Kidding ourselves about future MENA oil production

Recently, the International Energy Agency’s Chief Economist Fatih Birol was quoted as saying,

In the next 10 years, more than 90% of the growth in global oil production needs to come from MENA [Middle East and North African] countries. There are major risks if this investment doesn’t come in a timely manner.

While I agree that we need more oil production, I think we are kidding ourselves if we expect that 90% of the needed growth in global oil production will come from MENA countries. In this post, I will explain seven reasons why I think we are kidding ourselves.

Reason 1. MENA’s oil production, as a percentage of world oil production, has not increased since the 1970s, suggesting that MENA really cannot easily ramp up production.

Figure 1. Middle East and North Africa oil production as percentage of world oil production. Figure also shows oil price in 2010 dollars. Amounts are from BP Statistical Report. Oil includes NGL; oil price comparable to Brent.

MENA’s oil production amounted to more that 40% of the world’s oil production back in  the mid-1970s, but is now down to 36% of world oil supply. It is hard to see anything that looks like an upward trend in MENA’s share of world oil supply, even when high prices hit. OPEC talks big, but its actions do not correspond to what it says.

Reason 2. MENA claims huge oil reserves, but these reserves have not been audited, and there is little evidence that they can really be transformed into corresponding oil production in any reasonable time-frame.

Figure 2. World's "proven" oil reserves, according to BP Statistical data, split between Middle East, North Africa, and the Remainder of the World

Countries don’t all use the same standards when reporting oil reserves. Reserves of countries following SEC reporting requirements have historically been conservative, but Middle Eastern countries do not follow these standards. A small country with high oil reserves will appear rich to the rest of the world, and its leader will appear important in the eyes of local residents, so there can be a temptation to “stretch” the amount reported. There is no timeframe specified with respect to the stated reserves, either. If the oil is very heavy or difficult to extract, the expected extraction period could be hundreds of years.

Because of these issues, it does not necessarily follow that high oil reserves mean that with only a little effort, production can easily be increased. The Wall Street Journal published an article called Facing Up to End of ‘Easy Oil’ which talks about the lengths to which Saudi Arabia (with Chevron’s help) is going to develop techniques to steam out the Wafra field’s thick oil. If there were easier-to-obtain high-quality oil, Saudi Arabia would no doubt be working on the other sources, instead.

Reason 3. Saudi Arabia has said it does not intend to increase its capacity for oil production. According to the Oil and Gas Journal:

Birol’s comments [quoted above] came just days after Saudi Arabian Oil Co. Chief Executive Officer Khalid Al Falih told the Wall Street Journal that his country had no plans to increase oil production capacity to 15 million b/d [barrels a day], given the expansion plans of other producers such as Brazil and Iraq.

“There is no reason for Saudi Aramco to pursue 15 million b/d [of output capacity],” said Al-Falih, whose remarks ended speculation that arose in 2008 when Saudi Arabia’s Oil Minister Ali I. Al-Naimi said his country could boost its capacity by another 2.5 million b/d to 15 million b/d.

The excuse that Saudi Arabia gives is really strange (from same article):

“It is difficult to see [an increase in capacity] because there are too many variables happening,” Al-Falih said. “You’ve got too many announcements about massive capacity expansions coming out of countries like Brazil, coming out of countries like Iraq. The market demand is addressed by others.”

This is a strange statement to make; it is like General Motors saying it is not going to add automobile production, because Ford will be selling as many cars as buyers will want. If it is really making a profit on each barrel, why would it do this, unless it really is not capable of making the expansion it claims?

Reason 4. While Saudi Arabia claims current production capacity of 12.5 million barrels a day, this amount is not audited, and its actual capacity is quite possibly lower. Its highest recent production is 9.84 million barrels a day.

When Libya’s oil production was taken off line, Saudi Arabia was not able to make up for the loss with the type of oil that the market required. Recently, Saudi Arabia made a statement that it would ramp up production to 10 million barrels a day, its highest in 30 years. Saudi Arabia did manage to increase its crude oil production to 9.84 million barrels a day in July, 2011, an increase of 700,000 to 900,000 barrels a day over recent months’ production. But even with this big ramp up, MENA crude oil production has not made up for the shortfall in Libya production (Figure 3). And of course, Saudi production is still far short of the claimed 12.5 million barrel a day capacity.

