Who will save us from a 2005 peak?

Can we find hope for those of us who might be thinking, to paraphrase St Augustine, "Lord, make us conserve oil, but not just yet!" Remember this picture? Let's check in with our top enablers of the last few years and see who might be good for another fix, and thus break this bumpy plateau since July last year.

Top increasing and declining oil supply countries between 2001 and 2004. Figures are from BP Statistical Review of World Energy, and thus include NGLs.

Recall on Thanksgiving day, I posted a graph, showing the monthly production of crude (ex NGLS) has not really managed to get past the July 2004 level (it very slightly topped it in May 2005, but barely). Thus the rise of the last few years has, at least temporarily, ended in a plateau. Demand has been forced to accomodate this. Could this plateau be the peak, or is the cavalry on the way to further increase production?

If we look at all the recent countries that have increased significantly and plot the change in their monthly production since Jan 2002 (the beginning of the demand recovery after the tech-crash), we get the following picture.

Change in monthly production for top increasing countries from January 2002. Mexico has been excluded. Figures are from Oil and Gas Journal, and exclude NGLs.

I excluded Mexico since it's fairly uncontroversial that it's going to begin declining pretty soon. Clearly, most of the recent increases are coming from Russia and Saudia Arabia. The Saudi's haven't increased much after the middle of last year. No major projects are coming on stream this year, and just one modest one (Haradh III) next year. (Though it should be noted that megaproject analysis is not much use when applied to Saudi Arabia anyway). The Saudis are reportedly working against 5%-12% declines in their existing production.

However, Russia, after plateauing last year, has squeezed out a little more this year. The best reference on Russia that I'm aware of is Russian Oil Supply by John D. Grace. His view is that the revival of Russian production is predominantly due to repairing the Soviet infrastructure, especially in West Siberia, after production became profitable again with the rouble devaluation of the late nineties and then rising oil prices. He doesn't believe production can go too much higher than now unless Russia develops a sizeable infrastructure of small independent producers (the reverse of the current trend towards renationalization of the industry). However, I think continued Russian increases may well be the best hope for next year.

To help see the rest of the pack more easily, I took out Saudi Arabia and Russia and blew up the scale:

Change in monthly production for top increasing countries from January 2002. In addition to Mexico, Saudi Arabia and Russia have been excluded and the graph rescaled to make the rest easier to distinguish. Figures are from Oil and Gas Journal, and exclude NGLs.

In the midst of that knitting, we are looking for potential saviors - countries showing a strong upswing at the end that might carry into 2006. Here are my impressions, most optimistic first.

These guys are the pale blue line that's increasing dramatically towards the end of 04 and through 05. There's no question that Angola has a lot more deepwater to come onstream and will increase more. However, I note that Angola's reserves are being developed almost entirely by the big publicly traded international oil companies (IOCs). The IOCs look like they are flat or declining, probably because they are struggling to overcome big O(10%) internal decline rates. So a risk is that Angola will only serve to offset declines elsewhere in the IOC portfolio.
This is kind of the same story. There's lots more production increases to come from here as the huge Tengiz and Kashagan fields come on stream. But it's all IOC production. Dave has more to say about it here.
Ditto Angola, but slightly less so.
Nice steady production increases throughout the period. Seems like a country we need to look into further, though it's not on a track to become a Russia or a Saudia Arabia soon.
Was increasing well, but plateaued last year. Seems like with the bad news about Burgan, we probably shouldn't look for too much more here.
Increased moderately, but plateaued last year.
Plateaued since late 2003. EIA says 8%-13% FIP decline rate, plus significant geopolitical risk.
Has experienced moderate production decline since the end of 2003.

Now a key point (raised most recently by jkissing) is refinery capacity, which indeed appears to be a significant bottleneck, raising the question whether anyone will increase supply much further even if they could. (Though there's a chicken-and-egg consideration - maybe refinery capacity is not increasing because refiners don't expect supply to increase all that much). Detailed consideration of that will have to wait for another day, but I note one thing. Even if it's true we are refinery bottlenecked for a few years, we will still be depleting 30gb a year, mostly against the big old fields that the majority of production still comes from. We are going to be running up a steeper and steeper escalator as we go forward and so it will get harder and harder to hit that refinery bottleneck.

