Peak Oil Primer

Updated 24 Jan 2008

Peak Oil is a term well known to oil industry insiders, but just beginning to be heard in main stream media. What is it though? Does it mean that there is no more oil?

Oil Wells Simplified
To explain what peak oil really is, we first have to know a little about where oil comes from, and how oil wells extract it. To do this, I am going to simplify the process to the bare bones.

A drilling rig drills down through the dirt and rock strata until it hopefully reaches an oil deposit. This deposit is not a cavity in the earth filled with oil, but is a porous layer with an impermeable layer over top. The oil accumulated in the porous layer over millions of years, and may be likened to a jar of sand with liquid between the grains. Because of the depth and the weight of the overlying layers, the oil deposit is under pressure, and the well bore then presents an easy exit and pressure release allowing the oil to push up the well bore. We are able to drill to depths of over 30,000 feet to get to the black gold. Great, we now have a producing oil well (after casing and a bunch of other techie stuff to be able to control it), and it might have taken 3 years to get the oil flowing to market if new pipelines and infrastructure had to be built.

As you can guess, regardless of how large the oil layer is and how many barrels of oil are trapped in it, the size of the bore hole restricts how much oil can flow to the surface. So a typical well may provide up to several thousand barrels of oil per day when it is first drilled. 1998 data shows Saudi wells  averaged about 5000 barrels a day, while US wells averaged only 17 barrels a day.  To increase production, other wells are drilled into the same formation. This increases the barrels per day that can be extracted.... similar to putting two straws in a cup of soda so two people can drink at the same time. This of course does not increase the total amount of oil... it only increases how fast we can drain the reservoir. 

Considering that the daily usage of crude oil in the world is about 85 million barrels per day, it is evident that it takes a lot of oil wells to meet that demand.  The average production from an oil well in Saudi Arabia is now less than 5000 barrels per day.  There are more than 1/2 million wells in the US alone.

Oil Depletion
As oil is pumped from the ground, pressure in the well tends to drop, and the amount of oil coming to the surface decreases. As this happens, there are several things the well operators can do to maintain the production rate. One obvious thing is to drill more wells. For instance, if an oil field has 10 operating wells, and the oil flow decreases by 10%, then drilling one more well will restore the production rate. Another technique is to drill extra wells, and instead of pumping oil out, water is pumped in to restore the pressure in the wells. This is a common method. Of course, the oil is depleted faster, and there is a lot of water which now comes out of the production wells which must be separated from the oil and recycled. As the field ages and becomes more depleted, more and more water must be pumped into the oil field to maintain production. Sooner or later though, it becomes impossible to maintain the flow rates, and the oil produced from the field begins to drop. The amount of water added to a well to get a barrel of oil out is called the water cut. In the Saudi fields, the water cut is estimated to be at least 4 barrels of water in to get 1 out. In other places, the water cut is as high as 99. All of this effort to get the last barrels from the field is expensive and is the reason that cheap oil is a thing of the past.

When a field can no longer produce at its optimum rate, new oil fields must be located, drilled, and put into production to make up the difference. Otherwise there is not enough oil supply to match demand, and of course, the price skyrockets. The trouble is, all of the major oil fields like Ghawar in Saudi Arabia which had many billions of barrels of oil, have already been found.  It is extremely unlikely that we will ever find oil deposits that large again.  Now it is a big find to locate a potential field which contains 100 million barrels of oil. To put that in perspective, the world uses 85 million barrels of oil each day, so a find like that represents just a little more than one days supply for the world. With increase in demand, and depletion of existing fields, we will have to find the equivalent of a new Saudi Arabia every year just to keep up.  So far, that level of discovery has not happened and new discoveries have fallen for the last 30 years.

Oil drilling rigs are usually rented because of their cost. A deep water rig capable of operating in 2 miles of water in the Gulf of Mexico rents for about $500,000 per day. After the well is drilled, and oil is found, then an oil platform is installed to operate the well. There is currently a large shortage of rigs, and countries all over the world are bidding on their services. This shortage of drilling rigs is making it extremely difficult if not impossible to replace the production lost from declining fields. Considering it takes several years to build a rig, there is not a lot of help coming from that direction.  Prior to hurricane Katrina, there were 136 operating drilling rigs in the Gulf of Mexico.  Now (Jul 2006) there are 90. 

Examples of Depletion
In the summer of 2005, Kuwait announced that the Burgan oil field, the second largest oil field in the world, was rapidly depleting and could no longer maintain its expected production rate. This field was producing 2 million barrels a day, and now it is producing only 1.7 million barrels. This is significant for two reasons. First, the field was expected to last until 2030, so it appears that the science and technology used in estimating the oil reserves was not accurate. Secondly, there is now a 300,000 barrel a day shortfall, which means that 150 new wells producing 2000 barrels (Kuwait average) each has to be drilled to make up the lost production.  Burgan is the world's second largest oil field, and it is expected to be completely depleted by the end of the decade.