Figure 3. MENA Monthly crude oil production, based on EIA data.

Reason 5. MENA’s oil consumption is rising, so even if MENA’s production should rise, the rest of the world would not necessarily get much benefit from it.

Figure 4. Middle East oil production, consumption, and net exports, based on BP Statistical Data, from Energy Export Data Browser. Oil includes natural gas liquids.

The amount shown in green in Figure 4 is the amount of oil exports. These are declining, because consumption is rising, while production is flat. The above graphic is for the Middle East only, but MENA in total is showing a similar pattern of rising consumption leading to less exports.

Reason 6. Instability is a huge problem in the Middle East, leading to rising and falling oil production. This is especially the case for Iraq, a country which has planned large production increases.

Figure 5. Iraq oil production and consumption. Production from BP Statistical Data; consumption from EIA data.

Figure 5 shows the extent to which oil production has varied in Iraq since 1965, as a result of past instability. Overcoming this pattern will be difficult. Besides instability, there is a need to add a huge amount of new infrastructure–particularly additional port capacity to handle increased oil exports. Both the problems with instability and the need for new infrastructure will make it difficult to ramp up Iraq’s oil production quickly.

Iraq plans to increase its oil production to 6.5 million barrels a day by 2014, and to reach 12 million barrels a day by 2017. Neither of these targets will be possible without huge investment and political and economic stability. These targets are seen as unreasonably high by many.

Reason 7. High oil prices lead to high food prices, and a recent study shows that high food prices are associated with riots. So the high oil prices required to produce the difficult-to-extract oil are likely to sow the seeds of governmental overthrow (repeat of “Arab Spring”) and political instability in MENA countries.

Figure 6. Comparison of FAO Food Price Index and Brent Oil Price Index, since 2002.

Figure 6 shows the correlation between food and oil prices. A person would expect food and oil prices to be highly correlated because oil is used in the production and transport of food products. The FAO Food Index  relates to imported food, such as is often used in MENA countries. Because this food is often transported long distances, a person would expect its cost to be especially affected by oil prices.

A recent academic study called The Food Crises and Political Instability in North Africa and the Middle East by M. Lagi, K. Bertrand, and Y. Bar-Yam shows this graph:

Figure 7. Figure showing correlation between riots and high food prices, as measured by FAO Food Price Index from http://arxiv.org/pdf/1108.2455v1

The authors show that there is a high correlation between high food prices and riots. They say, “If food prices remain high, there is likely to be persistent and increasingly global social disruption.” They also point to the possibility of the situation getting much worse, in the 2012-2013 timeframe, as a result of a continuing rise in food prices.

We saw in Figure 6 that rising oil prices are associated with rising food prices. Thus, the fact that oil prices are rising because the “Easy Oil” has mostly already been extracted, and we now are moving on the more expensive oil, could contribute to riots. This association is likely to make it more difficult for MENA to raise oil production, because riots lead to political instability, and without political stability, it is difficult to increase or even maintain current levels of production.

* * *
For all of these reasons, depending on MENA for 90% of the growth in global oil production between now and 2020 seems unwise. I have shown in previous posts that what the world really needs is a rising supply of low-priced oil, if we are to avoid long-term recession. But MENA is unlikely to supply this. The Middle East claims huge oil reserves and Iraq offers high production targets, but in the end, we are likely to be kidding ourselves, if we believe that these will fix world oil problems.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply.
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57 Responses to Kidding ourselves about future MENA oil production

  1. Pingback: Daily Reading for the Financial Markets: 10/21/11 « Playing the Ponzi

  2. David F Collins says:

    Hi Don Stewart, Bicycle Dave, Dr House, Gail Tverberg:

    Trying to look into the future is a largely hopeless task, yet it is one we must engage in. Reading the tea leaves is always a mixed bag, and the bag is no teabag. (Too many feedback loops.) Trend, like Past, is never destiny for very long. Still, I look back over the experiences of my lifetime (the same magnitude as for Don & Dave), and things have never worked out as well as they could have and should have, nor as badly as they jolly well might have, either. And what I heard from my grandparents is similar, in this regard. In their childhood, they all knew hardship and severe hunger, whether on the plains of Kansas during multi-year droughts or in the polders of Holland back when that country’s Gini coefficient G → 1. But they all spoke fondly of many wonderful experiences and joys. Back in the days when energy consumption per capita of even the fortunate was small indeed in comparison to that of Americans in the 1940’s & 1950’s, back when I was young.