Could it be peak in May of this year for non-NGL crude oil? I think it very well could. Could some month next year go higher? I don't think we can rule it out yet. To believe next year could be higher, I think you have to believe some combination of these things:

  • Saudi Arabia can begin increasing production again next year after being plateaued (presumably as a result of the now rapidly increasing rig count there more than offsetting declines in existing Ghawar wells). HO has been questioning the feasibility of that for some time.
  • Russia can squeeze out some more after plateauing and then eking out a little more this year.
  • The IOCs can turn around their recent declines by delivering enough new deepwater and Caspian projects to overcome their high internal decline rates.
One thing's for sure. Production is not going to go up much if it does go up. And I bet those happy new Chinese and Indian car owners will be getting out onto the barely dry concrete on their new freeway systems regardless. Get used to conserving.

Thanks again for your analysis Stuart.
A 2005 peak is more and more plausible. Considering the previous post in this tribune let me just point out this:

  1. We have passed the logistic peak (the theoretical or technical peak, you name it)

  2. New projects cannot offset the decline rates of 8% for the giant fields.

All in all, the only question left is the decline rate of the smaller fields. If they are of the same magnitude of those for the bigger fields, that's it.
Also let me remind you of another major uncertainty, the Iranian Oil Burse (IOB). I do not believe that the present US administration will let the IOB to open, taking soon action in that direction. What will that mean in terms of oil output in Iran is very uncertain.
Stuart can I ask you to keep the folk up to date with that OGJ data? It would be nice if you post their data every month from now on, so we could follow the trend.
The idea of an Iranian bourse as a major threat to the US seems to be a perennial conspiracy theory thrown around on this site. So far it has never been supported by documentation or analysis beyond links to a few radical websites, which merely repeat the claim. If anyone has any evidence that US policy makers are concerned about the bourse, please provide it.

The U.S. does derive some small benefit from the conversion of currency to purchase oil if it is priced in dollars. However this would only last for a day or so during the transaction period. The significant benefit of the dollar as a reserve currency is assets held in dollars. It is far more important what is done with the dollars after the transaction.

The reality is that most oil producing countries are holding a huge quantity of dollars, every day, 365 days a year. The choice to hold dollar denominated assets is based on perceptions of risk, return and exchange rate management by the investing country.

It would make almost no difference to the US if oil was priced in another currency. It would make a huge difference if the funds the oil producing countries hold were invested in non-dollar assets. However, it appears to be the case that petrodollars are currently being invested in the US in large quantities.

Let me just ask you this, what would happend if 10% of the current petro-dollars worldwide where dumped in the market?
The fear, from an American standpoint, would be that the oil producing countries decided not to hold US denominated assets. In other words, they took back their Petrodollars and invested them elsewhere (I would guess a combination of European, Asian, and Middleastern assets would be most likely).

This would have the same impact that would occur if the Chinese did the same thing. The dollar would fall, US interest rates would go up, and our economy would suffer. I am not claiming that this would be a good thing, but it is entirely unrelated to the Iranian bourse or dollar pricing of oil. It is allocation of assets, which I noted in my original post was a realistic concern.

However, both Asian economies and oil producers do continue to invest in the US for a reason and won't divest unless that reason changes. In either case, their currency and exports would get more expensive and their best trading partner's economy would be damaged.

I recognize that the US benefits from having the global currency and that our current fiscal position makes us vulnerable to changes in the flow of capital. However, this has little to do with the recurrent claim that plans to change the currency in which oil is priced is a major economic issue or the cause of wars.

International currency exchange dynamics is not something I know  a whole lot about, so maybe some of these  question are off base.

