Blog post


In his article in the New York Times September 24, “Oil Industry Sets a Brisk Pace of New Discoveries”, staff reporter Jad Mouawad cites oil discoveries totaling ten billion barrels for the first half of 2009. The Tiber field in the Gulf of Mexico alone accounts for four to six billion barrels of crude that may eventually find its way into the world oil system. Indeed, this year has seen discovery results that could end up being the best since 2000. But, the article notes, the new oil was expensive to find, it will be expensive to extract, and both exploration and production are only possible because of high levels of investment and sophisticated, expensive new technologies.

To justify the needed level of effort, the oil industry requires prices in excess of $60 per barrel, according to Mouawad; otherwise, the new projects will turn out to be money-losers. Some analysts believe the magic break-even number is closer to $70. In any case, the figure is much higher than was required only a few years ago, and still-higher prices may be necessary to make exploration and production profitable for future projects—prices perhaps close to $80.

According to Mouawad, "While recent years have featured speculation about a coming peak and subsequent decline in oil production, people in the industry say there is still plenty of oil in the ground, especially beneath the ocean floor, even if finding and extracting it is becoming harder." So the new discoveries presumably indicate that peak oil has been delayed, and that our concerns about the event have been misplaced.

Yet this would be a strange conclusion to draw from the facts cited, for two reasons.

First: The ten billion barrels of new discoveries reported so far do initially sound encouraging: if the second half of 2009 is as productive, that means a total of 20 billion barrels of new oil will eventually be available to consumers as a result of discoveries this year. But how much oil does the world use annually? In recent years, that amount has hovered within the range of 29-31 billion barrels. Therefore (assuming continued good results throughout 2009), in its most successful recent year of exploration efforts, the oil industry will have found only two-thirds of the amount it extracted from previously discovered oilfields.

When the "ten billion barrels" figure is framed this way, its "gee whiz: shimmer quickly fades. (Yes, the article discusses the phenomenon of "reserve growth," which is supposed to render the pace of new discoveries less important—but that red herring has been exposed plenty of times, including here www.theoildrum.com/node/5811.) The Times article hints that 2009's high discovery rate may be the beginning of a new trend, so that we may see even better rates in future years; but remember, that hypothetical outcome hinges on a crucial factor—increasing investment in exploration and production—which leads us to a second critical thought.

The staggering levels of investment that enabled drilling in miles of ocean water, so as to achieve the 2009 finds, were occasioned by historic petroleum price run-ups from 2004 to 2008—with prices eventually spiking high enough to cripple the auto industry, the airlines, and global trade. As petroleum prices climbed ever higher, oil companies saw sense in drilling test wells in risky, inhospitable places. But in recent decades oil price spikes have repeatedly triggered recessions. And clearly, as we all discovered rather forcibly last year, the global economy cannot sustain an oil price of $147 a barrel: as the economy crashed in the latter months of 2008, so did oil demand and oil prices (which hit a low in December-January near $30).

So, what is a sustainable price? A review of recent economic history yields the observation that when petroleum sells above about $80 a barrel (in inflation-adjusted terms) the economy begins to stall. Oil industry wags have begun to speak of a "Goldilocks" price range of $60 to $80 a barrel (not too high, not too low—just right!) as the prerequisite for economic recovery (www.nytimes.com/2009/09/10/business/energy-environment/10opec.html). If prices are higher, the economy sputters, reducing oil demand and subsequently seriously undermining prices; if they drift lower, not enough investment will go toward exploration and production, so that oil shortages and price spikes will become inevitable a few years hence (indeed, since the oil price crash of late 2008 over $150 billion of investments in new oil projects have been cancelled). If the market can keep prices reliably within that charmed $60 to $80 range, all will be well. Too bad that petroleum prices have grown extremely volatile in recent years: we must hope and pray that trend is over (though there's no apparent reason to assume that it is).

Let me summarize: the industry needs oil prices that are both stable and near economy-killing levels in order to justify investments necessary to possibly replace depleting reserves and overcome declining production in existing oilfields (I say “possibly” because we have insufficient evidence as yet to conclusively show that new discoveries enabled by expensive new exploration and production technologies can offset declines in the world's aging giant oilfields).

Should this picture lead the viewer to come away with reassured thoughts of "No worries, happy motoring?" Or does this look more like a portrait of peak oil?

Several commentators (including analysts with financial services company Raymond James Associates and Macquarie, the Australian-headquartered investment bank) have concluded from recent petroleum statistics that global oil production peaked in 2008. Macquarie is saying that world production capacity is peaking this year, which is a nuanced way of saying the same thing, since currently production is constrained more by depressed demand than by immediate shortfalls in supply; in effect both organizations assert that the world will never see higher rates of extraction than the so-far record level of July 2008.

I see nothing in the recent discovery data that should call that conclusion into doubt.

Richard Heinberg is Senior Fellow with Post Carbon Institute and author of several books on resource depletion, including The Oil Depletion Protocol and Blackout: Coal, Climate and the Last Energy Crisis.

Photo credit: thomasstigler/flickr

Like this post?

Keep the information flowing: Donate to Post Carbon Institute
Stay connected: Receive our monthly e-newsletter
Reposting: See our reposting policy

blog comments powered by Disqus

Reader Comments

5 comments

I find it puzzling that

From: Anonymous, Sep 30, 2009 03:33 AM

I find it puzzling that supposedly intelligent people are unable to grasp a problem that is basically simple high school level mathematics akin to the example of the tap and the bathtub.

So Peak Oil deniers like Yergin et al are either incapable of performing high school level mathematics or they have an ulterior motive which makes them dishonest as a minimum.

and we shouldn't be burning it anyway

From: Anonymous, Sep 29, 2009 12:50 PM

climate change, anyone?

resource depletion shows capitalism's fallacy

From: John Mack, Sep 28, 2009 09:49 PM

In light of the fact the world has known for some time oil discoveries have trailed oil consumption, how is it that people are still unaware or refuse to acknowledge the peaking of oil production? After all, peak production is just the logical consequence of the peaking of oil discoveries more than 40 years ago. The answer is in the ideological commitment to capitalism which by emphasizing the individual's materialistic success implicitly supports hoarding, which is what humanity has been engaging in with oil. Up til 2008, this hoarding wasn't accompanied by the typical rise in prices. Those days are over.

Plenty of oil

From: Jerry McManus, Sep 28, 2009 12:33 PM

I find it odd that otherwise intelligent people would dismiss the years of debate and analysis poured into the subject of oil discovery and production, collectively known as peak oil, with the toss-off line "there's plenty of oil in the ground".

Anyone with even a rudimentary understanding of oil extraction knows that for any given oil deposit, using even the the best drilling technology and enhanced recovery techniques, the most one can currently hope to recover is approx. 30% of the resource, on average.

Based on this, the best estimates of the global Ultimately Recoverable Resource (URR) have been converging on about 2 trillion barrels. Apply some elementary arithmetic and we arrive at a total resource of 6 trillion barrels "in the ground".

Let us suppose for a moment that stupendous breakthroughs in drilling and extraction technology improves the percentage of the total resource that can be recovered to 50%. That brings us to a grand total of 3 trillion barrels, with 3 trillion more "in the ground", but never to be recovered becasue it is either too difficult, too expensive, or too energy intensive.

Yes, "plenty of oil in the ground", trillions of barrels in fact. So what?

Cheers,

Jerry