Is the Global Oil Tank Half-full, Is It Half-Empty…Or Are We Running On Fumes?

In his article in the New York Times September 24, “Oil Industry Sets a Brisk Pace of New Discoveries”, staff reporter Jad Mouawad cites oil discoveries totaling ten billion barrels for the first half of 2009. The Tiber field in the Gulf of...

September 27, 2009 | Source: Post Carbon Institute | by Richard Heinberg

In his article in the

New York Times September 24, “Oil Industry Sets a Brisk Pace of New Discoveries”,
staff reporter Jad Mouawad cites oil discoveries totaling ten billion
barrels for the first half of 2009. The Tiber field in the Gulf of
Mexico alone accounts for four to six billion barrels of crude that may
eventually find its way into the world oil system. Indeed, this year
has seen discovery results that could end up being the best since 2000.
But, the article notes, the new oil was expensive to find, it will be
expensive to extract, and both exploration and production are only
possible because of high levels of investment and sophisticated,
expensive new technologies.

To justify the needed level of effort, the oil industry requires
prices in excess of $60 per barrel, according to Mouawad; otherwise,
the new projects will turn out to be money-losers. Some analysts
believe the magic break-even number is closer to $70. In any case, the
figure is much higher than was required only a few years ago, and
still-higher prices may be necessary to make exploration and production
profitable for future projects—prices perhaps close to $80.

According to Mouawad, “While recent years have featured speculation
about a coming peak and subsequent decline in oil production, people in
the industry say there is still plenty of oil in the ground, especially
beneath the ocean floor, even if finding and extracting it is becoming
harder.” So the new discoveries presumably indicate that peak oil has
been delayed, and that our concerns about the event have been

Yet this would be a strange conclusion to draw from the facts cited, for two reasons.

First: The ten billion barrels of new discoveries reported so far do
initially sound encouraging: if the second half of 2009 is as
productive, that means a total of 20 billion barrels of new oil will
eventually be available to consumers as a result of discoveries this
year. But how much oil does the world use annually? In recent years,
that amount has hovered within the range of 29-31 billion barrels.
Therefore (assuming continued good results throughout 2009), in its
most successful recent year of exploration efforts, the oil industry
will have found only two-thirds of the amount it extracted from
previously discovered oilfields.

Think of this another way: 20 billion barrels of new reserves are
likely to translate to a maximum flow rate (achievable in maybe 12 or
15 years) of about 1.2 million barrels per day. But the International
Energy Agency says that existing oilfields have an average decline rate
of 6.7 percent; that’s an ongoing loss of 5 million barrels per day of
production capacity each year, and this somehow has to be made up for
by new discoveries and re-working of existing oilfields if total global
oil production is to remain flat. So this year’s discoveries, when they
finally achieve maximum rate of extraction, will, for a while, make up
for about a quarter of one year’s decline in production from existing

When the “ten billion barrels” figure is framed this way, its “gee
whiz: shimmer quickly fades. (Yes, the article discusses the phenomenon
of “reserve growth,” which is supposed to render the pace of new
discoveries less important—but that red herring has been exposed plenty
of times, including here The

article hints that 2009’s high discovery rate may be the beginning of a
new trend, so that we may see even better rates in future years; but
remember, that hypothetical outcome hinges on a crucial
factor—increasing investment in exploration and production—which leads
us to a second critical thought.

The staggering levels of investment that enabled drilling in miles
of ocean water, so as to achieve the 2009 finds, were occasioned by
historic petroleum price run-ups from 2004 to 2008—with prices
eventually spiking high enough to cripple the auto industry, the
airlines, and global trade. As petroleum prices climbed ever higher,
oil companies saw sense in drilling test wells in risky, inhospitable
places. But in recent decades oil price spikes have repeatedly
triggered recessions. And clearly, as we all discovered rather forcibly
last year, the global economy cannot sustain an oil price of $147 a
barrel: as the economy crashed in the latter months of 2008, so did oil
demand and oil prices (which hit a low in December-January near $30).

So, what

is a sustainable price? A review of recent economic
history yields the observation that when petroleum sells above about
$80 a barrel (in inflation-adjusted terms) the economy begins to stall.
Oil industry wags have begun to speak of a “Goldilocks” price range of
$60 to $80 a barrel (not too high, not too low—just right!) as the
prerequisite for economic recovery (
If prices are higher, the economy sputters, reducing oil demand and
subsequently seriously undermining prices; if they drift lower, not
enough investment will go toward exploration and production, so that
oil shortages and price spikes will become inevitable a few years hence
(indeed, since the oil price crash of late 2008 over $150 billion of
investments in new oil projects have been cancelled). If the market can
keep prices reliably within that charmed $60 to $80 range, all will be
well. Too bad that petroleum prices have grown extremely volatile in
recent years: we must hope and pray that trend is over (though there’s
no apparent reason to assume that it is).

Let me summarize: the industry needs oil prices that are both stable
and near economy-killing levels in order to justify investments
necessary to

possibly replace depleting reserves and overcome
declining production in existing oilfields (I say “possibly” because we
have insufficient evidence as yet to conclusively show that new
discoveries enabled by expensive new exploration and production
technologies can offset declines in the world’s aging giant oilfields).

Should this picture lead the viewer to come away with reassured
thoughts of “No worries, happy motoring?” Or does this look more like a
portrait of peak oil?

Several commentators (including analysts with financial services
company Raymond James Associates and Macquarie, the
Australian-headquartered investment bank) have concluded from recent
petroleum statistics that global oil production peaked in 2008.
Macquarie is saying that world production

capacity is peaking

year, which is a nuanced way of saying the same thing, since currently
production is constrained more by depressed demand than by immediate
shortfalls in supply; in effect both organizations assert that the
world will never see higher rates of extraction than the so-far record
level of July 2008.

I see nothing in the recent discovery data that should call that conclusion into doubt.

Richard Heinberg is Senior Fellow with Post Carbon Institute and author of several books on resource depletion, including

The Oil Depletion Protocol and

Blackout: Coal, Climate and the Last Energy Crisis.

Photo credit: thomasstigler/flickr