If we look at a graph of historical world oil production, we see a somewhat bumpy production pattern with two major price spikes (in 2009 $)–one peaking in 1981 and one peaking in 2008.
The first spike in prices occurred when Persian Gulf production dropped starting in 1980, so seems to be oil supply related. The second spike occurred when world oil production would not rise above a bumpy plateau, despite rising demand, in the 2005 to 2008 period.
In this post, I will show some breakdowns that I think give a little insight into our current situation.
All of the graphs that I have made are from EIA’s International Petroleum Monthly. The data I am showing oil production is “crude and condensate”. For price, I show US refiners average acquisition cost, since this is a data series that goes back to 1968. I have adjusted prices to 2009 levels using the US GDP deflator. The amounts shown reflect US prices; the price trend in other parts of the world would be affected by the relative value of the dollar, so would be a little different.
Persian Gulf Issues
One of the breakouts the International Petroleum Monthly shows in its data is called “Persian Gulf”. It consists of the production from Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, the United Arab Emirates and the Neutral Zone. In Europe and Arabian counties, this grouping might be called the “Arabian Sea,” but I have used the naming convention of the EIA and US-made maps. If we look at a graph of Persian Gulf oil, we find that it has two big humps to it.
If we overlay the same oil price information as used in Figure 1, we see that a big drop in Persian Gulf oil production immediately preceded the 1981 spike in prices. We also see that there wasn’t much of a Persian Gulf increase in oil production in response to the 2003-2008 rise in prices, which is no doubt a big reason prices increased so much.
If we look at the prices in Figure 3, there is a big jump in prices occurring about 1974, (actually starting October 1973), corresponding an oil embargo by Arab members of OPEC. There was not really a major change in production at that time, however. The US was especially affected by the embargo, and the graph shows that US oil prices roughly doubled then.
What can we learn from this graph? For one thing, Persian Gulf oil production is now approximately at the same level it was at in the 1970s. While OPEC talks big, Persian Gulf production doesn’t really follow the upward trend line one might expect if the countries are really able to significantly ramp up production above the level of 35 years ago.
We also see that a drop in oil production from the Persian Gulf nations seems to have played a role in the previous price run-ups. We know OPEC played a role in the 1974 US price run-up. It is pretty clear from the graph that a reduction in oil from the Persian Gulf played a major role in the 1981 oil price spice (through cutbacks in production related to disruptions such as the Iranian revolution and the Iran-Iraq war). Based on these experiences, it seems as though leaders of the US would be worried about stability of oil supply from the Persian Gulf.
Not long after these problems, the Persian Gulf members of OPEC raised their reserves in the 1980s, without actually finding more oil–the increases seemed to be motivated by wanting higher OPEC quotas.
With the history of instability of supply in the Persian Gulf, and the apparent lack of physical explanation for the increase, it seems as though US leaders could have told the US people:
Don’t really believe the new reserve numbers. They are not audited, and appear to be politically motivated. The folks from the Persian Gulf have caused problems with world oil supply in the past. We need to be cautious in dealing with them.
But instead, we saw increased friendliness with Saudi Arabia, and increased intervention into Persian Gulf affairs. No one mentioned the possibility that reported oil reserves might be overstated. The American people were only told about the general dangers of imported oil, not the specific way that we seemed to be being misled. All of this seems more than a bit odd.
Recently, OPEC has been claiming a huge amount of spare capacity–now 5.6 million barrels a day, according to IEA. But in the 2004 to 2008 price run-up, the Persian Gulf nations didn’t come to the world’s rescue, except to a very limited extent – a bit over 1 million barrels a day. This adds further to the oddness of the situation.
Many people who are concerned about oil supply expect that the Persian Gulf nations will help us out in the future. But looking back, we need to understand that this is historically an unstable area. While there is a possibility of increased supply (especially from Iraq), we haven’t seen much recent evidence of the Persian Gulf’s ability to ramp up production by more than a small amount. If King Abdullah of Saudi Arabia should die and there were to be a problem with succession, or if there should be a Middle Eastern war, we could see a decline in oil production rather than an increase. Persian Gulf leaders talk “big”, but it is not clear that we should believe them.
Other Major Groupings
Apart from the Persian Gulf, some other major oil producing areas are the following:
The former USSR:
The Former Soviet Union (FSU) saw a big dip in production at the time of its fall. This drop in production was no doubt related to the breakup of the FSU. In fact, it may have been a contributing cause to the breakup. The big drop in oil production occurred when oil prices were low. As oil prices rose, and as newer technology was added, the FSU was able to ramp up production to the same level it was prior to the collapse of the FSU. Production may continue to rise a bit if prices remain high. No one is expecting a huge additional ramp-up, however, because Russia seems to be running out of large new oil fields to put on line.
Oil production of the US has been falling since 1970. Addition of oil from Alaska helped produce an upward “bump” in the 1984 -1986 time-period. More recently, increased deepwater oil production and increased production from the Bakken has produced a small upward bump of about a half million barrels a day. Most of this increase relates to deepwater drilling. We will need to maintain our deepwater drilling if this higher level of production is to last for a few more years. Otherwise, we can expect the downward trend in production to continue.
Oil production from the North Sea is Europe’s story–initially a happy one, but now a sad one. Oil production reached a peak in 1999, and now is declining every year, even with infill drilling. It is hard to see that anything can be done to make the situation better. Some platforms are likely to become unprofitable as production declines, and need to be permanently taken off line. Removal of platforms could result in a steeper drop in production.
