World Oil Supply Outlook
Are we running out of oil? The answer to that question depends on your time frame. Oil is being produced at a rate vastly greater than the rate that it is generated and emplaced. Most of the world's largest oil fields are past their production peak. On the other hand, world production continues to increase, and the geographical concentration of that production continues to decrease. The heavy oil reserves of Canada and Venezuela, which are the largest oil accumulations in the world, are only beginning to be developed. Canadian oil production is now at an all-time high because of heavy oil production.
The important thing to remember about depletion is that it is a slow process. Unlike the oil shocks of the seventies that were caused by abrupt political events, any economic impact of global oil depletion will occur slowly enough for market forces to adjust to them. The oil shocks of the seventies gave valuable lessons to both consumers and producers. The lesson for consuming countries was that the actions of individuals on the demand side and private companies on the supply side solved the problem, and that nearly all government initiatives were counterproductive. The lesson for producing countries was that sharp contractions of oil supply hurt their interests as much or more than those of consumers. Like the sharp contraction in US money supply that helped trigger the Great Depression, sharp contractions in oil supply caused a sustained loss of market share.
There are now a number of books that claim that declining availability of oil will have a drastic impact on living standards in the industrialized world. While these books may be entertaining reading, they are not the basis for sound policy decisions. The only sensible thing that governments can do about energy is to collect factual information about all aspects of the energy industry and distribute this information freely. The problem with policies based on projected changes in the energy business is that the projections are nearly always wrong.
Looking Back at Looking Forward
For the last twenty years, the forecasts of the International Energy Agency and other energy agencies have shown the same pattern; rapid growth in Middle East production accompanied by slow decline in the rest of the world. The table at the bottom of this page shows that this is not what has happened. Middle East oil production rose rapidly until reaching about its present level in 1973. It contracted below 30% of world supply in 1981 and did not reach that level again until 1993. Since 1993, Middle East oil production has fluctuated between 30% and 32% of world supply, a narrow range compared to the fluctuation in oil prices over the same period. World oil production has grown by 13 million barrels per day since 1973 and all of that growth has come from outside the Middle East. The source of this historical oil production data is the annual Worldwide Production Report of the Oil and Gas Journal, probably the most authoritative source on the subject.
How did the forecasters get it so wrong? In one word, the answer is reserves. All of the largest fields in the Middle East were discovered before 1970 and full-scale development was delayed until the seventies when markets became large enough to absorb that much production. For this reason, reserves were large before the time period in question. In other parts of the world, discovery and development were a continuous process and there was no overhang of reserves at the beginning. The other problem with forecasts based on reserve numbers is that reserves are an opinion and often a biased one; production is a fact. Even a good-faith estimate of reserves early in the life if an oil field is likely to be wrong by a factor of two or more. In a situation where self-interest adds a bias, the difference can be much larger than that.
Five Year Trends
Looking at oil production trends over five years gives a good view of recent changes. The following production figures are from the Oil and Gas Journal, but my regional totals differ slightly because I have included Eastern Europe outside the Former Soviet Union with Western Europe. World oil production grew from 64.7 million barrels per day in 1999 to 71.2 million barrels per day in 2004.
The Middle East accounted for 30.6 % of World oil production in 2004, down from 31.5 % in 1999. Production in Iraq was disrupted by unrest in 2004, but production in other countries was not affected. Most Middle East oil production comes from a small number of very large fields; more than half of Saudi Arabia's production has come from the giant Ghawar field. The importance of Middle East oil peaked in the mid-seventies, when it reached 39% of World supply. Million-barrel-per-day producers in the Middle East are Saudi Arabia (8.9 million barrels per day in 2004), Iran (3.9 Mb/d), the United Arab Emirates (2.4 Mb/d), Kuwait (2.4 Mb/d) and Iraq (1.8 Mb/d).
The Western Hemisphere provided 23.9 % of World oil production in 2004, down from 26.1 % in 1999. Production in Mexico and Canada reached record levels in 2004, but production in the United States continued to decline. Million-barrel-per-day producers in the Western Hemisphere are the United States (5.4 Mb/d), Mexico (3.4 Mb/d), Canada (2.4 Mb/d), Venezuela (2.2 Mb/d)and Brazil (1.5 Mb/d).