But it would seem to  me that if I were a Middle Eastern oil producer and I sell you a barrel of oil on the Iranian bourse and receive euros instead of dollars, would I not be far more inclined to park those euros in euro-denominated assets rather than have to exchange my euros for dollars, possibly at an unfavorable exchange rate?

 Looking at the flip side of this, if you, as a US oil purchaser, have to convert your dollars into euros to buy my barrrel of oil, might that not put you in a less favorable position, again due to possibly unfavorable exchange rates?

And lastly, for those Middle Eastern (and other countries) that are becoming increasingly squeamish about having so much money in US assets, doesn't trading on an Iranian bourse make it all that much easier to avoid US assets?

While I'm not sure this is a big enough issue for the US to start a war over, I don't see how an Iranian bourse can have anything but a negative impact on the US.  

Again, I have an open mind about this, and if I am wrong I would welcome being shown where so.

Joule has somewhat touched the point. The main reason for a country like Iran to put petrodollars away is that they don't have trade with the US, their major partners are EU and Japan. By negotiating with EU in euros, for instance, they would eliminate the risks of currency fluctuations.
Now you have to understand that there are many other countries in the same situation. One of them being the big bear, Russia.
Another consideration is that by looking to the current US economic situation (growing deficits and so on) one wouldn't think owning US assets a good idea, unless of course you'd have to purchase oil.
Also you have to consider the psychological effects of such an event. If you're a central banker with 70% of your reserves in petrodollars, and you get suspicious of a coming dollar fall what would you do? That kind of fears can really drive the market, like in 2004 as more the dollar fell, more dollars where dumped in the open; until of course Greenspan made up is mind. Now imagine Trichet following his steps.
Finally I'd like to point out that a dollar fall won't be good to anybody (at least I don't see how). Besides the obvious consequences for the US, let's suppose that a major shift is made to the euro, that would lead to European unemployment rates which I prefer not to foresee.
I think you are totally off base here.
If oil starts trading in euros:
  1. There will be no reason for the oil producing countries to lose millions from the conversion to USD.
  2. What is thousand times more important - there will be much less incentitive for every other country to accept USD and to invest in USD assets. If I were a buyer and oil traded in euros, I would hold euros on my account to hedge against exchange rate risk and to avoid conversion charges. And if I knew oil would become scarce I would hold even more euros to have an insurance against future price shocks. Don't be fooled by the price; the real value of oil is not equal to half a GSM, and everyone knows it.
  3. Just to mention here that the whole Breton-Woods system imposing freely tradable currencies is tied with the petrodollar system to force the countries to hold huge reserves of USD for two purposes:
   - to protect their domestic currencies from currency runnups (predicated by the Breton-Woods system)
   - to buy oil
Reason 1 weakened with the appearance of the euro; can you imagine what will happen if reason 2 also disappears? The resulting shift could be devastating; the world is soaked with 4 trillion of the greenbacks and there is absolutely nothing to cover for them here at home.

You used to post on GNN?

In response to Jack's assertion that it appears that petro-dollars are being invested in large quantities in the U.S.:

Take a look at the latest Global Economic Forum commentary from Steve Roach of Morgan Stanley, for November 28, at:


His commentary is the first listed. If you read this after November 28, you will have to go to the Archives link and click on November 28.

His commentary suggests that in fact, large quantities of petro-dollars are not being re-invested, at least not to the same degree that they were in the '70s.

This is not your father's petro-dollar recycling...

The US derives great benefits from what some others and I call the Bretton Woods II dollar regime, informal yet real heir to the first BW system.  

Among the greatest benefits of having your fiat money universally accepted is that trade deficits are no obstacle - and all the energy needed is available by outbidding other countries who do not have the luxary of just printing as much money as they need to main their standard of living.  Essentially the country to hold the keys to the world's printing press will maintain its standard of living better and longer as the rest of te world slowly gets darker.