Unfortunately, we are having to drill into smaller and smaller pools of oil, and the wells have shorter and shorter expected life spans. This means we need more oil rigs drilling more holes in the ground every year, but as of now, there is not enough oil exploration going on. Seven out of 10 wells are dry holes in the ground, which makes the situation even worse.

Several times now the Saudi's have promised to increase their production, but haven't been able to meet their promised increases for reasons they haven't disclosed. Their production has been fairly flat at about 10 million barrels per day, and to do that, they have to continually increase the amount of water they are injecting into the oil field to maintain the flow rates. They are always optimistic about their ability to increase their production, but it seems the reality is that they may not be able to do so, at least to any great extent. Some industry analysts believe that the Saudis know their fields are now past peak, and are doing what they can to manage the remaining oil. That makes sense to me.

Its not just the Kuwaitis and the Saudis that are having trouble maintaining oil production. Iran's oil production is also declining. Just recently, the Mexican oil company PEMEX announced that their oil fields are declining, and they expect the decline rate will be 10% to 20% per year. The production in the North Sea by Britain and Norway has been decreasing at the rate of 14% a year for the past 2 years. Russia's oil production has been declining, and America of course has been in decline since peaking in 1972, even with all the wells drilled in the Gulf of Mexico.  Exxon's decline rate is estimated to be 8% per year, but could be considerably higher. Even with all the high tech computer analysis, and instrumentation, it is still a guess as to how much oil is below ground, and how much is retrievable. An 8% worldwide decline rate would mean that every year we have to find 6.5 million barrels a day new production just to break even.  It is highly unlikely we would find that much replacement oil, but it may also be that the total world rate of decline is not that high.  

Natural gas is also in a state of depletion and natural gas wells deplete even faster, as the decline rates for US natural gas wells is now about 45% per year by some accounts. This puts electric generation at risk. It also has the effect of taking drilling rigs out of the hunt for oil while they drill for more gas production. 

(Update 2/2/2007) Mexico has announced that the Cantarell oil field, which is the second largest in the world has declined in production from 2 Million barrels per day to 1.5 million barrels over the past year.  

Do you see the picture? When we reach the point where production levels cannot be maintained, the field has "peaked". When the aggregate production of all the oil wells in the world has peaked... bingo... "Peak Oil" has officially arrived. There are still huge amounts of oil in the ground though, with estimates of about 1 trillion barrels. Peak oil does not mean no oil. It means it cannot be extracted at a rate high enough to meet demand, and it means that it becomes much more expensive to produce. I think that would be about now with oil prices hovering around the $100 a barrel mark.  What we don't know is exactly what the world oil field depletion rate actually is.  We know some major fields are depleting at a rather high rate, and some have not peaked yet.  But the data necessary to actually figure out where the total world's oil production is on the depletion curve is not readily available.  It is the depletion rate that will effect the long term outlook for our civilization.

Outlook Depends on Depletion Rate
Because oil is the lifeblood of the western world, demand for oil is very inflexible. Everyone needs to eat, heat their homes, and drive to to work. In addition, modern manufacturing uses a lot of oil and natural gas for its feedstocks to make other materials; so very small fluctuations in supply or demand bring about large changes in price. As an analogy, consider 10 men who desperately need camels to support their families. These 10 visit Joe's Used Camel Shop but find there are only 9 camels for sale. You can bet that the price of those camels is going to go up higher than one of the men can afford, so someone is walking home but it may not be who you think. It may be that the one with the least "might" and not the least money is the one walking home, as the loser in the bidding war may take one of the camels from a successful bidder out of desperation. Haven't we already seen things like this happen on a world scale?

Insufficient supply equals high prices and/or shortages.  Escalating energy prices will lead to economic downturn, possibly even a full blown depression. Its certainly going to lower everyone's standard of living. How fast the collapse of oil production occurs will certainly have an effect on how painful it will be. Much of our lifestyle in the Western world is simply not sustainable without cheap oil. Food production is not sustainable (farming has been noted to be a method of transforming oil into food), which will no doubt lead to massive food shortages and consequent die off in many areas of the world. Expect gardening and home canning to make a big comeback. Homes will be much colder. Coal may become the fuel of choice again as other fuels become unaffordable; that is if people can afford to make the conversion and its still available. Some areas may become uninhabitable. Its hard to live in sub-zero weather without heat, so I would expect that a lot of people will move out of the colder areas seeking places that do not require heat.