Oil production in the Former Soviet Union grew to 15.1 % of World supply in 2004, up from 11.0 % in 1999. Much of this production growth came from Western Siberia, but substantial future growth is expected from Kazakhstan and offshore Sakhalin Island. The million-barrel-per-day producers in this area are Russia (8.9 Mb/d) and Kazakhstan (1.0 Mb/d in 2004), where production will continue to increase as the Tengiz and Kashagan Fields are fully developed. Oil production in Azerbaijan (0.3 Mb/d in 2004) may exceed one million barrels per day when its offshore Caspian Sea fields are developed.
Africa accounted for 11.6 % of World oil production in 2004, up from 10.2 % in 1999. Numerous deep-water oil discoveries offshore West Africa are continuing to add production capacity. Million-barrel-per-day producers in Africa are Nigeria (2.3 Mb/d), Libya (1.5 Mb/d) and Algeria (1.2 Mb/d). Angola (1.0 Mb/d in 2004) joined the million-barrel-per-day club in 2004 as deep water discoveries continued to be developed.
The Asia-Pacific Region accounted for 10.3 % of World oil production in 2003, down from 11.1 % in 1999. Production increases in China offset declines in Australia and Indonesia. The remaining million-barrel-per-day producer in the Asia-Pacific region is China (3.5 Mb/d). Indonesia's oil production fell just below 1.0 Mb/d in 2004.
Europe provided 8.1 % of World oil production in 2004, down from 10.2 % in 1999. Most of Europe's oil production comes from the North Sea, where major fields are facing production declines. Million-barrel-per-day producers in Europe in 2004 were Norway (3.0 Mb/d) and the UK (1.9 Mb/d).
Mideast and World Oil Production by Year
Data Source: Oil and Gas Journal
Geographic Concentration of Oil Production
A simple measure of the geographic concentration of oil production is the proportion of world oil production coming from the top 3 or top 5 producing countries. These measures show a pronounced decline in the geographic concentration of oil production since the seventies. There is a modest upturn from 2000 to 2004, due largely to increased oil production in Russia and Saudi Arabia, the two largest producers.
Concentration of Oil Production by Year
Data Source: Oil and Gas Journal
|Year||Top 3 Countries||Top 5 Countries|
|1970||45.2 %||61.2 %|
|1975||47.5 %||62.0 %|
|1980||50.7 %||58.7 %|
|1985||45.1 %||56.3 %|
|1990||41.3 %||51.1 %|
|1995||34.8 %||45.5 %|
|2000||30.0 %||40.2 %|
|2005||32.4 %||42.8 %|
Time for a Downward Revision?
The political and economic forces that encouraged OPEC member states to revise their reserves upward in the eighties have now reversed. When worldwide oil demand declined in the early eighties due to high prices, the OPEC member states needed a mechanism to prorate production. Reserves were a factor in the production allocation, so member states had an incentive for upward revision. The energy conservation efforts of the late seventies and early eighties were driven by projections of ever-increasing oil prices as much as by actual price levels, so both the oil exporting countries and the major oil companies had a vested interest in ending the panic by showing large remaining supplies. Today the OPEC member states are producing at rates close to their production capacity and oil consumers are as complacent about supply as they were before 1973. The popularity of large sport-utility vehicles in the United States is evidence of this complacency.
If the Middle East oil-producing nations are to work more closely with groups such as the IEA, detailed supporting information will have to be provided for such large reserve numbers. Mexico revised its reserves downward after joining the OECD, yet this large downward revision has not prevented its production from reaching an all-time high. Expect to see some downward revisions of Middle East oil reserves in the near future; self-interest dictates it.
There Is Always Natural Gas
The outlook for natural gas supply is brighter than for oil. Intensive development of this environmentally friendly fuel has only occurred in the US lower 48 states and the southern half of Canada. The large natural gas reserves of the North Sea are not yet fully developed, and so little exploration for natural gas has taken place in developing countries that the magnitude of the resource is not yet known. The level of natural gas development worldwide is about what oil development was fifty years ago.
Besides being clean and abundant, gas can be burned in internal combustion engines with minimal modification. The reason that natural gas has not already displaced gasoline and diesel as a vehicle fuel is that it is difficult to store. Compressed natural gas is used as an automotive fuel, but it does not provide the range of a tank of gasoline. Liquified natural gas allows more gas to be stored in a smaller volume, but it requires extremely low temperatures. Liquified natural gas tanks small enough to be used on trains, large aircraft or ships are current technology. One that can be used in a passenger car has yet to be developed.