    Furthermore, skills that have passed away can be resurrected, particularly if they have been well described in media more stable than brain cells. For instance, an adolescent granddaughter of mine (a bit brainy, to put it mildly) took the WW2-surplus sextant my parents gave me for Christmas, plus the texts by Bowditch and by Dutton, and taught herself celestial navigation, partly for the fun of it (¡cierto!) and partly because she is already worried about the issues here under discussion. I suspect navigating by star and planetary readings will take longer, of course, and in the meanwhile she has her girl-stuff to do. But the point is, if she can learn celestial navigation, I am sure others can learn cordage, gardening, sewing, etc. Myself, I grew up sailing. And I was regularly amazed at how quickly novice sailors learned how to read the wind and the waves, and how to handle a tiller or wheel (most of us have more trouble learning this than reading the wind and the waves; I remember my Dad yelling, “You’re not winding your watch”).

    In many cases, I suspect that new technologies will predominate in a society tumbling down the other side of Hubbert’s Peak. Like «digital» photography, as opposed to silver halide based photography. Folks could learn to take advantage of electricity when available, rather than bemoaning its «unreliability». And so forth.

    And I anticipate horridly difficult times to come.

  3. Arthur Robey says:

    It is the unfortunate function of my left hand brain to make models of reality. I refuse to defend any of my models.
    And this is what It comes up with.

    We are at a bi-farcation, cusp, a fork in the road. Or many forks if you must. If Rossi and Forcardi are successful, and the balance of probabilities is tilting in their favour, then we are off to the show. The singularity, another asymptotic exponential function, is in the cards.
    If not, then we are in for a bigger event than the domestication of wheat. Professor James Lovelock prognosticates a few breeding couples in the high Arctic by the end of this century.
    Either of these roads is poorly lit.
    One thing I can claim with moderate certainty is that there is a change in the air.

  4. Mitchell Covell says:

    Hello Gail,

    An aside to your observations regarding the oil production potential of Iraq. It is likely that political stability in Iraq can only be achieved by either increasing the standard of living of the people living there, or by installing an effective totalitarian government.
    A reasonable indicator of standard of living is the amount of oil consumed per capita. The most recent data I could find is for 2006-2007 but it should serve for the point that I am making. The average oil consumption per capita for a selection of reasonably stable, oil exporting, middle eastern states is 107 bbl/day per 1000 people [Qatar 132 / Kuwait 129 / Saudi Arabia 84 / UAE 82]. Iraq, by comparison, has a per capita oil consumption of only 11 bbl/day per 1000 people.
    The current population of Iraq is 31.5 million, and the domestic oil consumption is 0.7 million bbl/day (2009). A 5x increase in domestic oil consumption would bring Iraq’s per capita oil consumption up to 55 bbl/day 1000 people – low equivalency with the stable oil exporting MENA states. However, this would also cause the domestic oil consumption to rise to 3.5 million bbl/day. If this amount is subtracted from the near term oil production goal (6.5 million bbl//day), then the amount available for export is only 3.0 million bbl/day.
    This is not that much greater than the 1.8 million bbl/day exported in 2009.
    As well, this analysis does not consider Iraq’s rapidly growing population (2.5%). Projecting this rate of growth gives a population of around 40 million by 2020. If we acknowledge that the claim to increase production to 6.5 million bbl/day by 2014 is fantasy, then an expectation of this level of production by 2020 is more reasonable – anything would be more reasonable! However, my projection for increased domestic oil consumption would then have to be increased by 33% to keep it in line with the population increase. This adjustment results in a domestic oil consumption of 4.7 million bbl/day (2020), which leaves only 1.8 million bbl/day for export – exactly where we are today.
    Please note that I don’t believe we will see this projection come to pass. It is very unlikely that Iraq will be able to achieve the economic growth, growth in social infrastructure, and the concomitant stabilization of government, necessary to significantly increase oil production. China’s spectacular growth in the last decade was preceded by 30 years of a stable government that invested heavily in education. Iraq has not been so fortunate.