All of the rest of the countries in the world, combined:
This category includes all of the locations with smaller production amounts around the world. It includes areas such as Angola and Brazil, which have recently been growing their production. It includes Canada and its oil sands. It includes all of the new countries we have been hearing about like Uganda. But it also includes many countries where production has been taking place for many years, and which are now in decline, such as Mexico.
Production from this group of countries was rising until 2005, but has been pretty much flat since. It remains to be seen whether production from this group can rise again. If production does rise from this group, one might expect that it would rise gently, since individual new fields tend to add only a small amount, and since most of the increases that are being added are being offset by declines elsewhere.
If prices stay high, there is a possibility that production for this grouping might slowly rise, adding a few million barrels a day over the next 20 years. But given this grouping seems to already be on a plateau, there is also a possibility that production could start to decline within the next few years.
Countries in the Persian Gulf would like us to believe that there are great prospects for higher production from the area. Looking back at historical production and past changes in stated reserves, we should be a little cautious about believing what we are told. We should keep in mind that there are possibilities for disruption in oil supplies from that area as well possibilities for increases. The stories we are being told about higher productive capacity may be just that – stories.
The North Sea will no doubt continue to decline in its oil production. The US with its long-term decline also faces challenges. Unless a high level of deepwater production is maintained, it is likely that US oil production will again begin to decline.
The FSU and the Rest of the World have at least the possibility of increased production, but these increases are likely to be relatively small, based on past patterns.
In total, world oil production is unlikely to rise by much, and may fall in ways that are hard to predict in advance.
Nicely done. Thanks. Good comments, too.
Gail, Just wanted to Say, Thank you for doing this site and allowing the comment section etc. It would be great if you handled the important associated topics concerning Peak Oil.
Thank you for picking up the batton.
“I have adjusted prices to 2009 levels using the US GDP deflator”.
From a reliable dataset source like John Williams’ Shadowstats, or is that US Gubmint adjusted? 😉
Its US government (BEA) adjusted. Not great, but I was only trying to get approximate numbers. If the US dollar buys less now that what the government claims, then the recent price spike is higher than shown.
I note that production from Russia seems to be lower at Stuart Sanifords blog
Is that due to condensate or to a difference between “Russia” and “Former Soviet Union” See also The Hubbert Center Newsletter #98-3.
What a great analysis!!
I have been trying to research this on my own with my limited skills and experience. I too questioned the surplus capacity of OPEC and the EIA’s assessment of 5 MBD surplus.
How do they arrive with this information? Is it taken at word from OPEC?
IEA predicts demand to grow 1.2% per year through 2035. Is this underestimated?
For 27 years previously, oil demand grew at 2% per year.
IEA placed global oil demand at 87.4 MBD for 2010
EIA forecasts demand to grow 1.4 MBD for 2011.
IEA 1.2% growth carried from 2011 to 2012 would be 1.1 MBD
2013 – add 1.1 MBD demand growth
by 2014 we will need 4.7 MBD more oil.
Where will it come from?
Iraq currently produces 2.35 MBD and has a goal of 12 MBD by 2017, but inadequate infrastructure, security issues and political instability make this unlikely. CERA says Iraq will be able to expand only to 4.5 MBD by 2015 and 6.5 MBD by 2020.
Brazil looked to add between 3/4 to 1 MBD by 2015 if domestic demand remained near flat.
Canadian tar sands maybe add 1/2 MBD by 2015.
A Caspian Sea pipeline expansion looks to add 1.5 MBD and other projects look to add production – dates ??
Who else has room to expand production?
Hallibuton was hired in 2009 to drill 200 water injection wells into the Saudi Ghawar oil field to improve declining production. The Saudi Arabia says Ghawar is not in decline, but with 6% of the world’s oil coming from that field and in production since 1950, would they tell you if it was?
What of DOE’s Glenn Sweetnam’ interview with Le Monde where he stated a decline in liquid fuel production (currently in production) of 2% a year 2011-2015? The US military JOE 2010 study echoed the same numbers.
Currently I think we are ok, but JP Morgan predicted oil to rise to $120 a barrel by 2012. With our economy weak and unemployment at 9.8% and likely to remain high, this could be a problem.
It all hinges on if OPEC really has 5 MBD surplus.
If they do then I’m hand wringing for nothing in the near term.
The villains here are the IOCs who continue to deny geology and keep their customers believing in their ability to provide enough supply indefinitely. The NOCs don’t revise their reserves every year and in the case of OPEC they look like they are NOT greedily overpumping their reserves which is what Russia, North Sea and Mexico look like they are doing. It seems that US posters believe that ‘what’s mine is mine and what’s your is mine’ with respect to MENA oil.
We should worry about reducing our demand to a reasonable level.
The U.S. is not going to reduce its consumption of oil to “reasonable levels.” As Dick Cheney famously said: “The American lifestyle is nonnegotiable.” The U.S. will greedily consume $100 oil just as it now greedily consumes $88 oil. When prices go much above $100 per barrel there will be a global recession or a Greater Depression, but it is not until U.S. unemployment (according to the headline number) are 20% or 25% that we will see truly substantial decline in U.S. oil consumption. In other words, it is going to require a lot of economic pain before the U.S. changes much its quantity demanded of imported oil.