In public lectures that I give about global energy, I often
note that since the writing of A
Cubic Mile of Oil the global reserves of oil have increased, not decreased,
despite the fact that in the intervening time (i.e., between 2007 and 2013) the
world has consumed about 7.5 cmo. In this post I want to dig deeper and look at
the changes that have brought about this paradox, and what it means for Peak
Oil.
As I explain in the book, reserves have a special meaning refer to those geologic accumulations
that can be economically extracted with the current technology. With the
development of technology and/or changes in the price of oil, geologic
accumulations that were once only part of the larger resource base may get transferred to the reserves. Focusing only on the reserves
is apt to give a wrong impression about the total availability of oil. The
chart below shows the historic data for the World Proved Reserves (blue line) from the 2014 edition of the BP Statistical Review of Global Energy (BP2014) . Using the right ordinate I have also plotted the Reserves to Production rate (R/P) ratio (brown line). This
ratio has the units of years, and it has often been mistakenly interpreted as the years to exhaustion.
Likewise, current price of oil largely reflects the
immediate surplus or shortage of supplies, and reflects more on the conditions
above ground (in the supply chain) than on the geologic endowment of the
resource.
That said; let’s begin by taking stock of how the world
reserves of oil have changed in the last seven years. According to BP2007 world
reserves of petroleum in 2006 stood at 1,208 billion barrels (45.6 cmo), and
that’s the number I used in the book. The BP2014 edition lists the 2006
reserves at 1,364 billion barrels (51.5 cmo), and the 2013 reserves at 1,688
billion barrels (63.7 cmo). The upward revision of 156 billion barrels for the
2006 reserves resulted largely from reclassifying about 160 billion barrels of Canadian
tar sands from the category of unconventional resource to the reserves pool. Although
production of synthetic crude from tar sands had already begun to be
commercialized, BP did not include them in the World Total of oil reserves
until 2009. To a large extent the reclassification was aided by the maturing of
the technology, and also by the rise in the price of oil. In 2006 oil was
selling at around $40/ barrel, and that price was barely
enough to make Tar sands operations economical. By 2009 had already
spiked to above $140/barrel; since 2010 it has been hovering around $95±10/barrel.
Smaller upward revisions were also made to the reserves of Venezuela and the
Russian Federation, while there was a downward revision of the Kazakhstan
reserves (ca. 30 billion barrel).
The increase of 324 billion barrels in the global reserves
between 2006 and 2013 as listed in BP2014 edition is largely due to Venezuelan
oil. The heavy oil in the Orinoco Belt was very uneconomical to produce, but
has been less so since 2009 and the reserves in the Orinoco Belt have increased
by over 220 billion barrels (8.3 cmo). Iraq, Iran, and the US have also registered
increases in the reserves of 35, 19, and 15 billion barrels respectively.
The shale oil development in the US had received much
attention in the media, but it is sobering to realize that its contribution to
the reserves has been rather modest (<1.0 cmo). It has, however, had a more profound
and immediate impact on the US oil production, which has increased by about 3.2
million barrels/day, whereas the Venezuelan and Iranian productions have each
decreased by about 0.7 million barrels/day. Oil production in Iraq, which was
close to its low point in 2006 following the Gulf War, did recover and
increased production by about 1.1 million barrels/day. Total world production increased
by 4.2 million barrels/day, and had the US shale oil not developed the world
supply would have been much constrained, and we probably would have seen much
higher oil prices.
The recent news of abundant oil supplies has once again
called into question the Peak Oil theory. Writing for the Wall Street Journal, Russell
Gold recently provided a nice perspective
on why peak oil predictions have not come true. I agree with him on most
points, but would quibble with him on the role of technology. He ascribes
the increased production to the advent of hydraulic fracturing and horizontal
drilling, and places faith in technology to provide developments that will
unlock further resources of oil. Perhaps just as important to consider is the
price change, which responds more to the global demand for the commodity than
anything else. Producing shale oil is not inexpensive; the cost can be upwards
of $60/barrel. As mentioned above, prior to 2008 the oil price hovered around
$40/barrel, and after some spikes it has been above $80/barrel since mid 2009;
evidently the global market seems to be willing to pay this high price to
support production of expensive oil.
Distinct from geologic and economic
limits, which have dominated the Peak Oil debate, is the energy limit. I am
referring to the energy return on (energy) invested, or EROI. It takes energy
to extract oil, and easy oil—the kind that gushes out of wells can have an EROI
values around 100, meaning that for each barrel of oil energy invested, the
well produces 100 barrels of oil. Current global average of producing
conventional oil has EROI of 20, while the more difficult to extract Alberta
tar sands and shale oil have EROI between 5 and 7.
While it is true that oil may still be
extractable at higher prices, oil ceases to be a source of energy when the
energy required in recovering it exceeds what it can deliver. Now, there still
maybe an economic incentive for continuing to produce a fuel from sources with
EROI of less than 1 as long as the product fuel provides sufficient value—corn-derived
ethanol is a prime example of that. I should note that I was incorrect in the
book to say that once the EROI is less than 1, “there will no longer be an
incentive to extract it regardless of price.” I should have said that oil
ceases to be a contributor to global energy supply when its EROI drops below 1.