    Mitchell Covell

  5. Don Stewart says:

    To All
    Just in case you would like to take a look at what kind of housing the Dancing Rabbit people are actually building:
    http://www.yesmagazine.org/happiness/building-a-handmade-cob-house

    Don Stewart

  6. Ikonoclast says:

    Gail says, “The big world-changing event I see is collapse of the financial system.”
    You may well be right about this. However, we should remain clear (as I am sure you do) that the collapse of the financial system will be primarily a result, not a cause. (Although I do accept that the whole situation will become a bad feedback loop leading into a death-spiral.)

    The collapse of the financial system will have three major contributing causes. Cause one will be the environmental complex of resource depletion (including cheap energy), species extinction and climate change. Cause two will be population overshoot taking us over our carrying capacity as the carrying capacity is degraded. Cause three will be the inappropriate management of the economy according to neoliberal, neoclassical economics.

    I want to deal with cause three briefly as it does not get much a mention (understandably) in this blog. In the Keynesian era, circa 1945 – 1970, the economy performed well. There were many reasons of course including cheap, abundant energy. However, an important contributing cause was the willingness of governments to employ counter-cyclical spending or Keynesian economics. It was the rise of montarism which stuffed the financial system up basically. Government austerity become the order of the day, there were mass privataistions, eages were held back and provate debt skyrocketed.

    I will come back to this as appropriate in a subsequent topic.

    • We live in a finite world. The financial system as it is currently set up requires growth, but this growth cannot go on forever.

      Resource depletion is one outcome of attempted endless growth in a finite word; so is species extinction and climate change. In fact, so is pollution of many sorts, including ocean acidification.

      I have not studied some of the things you write about to know what their contribution to keeping the system going might be. It might be that before we started hitting limits, counter-cyclical spending worked better as a solution. I have a hard time seeing where the counter-cyclical spending would come from, except more debt.

    • Thanks! I was having trouble viewing this when your first posted it. One of the graphs looks familiar–and recent!

      • Kenneth says:

        The credit is yours and what may I ask do you think of my video? I do enjoy reading your articles and am gretly influenced by them. My videos however have to be kept simple for viewership, but I try to educate in my own way.

        • You have pulled together a lot of interesting information and presented it in a different way. It seems like different approaches are needed for different people–and this is likely helpful for some.

          Your photos are very nice. There were a few new ones I hadn’t seen before.

  7. Mats Lindqvist, ASPO Sweden says:

    I have a comment, Gail writes “If it is really making a profit on each barrel, why would it do this, unless it really is not capable of making the expansion it claims?”. The reason would be that Saudi already has a trade surplus which they invest in paper assets, whose future value is questionable, given the implications of peak oil. Why would they swap oil in the ground for paper money in a bank? I am convinced a foreign politician at some time in the past, whispered in the king’s ear, that if you don’t accept this paper money in exchange for your oil, we will invade you, if you do accept it, we will let you stay in power. An offer you can’t refuse. But now things are different, they are aware that growth might not continue, and that keeping the oil in the ground is probably the best way to save for the future. If it’s possible to raise doubts, without actually admitting they can’t raise output, they can keep up the value of paper assets, while at the same time saving some more oil the ground. A difficult balance for sure…

    • I thought about raising the point about saving oil for the future, but decided that for the purpose of the post (which is going to quite a few folks who are not familiar with peak oil, as well as many who are), I thought it would be clearer if I didn’t raise the issue.

      I think Saudi Arabia’s issue now is that it needs high oil prices, just to make current levels of subsidies to its citizens. According to this article,

      A recent study by the Riyadh-based finance house Jadwa Investment warns that the continued rise in domestic oil demand, combined with a weaker rate of price increases, could put a strain on government finances, especially given the far higher expenditures projected for the next five years or so.

      “While we think prices will continue to rise, we do not think they will rise at the rate required to meet the break-even price for the budget,” the report said. “Indeed, a decade-long plateau in oil prices, as the market has previously experienced, would likely lead to a rapid deterioration of the Kingdom’s future fiscal position.”

      With high food prices going along with high oil prices, I don’t think Arab countries really have the luxury of delaying production until future years.

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