Roubini Global Economics (http://www.rgemonitor.com/), an excellent economic service, says that oil producers are indeed recycling much of their petrodollars back into US denominated assets.  What would happen if they didn't?  William Clark explores this in his book Petrodollar Warfare (http://www.petrodollarwarfare.com/).  An update on what he thinks is available at Petrodollar Warfare: Dollars, Euros and the Upcoming Iranian Oil Bourse (http://wallstreetexaminer.com/?itemid=1342).

Even slight moves away from the dollar as thee reserve asset will probably have negative consequences for the US economy.

The link timed out for me.  Can you give us the gist?
It is primarily the US which stands to lose out from any move away from the petrodollar status quo, it is the world's largest importer of oil and a move away from invoicing oil in dollars to euros will undoubtedly have a negative effect on its economy.
Fewer nations would be willing to hold the dollar in reserve which would cause a significant devaluation and result in the loss seigniorage revenues. In addition, US energy-related companies stand to lose out as they will be unable to participate in the bourse due to the longstanding American trade embargo on Iran.
Thanks for the post, Stuart - and welcome back from your trip.  I assume the picture you are developing both here and on your Thanksgiving Day post includes (to make use of Colin Campbell's classification scheme) conventional oil plus deepwater exclusively.  Is this correct?  Also, could you clarify a bit how other categories of liquid fuels affect the picture you are sketching (Natural Gas Liquids, Heavy Oil, etc.)?
One other question, with regard to conventional oil:  What about the effect of new fields that are relatively small, and thus not reflected in the Megaprojects analysis (either yours or Skrebowski's)?  It occurred to me the other day that as the supergiants and giants start to go into decline, and as smaller fields are brought online to try to offset declines, there should be a considerable increase in their relative contribution to total conventional oil output.  Yet they seem to be relatively unaccounted for in all the near- to mid-term projections.
In a sense, accounting for the small fields doesn't matter much to the discussion of peak. Historically, once a region's major fields begin to decline and production of smaller fields (which produce much less and decline much faster) becomes necessary, the region has reached overall decline.
All of these predictions have the same catch phrase "excluding NGL's".   Well, what about NGL's?  Won't they and other non-conventional hydrocarbons offset a peak in conventional oil production for at least another year or two.  Or are they somewhat irrelevant?  

Could NGL's and other nonconventional oil resources buy some time as long as they increase faster than conventional depletion rates?

The 'All liquids' scenario results in a peak by mid 2006.
Go to WolfAtTheDoor click 'Hubbert Curve' and then 'Mathematics'.
The US EIA numbers which include all liquids show a maximum production the month before, in April 2005. See below:


Stuart, thanks again for yet another great graph.

I am most interested in the continuation of your post "Miles Data Predicts Big Economic Slowdown".

Will you pursue it further with actual data?. And don't be confounded by the "the new economy doesn't depend on energy any more" cries, regarding the later part of the graph. Under-reporting of inflation overstates GDP. If you use pre-Clinton CPI statistics and not the unrealistic method used nowadays, you get even a closer match (substract 2-3 GDP growth points).

The proof of that is that every month the energy prices spike, we'll see an incredible GDP growth (as happened last month). That's nothing more than inflation being reported as growth.

More info: http://www.financialsense.com/stormwatch/2005/1028.html

What are your thoughts on the matter?

No doubt I'll get back there eventually, and certainly inflation deserves major study for several reasons.  However, right now I'm still digging into the implications on the supply side that decline rates of fields in production seem to be higher than we used to think.
Also for some reason the FHWA has stopped updating their VMT statistics - I'm guessing because of hurricane related problems but I don't know as they haven't answered my email.
No doubt I'll get back there eventually, and certainly inflation deserves major study for several reasons.

Well, I look foward to it!
As for the FHWA having stopped updating their statistics, that's a pity. But they'll surely resume their updates sooner or later.
Thanks for answering.
Who will save us from a 2006 Demand-Supply gap?

Stuart, excellent graphs. Thank you.
The bigger question is what will 2001-2004 change-of-demand graphs (per country) show if superposed over the per-country supply graphs you show? Have we already cracked into the EGG zone? (Exponentially Growing Gap zone between oil supply and oil demand).

