Finance

The world is drawing down its oil reserves at an unprecedented rate and even assuming no growth in demand it is likely that by 2010 oil supply will be constrained by global production capacity and oil will permanently cease to be abundant, according to a new report by UK based Douglas-Westwood.

A 2 percent growth scenario results in an oil supply production peak in 2011. Zero growth changes this peak to 2022, according to a recent Douglas-Westwood report.( Source: Douglas-Westwood Ltd.)

Supply and demand will be forced to balance – but at a price. Then, like during the oil shocks of the 1970’s, prices could double or treble within two or three years as the world changes from oil abundance to oil scarcity.

The world is facing a future of major oil increases that will occur sooner than many people believe. These are amongst the conclusions of ‘The World Oil Supply Report,’ published in September by energy analysts Douglas-Westwood.

Oil Production to Peak Soon
The overall conclusion of the research carried out for this report, into all potential sources of oil, is that the world’s known and estimated ‘yet to find’ reserves cannot satisfy even the present level of production of some 74 million bpd beyond 2022. Any growth in global economic activity only serves to increase demand and bring forward the peak year. 1 percent demand growth brings the year to 2016, when production is expected to peak at around 83 million bpd; with 2 percent growth, peak production of 87 million bpd occurs in 2011, and with 3 percent growth, peak production of 87 million bpd occurs in 2006.

It is of significance to note that the EIA recently forecast that by 2020 oil demand would reach 119 million bpd. Clearly a major supply and demand imbalance is in prospect. In short, it seems likely that during the first 25 years of this century, we will witness the beginnings of the end of the age of oil. The discussion is not if it will happen, but when.

For at least the last century the developed world has depended on cheap oil supplies, which still make up 40 percent of global energy consumption, to fuel economic growth. Outside of periods of disruption caused by war and general political instability, oil supplies have been abundant, and they will continue to be so until global peak production capacity has been reached. When this peak will occur and how large it will be are factors critically important to regional and global economic growth.

According to study lead author Dr. Michael Smith, ‘95 countries now produce oil, have produced it in the past or will produce it in the future. However, 46 countries including the USA and Russia are already well past peak (Greater then 5 years) whilst another 10 including the UK and Malaysia are just beginning to see declining production, and 12 including Norway and China will reach peak soon. All the remainder (27) will see a peak within the next 20 years.

Opec to Regain Market Control
‘As this time approaches we expect Opec’s share of production will increase to 40 percent and major capital investments within Opec countries will be required to increase gross production by 2 mm bbls per day every year after that to offset decline elsewhere. Saudi Arabia, Iran and Iraq will all have to allow greater access by foreign companies to sustain production growth.

‘However, as Opec’s share of production reaches 40 percent the potential for it to begin controlling oil prices increases dramatically,’ Smith says.

‘The World Oil Supply Report’ presents a number of different scenarios, the results of which share one thing in common, the probability of a production peak in the not-too-distant future followed by major oil price increases.

The report notes that a number of countries are already facing up to the prospect of energy supply shortfalls and that individual governments such as the UK’s are beginning major programmes to encourage renewables, and that some of the major oil companies such as BP and Shell are also investing heavily in renewable energy. However, the report suggests that increased investment will be needed in all energy sources, from natural gas to nuclear power.

Using four demand growth scenarios; zero, 1 percent, 2 percent and 3 percent, the report considers for each oil producing country the likely year of peak production, its volume and the max. production level. The report is written by Dr Michael Smith and John Westwood. More information is available at their web site www.dw-1.com.