In November, the International Energy Agency (IEA) released its annual World Energy Outlook (WEO) for 2012. For the most part, the international financial press seized on one element of the report – the prediction that the US will grow its oil production to such an extent that, by 2020, it could eclipse Saudi Arabia and Russia and become the world’s largest producer. This development, says the IEA, could alter the geopolitical balance of power in the world by making the US less dependent on oil imports from the Middle East.
But there is much more to the US, and especially the global, oil picture than this, and the international press largely glossed over or omitted the most important issues and debates.
Firstly, we need to consider the IEA’s forecast for US oil output in its proper context. The US was the world’s foremost oil producer from the latter part of the nineteenth century until its production peaked at 11.3-million barrels a day in 1970, according to BP’s Statistical Review of World Energy. (This figure includes unconventional oil and natural gas liquids, in addition to conventional crude oil.) By 2006, output had fallen to 6.8-million barrels a day.
Since then, there has been a turnaround, thanks to rising production from deep offshore wells in the Gulf of Mexico and, more recently, production of ‘tight oil’ using hydraulic fracturing techniques in shale basins in Texas and North Dakota. By 2011, US liquid hydrocarbon production had risen to 7.8-million barrels a day. But US oil consumption in 2011 was running at 18.8-million barrels a day, which means the country still relied on imports to meet nearly 60% of its liquid fuel demand.
Meanwhile, US oil consumption has declined somewhat since peaking in 2005 at 20.8-million barrels a day, and it is likely that it will continue to fall in the years ahead, mainly as a result of tighter vehicle fuel efficiency standards. Even so, the IEA’s forecast for US oil production of 10.1-million barrels a day by 2020 will not make the US oil independent by a long shot.
Further, some independent analysts doubt that US tight oil production will rise above two-million to three-million barrels a day over the next few years, and will decline rapidly thereafter. This is because the rate of production from tight oil wells is estimated to decline by at least 40% n the first year alone, and most wells are dry within four to five years. In addition, the tight oil is not evenly spread in the shale basins, and companies are exploiting the ‘sweet spots’ first. Roger Blanchard, a lecturer at Lake Superior State University and author of a book titled The Future of Global Oil Production, expects US oil production to peak again around 2015.
Irrespective of what happens to US oil import dependence, the main issue of concern to the world as a whole is the trajectory of global oil production.
The highlight from the WEO that should have garnered international news headlines is this: output of crude oil (excluding light tight oil) fluctuates between 65-million barrels a day and 69-million barrels a day, never quite reaching the historic peak of 70-million barrels a day in 2008 and falling by three-million barrels a day between 2011 and 2035. In other words, conventional oil production has peaked – forever.
Given that conventional oil has comprised about 95% of all the oil produced to date – and has a much higher energy return on investment ratio, is considerably cheaper to produce and is less harmful to the envi- ronment than unconventional oil – this is a serious admission indeed.
Moreover, the IEA’s oil production forecast depends on a huge increase in output from Iraq – from around three- million barrels a day currently to over eight-million barrels a day by 2035. Given the ongoing conflict in Iraq and the region, this is a highly optimistic assumption, to say the least.
The IEA’s oil supply projection would also require upstream oil and gas invest- ments averaging a staggering $615- billion a year to 2035. In recent years, members of the Organisation of Petroleum Exporting Countries have invested much less than this, being preoccupied with placating their growing – and increasingly restless – populations.
Many independent energy analysts do not regard the IEA’s forecasts of future oil supplies as credible. For example, Sweden’s Professor Kjell Aleklett and his colleagues at Uppsala University’s Global Energy Systems Group have published several academic articles criticising the IEA’s methods and results. Researchers from Oxford University argue that global oil reserves have likely been overstated by up to 25%.
Should the IEA’s oil supply projections prove to be overly optimistic – as they have in virtually every year since 2004 – then the world will experience much higher oil prices that will dampen demand for oil and drag down the world economy. Investors, including our government and its transport parastatals, should incorporate these risks into their planning models, and not take the international media hype and selective reporting at face value.