Suppose that demand "wants" to increase by 2% next year, but supply is constrained. The result, clearly, is that actual demand will equal the constrained supply, at a higher price. A question that might be worth asking is, where will the demand "destruction" occur? That is, the US can better afford higher oil prices than many poorer countries will be able to. At the new, higher price, might US demand decrease by 1% while in a bunch of poorer countries demand decreases by 10%? 20%?
One concept that has increasingly pestered me, is if we ARE at the peak, it really doesnt mean we've used 50% of the planets oil. (Though that is the way Ive thought about it since learning of this subject).

While its true that Hubbertian geology points to the Peak as being the maximally sustainable amount of production for a well/nation/world, and that this is typically around 50% of the total, the 2nd 'half' will never be totally extracted. Several factors lead me to believe that if we're at the '50%' point we have really consumed 65-70% of all the oil that will ever be pulled out.

1)the second half will be much more difficult, in energy terms, to extract and then to refine.(deeper and more viscous)

2) Our worldwide infrastructure relies on some certain minimum bpd output, below which globablization probably gets curtainled and another minimum bpd level below which it shuts down. We can show graphs of reserves but in a world without transport, those reserves wont move.

3)the EROI of conventional oil, currently in theory, but probably in reality at some point will be 1 barrel for 1 barrel, especially if the life cycle of equipment and employees and profits being spent on 'stuff' is factored in. I believe there will be a point that we will leave oil in the GOM, perhaps at EROI-3-1 or so, because our quality crude will be better spent on other (>3-1) projects.

There will be alot of oil left in the ground 100 years from now - Peak Oil means the 50% point of all oil ever producable. The point when we reach 50% of all oil that ever is PRODUCED, is called something else, and is past.

There will be less transportation and mostly slower transportation but why would long distance trade shut down? Or do you mean that economies will be dominated by local trade in the same way as in the industrialised countries during the early 1900:s?  But that would not lead to a world withouth transportation.

My guess is that we would get far more electrified rail transportation. And slow ships using coal, orimulsion or synthetic liquid fuel from coal or biomass and some wind augumentation carrying bulk cargo like, coal, ore, refined metals, cereals, etc. And a smaller flotilla of very large and very fast nuclear powered container ships linking the rail networks carrying refridgerated cargo, electronics, machine parts, mail, etc. Cargo airfreight would almost disappear.

Sweet oils might be pumped with negative EROI to get high quality feedstock for chemical industry. Oilfields that can be pumped with electrical power from nuclear, hydro och wind powerplants will probably be pumped dry since it is a convenient way to convert electricity into a liquid fuel.

IMO, long-distance trade will not be shut down.  However, it will become something that's only worth it for luxury items.  The Silk Road was used to transport rare silk and spices, not turnips.  

The cost of transportation will simply become so high that it won't be worth it except for rare goods, and the very wealthy who can afford them.  

The thought of any sizable nuclear merchant fleet (flying under which flag?) is just frightening.  
They would litteraly be floating in a pool of unlimited emergency cooling water.  
At some point we will reach the fact that we can't afford to bring peachs to Ohio in the Winter time from Peru.

Look where the US consumer is getting a lot of their fresh Fruit in the winter time and you will see a lot of South American Produce.  AT what point in the future of limited OIL supply does that get so costly that it stops being an option??

I don't know,  but the "Consume till you drop" mind set of the modern shopper will have to suffer demand distruction too,  when we suffer from oil demand distruction.

Here's an additional 200+ kbopd that should hit the market very soon.
Alright!  Bonga arrives at last.
Stuart, I think I'm missing something.

The graphs are a change in monthly production, so a flat line on the graph (above 0) means ever increasing production?  This would seem like a good thing.  Or is the problem an exponential increase in demand with a linear increase in production?