Manufacturing will also be hurt badly, as a large part of every product is the energy it took to make it. Think of the huge amounts of energy it takes to mine iron ore and smelt into steel. Aluminum also requires large amounts of energy, so expect the materials things are made of to change. Glass takes energy to melt, and plastics are made from oil feedstocks. The cost of the energy and raw materials will make everything we buy more expensive, so as a result we will be forced to buy less. When demand drops for products, manufacturers need less employees, leading to layoffs and high unemployment rates. Depression, both economic and mental ensues, leading to civil unrest, which has the potential to lead to wars and revolutions. 

Further, a high depletion rate will probably produce the widest swings in the price of oil, as demand will swing considerably due to recessions, depressions, recoveries etc brought on by the instability in the price of energy.  These large swings in the price of oil will discourage investors from investing in drilling and exploration ventures, which will make the oil supply situation worse than it could have been.

If depletion rates are more moderate, a few percent per year, it will give us more time to gracefully contract our oil usage, and adjust to the falling supply of oil.  We would have more time to try to put alternatives in place, and more time to develop conservation measures.   Oil price swings would probably be less, and the entire situation would be more stable. 

Low depletion rates would give us decades to convert from oil to alternates, whatever they turn out to be.  Converting to different energy sources may require large investments in infrastructure, which take time to build, and also will require large inputs of fossil oil.  A low depletion rate will give us the time and the energy required to make the transition.  The danger is that if the depletion rate is too low, civilization may not feel the need to develop and switch to alternate fuels before it is too late. 

It will be interesting to see which of these scenarios is going to play out over the next couple of years.  There has been little talk of peak oil outside of the industry itself until recently, and there are many who totally disagree with the peak oil hypothesis.  But the facts speak for themselves, and hopefully, there will be a lot more dialog in the coming years.

Energy Taxation
Governments have huge incomes from the taxes on fuels, and its likely they won't allow falling sales of fuels to lower that tax base.  So they may raise the tax rates on gasoline and diesel fuels to make up for the lowered volume of sales.  This increases the cost to consumers and business, and is another dampener on the economy.  But at the same time, it also depresses the usage the fuel if the tax increase is substantial.  Remember the old adage:  "whatever you tax, you get less of" This lowered demand will help mediate the growth of demand and and actually help to decrease or stabilize the price of crude oil.  This in turn could inhibit further investment in drilling and refining, so the shortage will worsen.  There was also some talk about an added tax on hybrid vehicles to lessen the revenues lost from decreased fuel usage.  Of course these kinds of taxation will ultimately make the situation worse, so lets hope the governments of the world are smarter than that.  

What about ANWR?
According to the US Dept. of the Interior, the Alaska National Wildlife Reserve is estimated to contain about 10.4 billion barrels of oil, and could produce at a rate about equal to the Gulf of Mexico, 1.4 million barrels a day.  At full production, this would be about 7% of our daily oil usage in America, and would be a significant help in reducing our oil imports.  It would probably take several years to actually begin full scale production.  Long term though, it is just a stopgap measure.  10.4 billion barrels will power the US for a mere 1 year and 5 months at our current usage.  Perhaps it would be best to leave it alone until later, as an emergency supply.

Abiotic Oil -- infinite supply?
What about abiotic oil? The Russian's were the first to put forth the hypothesis that oil is abiotic -- not biologic in nature, but comes from processes much deeper in the earth where extreme pressure plus limestone and water are converted into oil over time. If this is true, then there would be an unending supply of oil wouldn't there? Well, yes and no. If the earth created oil in the amounts we use, the underground traps would have filled up and overflowed millennia ago, and the surface of the earth would be swimming in oil. That didn't happen, so we can conclude that even if the abiotic oil theory is true, it does not supply enough oil to make a dent in our current problem. It may mean that a million years from now, oil will be plentiful once more though.

There is some evidence this theory might in fact be true, as occasionally oil is found in places where it shouldn't if it is only from biological origins. Kansas has some oil fields like that. So either we do not have a complete understanding of geology, or we do not have a complete understanding of how oil is created. Methane was recently detected on Saturn's moon Titan, and abiotic oil proponents are pointing to that as evidence that carbon compounds can be created without life. However methane (CH4) is about the simplest hydrocarbon, being 1 carbon atom bound to 4 hydrogen atoms, and there are lots of ways to make that. Carbon has several common isotopes, C12 and C13, and C14. Living organisms prefer Carbon 12, and Carbon compounds from living organisms have a higher ratio of C12 to C13. So it is possible to distinguish where methane came from. In the case of Titan, there was no enrichment of C12 in the methane detected, but on earth, the methane from the oil wells is enriched with C12 showing it came from biological origins.

So oil may come both from biological sources, and non biological sources. It really doesn't matter at this point. The only thing that matters at present is how fast we can or cannot produce it.  It will make more of a difference in a million years.

                    NEXT -->