Declining Oil: Rising Prices & Dangerous Waters

Chris Skrebowski, editor of Petroleum Review, in his comprehensive analysis of oil production a few years ago discovered that 65% of all oil is coming from countries whose total extraction has been in decline for some time. Aka. They are likely past their peak extraction rate. A more recent presentation by Klaus Rehaag of the IEA concluded that 70% of oil production is in decline.

Skrebowski also discovered that the cumulative total of this decline rate is impacting global oil extraction at a rate of 4.1 Mmb/d. (Million barrels/day) In other words we must find 4.1Mmb/d worth of new oil to extract every year just to keep production flat. To put this another way: 70% of our really producing fields have been declining by 4.1Mmb/d a year. The remaining 30% of our production, in combination with new production, have on the other hand been rising by 4.1 Mmb/d.

This is the precarious energy race that we have been running for some time. A race that turned into treadmill in 2005 when the all-time high global peak of 74.4 Mmb/d turned into a plateau. Since then we have essentially been stuck in the 73 to 74 Mmb/d range. This despite extraordinary technical feats and major expenditures.

All of which begs the following question: If Saudi Arabia and Russia are now too moving past peak what will this mean to global oil availability and the cost of importing oil?

The Numbers:
A) 70% of 74.4 Mmb/d = 52.08 Mmb/d.

B) 4.1 Mmb/d is 7.87% of 52.08 Mmb/d.

C) When Russia and Saudi Arabia roll over their peak the 70% number will move close to 90%. How much higher then will the 4.1Mmb/d number move?

D) Much of the increase in total extraction from 2000 to 2005 came from Russia and Saudi Arabia.

And what is the upshot of these numbers? Well for one thing it seems impossible to argue that once Saudi Arabia and Russia roll over their peak extraction rate that the 4.1 Mmb/d number will not increase substantially. Similarly, as they were responsible for most of this millennium’s increases, it seems equally impossible that once they are added to the list of post peak countries that total crude production will not begin to decline. The next logical question is then of course: By how much?

My thoughts are tending in the following direction: The numbers seem to support a global yearly decline rate in the 7% – 12% range. And what might this mean? In Richard Gilbert and Anthony Perle’s book, Transport Revolutions, they quote a U.S. National Commission on Energy study which projected that a 4% decline in global availability would translate into a 177% increase in oil. A Brookings Institute study they also quote projected a 15% decline would translate into a 550% price increase. Even these numbers, as staggering as they may seem, may be understated. Remember, we have seen a five fold increase in the price of oil during the Bush era, $24 to $120, and this without any declines in availability.

There is today speculation in every quarter about $200/barrel and higher. Quite a contrast with the fact that only two years ago those of us who talked about $100 oil were dismissed as the lunatic fringe. More importantly today we are seeing global food riots and the lockstep of food prices with oil prices. We are also already seeing many a poor country forced into radical demand destruction and the breakdown in basic human services as a result of $100+ oil.

In fact, in every important essential, everything the ‘peakers’ have been warning about is beginning to manifest itself in spades as crude oil extraction plateaus. Albeit it is happening more quickly than even this intellectual community projected. To some observers much of this acceleration can be directly traced to the effects of the American occupation of Iraq in combination with the massively reckless fiscal programs of the Bush administration. The resulting effects on the people and politics of the Middle East, and the American dollar, is having global repercussions. It is a sobering harbinger of change indeed to consider that the American dollar is today in decline even against the Thai baht.

Once we fall off the ‘out with the old and in with the new’ 4.1Mmb/d seesaw that is for now keeping us more or less at peak, the decline in oil’s availability will almost certainly be meaningfully steeper than the previous conventional wisdom which placed it at 2% – 3%. If the world cannot counterbalance the effects of this decline with a more peaceful Middle East, and a financially responsible U.S., it seems difficult to see the food riots of this spring as anything but the mildest of precursors for what lays ahead.

The simplest path to both of these results is exceedingly obvious: American withdrawal from Iraq. This would stop both the literal and financial bleeding that is causing so many problems for us all. That this path will not be taken by the administration most ethically obligated to it is if anything even more obvious.

Given that this larger goal is for now relegated to an undetermined future date, no matter who is President, in the shorter term, at the very least, it would be nice to see governments worldwide begin to include food and energy in their inflation indices. Knowing where you are is after all a prerequisite to figuring out how to get where you want to go. A more realistic accounting of inflation is beginning to be made in some analytic quarters in the U.S. The data supports a measurement in the 10% to 12% range.

These inflation numbers mean the erosion of almost half of the buying power of Americans in a handful of years. Given how moribund is North America’s labour movement, and how dead set against inflation are the business and investment communities, there is virtually no chance that we will see the kind of wage hikes necessary to keeping many times many more Americans from joining the ranks of the working poor.

In other words the effects of American political recklessness, economic profligacy, and the plateau of oil extraction are now truly global. I.e. They are finally starting to powerfully affect more Americans.

Which, come to think of it, is perhaps the one silver lining to this all. What I mean by this is simple and implies no schadenfreude. All I mean to say is that now that this is so maybe we will finally start to see a swing in the pendulum of American policy back towards reality and away from the dangerously blind ideology that has led us all into such dangerous waters.

Jeff Berg is a freelance writer and activist whose focus is Energy & Emissions and their micro and macro implications ecologically, economically and socially. Read other articles by Jeff, or visit Jeff's website.

5 comments on this article so far ...

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  1. Don Hawkins said on April 30th, 2008 at 8:47am #

    Jeff I get it and looking at the big picture so far I don’t get it

  2. Keith said on May 2nd, 2008 at 12:38am #

    Yeah, the world is in for some hard times. Really nothing we can do except expect for and prepare for the worse. Americans have the means to do so on a personal level at the moment. Those too blind and placated to understand what is coming will sadly suffer the consequences. Buy a gun and lots of ammo now. We’re in for a wild ride the next decade folks.

  3. Jim Cronin said on May 2nd, 2008 at 6:40am #

    Every person who advocates buying guns and using violence is any kind of solution to our current problems is either an idiot or an agent provocateur. Think about it: do you think just anyone who picks up a gun or makes a bomb in the basement has the wisdom to make decisions for you and everyone else. Do you want to live in an environment where such people will force their views on you and others with acts of violence or the threat of violence?

    Violence is antidemocratic. Nonviolence depends on creative solutions. Violence abandons creativity for the quick fix that always fails. If you want a revolution, you have to embody the future you wish to create, not violate its principles from the beginning. This means community organizing and nonviolent means, not the insanity that history itself shows results from elitist individuals and groups taking up the gun.

  4. Mike McNiven said on May 3rd, 2008 at 12:45pm #

    US imperialism is very much at work here:

    For example, according to the mainstream US media, just off the coasts of Florida and Texas there are two proven petroleum reserves with more than fifty billion barrels of oil in each one of them!
    At this moment, it is to the US imperialism’s adavantage to dry-up the other countries oil reserves and then consume the domestic ones. Imagine a Venezuela which has to import its energy related technology and goods from the US…

  5. hp said on May 3rd, 2008 at 8:05pm #

    Mexico also floats on oil.