Sorry - the graphs are cumulative change in monthly production from the level in January 2002.  So a  line that was flat along the X-axis would mean a country who's production had stayed exactly at the January 2002 level.  A country which by the end reached the 1mbpd level would mean that it's August 2005 production was 1mbpd more than it's January 2002 production.
Ahh, got it.  Maybe changing "from January 2002" to "relative to January 2002" in the graph descriptions would make things more clear.
Re: "unless Russia develops a sizeable infrastructure of small independent producers (the reverse of the current trend towards renationalization of the industry). However, I think continued Russian increases may well be the best hope for next year."

Well, Stuart, if that's our best hope for 2006, it's not looking good according to the latest stuff I'm reading. One very good document is Can Russian oil growth be sustained? (pdf) by Erik Janssen of Clingendael. Some of it is based on an excellent presentation by V. Milov titled Why did oil production in Russia stop growing? (ppt). This can be found at the Russian Institute of Energy Policy. The powerpoint includes the following points
  • Beginning from September 2004, the average daily production of oil in Russia stopped growing (slide 2)
  • All traditional industrial reasons for the decline or retardation in oil production such as reduced production drilling and oilfield depletion) are wrong. The real reason is the investment policy hinging upon political factors (slide 20)
  • Here's the real kicker (slide 21). It answers the question "What are the political factors governing the investment decisions in the field of oil production?"
I recommend this presenation--slide 21 and subsequent discussion is too complex to summarize here. Also, an older excellent short summary is The future of Russian energy by J. Robinson West.
Hopefully the Institute will soon issue "Why did oil production in Russia start growing again", which it did in June (ie right around the time of their slides).  That slide set is a great reference, however.  I buy the general idea that production dynamics in Russia at the moment have a lot to do with economics/politics.  Grace also emphasizes that looking at the current profitability of the industry is key to understanding whether it is growing or shrinking.  Which of course means that if Putin is willling, we may have more oil next year.  However, I think the depletion may be underestimated because I'm guessing that the depletion percentages in slide 19 are based on the Russian A+B+C reserves, which probably overstate what is really economically recoverable (it is the old Soviet system which is based on what may be technically recoverable ever without regard to cost).
Re:  The Canadian "Cavalry"

Canada's oil production is basically flat year over year.  In other words, the increasing production from tar sands is just going to offset ongoing domestic declines in conventional production--which certainly doesn't leave much to offset impending declines in Saudi Arabia.  

Typically, world oil demand increases by 2 to 3 million barrels per day in the winter compared to the fall. This fall the demand increase was delayed because of the mild weather. We should start seeing the effect of increased demand now that winter is getting going. This year is the first without surplus capacity from OPEC to cover shortfalls, but we do have good domestic inventories. These inventories could go quickly, however. With nothing to fall back on, could get interesting.
How does Iraqi oil factor into the whole peak oil calculation?  
Very unpredictably!  I think the conservative thing to do is assume no change in production.  I find it hard to be optimistic that the place will stabilize enough to develop the oilfields anytime soon.  There is a lot of undeveloped oil there.
I agree with Stuart. You'll hear lots of speculation but it clearly won't save us in any short-term. I believe we'll be well into peak before they can develop their resources much further. There is also the question of damage to current fields which may have reduced their ultimate output. ASPO had a good, thoughtful article on the history and reserves of Iraq oil in 2002. An interesting article. See below:


If peak theory is correct, and those that advance the notion of a 2005 peak are also correct, then logically, nothing will "save" us.

Keep in mind that a "peak" of the magnitude we are talking about here has never happened before. And, it is just a theory. We don't know what would happen - all there are are guesses. Since we don'tknow what will happen, we don't necessarily know what to recognize as signs that the peak is or has occurred and is causing the change that we have come to associate with our little theory.

Peaks that have occurred in individual countries or fields, or even that which happened in the US in the early seventies are not really any help, because they are not the same thing. They don't encompass a worldwide stranglehold on the supply of this most precious commodity.

Say the peak is happening right now. Maybe the peak is raising the price to a point where the effects of the peak are not occurring. In other words, the peak is affecting itself and in terms of the question posed here,"saving us from itself."