The French fishermen led the revolt, but it soon spread across the Channel. Everyone is up in arms about the high price of fuel. Understandably they are confused and look for someone to blame, finding ready candidates in a greedy Chancellor or the OPEC sheikhs. They are right to blame the Government: not for the high price of oil but for their record of denial and obfuscation in facing up to the reality of oil depletion. Had the people been better informed, they would have devoted their energies not into blockades but to finding viable long-term solutions.
The world is now entering a new oil crisis. The roots of it have been evident for a long time to those analysts who give due weight to the endowment of oil in nature, its distribution and above all its depletion. Others, with a blind faith in technology and market forces, have failed to read the signals.
Oil has to be found before it can be produced, meaning that there is an obvious relationship between discovery and production. It follows that the peak of discovery in the 1960s, which is now an historical fact, has to be followed by a corresponding peak of production. When the numbers are added up, the evidence indicates that such a peak for conventional oil will arrive around 2005, and about five years later for all hydrocarbons, assuming no radical change in demand.
Oil is most unevenly distributed for geological reasons, with about half the remaining conventional oil, lying in just five Middle East countries. Furthermore, the expropriations of the 1970s distorted the normal economic pattern of depletion. It forced the industry to explore and exploit the relatively difficult and expensive places like the North Sea or Alaska as fast as possible, leaving the principal OPEC countries with control of the relatively cheap and easy oil, found long ago. This predictably led to price volatility.
The oil industry has suffered throughout its history from “boom and bust”, which is inherent in the very nature of finding and producing a liquid resource, concentrated by Nature into a few preferred places. The industry has accordingly always needed a degree of overall control that runs in the face of free market capitalism. Such control has been exercised variously by Standard Oil, the Texas Railroad Commission, the major oil companies and finally OPEC itself. Up until now, such regulation has sought to limit excess production to support price in an environment of surplus capacity. The fundamental nature of the regulation however changes at peak production when the need is to produce more not less. The Texas Railroad Commission ceased US pro-rationing when that country peaked in 1970. North Sea production is at peak now and set to fall at a high rate. The FSU peaked in 1988, and non-Gulf OPEC countries have also peaked. It means that the control of the supply of world oil rests squarely with the five Middle East countries.
This seems so obvious, yet it is not widely understood. Even the OPEC governments themselves fail to fully grasp the strength of the position that has been forced upon them. They have a misplaced fear that rising prices will encourage non-Middle East production, spurred by new technology and market forces. They fear that high prices will prompt a move to alternative fuels, including gas, coal and nuclear power, as well as energy savings and eventually renewable energy..
In reality, non Middle East production is inexorably set to decline through natural depletion. Production in the North Sea will halve in about ten years. Accordingly, the share of conventional oil production coming from the five Middle East countries is set to rise. It was 38% in 1973 at the time of the first oil shock, but had fallen to 18% in 1985, as already found new provinces in Alaska, the North Sea and elsewhere delivered flush production from giant fields. They are always found early in the exploration process. Share has been rising since 1985 to reach 30% to-day. This time, it is set to continue to rise because there are no major new conventional provinces ready to deliver, or indeed in sight. By 2010, it is likely that the Middle East will be asked to supply 50% given that demand can be held steady by rising prices.
The world has huge deposits of non-conventional oil in the form of heavy oil, bitumen, oil shale, polar and deepwater oil but production is perforce a slow and expensive business, carrying environmental costs. It cannot accordingly have any material impact on peak,
Spare capacity can mean many things. A shut-in Middle East well can be re-opened to provide an instant high rate of flow, but infill drilling, enhanced recovery techniques and exploration can deliver less, taking much investment, work and above all time. The OPEC producers have to run ever faster to stand still, as they desperately seek to offset the natural decline of their old fields, which hold most of their oil. 90% of the world’s oil comes from fields more than twenty years old, and 70% from fields more that thirty years old.
It transpires that there are very few shut-in wells anywhere. The world is just about out of operational spare capacity. An improvident draw on stocks has left them at a 24 year low.
OPEC has no good reason for raising production when its revenues increase by not doing so. The Western consuming countries also have no good reason to press OPEC to increase production. It would merely mean that the inevitable global peak becomes higher and the subsequent decline steeper. While increased production would solve a temporary price surge, it offers no long-term solution to the West.
OPEC now finds itself in a dilemma as it begins to question its fundamental role. Is its traditional function of rationing production to support price giving way to a new policy of having to exert pressure on its members to increase production to meet the consuming nation’s demands and possibly threats, even military threats? It is ironic that Britain and the USA continue to bomb Iraq, whose oil they now desperately need.
You do not have to be a rocket scientist to understand the simple concept of depletion. Think of a glass of beer. The first sip tastes good, but your brow creases when the glass is half empty and you realise that you have drunk more than remains. When the glass is empty, all you can do is ask for another unless it is closing time. It is the same with oil. Peak comes more or less at the midpoint of depletion, when the glass is half empty.
The reason why people don’t understand the situation better is that the public data on reserves is grossly unreliable, subject to lax definition and poor reporting practices. The industry has systematically under-reported the size of discoveries for good regulatory and commercial reasons. Accordingly, the reported reserves have appeared to grow over time, giving the misleading impression that more was being found than was the case. In fact, the world consumes four barrels of conventional oil for every one it finds. The upward revision is mistakenly attributed to advances in technology when it is simply in the reporting. Technology holds production as high as possible for as long as possible, which increases profit, but has little impact on the reserves themselves. A field contains what it contains because it was filled in the geological past.
BP wins the prize for the most oblique reference to the depletion of oil, its principal asset, when it changes its logo to a sunflower and says that BP stands for Beyond Petroleum.
Th world faces an oil crisis. Oil production is at peak. We depend on it for transport and agriculture. World trade depends on transport. We are not running out of oil, but we are facing the natural peak of the fuel that has driven our economy and prosperity for most of the last Century. What should we do about it? The first step is to satisfy ourselves as to the facts, and then face them head on. The second step is to use intelligently the oil supply we still have. It can help us over the transition, during which we need, as a matter of urgency and priority, to find new ways of using less. We have only to look at our traffic choked streets to see how wasteful we are.
The message for government is clear. Get off your knees and stop begging OPEC for help. Face the situation squarely. Inform the people honestly so that they will support the measures to be taken, however draconian, and then get to work on a new direction. Think of 1940.