC’s production agenda. OPEC is the arbiter of the world oil economy today and in the future, although that topic is too complex to be taken up in this note.   Output in the U.S. peaked in 1970 at 9.5 mb/d, and when the giant Prudhoe field in Alaska came on line production turned up, but the previous peak was never attained. Instead the new peak was 7.5 mb/d. Today it is less than 6 mb/d, and steadily falling. North Sea oil (Norway + UK) peaked just before the end of the 20th century, and the super-giant Cantarell Field in Mexico – the third largest in the world – peaked slightly before that. Its decline is steeper than students of Mexican oil could possibly have expected.

Roughly two years ago the Saudi oil minister stated that his country would soon be producing 15 mb/d of oil in the not too distant future, and that output could be held for 50 years, but Saudi production has almost certainly peaked at less than 10 mb/d, despite what appears to be exceptional efforts to raise it to 10 mb/d after about 2005. Of course, as far as I am concerned, it does not make any difference what an oil minister or foreign oil expert says about Saudi intentions. Thirty years ago or so it was decided that (sustainable) Saudi production would never exceed 10 mb/d, although a surge output of 2 mb/d might be made available.

One of the persons cited in Mr Reed’s article is Leonardo Maugeri, a senior executive of the Italian oil major ENI. He states that “there will be enough oil for at least 100 years.” Actually there will be enough for a thousand or more, but not enough to keep our Volvos in the fast lane up to the skiing and partying in the Midnight Sun at Riksgränsen in the North of Sweden. There should however be enough though for the lamps of China and Beverly Hills.

Peter Jackson, a director of Cambridge Energy Research Associates, has ostensibly reviewed data from the world’s biggest fields, and his conclusion is that 60 percent of their reserves remain available. This is the figure that Amy Jaffe gave me at a conference in Rome some years ago, and before the discussion ended I think that I convinced most of her audience that she did not know what she was talking about. In her opinion the “oil recovery rate” (from oil in place) would climb rapidly, and eventually could amount to more than 50%. In my oil book, written 30 years ago, the figure was 32%, and according to the article being discussed, it is still below 35%. I will admit however that at the time I wrote my book, I too believed that a large increase in the recovery rate would soon take place, however when an American businessman in Vienna called me a fool for entertaining that thought, I smartened up.

There was also some talk in the Business Week article about “simple methods” that permit mature oil fields to uncover and produce additional oil. I discussed these in many articles and lectures, and the word I probably used the most was ‘disappointing’. Unfortunately the example given by Mr Reed for these simple methods was Indonesia, whose output before WW2 was especially impressive, but which now is strictly a has-been. I don’t recall when the output of that country peaked, but I do recall someone saying that Indonesia will never again be an important oil producer.

Mr Reed’s article was apparently written with the help of colleagues in Washington and Beijing, and this is the thing that is really sad, because the issue is no longer ‘peaks’ but prices, and this should be appreciated by everybody – especially our political masters. I can identify four oil price shocks before the apparently sustainable rise in oil prices that began about 2004. Each of those four shocks was followed by economic downturns, and recovery was progressively slower. As for the sustainable rise from 2004 to the winter of 2008, this is a large but unfortunately unappreciated source of the macroeconomic misery we are experiencing today. Like most teachers and researchers, I too have a forecast for the global oil production peak, but as far as I am concerned, when the price of oil can climb the way that it did a few years ago, that forecast is no longer interesting.

This article was written by Ferdinand Banks for Oilprice.com

Banks, Ferdinand E. (2010). ‘Oil, Money and Economic Theory.
Energy Politics (forthcoming).
_____. (2010). Energy, Environment, and Economic Theory. London, New York
and Singapore: World Scientific.
_____.(2007). The Political Economy of Energy: An Introductory Textbook. . London, New
York and Singapore: World Scientific.

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  • Anonymous on February 09 2010 said:
    All the more reason to accelerate development of radically new alternatives that have the potential to supersede oil.

    Small amounts of ordinary water will become a major fuel.

    The article titled Hydrinos at www.american-reporter.com/ is a good place to learn why.

    The story is about fractional Hydrogen. Our firm is also developing this almost unknown, new source of energy.

    The goal is powering hybrid vehicles. A gallon of water is expected to provide 1,000 miles of driving.

    We call this ECHO(tm) - Energy from Collapsing Hydrogen Orbits.

    ECHO makes possible SPICE(tm) - A Self Powered Internal Combustion Engine.

    To learn more, see: www.chavaenergy.com Look under the heading how?

    There you will also see other revolutionary technologies that promise to replace oil.

    Two independent validations of fractional Hydrogen have taken place. More will help to increase acceptance of this hard to believe new source of energy.

    One barrel of water will replace 200 barrels of oil!

    Hybrid cars and trucks running on ECHO, along with other revolutionary technologies, once they are thoroughly validated, can become power plants when suitably parked. No wires needed. The vehicles might pay their way by selling electricity to the local utility!

    Who will not want such a car or truck?

    A 24/7 development program can move this remarkable alternative into the market rapidly - and perhaps help to avoid the sharp rise in the price of oil that is here suggested.
  • Anonymous on February 11 2010 said:
    That's right, Mark, but the difficult thing is to decide which new alternatives should receive attention, and which should be completely and totally dismissed. As they say in real science, 'the important things is not to come up with new ideas - there are always plenty of those around; but to get rid of bad ideas as quickly as possible'. I was always a good teacher, but when I found this out, I became a great teacher. Of course, my students who couldn't get with the program might have different ideas, but everybody can't be satisfied.

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