Peak Oil

Oil is a finite resource and global oil production is likely to hit its peak in the near future. That point is known as ‘peak oil’ and after it is reached the world economy will have to cope with declining production. Oil demand tends to grow with the world economy so alternative sources of fuel will be required to make sure that the decline in oil production does not hit economic growth, but the world has already consumed around half of the total amount of recoverable oil. Underscoring the importance of this energy resource, according to the Oil Depletion Analysis Centre, oil is used to fuel 95% of land, sea and air transport. Just as important, oil is not only used as a fuel but also in fertilisers, plastics and clothing amongst other things. 

According to the International Energy Agency (IEA) oil supply reached 88.7m b/d in June 2011. KBC Energy Economics, the forecasting division of AIM-quoted refinery consultancy KBC Advanced Technologies, believes that oil demand will rise by around 1% in 2011 as a whole with falls in demand in the US, Japan and Germany offset by strong growth in China, India and Brazil. These latter three countries will also help to fuel estimated growth in oil demand of 1.6% in 2012.

The IEA and OPEC have recently trimmed their demand forecasts. Nonetheless, the IEA forecasts oil demand will still grow from 89.48m b/d in 2011 to 91.09m b/d in 2012, while OPEC is estimating growth from 88.14m b/d to 89.44m b/d. BP’s figures show global oil reserves were 1,383.2 thousand million barrels of oil at the end of 2010, up from 1,376.6 thousand million barrels in 2009. This does not include 143.1 thousand million barrels in the Canadian oil sands.

These reserves are defined as having a reasonable certainty of recovery given existing economic and operating conditions and, according to BP, they would last just over 46 years at the current rate of world oil production. Since demand continues to grow however the oil is unlikely to last that long. In any case, this depletion figure is different from ‘peak oil’, the date of which is much nearer. According to Colin Campbell, a founder of the Association for the Study of Peak Oil & Gas (ASPO), the peak of oil discovery was reached in the 1960s, with the world starting to use more oil than was being discovered back in 1981.

There are a wide range of views on just when peak oil will be reached. Scientists at Kuwait University and the Kuwaiti Oil Company predict that global conventional (easily extractable) oil production will peak in 2014. Said report also estimated that OPEC production will peak in 2026. Non-OPEC countries, on the other hand, are calculated to have reached peak production in 2006. Additionally, the report estimated that world oil reserves are being depleted at 2.1% a year. Another estimate comes from researchers at Oxford University, who argue that world oil reserves have been exaggerated by one-third.  Even so, they still predict peak oil in 2014-15. Having said that, there are forecasters that expect that peak oil will not be reached until the following decade or even as far out as 2035.

Saudi Arabia, for one, argues that it can increase supply in order to meet increasing demand, but this cannot go on forever. There are also oil producers which are not producing at their full rate at the moment, Libya for example, so there is scope for them to boost production in the future. There are also potential new oilfields that can be discovered that will boost future supply. This could push peak oil further into the future than some analysts are predicting. The Oil Depletion Analysis Centre, for its part, argues that “forecasting the precise date (for peak oil) is now less important than preparing for the event”.

Once peak oil is passed there will be a continuous decline in supply. Interestingly, Dr Jörg Friedrichs of Oxford University argues that there could be a 2% or more decline in annual oil production for the two decades after peak oil is reached. Lastly, and on a more positive note, switching from oil to other fuels will help to mitigate the effect of that decline in supply. However, it takes many years to build up infrastructure and invest in alternative fuels so it has to be done before peak oil is reached. Gas demand is expected to grow rapidly as it increasingly becomes an alternative to oil and coal and it could produce one-quarter of the world’s energy by 2030, according to the IEA.