The world is drawing down its oil reserves at an unprecedented rate and even assuming no growth in demand it is likely that that by 2010 oil supply will be constrained by global production capacity and oil will permanently cease to be abundant. Supply and demand will be forced to balance - but at a price. Then, like during the oil shocks of the 1970’s, prices could double and treble within two or three years as the world changes from oil abundance to oil scarcity. The world is facing a future of major oil price increases which will occur sooner than many people believe. These are amongst the conclusions of The World Oil Supply Report
, an important new study published today by energy analysts Douglas-Westwood.
Oil production to peak soon
The overall conclusion of the extensive research carried out for this report, into all potential sources of oil, is that the world’s known and estimated ‘yet to find’ reserves cannot satisfy even the present level of production of some 74 million barrels per day beyond 2022. Any growth in global economic activity only serves to increase demand and bring forward the peak year. 1% demand growth brings the year to 2016, when production is expected to peak at around 83 million barrels per day; with 2% growth, peak production of 87 million barrels per day occurs in 2011, and with 3% growth, peak production of 87 million barrels per day occurs in 2006.
It is of significance to note that the EIA recently forecast that by 2020 oil demand would reach 119 million barrels per day. Clearly a major supply and demand imbalance is in prospect. In short, it seems likely that during the first 25 years of this century, we will witness the beginnings of the end of the age of oil. The discussion is not if it will happen, but when.
For at least the last century the developed world has depended on cheap oil supplies - which still make up 40% of global energy consumption - to fuel economic growth. Outside of periods of disruption caused by war and general political instability, oil supplies have been abundant, and they will continue to be so until global peak production capacity has been reached. When this peak will occur and how large it will be are factors critically important to regional and global economic growth.
According to study lead author Dr. Michael Smith, “95 countries now produce oil, have produced it in the past or will produce it in the future. However, 46 countries including the USA and Russia are already well past peak (greater than 5 years) whilst another 10 including the UK and Malaysia are just beginning to see declining production, and 12 including Norway and China will reach peak soon. All the remainder (27) will see a peak within the next 20 years.
OPEC to regain market control
“As this time approaches we expect OPEC’s share of production will increase to 40% and major capital investments within OPEC countries will be required to increase gross production by 2 mm bbls per day every year after that to offset declines elsewhere. Saudi Arabia, Iran and Iraq will all have to allow greater access by foreign companies to sustain production growth.
“However, as OPEC’s share of production reaches 40% the potential for it to begin controlling oil prices increases dramatically.”
The World Oil Supply Report presents a number of different scenarios, the results of which share one thing in common – the probability of a production peak in the not-too-distant future followed by major oil price increases.
The report notes that a number of countries are already facing up to the prospect of energy supply shortfalls and that individual governments such as the UK’s are beginning major programmes to encourage renewables, and that some of the major oil companies such as BP (BP)
and Shell are also investing heavily in renewable energy. However, the report suggests that increased investment will be needed in all energy sources, from natural gas to nuclear power.
Urgent action required
Amongst the recommendations of the report are that:
All governments, both oil and gas exporters and importers must endeavour to understand the problem and review energy supply security now. Government budgets and policies need to be consistent with impending global shortfalls in oil supply in “the critical years”.
Governments must impose obligations to improve energy efficiency and conservation and endeavour to purchase a proportion of power from renewable sources. Focused renewables policies should be developed, especially for offshore wind.
Oil companies and their major suppliers must develop strategies for their long-term survival. Decisions need to be made on what energy sources to focus on and where. Profits need to be at least partly employed in bringing on other forms of energy, especially renewables and fuels such as hydrogen.
The transport industry, especially vehicles that use refined oil products
, is growing rapidly. However, as “the critical years” approach, this growth will become unsustainable and new mass-produced alternative and fuel-efficient transport systems will be required.