Peak or Plateau: Planning for the Inevitable
Republished from the September 10, 2007 edition of ASPO USA's weekly 'Peak OIl Review'.
A framework is needed for planning the mitigation of oil shortages created by world oil production reaching a maximum and going into decline. Some argue that normal market evolution will be adequate to avoid shortages. We assume that will not be the case.
In dealing with such matters, the best that can be hoped for is to bracket mitigation requirements, because the myriad of variables and unknowns do not allow precision. Accordingly, our analysis involves consideration of order of magnitude economics, past real-world experience, forecasts of future world oil production, and possible oil exporter behavior.
Considerations of oil shortages, as distinguished from simply considering oil price increases, necessitates dealing in an area in which there is no recent experience, since the world today is different from 1973 and 1979, when brief shortages occurred. We approach this challenge with the belief expressed in Oil Shockwave: “It only requires a relatively small amount of oil to be taken out of the system to have huge economic and security implications.” 1
In this context of world oil, relatively small percentage changes are hugely meaningful. For example, the 3% decrease in U.S. GDP resulting from the 1973 Arab oil embargo resulted in a damaging economic recession. A 1% change in current world oil production equates to over 800,000 barrels per day (bpd), which represents a huge volume. To save that level of consumption through increases in the efficiency of the world’s light duty vehicle fleet (automobiles and light trucks) would require more than a decade, assuming crash program implementation.2 On the supply side, the production of 800,000 bpd of substitute liquid fuels would require coal-to-liquids (CTL) plants costing $50 - 100 billion and require more than a decade under the best of conditions, for example. Thus, small percentages of world oil production and demand represent large economic impacts and very large levels of mitigation hardware and investment.
To estimate potential economic impacts, a reasonable relationship between percent decline in world oil supply and percent decline in world GDP was determined to be roughly 1:1, i.e., a 2% decline in world oil supply would result in roughly a 2% decline in world GDP, an extremely large impact.
As a limiting case for decline rates, giant fields were examined, and decline rates of 8-16% were evident after plateaus in well-managed cases. Actual oil production from Europe and North America demonstrated significant periods of relatively flat oil production (plateaus). However, before entering its plateau period, North American oil production went through a sharp peak and steep decline. Examination of a number of future world oil production forecasts showed multi-year rollover / roll-down periods, which represent pseudo plateaus. But potentially overwhelming all else, considerations of resource nationalism posits an Oil Exporter Withholding Scenario, hastening the onset of decline and exaggerating world supply decline rates.
Three scenarios for mitigation planning resulted from the analysis:
1) A Best Case, where maximum world oil production is followed by a multi-year plateau before the onset of a monatomic decline rate of 2-5% per year;
2) A Middling Case, where world oil production abruptly reaches a maximum, after which it drops into a long-term, 2-5% monotonic annual decline; and finally
3) A Worst Case, where the sharp peak of the Middling Case is degraded by oil exporter withholding, leading to world oil shortages growing more rapidly than 2-5% per year, creating the most dire world economic impacts.
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