Has oil peaked?

THIS SUMMER saw the death of Houston-based oil expert and investment banker Matt Simmons, marked by obituaries in the major financial media. In 2002, Simmons supported predictions by the Association for the Study of Peak Oil (ASPO) that "as early as 2010" global supplies of crude oil will peak and then start to decline. In May this year Simmons said: "We are in [the] early stages of a global train wreck when demand outstrips supply and shortages begin. This could easily morph into social chaos and war".

Even the International Energy Agency (IEA), an intergovernmental organisation established in the wake of the 1973 oil crisis by the Organisation for Economic Co-operation and Development (OECD), carried an obituary, although adding it "did not always agree with Mr Simmons’ analyses". The IEA concedes: "Current global trends in energy supply and consumption are patently unsustainable – environmentally, economically, socially" – but not physically – and that "the era of cheap oil is over". (World Energy Outlook 2008) It warns of an alarming future of "possible energy-related conflict and social disruption", forgetting a century of energy-related conflict, chaos and war in Iraq and the rest of the neo-colonial world.

Simmons’ view that the earth’s oil reserves are finite, that new finds are getting rarer, and that extraction from new finds and old is becoming more difficult and expensive, is receiving increasing support. Despite the incentive of higher oil prices, oil experts like Simmons are not optimistic about productive new finds. The new deep sea oil finds peak and decline very quickly: North Sea oil peaked in 1999 and is now at 35% of it peak production.

In June 2010, Lloyd’s of London and Chatham House (in collaboration with BP, Shell and other big businesses) advised: "We are heading towards a global oil supply crunch and price spike… due to costs of producing additional barrels from difficult environments, such as deep offshore fields and tar sands", prompting "drastic national measures to cut oil dependency".

By contrast, the IEA argues that the "world’s total endowment of oil is large enough to support the projected rise in production beyond 2030", estimating the current supply of 84 million barrels a day (mbd) will rise to 106mbd in 2030 (including liquefied natural gas, NGL). Nevertheless, the IEA, which expects the "bulk of the increase in world oil output" to come from OPEC countries, has revised its projections substantially downwards in the last few years.

Both Lloyds and the IEA prefer not to look into the abyss, the double-dip recession, or possible 1930s-type depression, which might depress oil demand for decades. The major recession of 1979-82 caused demand for oil to drop by 7mbd from its 1979 peak and did not exceed those levels until 1993. The 2007 great recession continues to threaten much worse, rendering all popular peak oil disaster scenarios void.

The first peer-reviewed scientific assessment of peak oil was published in 2003 by the Uppsala Hydrocarbon Depletion Study Group of Uppsala University, Sweden. Kjell Aleklett, a physics professor, had invited Simmons to an ASPO international conference in 2002. Claiming to have introduced the term ‘peak oil’, Aleklett and others provided a detailed scientific assessment of oil depletion. By contrast, in Aleklett’s view, the Hubbert model – developed in 1956 by geologist M King Hubbert, who successfully predicted the peaking of the USA’s oil production in the 1970s – was not precise enough.

Since 2003, ASPO has argued for peak oil somewhere between 2010 and 2015, reaching roughly the current levels of production. In 2003, ASPO predicted a peak in 2010 at 30 billion barrels a year (82mbd). This is a fraction below the current plateau of 2005-09, which some peak-oilers already declare as peak oil, something that is simply too early to tell. A recent ASPO study took 21 independent predictions from national governments, oil producers, energy analyst firms and retired oil geologists and oil engineers who accept peak oil, averaging a peak oil date of 2013 (ASPO USA Peak Oil Review, July 2010).

In an OECD discussion paper authored by Aleklett in 2007, peak oil is estimated to be between 2010 and 2012, noting ExxonMobil’s estimate that existing oilfields are declining by 4–6%. Mexico’s Cantarell oilfield, the largest outside Saudi Arabia, peaked in 2004-05. The CEO of Petrobras, Brazil's state-run energy company, argued in February this year that "the world needs the equivalent of one Saudi Arabia every two years just to keep production constant by offsetting natural oil decline rates".

ASPO, like most peak oil organisations, argues that the IEA’s projections assume additional exploration successes that are not realistic, because large finds of oil, which peaked in the 1960s, are increasingly rare: "The world now discovers 10–15 billion barrels of new oil a year, but consumes 31 billion barrels". Today the IEA accepts that "field-by-field declines in oil production are accelerating", giving a decline of 9% for post-peak fields worldwide, although with investment in enhanced oil recovery techniques this can be mitigated to a decline of 5% (IEA World Energy Outlook 2008). The IEA expects that "fields yet to be found" will prevent a fall in world oil supply, an expectation which Simmons considered to be wishful thinking.

A senior source formerly at the Paris-based IEA said that a "key rule at the [IEA] was that it was ‘imperative not to anger the Americans’," the Guardian reported, "but the fact was that there was not as much oil in the world as had been admitted. ‘We have entered the ‘peak oil’ zone. I think that the situation is really bad’, he added". (Key Oil Figures Were Distorted By US Pressure, Says Whistleblower, 9 November 2009) Peak oil studies find that 70% of non-OPEC countries have peaked. The rest produce together less than the Saudi national oil company, Aramco, claims is its ‘maximum sustainable capacity’ of 12mbd until 2033.

Simmons’ visit to Saudi Arabia in 2003, "poring through neglected engineering data", convinced him that "the country was close to or nearing peak output". He discovered that the Saudis use enhanced oil recovery techniques to maintain supply from all five of their giant oil fields. In 2004, the IEA projection that Saudi Arabia, currently producing 8mbd, would increase supply to 22mbd by 2030 was challenged by Simmons. This was reduced to 15.6mbd in the IEA’s 2008 report.

The difficulties of estimating future world supply are immense. Reaching an output of 10mbd in 2010, Russia has topped Saudi Arabia’s output despite the declines of its vast Siberian fields. Iraq promises an 11mdb output by 2020, an increase of 8mbd, but peak oil studies see Iraq capable of producing 7mbd beyond 2050.

US oil production rose by 7% year-on-year in 2009, the first rise of any significance in its 40-year decline, but will fall again this year due to the Deepwater Horizon disaster in the gulf of Mexico. Since 2005, war in Iraq and other ‘shocks’ in Nigeria, Russia, Venezuela and elsewhere affected oil supply, while China’s demand increased by 4mbd. As a result, in 2007, demand was nearly 2mbd more than supply according to the US Energy Information Administration figures.

Simmons attended ASPO’s annual conferences since their foundation and in recent years strongly promoted alternative energy sources such as solar, wind and wave energy. He became increasingly concerned about the world’s freshwater supplies. The oil industry consumes and pollutes vast qualities of fresh water, particularly to process oil sands.

But Simmons also made simplistic, mechanistic oil demand predictions based on assumptions of a perpetually growing world economy, population growth, and increasing oil demand, predicting chaos and war as a result of declining oil supplies. But the existing chaos and war in the Middle East and much of the world result from the manic capitalist drive for profit rather than a drive to meet the needs of the world’s population. Our concern as socialists is to end the capitalist dependence on oil and the global warming it brings.

Nevertheless, on the supply side, Simmons and ASPO provide sophisticated and informed arguments which strongly suggest that, not only is the world’s oil limited but that, in the course of this decade, the production capacity of the world’s oil suppliers will peak. There are too many unknowns to be certain or make more precise predictions, and declining demand may well disguise any decline in supply enforced by peak oil. But, if demand does not fall significantly over the next few years, it will be interesting to see if Simmons’ supply-side predictions turn out to be true.

Pete Mason