Is the world drowning in oil?

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In March 1999 the cover of The Economist carried the bold headline “Drowning in Oil.” In December 1998 the price of Brent crude oil had dipped below $10 per barrel to then lie just over that mark. By October 2003 the situation in the oil market had changed, and the Economist now carried the headline “The End of the Oil Age.” At that time the price fluctuated around $30 per barrel which was an increase of 200 %. Low prices are usually an indicator of excess supply, and high prices are the opposite.

Since it has the world’s largest reserves of oil, Saudi Arabia has been the main player in the oil market since the 1960s. The figure above shows that nation’s oil production. As a reaction to the war in Israel, Saudi Arabia closed down production from some its oil wells at the beginning of the 1980s. But there is also an additional explanation to why production decreased.

Up until 1973 international oil companies owned the right to produce oil in Saudi Arabia but, since the 1950s, the Saudis had forced them to surrender half of their profits to the Saudi government. In 1973 Saudi Arabia took over control of 25% of the business and this increased to 60% in 1960. In 1980 Saudi Arabia bought 100% of Saudi Armco, and the international oil companies lost their share of the world’s largest oil reserves. Instead, they then made substantial investments in production from the North Sea. When it became clear to the international oil companies that they would gradually lose control over the production and profits of Saudi oil, they maximized their profits by upping their production to the maximum possible during the 1970s. They did this by pumping in gas at the top of the field to increase pressure. When Saudi Arabia took over control of production, the oil fields required massive investments to then pressurize them by pumping in the water around the fields’ outer edges.

In the picture above you can see the giant oil field Abqaiq (Illustration from Peeking at Peak Oil). The red well is where they have pumped in gas and all the blue wells are those that Saudi Arabia had to drill for water injection to get production moving again after the gas injection.

The figure above shows Abqaiq’s production history. One can clearly see how the international oil companies skimmed off the oil that was easiest to produce after gas injection and then it took some years before water injection could be instituted. By the end of the 1990s, oil production had increased by 0.3 Mb/d from this field alone. Similar measures were needed for Ghawar and other oil fields, and the increasing use of water injection is one of the reasons why were “drowning in oil” in 1999. (A detailed analysis can be found in my book Peeking at Peak Oil.)

But there is still another factor that caused the oil flood in 1999. That is the dramatic increase in production from the North Sea. However, at the start of the 2000s production from the North Sea began to decline and some of the fields in Saudi Arabia had also passed their production peaks. Oil production in the USA had begun to decline in the 1970s and continued to do so until the fracking boom. The supply of oil decreased, and the price rose. The price passed $50 per barrel in 2004 and finally reached $147 per barrel in 2008.

In the Autumn of 2014 global oil production was in a situation reminiscent of 1999. Saudi Arabia had finished its massive investments to raise the pressure in the Manifa oil field and some other fields, and at the start of 2013 could now raise production by 1 Mb/d.

At the same time, the USA raised oil production dramatically by 4 Mb/d by 2014 through fracking. Fracking now played the same role that North Sea production had played during the 1990s. In its recently released report, the IEA now says that the world is once again drowning in oil. By lifting the sanctions against Iran, we will first see that they sell all the oil they have stored at sea on old oil tankers. Then they will increase production. Thus Iran will increase the world’s oil supply further.

The question is, when will we see a decline in production like that we had at the beginning of the 2000s? In the figure above you can see the scenario that the IEA presented in November 2015. Crude oil production that peaked at 70 Mb/d in 2007 was down at 66.6 Mb/d by 2014, and preliminary data suggests it was 65 Mb/d in 2015. This year it should decrease by 4%, i.e. 2.6 Mb/d. Production from fracking will decrease by up to 1 Mb/d. What will compensate for this decline in production from existing fields is that previously discovered fields will be put into production. However, we know that the willingness to invest in oil production is currently decreasing along with the willingness to fund exploration for new oil fields. The latter means that fewer fields will be put into production in the longer term.

My conclusion is that the world will not be drowning in oil but that, like the oversupply in 1999, it will take a few years before the market sees a shortage. The question is what will happen to oil demand. One consequence of the current oversupply can be that the shortage in the future will be more severe since there is less investment in new supply. We have already seen that crude oil has passed its production peak and the price of oil will be decisive for the moment in time when unconventional oil peaks. Production of natural gas liquids, currently in oversupply in the USA, is dependent on natural gas production and at the moment they believe that it will increase considerably. If that does not happen then that fraction of oil supply will also fall.

To those who believe that we can forget Peak Oil I just want to repeat that the bulk of the world’s oil production – conventional crude oil – has already passed its peak. Unconventional oil may also have reached its peak when fracking peaked in 2015. The next few years will reveal the truth.

From 1999 it took four years to go from drowning in oil to the end of the Oil Age. The Norwegian oil field Johan Sverdrup will be profitable if the price of oil is $40 per barrel. Oil that is planned to come into full production in 2020 will presumably be very profitable if we see a similar development to what we saw after 1999.

(You can discuss this contribution on Aleklett’s Energy Mix.)

Kjell Aleklett is Professor of Physics at Uppsala University in Sweden where he leads the Uppsala Global Energy Systems Group (UGES).

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