Peak Oil: A Major World Crisis

Peak Oil was a theory that was developed around 1956 by M. King Hubbert that predicts when world oil production reaches its maximum point and its subsequent decline due to burgeoning global population.

A recent study came out and was published in the Economist about Peak Oil. The results are alarming:

Faith Birol, the chief economist of the International Energy Agency (IEA), believes that if no big new discoveries are made, “the output of conventional oil will peak in 2020 if oil demand grows on a business-as-usual basis.” Coming from the band of geologists and former oil-industry hands who believe that the world is facing an imminent shortage of oil, this would be unremarkable. But coming from the IEA, the source of closely watched annual predictions about world energy markets, it is a new and striking claim.

A contributing factor to the world’s oil production is the decline of certain oil means of production, like the Cepu Banyu Urip in Indonesia, says the Jakarta Times:

Bojonegoro, East Java. The massive Cepu oil project is expected to fall short of its peak production goal of 165,000 barrels per day in 2012 because lead operator Exxon Mobil has yet to receive government clearance to construct vital facilities.

“After getting approval from the government, we will need three to four years to complete construction of the peak facilities,” Deddy Afidick, a spokesman for the US oil major’s Mobil Cepu Ltd. unit, said on Friday from the project site.

A green light from regulator BPMigas is needed before bidding can open on engineering, procurement and construction for the block, located on the border of Central Java and East Java.

Energy and Capital puts the pieces together:

More than one-quarter of our crude production comes from just 20 oilfields. Most of these massive oil fields were discovered about 50 years ago. Another 50% of global oil supply comes from about 110 other fields, with the remaining production produced by approximately 70,000 smaller fields. The natural rate of decline in fields past their peak was approximately 9%.

Of course, of those 20 largest oilfields, every one of them has passed their peak production.

If you really want an idea of what can happen to these oil fields, look no further than the once-mighty Cantarell field in Mexico.

Ignoring Cantarell’s Lesson

I know this isn’t the first time we’ve talked about Cantarell, but the lesson is too important to forget.

Discovered in 1976, the Cantarell field was the second largest oil producing field in the world at one point. In 2000, Pemex began injecting nitrogen into the field. Three years later, Cantarell was pumping out 2.1 million barrels per day.

Since then, the field has been in an out-of-control death spiral that nothing could stop. Production started to decline at a rate of 14% per year. Today, production has fallen to half a million barrels per day.

The consequences will be even more drastic: Approximately 90% of Mexico’s electricity generation is dependent on fossil fuels. Recently, the country’s energy minister announced its goal to have 26% of its power-generation come from renewable sources. That may be little more than wishful thinking. Revenue from Pemex accounts for 40% of the country’s budget.

Also, the IEA says there will definitely be more oil use in 2010:

The International Energy Agency this month raised its forecast for global oil demand in both 2009 and 2010 due to optimistic demand expectations in China and over developing economies in Asia and the Middle East.

According to the agency, global demand for 2009 now is seen averaging 84.8 million barrels/day. That’s higher than the IEA’s previous forecast, but still down 1.5 million barrels/day from the revised 2008 daily-use estimate of 86.3 million barrels/day. The IEA in May had reduced the 2009 demand estimate to 83.2 million barrels/day but that has been revised upward because of “stronger-than-expected preliminary data in North America and buoyant demand in Asia outside China and the Middle East.”

Looking ahead, IEA projects that demand in 2010 could increase by as much as 1.4 million barrels/day to 86.2 million since “the worst of the global recession has passed in China and India,” says Nobuo Tanaka, the agency’s executive director, in an interview with ICISnews.com. China is the world’s second-largest user of crude oil and petroleum products.